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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-26494
GSE Systems, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 52-1868008
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(State of incorporation) (I.R.S. Employer Identification Number)
8930 Stanford Boulevard, Columbia, Maryland 21045
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 312-3700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates as of
March 6, 1998 was $5,739,857 based on closing price of such stock on that date.
Number of shares of Common Stock outstanding as of March 6, 1998:
5,065,688.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
Registrant's definitive proxy statement to be filed for its 1998 annual meeting
of shareholders.
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GSE SYSTEMS, INC.
FORM 10-K
For the Year Ended December 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
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<S> <C> <C>
Item 1. Business....................................................................... 3
Item 1A. Risk Factors................................................................... 8
Item 2. Properties..................................................................... 12
Item 3. Legal Proceedings.............................................................. 12
Item 4. Submission Matters to a Vote of Security Holders............................... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................................ 13
Item 6. Selected Financial Data........................................................ 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................... 22
Item 8. Financial Statements and Supplementary Data.................................... 23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................................... 25
PART III
Item 10. Directors and Executive Officers of the Company*............................... 26
Item 11. Executive Compensation*........................................................ 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management*............................................................ 26
Item 13. Certain Relationships and Related Transactions*................................ 26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................................ 27
SIGNATURES.......................................................................................... 28
</TABLE>
* to be incorporated by reference from the Proxy Statement for the registrant's
1998 Annual Meeting of Stockholders.
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GSE SYSTEMS, INC.
FORM 10-K
For the Year Ended December 31, 1997
Cautionary Statement Regarding Forward-Looking Statements.
This Form 10-K contains certain "forward-looking statements," within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
subject to the safe harbors created by those Acts. These statements include the
plans and objectives of management for future operations, including plans and
objectives relating to the development of the Company's business in the domestic
and international marketplace. All forward-looking statements involve risks and
uncertainties, including, without limitation, risks relating to the Company's
ability to enhance existing software products and to introduce new products in a
timely and cost-effective manner, reduced development of nuclear power plants
that may utilize the Company's products, a long pay-back cycle from the
investment in software development, uncertainties regarding the ability of the
Company to grow its revenues and successfully integrate operations through
expansion of its existing business and strategic acquisitions, the ability of
the Company to respond adequately to rapid technological changes in the markets
for process control, data acquisition and simulation software and systems,
significant quarter-to-quarter volatility in revenues and earnings as a result
of customer purchasing cycles and other factors, dependence upon key personnel,
and general market conditions and competition. See Item 1A. Risk Factors. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties as set forth herein, the failure
of any one of which could materially adversely affect the operations of the
Company. The Company's plans and objectives are also based on the assumptions
that market conditions and competitive conditions within the Company's business
areas will not change materially or adversely and that there will be no material
adverse change in the Company's operations or business. Assumptions relating to
the foregoing involve judgments with respect, among other things, to future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and there can, therefore, be no assurance that
the forward-looking statements included in this Form 10-K will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
PART I
ITEM 1. BUSINESS.
GSE Systems, Inc. ("GSE Systems" or the "Company") designs, develops
and delivers business and technology solutions by applying
high-technology-related process control, data acquisition, high fidelity
simulation, systems and services into applications for worldwide industries
including energy and process manufacturing. The Company's solutions and services
assist customers in improving quality, safety and throughput; reducing operating
expenses; and enhancing overall productivity.
The Company's products are used in over 700 applications, representing
over 250 customers in 30 countries, in the following industries: specialty
chemical, food & beverage, petroleum refining, oil & gas pipelines,
pharmaceutical, fossil and nuclear power generation, metals and water treatment.
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Recent Developments.
In 1997, the Company had poor financial results. The senior management
of the Company has been substantially changed in the last twelve months and the
current management has set a course to reduce costs and to return the Company's
focus to its core businesses of controls and simulation.
The Company had previously acquired Erudite Software & Consulting, Inc.
("Erudite Software"), a regional provider of client/server technology, custom
application software development, training services, hardware/software sales,
and network design and implementation services. This acquisition was made to
facilitate the Company's efforts to enter the client/server IT solutions market.
However, as a result of the Company's decision to re-focus its strategy on its
core businesses, the Company has taken steps toward the divestiture of Erudite
Software upon the receipt of an appropriate purchase offer. The Company's
current plan is to complete such a divestiture during the second quarter of
1998, however, there can be no assurance that such a divestiture will occur
within this time.
The Company had previously sought to expand its presence in overseas
markets, especially in Asia. Although the Company has made inroads in the
Asia-Pacific region from its base in Singapore, the Company has decided, as a
result of the instability caused by the recent Asian economic crisis, to
significantly reduce its presence in the region for at least the next twelve
months. The Company believes that such action will reduce its business
risk and cost in this region.
For the last several years, the Company has occupied a facility of
approximately 154,000 square feet in Columbia, Maryland. However, in order to
better meet the Company's expected facilities requirements for the foreseeable
future, the Company has entered into commitments whereby the lease for its
existing Columbia facility will be terminated and the affected operations are
scheduled to relocate into two separate facilities during the second quarter of
1998; one of these facilities will be in Columbia, Maryland (approximately
53,000 square feet); the other facility will be in Baltimore, Maryland
(approximately 33,000 square feet). The Company believes it can achieve an
annualized savings in excess of $1 million by the implementation of these
facilities arrangements.
The Company believes these actions will result in an ongoing, viable
enterprise more closely focused on its core businesses.
Background.
GSE Systems was formed on April 13, 1994, by ManTech International
Corporation ("ManTech"), GP Strategies Corporation ("GP Strategies" and formerly
known as "National Patent Development Corporation" or "NPDC") and its
affiliates, General Physics Corporation ("GPC") and SGLG, Inc. ("SGLG" and
formerly known as "GPS Technologies, Inc." or "GPS"); and Vattenfall AB
("Vattenfall") to consolidate the simulation and related businesses of their
affiliates, GSE Power Systems, Inc. ("Power Systems" and formerly known as
"Simulation, Systems & Services Technologies Company" or "S3 Technologies"), GP
International Engineering & Simulation, Inc. ("GPI") and GSE Power Systems AB
("Power Systems AB" and formerly known as "EuroSim AB" or "EuroSim"). On
December 30, 1994, GSE Systems expanded into the process control automation, and
supply chain management consulting industry through its acquisition of the
process systems division of Texas Instruments Incorporated ("TI"), which the
Company operates as GSE Process Solutions, Inc. ("Process Solutions").
In April 1996, the Company aligned its operating groups into three
strategic business units (SBUs) to better serve its primary vertical markets -
Power, Process and Oil & Gas. The realignment allowed the Company to focus on
providing all of its technologies to these markets, while addressing the
specific needs of each market and delivering industry specific solutions.
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In May 1996, the Company acquired Erudite Software, a regional provider
of client/server technology, custom application software development, training
services, hardware/software sales, and network design and implementation
services. Erudite Software was subsequently combined with a small pre-existing
consulting group within the Company to form the Company's Business Systems unit.
See "Recent Developments".
In December 1997, the Company acquired 100% of the outstanding common
stock of J.L. Ryan, Inc., ("Ryan"), a small provider of engineering
modifications and upgrade services to the power plant simulation market, for an
initial purchase price of $1 million ($600,000 of which was paid in cash upon
the closing of the transaction and the remainder through a promissory note
payable in four annual installments of $100,000 each beginning on January 2,
1999) and an amount equal to 50% of the earnings before interest, taxes and
amortization of the acquired business from 1998 to 2002; a minimum of $250,000
of such earnings payments for each of 1998 and 1999 has been guaranteed by the
Company. The combination of the Company's pre-existing technology with the
technical staff of the acquired Ryan business positions the Company to be more
competitive for modifications and upgrade services projects within the nuclear
simulation market. This acquisition has been accounted for under the purchase
method. The acquisition was part of a comprehensive settlement of claims among
Power Systems, Ryan and certain individuals affiliated with Ryan which had been
pending in connection with a lawsuit filed by Power Systems in early 1997. See
Item 3. Legal Proceedings.
Business Strategy.
Users in the markets served by the Company want to focus their
resources on their own customers and wish to spend less resources on managing
non-core-competency areas such as control and simulation systems.
At the same time, rapid change brought on by the popularity of
Microsoft(R) operating systems has offered users the promise of historically
equivalent technology at greatly reduced costs and/or improved technology at
equal costs. The emergence of open standards portends a future where
applications and systems adhering to these standards will work together
seamlessly regardless of what combination of software the user desires. However,
this multi-vendor systems environment is very complicated and users with fewer
resources now need more assistance to manage this new technology to meet the
specific requirements of their enterprises.
Furthermore, the Company believes change with respect to governmental
controls is occurring as a result of industry and utilities moving to a more
decentralized and unregulated posture worldwide. The Company believes the
governmental role will shift from direct control/intervention/regulation to
audit/assurance. Therefore, industrial and utility customers may be required to
train and certify their operations staffs using an approved training program
such as simulation technology, of which the Company is a worldwide leader.
By strategically focusing its products and services offerings on
opportunities created by these three convergent trends - greater reliance by the
market on key vendors, greater complexity of application and solution
integration, and growing demand for simulation technology and services -
the Company believes its prospects for the future will be strengthened.
Services and Products.
GSE Systems has a wide range of knowledge of control and simulation
systems and the processes those systems are intended to improve, control and
model. The Company's knowledge is concentrated heavily in the process
industries, which include the chemicals, food & beverage, oil & gas; and
pharmaceuticals fields, as well as in the power generation industry, where the
Company is a world leader in nuclear power plant simulation.
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As the Microsoft Windows NT(R) operating environment technology evolves
to have the robustness, features and benefits necessary for the requirements of
the Company's target industries, the Company has continued the migration of its
products to this platform in such a way as to assure current customers' legacy
applications will function properly while at the same time offering the
advantages of the new technology. Although the Company uses open standards for
its products, the Company's standard system configurations are based on
proprietary technology and know-how which are necessary to meet the requirements
of its customers in the controls and simulation markets. Since the Company's
business model is based on recovering income via software licensing and
value-added services rather than the common industry practice of embedding
software costs inside the hardware sold, the Company can maintain its business
model in an environment of rapidly decreasing hardware costs.
The Company's proprietary products include a Distributed Control System
("DCS") product, known as the D/3 DCS(TM) that is highly flexible and open and a
family of real-time dynamic simulation tools. This product is a real-time
system, which uses multiple process control modules to monitor, measure, and
automatically control variables in both continuous and complex batch processes.
Other products include the following: FlexBatch(R), a flexible batch
manufacturing system used to facilitate the rapid creation of various batch
production processes; TotalVision(TM), which is a graphical system that provides
a client/server-based human machine interface for real-time process and plant
information; and SABL(TM), which is a sophisticated batch and sequential
manufacturing software language that permits the scheduling and tracking of raw
materials and finished products, data collection and emergency shutdown
procedures.
The Company's proprietary technology also includes real-time dynamic
simulation tools and products that are used to develop high fidelity simulations
for nuclear and fossil power plants, petroleum refineries, oil & gas pipelines,
chemical processing plants and other industrial plants. This technology is both
licensed by the Company to its customers as well as used by the Company to
develop simulations for its customers. The most prominent products and tools are
known as SimSuite Pro(TM), SimSuite Pipeline(TM) and SimSuite Power(TM). Each of
these tools facilitates design verification, process optimization and operator
training.
The Company also provides value-added services to help users plan,
design, implement, and manage/support simulation and control systems. Services
include application engineering, project management, training, site services,
maintenance contracts and repair.
Customers.
The Company has provided over 700 simulation, process control and data
acquisition, and business systems to an installed base of over 250 customers
worldwide. In 1997, approximately 36.5% of the Company's worldwide revenue was
generated from customers outside the United States.
The Company's customers include, among others, Algonquin Gas
Transmission Company, Alyeska Pipeline Service Company, Archer Daniels Midland
Company, BASF Corporation, Cargill Incorporated, Exxon Company USA, Kraftwerks
Simulator Gesellschaft (Germany), Miller Brewing Company, PECO Energy, Tokyo
Electric Power Company (Japan) and USX-US Steel Group.
No individual customer represented more than 10% of the Company's 1997
revenue.
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Strategic Alliances.
In recent years, a high portion of the Company's international business
has come from major contracts in Europe, the republics of the former Soviet
Union and the Pacific Rim. In order to acquire and perform these contracts, the
Company entered into strategic alliances or partnerships with various entities
including: Siemens AG (Europe), All Russian Research Institute for Nuclear Power
Plant Operation (Russia), Kurchatov Institute (Russia), Beijing Aerospace
Industrial Control Automation Group Company (China), Samsung Electronics
(Korea), Toyo Engineering Corporation (Japan), and Institute for Information
Industry (Taiwan). These alliances have enabled the Company to penetrate work in
these regions by combining its technological expertise with the regional or
local presence and knowledge of its partners.
Also, the Company continues to believe that it must have strong
solutions partners as well as strong technology partners in order for it to
address the myriad of systems needs of its customers in the various geographical
areas in which they do business.
Sales and Marketing.
The Company markets its products and services through a network of
direct sales staff, agents and representatives, systems integrators and
strategic alliance partners. The Company also employs personnel that support
corporate advertising, literature development and exhibit/conference
participation.
GSE Systems employs a direct sales force in the continental United
States which is regionally based, market focused and trained on its product and
service offerings. Market-oriented business and customer development teams
define and implement specific campaigns to pursue opportunities in the power,
process and client/server solutions marketplaces. This effort is supported by an
extensive, regionally-based support organization focused on the current customer
installed base. The Company's ability to support its multi-facility,
international and/or multinational clients, is facilitated by its network of
offices throughout the U.S. and overseas. Within the U.S., the Company maintains
offices in: Maryland, Utah, Arizona, New Jersey, North Carolina, Georgia,
Louisiana, Texas, and Pennsylvania. Outside the U.S., the Company has offices in
Sweden, Belgium, Singapore, Taiwan and Korea. In addition to its offices located
overseas, the Company's ability to conduct international business is enhanced by
its multilingual and multicultural work force.
Strategic alliance partners, systems integrators and agents represent
the Company's interests in Russia, Germany, Switzerland, Spain, Czech Republic,
Slovakia, United Arab Emirates, India, South Africa, Venezuela, Mexico,
Argentina, and the Peoples Republic of China.
Product Development.
In 1997, the Company continued investment in the conversion of its D/3
DCS(TM) product to the Microsoft Windows NT(R) platform, enhancement of its S/3
SCADA(TM) system and the productization of its SimSuite(TM) software tools.
During the years ended December 31, 1997, 1996 and 1995, gross research and
product development expenditures for the Company were $5.1 million, $5.8 million
and $4.6 million, respectively. Capitalized software development costs totaled
$3.5 million, $3.9 million and $1.6 million during the years ended December 31,
1997, 1996 and 1995. See Note 2 of "Notes to Consolidated Financial Statements"
for a discussion of the Company's policy regarding capitalization of software
development costs.
7
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Industries Served.
The following chart illustrates the approximate percentage of the
Company's 1997 and 1996 revenues, respectively, attributable to each of the
major industries served by the Company:
1997 1996
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Power............................................... 31% 45%
Process............................................. 46% 32%
Other............................................... 23% 23%
Contract Backlog.
The Company does not reflect an order in backlog until it has received
a contract that specifies the terms and milestone delivery dates. As of December
31, 1997, the Company's aggregate contract backlog totaled approximately $39.0
million. At December 31, 1996, contract backlog totaled $35.2 million.
Employees.
As of February 28, 1998, the Company had approximately 530 employees,
which represents a decrease of approximately 13% compared to February 1997. GSE
Systems' operations are dependent on the efforts of its technical personnel and
its senior management. Thus, recruiting and retaining capable personnel,
particularly engineers, computer scientists and other personnel with expertise
in computer software and hardware, as well as particular customer processes, are
critical to the future performance of the Company. Competition for qualified
technical and management personnel is substantial. Certain of the Company's
senior executives are subject to employment agreements which include
non-competition covenants. Although the Company's other key personnel are not
subject to long-term employment or non-competition agreements, they are subject
to standard confidentiality agreements.
ITEM 1A. RISK FACTORS.
Fluctuations in Quarterly Operating Results, Market Price.
The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future as a result of a variety of factors,
including purchasing patterns, timing of new products and enhancements by the
Company and its competitors, and fluctuating foreign economic conditions. Since
the Company's expense levels are based in part on its expectations as to future
revenues, the Company may be unable to adjust spending in a timely manner to
compensate for any revenue shortfall and any revenue shortfalls would likely
have a disproportionate adverse effect on net income. The Company believes that
these factors may cause the market price for the Common Stock to fluctuate,
perhaps significantly. In addition, in recent years the stock market in general,
and the shares of technology companies in particular, have experienced extreme
price fluctuations. The Company's Common Stock has also experienced a relatively
low trading volume, making it further susceptible to extreme price fluctuations.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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International Sales and Operations.
Sales of products and the provision of services to customers outside
the United States accounted for approximately 36.5% of the Company's revenues in
fiscal year 1997. The Company anticipates that international sales and services
will continue to account for a significant portion of its revenues in the
foreseeable future. As a result, the Company may be subject to certain risks,
including risks associated with the application and imposition of protective
legislation and regulations relating to import or export (including export of
high technology products) or otherwise resulting from trade or foreign policy
and risks associated with exchange rate fluctuations. Additional risks include
potentially adverse tax consequences, tariffs, quotas and other barriers,
potential difficulties involving the Company's strategic alliances and managing
foreign sales agents or representatives and potential difficulties in accounts
receivable collection. The Company currently sells products and provides
services to customers in emerging market economies such as Russia, Ukraine,
Bulgaria, and the Czech Republic, as well as customers in countries whose
economies have suffered in the recent Asian financial crisis. The Company has
taken steps designed to reduce the additional risks associated with doing
business in these countries, but the Company believes that such risks may still
exist and include, among others, general political and economic instability,
lack of currency convertibility, as well as uncertainty with respect to the
efficacy of applicable legal systems. There can be no assurance that these and
other factors will not have a material adverse effect on the Company's business,
financial condition or results of operations. Furthermore, the Company's ability
to expand its business into certain emerging international markets is dependent,
in part, on the ability of its customers to obtain financing.
Revenues in the Nuclear Power Industry.
Although, the Company has reduced its reliance on the development of
large application systems having multi-year delivery schedules, such as
full-scope nuclear power plant simulation projects, the Company will continue to
derive a significant portion of its revenues from customers in the nuclear power
industry, particularly the international nuclear power industry, for the
foreseeable future. The Company's ability to supply nuclear power plant
simulators and related products and services is dependent on the continued
operation of nuclear power plants and, to a lesser extent, on the construction
of new nuclear power plants. A wide range of factors affects the continued
operation and construction of nuclear power plants, including the political and
regulatory environment, the availability and cost of alternative means of power
generation, the occurrence of future nuclear incidents, general economic
conditions and the ability of customers to obtain adequate financing.
Revenues in the Chemicals Industry.
The Company derives a portion of its revenues from companies in the
chemicals industry. Accordingly, the Company's future performance is dependent
to a certain extent upon the demand for the Company's products by customers in
the chemical industry. The Company's revenues may be subject to period-to-period
fluctuations as a consequence of industry cycles, as well as general domestic
and foreign economic conditions and other factors affecting spending by
companies in the Company's target process industries. There can be no assurance
that such factors will not have a material adverse effect on the Company's
business, operating results and financial condition.
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Product Development and Technological Change.
The Company believes that its success will depend in large part on its
ability to maintain and enhance its current product line, develop new products,
maintain technological competitiveness and meet an expanding range of customer
needs. The Company's product development activities are aimed at the development
and expansion of its library of software modeling tools, the improvement of its
display systems and workstation technologies, and the advancement and upgrading
of its simulation, process control and data acquisition technologies. The life
cycles for software modeling tools, display system software, process control,
data acquisition and simulation technologies are variable and largely determined
by competitive pressures. Consequently, the Company will need to continue to
make significant investments in research and development to enhance and expand
its capabilities in these areas and to maintain its competitive advantage.
The Company's products are offered in markets affected by technological
change and emerging standards which are influenced by customer preferences. The
Company has expended significant resources in developing versions of its core
products which operate in the increasingly-popular Windows NT environment,
however, there can be no assurance of customer acceptance of these Windows
NT-based products or that these products will be competitive with products
offered by the Company's competitors. Although the Company believes that no
significant trends to migrate to other operating platforms currently affect the
markets for the Company's products, there can be no assurance that customers
will not require compatibility with such other operating platforms in the
future.
Intellectual Property Rights.
Although the Company believes that factors such as the technological
and creative skills of its personnel, new product developments, frequent product
enhancements and reliable product maintenance are important to establishing and
maintaining a technological leadership position, the Company's business depends,
in part, on its intellectual property rights in its proprietary technology and
information. The Company relies upon a combination of trade secret, copyright,
patent and trademark law, contractual arrangements and technical means to
protect its intellectual property rights. The Company generally enters into
confidentiality agreements with its employees, consultants, joint venture and
alliance partners, customers and other third parties that are granted access to
its proprietary information, and generally limits access to and distribution of
its proprietary information. There can be no assurance, however, that the
Company has protected or will be able to protect its proprietary technology and
information adequately, that the unauthorized disclosure or use of the Company's
proprietary information will be prevented, that others have not or will not
develop similar technology or information independently, or, to the extent the
Company owns patents, that others have not or will not be able to design around
those patents. Furthermore, the laws of certain countries in which the Company's
products are sold do not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States.
Competition.
The Company's businesses operate in highly competitive environments
with both domestic and foreign competitors, many of whom have substantially
greater financial, marketing and other resources than the Company. The principal
factors affecting competition include price, technological proficiency, ease of
system configuration, product reliability, applications expertise, engineering
support, local presence and financial stability. The Company believes that
competition in the simulation and process automation fields may further
intensify in the future as a result of advances in technology, consolidations
and/or strategic alliances among competitors, increased costs required to
develop new technology and the increasing importance of software content in
systems and products. The
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Company believes that its technology leadership, experience, ability to provide
a wide variety of solutions, product support and related services, open
architecture and international alliances will allow it to compete effectively in
these markets. As the Company's business has a significant international
component, changes in the value of the dollar could adversely affect the
Company's ability to compete internationally.
Emergence of New Requirements.
The Company is aware of general industry concerns that software
products provide consistent operation through and after the year 2000. The
Company has established a compliance program to test and, if necessary, modify
new versions of its products which are designed for use in connection with
applications for actual plant operations. An evaluation of the Company's
products which are not designed for use in connection with actual plant
operations has also been commenced. Any failure or delay in testing and/or
modifying its products to be year 2000 compliant could affect the Company's
competitive position or lead to product obsolescence.
Reliance on Key Technical and Executive Personnel.
The Company's operations are dependent on the efforts of its technical
personnel and its senior management. Thus, recruiting and retaining capable
personnel, particularly engineers, computer scientists and other personnel with
expertise in computer software and hardware, are critical to the future
performance of the Company. Competition for qualified technical and management
personnel is substantial, and there can be no assurance that the Company will be
successful in attracting and retaining the personnel it requires to continue to
operate profitably. Certain of the Company's senior executives are subject to
employment agreements which include noncompetition covenants. Although the
Company's other key personnel are not generally subject to long-term employment
or noncompetition agreements, they are subject to standard confidentiality
agreements.
Legal Liability.
The Company's business could expose it to third party claims with
respect to product, environmental and other similar liabilities. Although the
Company has sought to protect itself from these potential liabilities through a
variety of legal and contractual provisions as well as through liability
insurance, the effectiveness of such protections has not been fully tested. The
failure or malfunction of one of the Company's systems or devices could create
potential liability for substantial monetary damages and environmental cleanup
costs. Such damages or claims could exceed the applicable coverage of the
Company's insurance. Although management has no knowledge of material liability
claims against the Company to date, such potential future claims could have a
material adverse effect on the business or financial condition of the Company.
Certain of the Company's products and services are used by the nuclear power
industry; although the Company believes that it does not have significant
liability exposure associated with such use as nearly all such products and
services relate to training, and although the Company's contracts for such
products and services typically contain provisions designed to protect the
Company from potential liabilities associated with such use, there can be no
assurance that the Company would not be materially adversely affected by claims
or actions which may potentially arise.
Influence of Affiliate Stockholders.
As of the date of this report, certain directors, executive officers
and other parties which are affiliates of the Company own in excess of 50% of
the Common Stock of the Company. If these stockholders vote together as a group,
they will be able to effectively control the business and affairs of the
Company, including the election of individuals to the Company's Board of
Directors, and the outcome of actions which require stockholder approval.
11
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ITEM 2. PROPERTIES.
As of the date of this report, GSE Systems maintains its headquarters
and leases a facility of approximately 154,000 square feet in Columbia,
Maryland. However, in order to better meet the Company's expected facilities
requirements for the foreseeable future, the Company has entered into
commitments whereby the lease for its existing Columbia facility will be
terminated and the operations presently occupying such facility are scheduled to
relocate into two separate facilities during the second quarter of 1998; one of
these facilities will be in Columbia, Maryland (approximately 53,000 square
feet) and will be occupied by the Company's corporate headquarters offices, the
operations of Power Systems, as well as various other Company operations; the
other facility will be in Baltimore, Maryland (approximately 33,000 square feet)
and will be occupied by the operations of Process Solutions. Each of the leases
for these smaller facilities has a term of ten (10) years.
In addition, the Company also leases office space domestically in
Arizona, Georgia, Louisiana, Texas, Pennsylvania, New Jersey, North Carolina,
and Utah, as well as in Belgium, Japan, Korea, Singapore, Sweden and Taiwan. The
Company leases these facilities for terms ending between 1998 and 2002.
ITEM 3. LEGAL PROCEEDINGS.
In December 1997, Power Systems, Ryan, and certain individuals
affiliated with Ryan reached a comprehensive settlement of the
previously-reported lawsuit pending among them; pursuant to this settlement,
Power Systems acquired all the capital outstanding stock of Ryan and all claims
among the parties were dismissed. See Item 1. Business - "Background."
Various other actions and proceedings are presently pending to which
the Company is a party. In the opinion of management, the aggregate liabilities,
if any, arising from such actions are not expected to have a material adverse
effect on the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the
quarter ended December 31, 1997.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The following table sets forth for the periods indicated the high and
low sale prices for the Common Stock reported by the Nasdaq National Market
System.
<TABLE>
<S> <C> <C>
1996 High Low
---- ---- ---
First Quarter........................................ $ 16 $ 13 1/4
Second Quarter....................................... $ 17 3/4 $ 12
Third Quarter........................................ $ 14 7/8 $ 9 1/4
Fourth Quarter....................................... $ 11 3/4 $ 6 1/2
1997 High Low
---- ---- ---
First Quarter........................................ $ 11 $ 5 3/4
Second Quarter....................................... $ 7 1/4 $ 4 3/8
Third Quarter........................................ $ 6 3/4 $ 3 3/4
Fourth Quarter....................................... $ 6 3/4 $ 3
</TABLE>
There were approximately 50 holders of record of the Common Stock as of
March 6, 1998. Based upon information available to it, the Company believes
there are approximately 600 beneficial holders of the Common Stock. The Company
has never declared or paid a cash dividend on its Common Stock. The Company
currently intends to retain future earnings to finance the growth and
development of its business, and therefore does not anticipate paying any cash
dividends in the foreseeable future.
The Company believes factors such as quarterly fluctuations in results
of operations and announcements of new products by the Company or by its
competitors may cause the market price of the Common Stock to fluctuate, perhaps
significantly. In addition, in recent years the stock market in general, and the
shares of technology companies in particular, have experienced extreme price
fluctuations. The Company's Common Stock has also experienced a relatively low
trading volume, making it further susceptible to extreme price fluctuations.
These factors may adversely affect the market price of the Company's Common
Stock.
In 1997, the Company granted one of its senior executives a stock
option to acquire 25,000 shares of Common Stock at an exercise price of $11.25.
In 1996, in exchange for services, the Company granted stock options to two
consultants to acquire 10,000 shares of Common Stock in the aggregate at an
exercise price of $14.00. None of the aforementioned stock option grants were
made pursuant to the Company's 1995 Long-Term Incentive Plan. Such transactions
were exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(2) thereunder.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following tables present selected unaudited combined financial data
of Power Systems, GPI, Power Systems AB and Erudite Software with respect to the
periods beginning January 1, 1993 through April 13, 1994 and of the Company for
periods after April 13, 1994. Historical results of the Company from April 13,
1994 through December 31, 1994 include the operations of Power Systems, GPI,
Power Systems AB and Erudite Software. Power Systems, GPI, Power Systems AB and
Erudite Software are collectively referred to as the "Predecessors" with respect
to all periods between January 1, 1993 and April 13, 1994. The balance sheet
data of the Company as of December 31, 1994 includes the Predecessors and
Process Solutions which was acquired on December 30, 1994, except for certain
international operations of the TI process systems business which were acquired
by the Company in the second quarter of 1995. Historical results of operations
and balance sheet data for 1997, 1996 and 1995 include the Predecessors and
Process Solutions. The financial information has been derived from the
historical financial statements of the Predecessors and the Company. Erudite
Software was acquired on May 22, 1996 through a merger. The merger was accounted
for by using the pooling of interests method. Accordingly the Company's and
Predecessors' financial statements have been restated to include on a historical
cost basis the accounts and operations of Erudite Software for all periods
presented. The balance sheet data of the Company as of December 31, 1997
includes the operations of Ryan which was acquired by Power Systems as of
December 1, 1997. The statement of operations data for the year ended December
31, 1997 includes the activity of Ryan since the date of its acquisition.
14
<PAGE>
<TABLE>
<CAPTION>
Predecessors (1) Company
---------------------- ----------------------------------------------------
Year Jan.1 Apr. 14 Year Ended December 31,
Ended through through ---------------------------------------
Dec. 31, April 13, Dec. 31,
1993 1994 1994 (2) 1995 (3) 1996 (3) 1997 (3)(4)
---- ---- -------- -------- -------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues .................................. $50,242 $14,659 $37,085 $96,060 $96,033 $79,711
Cost of revenue .......................... 45,656 10,380 27,932 65,592 63,679 58,326
------- ------- ------- ------- ------- -------
Gross profit ........................... 4,586 4,279 9,153 30,468 32,354 21,385
Operating expenses:
Selling, general and administrative ..... 11,342 2,628 6,313 21,815 24,192 27,320
Depreciation and amortization ........... 1,041 420 1,125 2,341 2,111 2,368
Business combination costs .............. -- -- -- -- 1,206 --
Employee severance and termination
costs.................................. -- -- -- -- -- 1,124
Total operating expenses ............
------- ------- ------- ------- ------- --------
12,383 3,048 7,438 24,156 27,509 30,812
------- ------- ------- ------- ------- --------
Operating income (loss) .................... (7,797) 1,231 1,715 6,312 4,845 (9,427)
Interest expense ........................... 48 41 402 983 387 765
Other expense (income), net ................ 57 (43) (192) (364) (394) 1,228
------- ------- ------- ------- ------- --------
Income (loss) before income taxes .......... (7,902) 1,233 1,505 5,693 4,852 (11,420)
Provision (benefit) for income taxes ....... (849) 678 552 2,017 709 (2,717)
Net income (loss) .......................... $ (7,053) $ 555 $ 953 $ 3,676 $4,143 $ (8,703)
======== ====== ====== ======= ====== ========
Earnings (loss) per common share - Basic .... $ 0.26 $ 0.91 $ 0.82 $ (1.72)
====== ======= ====== ========
- Diluted .. $ 0.26 $ 0.91 $ 0.82 $ (1.72)
====== ======= ====== ========
Weighted average common shares
outstanding - Basic .... 3,341 4,049 5,066 5,066
====== ======= ====== ========
- Diluted... 3,341 4,059 5,073 5,066
====== ======= ====== ========
<CAPTION>
As of As of As of December 31,
Dec. 31, Apr. 13, --------------------------------------------------
1993 1994 1994 1995 1996 1997
---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Working capital.............................. ($2,039) ($434) $ 1,269 $16,077 $13,867 $ 1,646
Total assets................................. 29,588 35,655 42,312 54,688 51,006 48,362
Long-term liabilities........................ 10,326 15,570 15,783 6,055 2,580 2,369
Series A Preferred Stock..................... -- -- 2,400 -- -- --
Stockholders' equity (deficit)............... (3,128) (2,563) (4,229) 20,532 24,693 15,924
</TABLE>
- ----------
(1) Historical results of operations and balance sheet data for the
Predecessors include the combined results of operations and the combined
balances on a historical cost basis of Power Systems (as a wholly-owned
subsidiary of Bicoastal Corporation until August 31, 1993 and of ManTech
thereafter), GPI, Power Systems AB and Erudite Software.
(2) Statement of operations data for the period April 14 through December 31,
1994 include the results of operations of the Company and its wholly-owned
subsidiaries Power Systems, GPI, Power Systems AB and Erudite Software.
Balance sheet data as of December 31, 1994 also includes the domestic
operations of Process Solutions, which was acquired on December 30, 1994.
(3) Statement of operations data for the year ended December 31, 1995, 1996 and
1997 includes the operations of Power Systems, GPI, Power Systems AB,
Erudite Software, the domestic operations of Process Solutions and the
international operations of Process Solutions, substantially all of which
the Company acquired in the second quarter of 1995. Balance sheet data as
of December 31, 1995, 1996 and 1997 includes Power Systems, GPI, Power
Systems AB, Erudite Software, the domestic and international operations of
Process Solutions.
(4) Statement of operations data for the year ended December 31, 1997 also
includes the operations of Ryan since its acquisition by Power Systems as
of December 1, 1997.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations.
The following table sets forth the results of operations for the
periods presented expressed in thousands of dollars and as a percentage of
revenues.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1997 1996 1995
-------------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Contract revenue ........................ $ 79,711 100.0% $ 96,033 100.0% $ 96,060 100.0%
Cost of revenue ......................... 58,326 73.2 63,679 66.3 65,592 68.3
-------- ----- -------- ----- -------- -----
Gross profit ............................ 21,385 26.8 32,354 33.7 30,468 31.7
Selling, general and administrative....... 27,320 34.3 24,192 25.2 21,815 22.7
Depreciation and amortization ........... 2,368 3.0 2,111 2.2 2,341 2.4
Business combination costs .............. -- -- 1,206 1.3 -- --
Employee severance and termination costs.. 1,124 1.4 -- -- -- --
-------- ----- -------- ----- -------- -----
Operating (loss) income ................. (9,427) (11.8) 4,845 5.0 6,312 6.6
Interest expense ........................ 765 1.0 387 0.4 983 1.0
Other expense (income) ................... 1,228 1.5 (394) (0.4) (364) (0.4)
-------- ----- -------- ----- -------- -----
(Loss) income before income taxes ....... (11,420) 14.3 4,852 5.0 5,693 5.9
(Benefit from) provision for income
taxes ................................... (2,717) (3.4) 709 0.7 2,017 2.1
-------- ----- -------- ----- -------- -----
Net (loss) income ....................... $ (8,703) (10.9)% $ 4,143 4.3% $ 3,676 3.8%
======== ===== ======== ===== ======== =====
</TABLE>
Comparison of 1997 to 1996.
Contract Revenue. Total contract revenue was $79.7 million and $96.0
million for the years ended December 31, 1997 and 1996, respectively. This $16.3
million (17%) decrease in revenue was primarily attributable to a significant
decrease in power plant simulation revenue, resulting from the conclusion of
several full-scope nuclear power plant simulation projects in the first half of
1997, and a decrease in third party hardware sales by the Company's Business
Systems unit, which decreases were only partially offset by a 12% increase in
the domestic revenue of the Company's Process business. The Company as a whole
continues its transition towards smaller and shorter-term projects that often
include licenses of the Company's proprietary tools.
Revenues from fixed price contracts constitute approximately 90% of the
Company's revenues for the past three years. Any unexpected costs or
unanticipated delays in connection with the performance of fixed priced
contracts could adversely affect the Company's financial results.
International sales were approximately $29.1 million or 36.5% of total
revenues in 1997 and $48.2 million or 50.2% of total revenues in 1996, a
decrease which reflects the significant reduction in power plant simulation
revenue in 1997. This decrease notwithstanding, the Company expects that
international sales will continue to represent a significant portion of its
total revenues. The Company currently sells products and services to customers
in emerging market economies such as Russia, Ukraine, Bulgaria, and the Czech
Republic, as well as customers in countries whose economies have suffered in the
recent Asian financial crisis. The Company's international
16
<PAGE>
operations are subject to various risks, including exposure to currency
fluctuation, regulatory requirements, political and economic instability and
trade restrictions. The Company has taken steps to reduce these risks,
particularly risks associated with doing business in emerging markets, but there
can be no assurance that the above mentioned risk factors will not have a
material adverse affect on the Company's business, financial condition or
results of operations.
Gross Profit. Gross profit decreased to $21.4 million in 1997 from
$32.4 million in 1996, a decline of 33.9%, primarily due to lower revenues
generated by power plant simulation contracts. Gross profit percentage was 26.8%
in 1997 compared to 33.7% in 1996, reflecting a higher percentage of government
contract-related revenues in the power simulation business with corresponding
lower margins, an increase to the amortization of software development costs
capitalized, lower labor utilization within the Business Systems unit, as well
as reserves taken against certain contracts in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $27.3 million, or 34.3% of revenues, during
the year ended December 31, 1997 from $24.2 million, or 25.2% of revenues,
during the corresponding period in 1996. The increase in these expenses in 1997
consists of increased sales and marketing costs, primarily within the Business
Systems unit, increased recruiting and relocation costs, and increased costs for
professional services related to the lawsuit referred to in Part I, Item 3.
Legal Proceedings. Additionally, the increase reflects a reserve of $600,000
recorded to reduce certain Korean receivables to their estimated realizable
value as a result of the Asian financial crisis. In the fourth quarter of 1997,
the Company also recorded costs of $852,000 associated primarily with the future
lease commitments on the unused portion of the current Columbia, Maryland leased
facility for which the Company will derive no future benefit.
Gross research and product development expenditures were $5.1 million
and $5.8 million for the years ended December 31, 1997 and 1996, respectively.
Capitalized software development costs totaled $3.5 million and $3.9 million,
during the years ended December 31, 1997 and 1996, respectively. Net research
and development costs expensed and included within selling, general and
administrative expenses were $1.6 million and $1.9 million during the years
ended December 31, 1997 and 1996, respectively. The Company continued investing
in the conversion of its D/3 DCS(TM) product to the Microsoft Windows NT(R)
platform, enhancement of its S/3 SCADA(TM) System for the Microsoft Windows
NT(R) platform and the productization of its SimSuite(TM) software tools.
Employee Severance and Termination Costs. The Company recorded a net
charge for severance and other employee obligations of $1.1 million in
connection with cost reduction efforts initiated to offset the impact of a
decrease in contract revenues. Of this charge, $976,000 has been expended as of
December 31,1997.
Depreciation and Amortization. Depreciation expense amounted to $2.1
million and $1.9 million during the years ended December 31, 1997 and 1996,
respectively. This increase was attributable to higher capital expenditures made
in 1997 and 1996.
Amortization of goodwill and intangibles was $219,000 and $168,000
during the years ended December 31, 1997 and 1996, respectively. This increase
resulted from amortization of certain intangible assets which were fully
amortized as of December 31, 1997.
Business Combination Costs. In 1996, business combination costs related
to the acquisition of Erudite Software, which consist primarily of consulting
fees, legal and accounting expenses, and compensation expense for the shares
issued to employees by the owners of Erudite Software pursuant to stock transfer
agreements, amounted to approximately $1.2 million and were charged to operating
expenses.
17
<PAGE>
Operating (Loss) Income. Operating loss amounted to ($9.4) million, or
(11.8)% of revenues, and operating income amounted to $4.9 million, or 5% of
revenues, during the years ended December 31, 1997 and 1996, respectively. This
significant decrease in operating income reflects the reduction in margin from
power plant simulation projects, increased sales and marketing costs and
employee severance and termination costs as well as several other fourth quarter
adjustments. See Note 18 of "Notes to Consolidated Financial Statements".
Interest Expense. Interest expense increased to $765,000 in 1997 from
$387,000 in 1996. This increase is attributable primarily to a significant
increase in the Company's borrowings under its lines of credit made during the
period to fund working capital requirements.
Other Expense (Income). Other expenses amounted to $1.2 million in
1997, resulting almost exclusively from recognized foreign exchange losses of
the Company's Asian operations. During 1996, $394,000 in interest income was
earned from short-term investments of excess cash during the year as well as
proceeds from the sale of an equity interest in a joint venture.
(Benefit from) Provision for Income Taxes. Due to the loss experienced
in 1997, the Company recognized a tax benefit of $2.7 million as compared to the
tax provision of $709,000 recognized in 1996. The effective tax rate was
different in 1997 as a result of reductions in the valuation allowance
recognized as income by the Company in 1996.
Comparison of 1996 to 1995.
Contract Revenue. Total contract revenue was $96.0 million and $96.1
million for the years ended December 31, 1996 and 1995. There was an increase in
1996 revenues from the Company's growing client/server solutions business of 82%
or $8.8 million, which was offset by a reduction in nuclear simulation project
revenues by 14% or $7.0 million, due in part to the maturing of the nuclear
simulation business and the stoppage on a large Eastern European project due to
lack of customer funding.
Contract backlog at December 31, 1996 and 1995 totaled $35.2 million
and $60.1 million, respectively.
International sales were approximately $48.2 million or 50.2% of total
revenues in 1996 and $50.8 million or 52.8% of total revenues in 1995.
Gross Profit. Gross profit increased to $32.4 million, a gross margin
of 33.7% for the year ended December 31, 1996 from $30.5 million, a gross margin
of 31.7%, in the corresponding period of 1995. The increased gross margin was
primarily attributable to declining volume of certain low margin contracts,
settlement of claims on two international contracts, changes in contract and
warranty estimates and cost containment measures.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $24.2 million, or 25.2% of revenues, during
the year ended December 31, 1996 from $21.8 million, or 22.7% of revenues,
during the corresponding period in 1995. The increase in selling, general and
administrative expenses for 1996 was primarily attributable to increased sales
force, bid and proposal activities, a full year charge attributable to the
international operations of Process Solutions, a one time charge for severance
and employee related obligations as a result of the Company's alignment into
strategic business units and business expansion efforts. These expenses were
offset, in part, by a significant decrease in net research and development
expenses as discussed below and to a one-time $1.1 million adjustment in
connection with consolidation of duplicate facilities.
Gross research and product development expenditures were $5.8 million
and $4.6 million for the years ended December 31, 1996 and 1995, respectively.
Capitalized software development costs totaled $3.9 million and
18
<PAGE>
$1.6 million, during the years ended December 31, 1996 and 1995, respectively.
Net research and development costs expensed and included within selling, general
and administrative expenses were $1.9 million and $3.0 million during the years
ended December 31, 1996 and 1995, respectively. During 1996, the Company
continued investing in its FlexBatch(R) recipe and process management system,
conversion of the S/3 SCADA(TM) System to Microsoft Windows NT(R) platform and
productization of SimSuite(TM) software tools.
Depreciation and Amortization. Depreciation expense amounted to $1.9
million and $1.6 million during the years ended December 31, 1996 and 1995,
respectively. This increase was attributable to higher levels of capital
expenditure in 1996.
Amortization of goodwill and intangibles was $168,000 and $766,000
during the years ended December 31, 1996 and 1995, respectively. This decrease
was attributable to the significant reduction in goodwill and other intangible
assets at December 31, 1995, as fully discussed in Note 8 of "Notes to
Consolidated Financial Statements".
Business Combination Costs. Business combination costs related to the
acquisition of Erudite Software, which consisted primarily of consulting fees,
legal and accounting expenses, and compensation expense for the shares issued to
employees by the owners of Erudite Software pursuant to stock transfer
agreements, amounted to approximately $1.2 million and were charged to operating
expenses in 1996.
Operating Income. Operating income amounted to $4.9 million and $6.3
million during the years ended December 31, 1996 and 1995, respectively. During
1996, excluding the non-recurring acquisition costs, operating income was $6.1
million, or 6.3% of revenues, as compared with $6.3 million, or 6.6% of revenues
during the corresponding period of 1995. The decrease in operating income for
1996 was attributable to higher expenses relating to sales and marketing efforts
and business expansion activities, which were partially offset by higher margins
on contracts, continued cost control initiatives, lower net research and
development expenses and one-time facility adjustment.
Interest Expense. Interest expense decreased to $387,000 during the
year from $983,000, during 1995. This decrease is attributable primarily to the
repayment in August 1995 of a five year promissory note to finance the Process
Solutions acquisition and temporary pay-down of the working capital bank lines
with the Company's initial public offering of Common Stock in mid-1995 ("IPO")
proceeds.
Other Expense (Income). Other income amounted to $394,000 from interest
earned from short-term investments of excess cash during the year ending
December 31, 1996 as well as proceeds from the sale of an equity interest in a
joint venture. During the corresponding period of 1995, $364,000 in interest
income was earned from short-term investments of cash proceeds from the IPO.
Income Tax Expense. The Company's effective tax rate decreased to 14.6%
in 1996 from 35.4% in 1995. The 1996 rate was decreased as a result of a one
time reduction of the tax provision of $1.1 million. This reduction reflected
the Company's assessment that it would be able to utilize previous net operating
loss carry forwards generated by its power business unit.
Liquidity and Capital Resources.
The Company has funded its activities primarily from operations and
from borrowings under lines of credit. In 1997, the Company's operating
activities used cash totaling approximately $3.8 million, primarily
19
<PAGE>
related to the 1997 net loss of $8.7 million, together with an increase in
deferred income tax assets associated with a net operating loss carryforward,
partially offset by non-cash items such as depreciation and amortization. For
the year ended December 31, 1996, the Company's operating activities used cash
of approximately $1.9 million. At December 31, 1997, the Company had cash and
cash equivalents of $334,000 compared to $2.4 million as of December 31, 1996.
The Company used approximately $4,449,000 in cash for investing
activities, made up primarily of $3,474,000 of capitalized software development
costs and $918,000 of capital expenditures.
The Company generated cash flows from financing activities of
approximately $6,167,000, made up primarily of $6,450,000 in borrowings under
the Company's lines of credit.
The Company maintains, through its subsidiaries, two lines of credit
that provide for borrowings up to a total of $14.0 million to support foreign
letters of credit, margin requirements or foreign exchange contracts and working
capital needs. The first line for $7.0 million is 90% guaranteed by the
Export-Import Bank of the United States ("EXIM"), is collateralized by Power
Systems' contract receivables and inventory, and provides for borrowings up to
90% of eligible receivables and 60% of unbilled receivables. The second line,
also for $7.0 million, is collateralized by substantially all of Process
Solutions' assets, and provides for borrowing up to 85% of eligible receivables
and 20% of inventory (not to exceed $500,000). The lines require the Company to
comply with certain financial ratios and preclude the Company from paying
dividends and making acquisitions beyond certain limits without the bank's
consent.
In November 1997, the Process Solutions line was amended to permit the
use of loan proceeds to support the working capital needs of Erudite Software.
In connection with this amendment, Erudite Software became fully liable for
amounts outstanding under the line and substantially all of its assets were
pledged as collateral.
In March 1998, the Company entered into agreements with the bank
whereby each of the Power Systems and Process Solutions lines of credit was
conditionally extended through June 30, 1998 and a temporary $1.5 million
over-advance limit was established for the Process Solutions line. In connection
with the aforementioned agreement concerning the Process Solutions line, the
Company has arranged for certain guaranties to be provided on its behalf to the
bank by GP Strategies and ManTech. In consideration for the guaranties, the
Company has agreed to grant both GP Strategies and ManTech warrants to purchase
shares of the Company's Common Stock; the number of shares of Common Stock and
other provisions for such warrants have not been finalized as of the date of
this report. The aforementioned agreement concerning the Process Solutions line
also provides for: (i) an increase of the applicable interest rate from the
prime rate to the prime rate plus 1.00% or from LIBOR plus 1.0% to LIBOR plus
3.00%, as the case may be, and (ii) a reduction in the available borrowing
level, and a repayment of outstanding borrowings above such level, in the event
of the Company's sale or transfer of certain assets. The Power Systems line
continues to bear interest at the prime rate or LIBOR plus 1.5%, as the case may
be.
Although the Company was not in compliance with its cash flow coverage
ratio or minimum tangible net worth ratio covenants as of December 31, 1997, the
Company has received a written waiver of such covenants from its bank.
In 1997, the Company entered into an equipment lease arrangement which
provided for up to $1.2 million of available credit to be used for the
procurement of certain computer hardware and office equipment. The Company had
utilized $610,000 of credit under this arrangement, of which $521,000
related to a sale and lease-back of equipment previously purchased by the
Company, prior to expiration of the availability of credit on December 31, 1997.
The terms of the lease provide for the Company's payment of monthly lease
charges for a term of 36 months.
The Company's additional commitments as of December 31, 1997 consisted
primarily of leases on its headquarters and other facilities. Further, the
performance of certain of the Company's customer contracts are secured by
performance guaranties, amounting to $548,000, and letters of credit, amounting
to $318,000, as of December 31, 1997, furnished by its subsidiaries' respective
former parent organizations in accordance with the
20
<PAGE>
agreement among ManTech, GP Strategies, GPC, SGLG, Vattenfall and the Company
dated April 13, 1994 (the "Formation Agreement"). Letters of credit are issued
by the Company in the ordinary course of business through commercial banks as
required by certain contracts and proposal requirements.
During the year ended December 31, 1997, the Company generated a net
loss of $8.7 million. The Company's credit facilities expire at June 30, 1998,
and currently the Company does not have the financial wherewithal to repay these
loans. The Company plans to reduce its borrowings through the proceeds from the
sale of Erudite Software, which sale the Company is currently actively pursuing.
Further, the Company is exploring other options to enhance its liquidity through
an additional restructuring of its operations. Although the Company intends to
seek to renegotiate or replace its expiring credit facilities in connection with
these liquidity enhancing actions, there can be no assurance that such financing
will be available to the Company, or if available, will be on terms favorable to
the Company.
In the event that the sale of Erudite Software does not result in
sufficient proceeds to meet the Company's current obligations as they become
due, or in the event that the sale of Erudite Software does not occur before
June 30, 1998, certain of the Company's principal stockholders ManTech and GP
Strategies have agreed to provide working capital support to the Company through
credit enhancements, a portion of which is subject to bank approval which is
expected to be received, or by taking actions that would result in additional
liquidity to the Company. Although the specific form(s) of this working capital
support has not yet been determined, such support may be in the form of credit
enhancements, corporate guaranties and/or purchases of certain of the Company's
assets.
Management believes that the above actions will result in sufficient
liquidity and working capital resources necessary for planned business
operations, debt service requirements, planned investments and capital
expenditures.
Although the terms of the aforementioned credit working capital support
arrangements have not yet been determined, such arrangements could have a
dilutive effect on the interests of other holders of the Company's Common Stock.
Foreign Exchange.
A portion of the Company's international sales revenue is received in a
currency other than the currency in which the expenses relating to such revenue
are paid. The Company manages its foreign currency exposure primarily by
entering into foreign currency exchange agreements and purchasing foreign
currency options. The former requires the Company, on a specified date or during
a specified period, to exchange a set amount of foreign currency for United
States dollars or another base currency. The latter provides the Company with
the option to exchange foreign currency for United States dollars or another
base currency on a specified date or during a specified period. The Company
utilizes these foreign exchange agreements and options only to reduce the impact
of foreign currency fluctuations on its operating results and does not engage in
foreign currency speculation. Foreign exchange contracts do not expose the
Company to material risk because any losses on the contracts are calibrated to
be offset by gains on the value of the foreign receivables being hedged. Foreign
exchange options do not expose the Company to material risk since the Company
has the right not to exercise the option.
At December 31, 1997, the Company had forward option contracts of
$460,000 to hedge future German mark receipts and the Company's Swedish
subsidiary had forward exchange contracts of Swedish krona 7.0 million, or
approximately $900,000 to hedge future Japanese yen and German mark receipts.
Gains and losses on such contracts are recognized as part of the cost of the
underlying transactions being hedged. Foreign exchange contracts have an element
of risk that the counterparty may not be able to meet the terms of the
agreement. However, the Company minimizes such risk exposure by limiting
counterparties to NationsBank and Nordbanken AB. Management believes that the
risk of incurring such losses is immaterial. The Company has also entered into
foreign exchange option contracts with NationsBank, which permit, but do not
require, the Company to exchange foreign currencies at a future date with the
bank at a contracted exchange rate. Costs associated with such contracts are
amortized over the life of the contract matching the underlying receipts.
Other Matters.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130,
21
<PAGE>
"Reporting Comprehensive Income," and Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," in June 1997, which are both effective for the year ending
December 31, 1998. SFAS No. 130 establishes standards for reporting
comprehensive income in a full set of general purpose financial statements
either in the income statement or in a separate statement. SFAS No. 131
establishes standards for reporting information about operating segments,
including related disclosures about products and services, geographic areas and
major customers. These standards are not expected to have a material impact on
the financial reporting or disclosures of the Company.
Statement of Position 97-2 ("SOP 97-2") regarding Software Revenue
Recognition will be effective for transactions entered into in fiscal years
beginning after December 15, 1997. SOP 97-2 addresses contract accounting issues
in the context of the software industry. Adoption of SOP 97-2 is not expected to
have a material impact on the Company.
The Company is in the process of assessing its computer applications to
ensure their functionality with respect to the year 2000 millennium change. At
present, the Company does not anticipate that material incremental costs will be
incurred in any single future year.
To date, management believes inflation has not had a material impact on
the Company's operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
GSE Systems, SimSuite Pro, SimSuite Pipeline, SimSuite Power,
FlexBatch, TotalVision, SABL, D/3 DCS and S/3 SCADA are trademarks of GSE
Systems, Inc. All other trademarks and/or registered trademarks are the property
of their respective owners.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
GSE Systems, Inc. and Subsidiaries
Report of Independent Accountants....................................................................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................................ F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995..................................................................................... F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1997, 1996 and 1995..................................................................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995..................................................................................... F-5
Notes to Consolidated Financial Statements.............................................................................. F-6
</TABLE>
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of
GSE Systems, Inc.
We have audited the accompanying consolidated balance sheets of GSE Systems,
Inc. and Subsidiaries (the Company) as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of GSE Systems, Inc.
and Subsidiaries as of 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.
COOPERS & LYBRAND L.L.P.
McLean, Virginia
March 31, 1998
F-1
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................................ $ 334 $ 2,450
Contract receivables ............................................................. 24,371 27,457
Inventories ...................................................................... 2,700 3,538
Prepaid expenses and other current assets ........................................ 1,739 2,701
Deferred Income taxes ............................................................ 2,570 1,454
------- -------
Total current assets ........................................................ 31,714 37,600
Property and equipment, net ...................................................... 3,864 5,318
Investment in joint venture ...................................................... 252 --
Software development costs, net .................................................. 7,526 5,176
Goodwill and other intangible assets, net ........................................ 2,974 2,059
Deferred income taxes ............................................................ 1,730 569
Other assets ..................................................................... 302 284
------- -------
Total assets ............................................................... $48,362 $51,006
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit .................................................................. $ 9,032 $ 2,582
Accounts payable ................................................................ 7,919 8,604
Accrued expenses ................................................................. 4,304 4,430
Obligations under capital lease ................................................. 208 186
Accrued severance costs ......................................................... 148 --
Billings in excess of revenue earned ............................................. 6,719 5,358
Accrued contract reserves ....................................................... 287 233
Accrued warranty reserves ....................................................... 625 1,408
Other current liabilities ....................................................... 513 281
Income taxes payable ............................................................. 313 651
------- -------
Total current liabilities ................................................ 30,068 23,733
Notes payable to related parties ............................................... 185 202
Obligations under capital lease .................................................. 234 420
Billings in excess of revenue earned ............................................ -- 803
Accrued contract and warranty reserves ........................................... 675 687
Other liabilities ............................................................... 1,276 468
------- -------
Total liabilities ........................................................ 32,438 26,313
------- -------
Stockholders' equity:
Common stock $.01 par value, 8,000,000 shares authorized,
5,065,688 shares issued and outstanding .................................... 50 50
Additional paid-in capital .................................................. 21,378 21,378
Retained earnings (deficit) - at formation ................................... (5,112) (5,112)
Retained earnings (deficit) - since formation ................................ (239) 8,464
Cumulative translation adjustment............................................. (153) (87)
------- -------
Total stockholders' equity ................................................ 15,924 24,693
------- -------
Total liabilities & stockholders' equity .................................. $48,362 $51,006
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Contract revenue...................................... $79,711 $96,033 $96,060
Cost of revenue....................................... 58,326 63,679 65,592
-------- ------- -------
Gross profit..................................... 21,385 32,354 30,468
-------- ------- -------
Operating expenses:
Selling, general and administrative................. 27,320 24,192 21,815
Depreciation and amortization....................... 2,368 2,111 2,341
Business combination costs.......................... -- 1,206 --
Employee severance and termination costs............ 1,124 -- --
-------- ------- -------
Total operating expenses............................ 30,812 27,509 24,156
-------- ------- -------
Operating (loss) income ......................... (9,427) 4,845 6,312
Interest expense, net................................. 765 387 983
Other (income) expense ............................... 1,228 (394) (364)
-------- ------- -------
(Loss) income before income taxes................ (11,420) 4,852 5,693
(Benefit from) provision for income taxes............. (2,717) 709 2,017
-------- ------- -------
Net (loss) income............................... $ (8,703) $ 4,143 $ 3,676
======== ======= =======
Basic and diluted (loss) earnings per common share.... $ (1.72) $ 0.82 $ 0.91
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Retained Earnings
Common Stock (Deficit)
--------------- Additional ---------------------
Paid-in At Since
Shares Amount Capital Formation Formation
------ ------ ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1995......... 3,341 $ 33 $ -- $(5,048) $ 874
Issuance of common stock........ 1,725 17 21,121 -- --
Distribution to shareholder..... -- -- -- (64) (229)
Reductions in notes receivable.. -- -- -- -- --
Foreign currency translation.... -- -- -- -- --
Pension liability adjustment.... -- -- -- -- --
Net income... .................. -- -- -- -- 3,676
----- ------ ------- ------- -------
Balance, December 31, 1995...... 5,066 50 21,121 (5,112) 4,321
Compensation expense............ -- -- 257 -- --
Foreign currency translation.... -- -- -- -- --
Pension liability adjustment.... -- -- -- -- --
Net income...................... -- -- -- -- 4,143
----- ------ ------- ------- -------
Balance, December 31, 1996...... 5,066 50 21,378 (5,112) 8,464
Foreign currency translation.... -- -- -- -- --
Net loss........................ -- -- -- -- (8,703)
----- ------ ------- ------- -------
Balance, December 31, 1997...... 5,066 $ 50 $21,378 $(5,112) $ (239)
===== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Notes Pension Foreign
Receivable from Liability Currency
Stockholders Adjustment Translation Total
------------- ---------- ----------- -----
<S> <C> <C> <C> <C>
Balance January 1, 1995......... $ (75) $ (73) $ 60 $(4,229)
Issuance of common stock........ -- -- -- 21,138
Distribution to shareholder..... -- -- -- (293)
Reductions in notes receivable.. 75 -- -- 75
Foreign currency translation.... -- -- 194 194
Pension liability adjustment.... -- (29) -- (29)
Net income... .................. -- -- -- 3,676
------- ------ ------ -------
Balance, December 31, 1995...... -- (102) 254 20,532
Compensation expense............ -- -- -- 257
Foreign currency translation.... -- -- (341) (341)
Pension liability adjustment.... -- 102 -- 102
Net income...................... -- -- -- 4,143
------- ------ ------ -------
Balance, December 31, 1996...... -- -- (87) 24,693
Foreign currency translation.... -- -- (66) (66)
Net loss........................ -- -- -- (8,703)
------- ------ ------ -------
Balance, December 31, 1997...... $ -- $ -- $ (153) $15,924
======= ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net (loss) income ............................................................. $(8,703) $ 4,l43 $ 3,676
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation and amortization.............................................. 3,492 2,747 2,813
Accrued facility reserve................................................... 852 (1,451) (348)
Provision for doubtful contract receivables ............................... 723 -- 102
Foreign currency transaction loss.......................................... 1,275 -- --
Non-cash stock compensation................................................ -- 257 --
Deferred income taxes ..................................................... (2,277) 71 627
Interest imputed on discounted note payable ............................... -- -- 17
Changes in assets and liabilities:
Contract receivables.................................................. 1,464 2,103 (7,962)
Inventories........................................................... 727 (1,245) 271
Prepaid expenses and other current assets............................. 836 355 (1,208)
Other assets.......................................................... (17) (181) (150)
Accounts payable and accrued expenses................................. (2,152) 1,399 3,645
Accrued severance .................................................... 148 -- --
Billings in excess of revenue earned.................................. 644 (6,933) 617
Accrued contract and warranty reserves................................ (710) (1,927) (2,605)
Other current liabilities............................................. 200 (780) (157)
Income taxes payable ................................................. (315) (520) 676
Other liabilities..................................................... (2) 41 (1)
------- ------- ------
Net cash provided by (used in) operating activities............................ (3,815) (1,921) 13
------- ------- ------
Cash Flows From Investing Activities:
Capital expenditures.................................................. (918) (2,834) (1,501)
Capitalization of software development costs.......................... (3,474) (3,890) (1,664)
Purchase of business, net of cash acquired............................ (578)
Proceeds from sale/leaseback transaction.............................. 521 -- --
------- ------- ------
Net cash used in investing activities.......................................... (4,449) (6,724) (3,165)
------- ------- ------
Cash Flows From Financing Activities:
Increase in (repayments under) lines of credit with bank................... 6,450 2,369 (4,024)
Cash overdraft ............................................................ -- -- (13)
Repayment to Vattenfall ................................................... -- -- (1,411)
Repayments under capital lease obligations................................. (266) (37) (75)
Principal payments under term-note......................................... -- -- (7,882)
Decrease in notes payable to related parties .............................. (17) -- (38)
Payments to shareholder at formation ...................................... -- -- (64)
Net proceeds from sale of common stock .................................... -- -- 21,138
Redemption of preferred stock ............................................. -- -- (2,400)
Net repayment of amounts due from stockholders............................. -- (204) 2,473
------- ------- ------
Net cash provided by (used in) financing activities............................ 6,167 2,128 7,704
Effect of exchange rate changes on cash........................................ (19) (49) 112
------- ------- ------
Net increase (decrease) in cash and cash equivalents........................... (2,116) (6,566) 4,664
Cash and cash equivalents at beginning of period............................... 2,450 9,016 4,352
------- ------- ------
Cash and cash equivalents at end of period..................................... $ 334 $ 2,450 $ 9,016
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business
GSE Systems, Inc. (the "Company") designs, develops and delivers business and
technology solutions by applying process control, data acquisition, simulation,
client/server and business software, systems and services to the energy, process
and manufacturing industries worldwide. The Company was formed on April 13, 1994
through the consolidation of operations of GSE Power Systems, Inc. ("Power
Systems" and formerly "Simulation, Systems & Services Technologies Company" and
its immediate parent MSHI, Inc.), GP International Engineering & Simulation,
Inc. ("GPI") and GSE Power Systems AB ("Power Systems AB" and formerly "EuroSim
AB"). In December 1994 and in the second quarter of 1995, the Company expanded
into the process control and data acquisition business through the acquisition
of the net assets of the process control systems division of Texas Instruments
Incorporated ("TI"), which now does business as GSE Process Solutions, Inc.
("Process Solutions"). In May 1996, the Company acquired all of the outstanding
shares of capital stock of Erudite Software & Consulting, Inc. ("Erudite
Software"), a provider of client/server solutions through custom application
software development, training services, hardware-software sales and network
design and implementation. In December 1997, the Company acquired all of the
outstanding shares of capital stock of J.L. Ryan, Inc. ("Ryan"), a provider of
engineering modifications and upgrade services to the power plant simulation
market.
During the year ended December 31, 1997, the Company generated a net loss of
$8.7 million. The Company's credit facilities expire at June 30, 1998, and
currently the Company does not have the financial wherewithal to repay these
loans. The Company plans to reduce its borrowings through the proceeds from the
sale of Erudite Software, which sale the Company is currently actively pursuing.
Further, the Company is exploring other options to enhance its liquidity through
an additional restructuring of its operations. Although the Company intends to
seek to renegotiate or replace its expiring credit facilities in connection with
these liquidity enhancing actions, there can be no assurance that such financing
will be available to the Company, or if available, will be on terms favorable to
the Company.
In the event that the sale of Erudite Software does not result in sufficient
proceeds to meet the Company's current obligations as they become due, or in the
event that the sale of Erudite Software does not occur before June 30, 1998,
certain of the Company's principal stockholders ManTech and GP Strategies have
agreed to provide working capital support to the Company through credit
enhancements, a portion of which is subject to bank approval which is expected
to be received, or by taking actions that would result in additional liquidity
to the Company. Although the specific form(s) of this working capital support
has not yet been determined, such support may be in the form of credit
enhancements, corporate guaranties and/or purchases of certain of the Company's
assets.
Management believes that the above actions will result in sufficient
liquidity and working capital resources necessary for planned business
operations, debt service requirements, planned investments and capital
expenditures.
Although the terms of the aforementioned credit working capital support
arrangements have not yet been determined, such arrangements could have a
dilutive effect on the interests of other holders of the Company's Common Stock.
2. Summary of significant accounting policies
Formation of the Company
The Company was formed through the contribution of the businesses of Power
Systems (and its immediate parent), GPI and Power Systems AB by their parent
organizations, ManTech and certain of its employees and related parties, GP
Strategies and GP Strategies' affiliates, SGLG, Inc. ("SGLG" and formerly "GPS
Technologies, Inc." or "GPS") and General Physics Corporation ("GPC"), and
Vattenfall Engineering AB ("Vattenfall"). In exchange, the contributors received
shares of Common Stock of the Company. In addition, ManTech received shares of
preferred stock of the Company and Vattenfall received cash and notes. In light
of the equality of interests of the Company's principal stockholders, there was
no identifiable acquirer in the consolidation. Thus, the assets and liabilities
of each of the businesses contributed were recorded at historical cost.
Principles of consolidation
The accompanying consolidated financial statements include the results of
operations of the Company and its wholly-owned subsidiaries: Power Systems, GPI,
Power Systems AB, Process Solutions, Erudite Software and Ryan. All
inter-company balances and transactions have been eliminated.
F-6
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounting estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and short-term highly
liquid investments with original maturities of less than three months at the
date of purchase.
Supplemental disclosures of cash flow information (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Non cash investing & financing activities:
Obligations under capital leases........................ $ 102 $ 313 $ 90
===== ===== ===
Notes payable to related party for investment in joint
venture................................................... $ 252 $ -- $ --
===== ===== ====
Cash paid:
Interest.................................................. 741 228 882
===== ===== ====
Income taxes.............................................. 233 285 767
===== ===== ====
</TABLE>
As discussed in Note 3 the Company acquired Process Solutions' international
operations in the second quarter of 1995 and the operations of J. L. Ryan in
December of 1997. In conjunction with these acquisitions, the purchase price
consisted of the following: (in thousands)
<TABLE>
<S> <C> <C> <C>
Cash paid................................................. $ 600 -- $ --
Long-term note payable issued............................. 900 -- 1,043
------ ------ -------
Total purchase price...................................... $1,500 -- $ 1,043
====== ====== =======
</TABLE>
Inventories
Inventories are stated at the lower of cost, as determined by the average
cost method, or market. Obsolete or unsaleable inventory is reflected at its
estimated net realizable value. Inventory costs include raw materials and
purchased parts.
F-7
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of inventories is as follows (in thousands):
December 31,
1997 1996
---- ----
Raw materials.......................... $ 1,610 $ 2,115
Service parts.......................... 1,090 1,423
------- -------
$ 2,700 $ 3,538
====== ======
Property and equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method with estimated useful lives ranging from three to ten
years. Leasehold improvements are amortized over the life of the lease or the
estimated useful life, whichever is shorter, using the straight-line method.
Upon sale or retirement, the cost and related amortization is eliminated from
the respective accounts and any resulting gain or loss is included in
operations. Maintenance and repairs are charged to expense as incurred.
Software development costs
Certain computer software development costs are capitalized in the
accompanying consolidated balance sheets. Capitalization of computer software
development costs begins upon the establishment of technological feasibility.
Capitalization ceases and amortization of capitalized costs begins when the
software product is commercially available for general release to customers.
Amortization of capitalized computer software development costs is included in
cost of revenue and is provided at the greater of the amount computed using (a)
the ratio of current gross revenues for a product to the total of current and
anticipated future gross revenue or (b) the straight-line method over the
remaining estimated economic life of the product, not to exceed five years.
Research and development
Development expenditures incurred to meet customer specifications under
contracts accounted for under the percentage of completion method are charged to
contract costs. Company sponsored research and development expenditures are
charged to operations as incurred and are included in selling, general and
administrative expenses. The amounts incurred for Company sponsored research and
development activities relating to the development of new products and services
or the improvement of existing products and services, exclusive of amounts
capitalized, were approximately $1,580,000, $1,861,000 and $2,945,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Goodwill
Goodwill represents the excess of purchase price over the fair value of net
tangible and intangible assets acquired. These amounts are amortized on a
straight-line basis over periods ranging from seven to fifteen years.
Asset Impairments
At each balance sheet date, management evaluates the recoverability of
identifiable tangible and intangible assets using certain financial indicators,
such as historical and future ability to generate income from operations. The
Company's policy is to record an impairment loss against the net unamortized
cost of the asset in the period when it is determined that the carrying amount
of the asset may not be recoverable. This determination is based on an
evaluation of such factors as the occurrence of a significant event, a
significant change in the environment in which the business operates, or if the
expected future net cash flows (undiscounted and without interest) would become
F-8
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
less than the carrying amount of the asset. Measurement of the impairment loss
is based on the estimated fair value of the asset.
Foreign currency translation
Balance sheet accounts for foreign operations are translated at the exchange
rate at the balance sheet date, and income statement accounts are translated at
the average exchange rate for the period. The resulting translation adjustments
are included as a separate component of stockholders' equity. Transaction gains
and losses, resulting from changes in exchange rates, are included in operations
in the period in which they are incurred. For the year ended December 31, 1997,
the foreign currency transaction loss, which is included in other (income)
expense, was approximately $1,275,000. This transaction loss is primarily the
result of intercompany transactions which have been negatively impacted by the
poor financial condition of Asian markets. Foreign currency transaction gains
and losses were not material in 1996 and 1995.
Revenue recognition
Revenue under fixed-price contracts generally is accounted for on the
percentage-of-completion method, based on contract costs incurred to date and
estimated costs to complete. Estimated contract earnings are reviewed and
revised periodically as the work progresses and the cumulative effect of any
change is recognized in the period in which the change is determined. Estimated
losses are charged against earnings in the period such losses are identified.
The remaining liability for contract costs to be incurred in excess of contract
revenue is reflected as accrued contract reserves in the Company's consolidated
balance sheets. Revenue from sales of other products is recorded when the
products are shipped, and for software products, upon execution of a licensing
agreement, shipment of the product and the determination by management that the
resulting receivable is deemed collectible. Revenue from certain consulting or
training contracts are recognized on a time and material basis. For
time-and-material type contracts, revenue is recognized based on hours incurred
at a contracted labor rate plus expenses. The Company has no significant vendor
obligations or collectibility risk associated with its product sales.
Warranties
As the Company recognizes revenue under the percentage-of-completion method,
it provides an accrual for estimated future warranty costs based on historical
and projected claims experience. During 1997 and 1996, the Company revised its
estimate for future warranty costs. The effect of these changes in estimates was
to decrease gross profit in 1997 by approximately $(230,000) and increase gross
profit in 1996 by approximately $601,000.
Income taxes
Deferred income taxes are provided under the asset and liability method.
Under this method, deferred income taxes are determined based on the differences
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. Income tax expense
consists of the Company's current liability for federal, state and foreign
income taxes and the change in the Company's deferred income tax assets and
liabilities. No provision has been made for the undistributed earnings of the
Company's foreign subsidiaries as they are considered permanently invested.
Amounts of undistributed earnings are not material to the overall consolidated
financial statements.
F-9
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings per share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," which requires the
presentation of basic earnings per share and diluted earnings per share. Basic
earnings per share is based on the weighted average number of outstanding common
shares for the period. Diluted earnings per share adjusts the weighted average
for the potential dilution that could occur if stock options, warrants or other
convertible securities were exercised or converted into common stock. Diluted
earnings per share is the same as basic earnings per share for the year ended
December 31, 1997 because the effects of such items were anti-dilutive. The
earnings per share computations have been restated for all periods presented to
conform to FAS 128.
The number of common shares and common share equivalents used in the
determination of basic and diluted earnings (loss) per share was as follows. The
difference between these amounts in 1996 and 1995 represents dilutive options to
purchase shares of common stock computed under the treasury stock method.
1997 1996 1995
---- ---- ----
Basic................. 5,065,700 5,065,700 4,049,000
========= ========= =========
Diluted............... 5,065,700 5,073,700 4,059,000
========= ========= =========
New Accounting Standards
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," and Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in June 1997, which are both effective for
the year ending December 31, 1998. SFAS No. 130 establishes standards for
reporting comprehensive income in a full set of general purpose financial
statements either in the income statement or in a separate statement. SFAS No.
131 establishes standards for reporting information about operating segments,
including related disclosures about products and services, geographic areas and
major customers.
Statement of Position 97-2 (SOP 97-2) regarding Software Revenue Recognition
will be effective for transactions entered into in fiscal years beginning after
December 15, 1997. SOP 97-2 addresses contract accounting issues in the context
of the software industry. Adoption of SOP 97-2 is not expected to have a
material impact on the Company.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of contract receivables. Credit risk on
contract receivables is mitigated by the nature of the Company's worldwide
customer base and its credit policies. The Company's customers are not
concentrated in any specific geographic region, but are concentrated in the
energy and manufacturing industries. No single customer accounted for a
significant (greater than 10%) amount of the Company's revenue during the years
ended December 31, 1997, 1996 and 1995 and there were no significant contract
receivables from a single customer at December 31, 1997 and 1996. The Company
typically performs a credit evaluation before extending credit and may require
letters of credit, bank guarantees or advance payments. Thereafter, the Company
continues to monitor its contract receivables exposure after giving effect to
letters of credit, bank guarantees, the status of work performed on contracts,
and its customers' financial condition.
Off balance sheet risk and foreign exchange contracts
The Company enters into forward exchange contracts, options and swaps as
hedges against certain foreign currency commitments. The Company also enters
into letters of credit and performance guarantees in the ordinary course of
business as required by certain contracts and proposal requirements. The Company
does not hold any derivative financial instruments for trading purposes.
F-10
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Gains and losses on foreign exchange contracts and swaps are recognized as
part of the cost of the underlying transactions being hedged in the period in
which the exchange rates changed. Foreign exchange contracts have an element of
risk that the counterparty may not be able to meet the terms of the agreement.
However, the Company minimizes such risk exposure by limiting counterparties to
nationally recognized financial institutions. Foreign exchange options contracts
permit but do not require the Company to exchange foreign currencies at a future
date with counterparties at a contracted exchange rate. Costs associated with
such contracts are amortized over the life of the contract matching the
underlying receipts.
3. Acquisitions
The Company acquired the net assets of the domestic operations of Process
Solutions on December 30, 1994 and the international operations in the second
quarter of 1995 for an aggregate purchase price of $9,882,000. This acquisition
was accounted for under the purchase method. The financial results of Process
Solutions have been included in the results of operations from the dates of
acquisition. The acquisition was financed through a promissory note payable in
the amount of $5,882,000 with a five year term (the "TI Five-Year Note"), a
short-term promissory note payable in the amount of $2,000,000 and cash from
operations of the Company in the amount of $2,000,000. The TI Five-Year Note,
which was guaranteed by the Company and certain of its stockholders, and the
short-term promissory note, bore interest at a rate of 8% and were fully repaid
in 1995. The Company is also required to make quarterly performance payments to
TI equal to 15% of the revenue earned through December 30, 1999 attributable to
the Real Time Business Controls portion of the acquired business with a minimum
payment of $750,000 and a maximum payment of $4,000,000. The minimum amount of
$750,000 has been accrued and recorded as goodwill, and all additional payments
above $750,000 will be recorded as goodwill if paid. The acquisition resulted in
total goodwill of $2,427,000, which is being amortized over fifteen years.
On May 22, 1996, the Company acquired all of the outstanding shares of
capital stock of Erudite Software. The acquisition was accomplished through a
merger of Erudite Software into a wholly owned subsidiary of the Company in
which 840,688 shares of the Company's Common Stock were exchanged for all
outstanding shares of capital stock of Erudite Software. The acquisition has
been accounted for using the pooling-of-interests method of accounting and
accordingly, the Company's consolidated financial statements have been restated
to include the accounts and operations of Erudite Software for all periods prior
to the merger.
Combined and separate results of the Company and Erudite Software during the
periods preceding the merger were as follows (in thousands):
<TABLE>
<CAPTION>
The Company Erudite Software Combined
----------- ---------------- --------
<S> <C> <C> <C>
Three Months Ended March 31, 1996:
Revenue......................... $ 18,545 $ 3,758 $ 22,303
============ =========== ==========
Net income...................... $ 860 $ 231 $ 1,091
============ =========== ==========
Year Ended December 31, 1995:
Revenue......................... $ 85,302 $ 10,758 $ 96,060
============ =========== ==========
Net income...................... $ 3,490 $ 186 $ 3,676
============ =========== ==========
</TABLE>
On December 1, 1997, the Company acquired 100% of the outstanding common
stock of J.L. Ryan, Inc. ("Ryan") for an initial purchase price of $1,000,000
and contingent consideration based on the performance of the business from 1998
to 2002; a minimum of $250,000 of such earnings payments for each of 1998 and
1999 has been guaranteed by the Company. The Company paid $600,000 in cash upon
the closing of the transaction and entered into a promissory note payable in
four annual installments of $100,000 each beginning on January 2, 1999. This
F-11
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
acquisition has been accounted for under the purchase method. The financial
results of Ryan have been included in the results of operations from the date of
acquisition. The acquisition resulted in total goodwill of $1,133,976, which is
being amortized over seven years. The following unaudited pro forma information
has been prepared assuming that the acquisition was consummated on January 1,
1996.
Pro Forma Information (Unaudited)
<TABLE>
<CAPTION>
Year Ended
------------------------
1997 1996
---- ----
(In thousands, except per share data)
(Unaudited)
<S> <C> <C>
Revenues .................................................... $ 81,239 $ 98,310
Net income .................................................. $ (8,861) $ 4,505
Basic and diluted (loss) earnings per share................... $ (1.75) $ .89
Weighted Average Number of Shares Outstanding - Basic......... 5,066 5,066
======== ========
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition and the payment of debt had been made at the
beginning of the above periods. In addition, they are not intended to be a
projection of future results.
4. Fair values of financial instruments
The carrying amounts of cash and cash equivalents and short-term debt
approximate fair value because of the short-term maturity of these instruments.
The carrying amount of long-term debt approximates fair value based on either
market prices for the same or similar issues or the current rates offered to the
Company for similar debt of the same maturities. Fair value estimates of foreign
currency instruments, which are included in prepaid expenses and other current
assets in the consolidated balance sheet, were based on quotes from financial
institutions, as set forth below (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------------- ----------------------------------
Notional/ Notional/
Carrying Fair Contract Carrying Fair Contract
Amount Value Value Amount Value Value
------ ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Foreign currency instruments:
Options......................... $ 55 $ 62 $ 520 $ 333 $ 231 $ 3,973
Forward contracts............... $ - $ - $1,410 $ 370 $ 409 $ 4,665
Swaps........................... $ - $ - $ - $ 106 $ 89 $ 594
</TABLE>
5. Contract receivables and billings in excess of revenue earned
Contract receivables represent balances due from a broad base of both
domestic and international customers. Due to the various billing and payment
terms, none of these individual customer balances is significant (more than
10%). All contract receivables are considered to be collectible within twelve
months. The components of contract receivables are as follows (in thousands):
F-12
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
Billed receivables........................................................ $ 16,994 $ 18,041
Recoverable costs and accrued profit - not billed......................... 8,398 9,714
Allowance for doubtful accounts........................................... (1,021) (298)
-------- --------
Total contract receivables............................................ $ 24,371 $ 27,457
======== ========
</TABLE>
Recoverable costs and accrued profit - not billed represent costs incurred
and associated profit accrued on contracts that will become billable upon future
milestones or completion of contracts.
Revisions in estimated contract costs at completion are reflected in the
period during which facts and circumstances necessitating such a change first
become known. The effect of changes in estimates of contract profits was to
decrease gross profit by approximately $410,000 for the year ended December 31,
1997 and to increase gross profit by approximately $1,900,000 and $1,019,000
during the years ended December 31, 1996 and 1995 respectively.
For the year ended December 31, 1995, the total estimated contract revenue
and costs at completion for two international contracts included claims revenue,
which was equal to estimated future costs, of $1,200,000. During 1996, the
Company received contract modifications totaling $2,200,000 for the claims
recognized in 1995 and for additional claims in 1996. In connection with these
contract modifications, the Company incurred total costs of approximately
$1,600,000, including costs related to the claims recognized in 1995.
Accordingly, the Company recognized additional gross profit of approximately
$600,000 during 1996.
Additionally, in early 1997, the Company settled claims and counterclaims with
its consortium partner on these international contracts for which there was no
net impact to the Company.
6. Property and equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
Computer equipment........................................................ $ 7,771 $ 7,101
Leasehold improvements.................................................... 1,889 1,829
Furniture and fixtures.................................................... 1,652 1,521
------- -------
11,312 10,451
Accumulated depreciation and amortization................................. (7,448) (5,133)
------- -------
Property and equipment, net............................................... $ 3,864 $ 5,318
======= =======
</TABLE>
Depreciation and amortization expense was $2,149,000, $1,943,000 and
$1,575,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company has $962,000 and $860,000 in assets held under capital lease as
of December 31, 1997 and 1996, respectively. Accumulated amortization on these
assets was $384,000 and $190,000 as of December 31, 1997 and 1996, respectively.
F-13
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Software development costs
Software development costs, net, consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
Capitalized software development costs.................................... $ 9,028 $ 5,554
Accumulated amortization.................................................. (1,502) (378)
------- --------
Software development costs, net........................................... $ 7,526 $ 5,176
======== ========
</TABLE>
Software development costs capitalized were $3,474,000, $3,890,000 and
$1,664,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Amortization of software development costs capitalized was $1,124,000, $635,000,
$471,000 for the years ended December 31, 1997, 1996 and 1995, respectively, and
are included within cost of revenue. During 1996, the Company wrote-off
approximately $2.4 million in fully amortized capitalized software development
costs.
8. Goodwill
Goodwill consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
Cost...................................................................... $ 3,559 $ 2,425
Accumulated amortization.................................................. (585) (366)
------- -------
Total............................................................... $ 2,974 $ 2,059
======= =======
</TABLE>
Amortization expense for goodwill was approximately $219,000, $168,000 and
$270,000 for the years ended December 31, 1997, 1996 and 1995, respectively. For
the year ended December 31, 1995, the Company recorded amortization expense of
$496,000 for other intangible assets that were fully amortized by December 31,
1995.
As discussed in Note 11, during 1996 and 1995, the Company reduced the
valuation allowance (against deferred tax assets) that was set up in connection
with the acquisition of Power Systems in August 1993. This resulted in a
corresponding reduction of goodwill of $109,000 and $525,000 during the years
ended December 31, 1996 and 1995, respectively, and other intangible assets by
$829,000 during the year ended December 31, 1995.
9. Accrued expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1996
---- ----
<S> <C> <C>
Accrued vacation, severance and other benefits............................ $ 1,771 $ 2,456
Accrued compensation and payroll taxes.................................... 1,260 1,504
Other accrued expenses.................................................... 1,273 470
------- -------
Total................................................................... $ 4,304 $ 4,430
======= =======
</TABLE>
F-14
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Notes payable and financing arrangements
Notes payable and financing arrangements consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
Lines of credit with bank................................................. $ 9,032 $ 2,582
Notes payable to related parties.......................................... 185 202
Capital lease obligations................................................. 442 606
------- -------
Total notes payable and financing arrangements.......................... 9,659 3,390
Less amounts payable within one year...................................... (9,240) (2,768)
------- -------
Long-term portion....................................................... $ 419 $ 622
======= =======
</TABLE>
Lines of Credit
The Company maintains, through its subsidiaries, two lines of credit that
provide for borrowings up to $14.0 million to support foreign letters of credit,
margin requirements or foreign exchange contracts and working capital needs. The
first line, through Power Systems, of $7.0 million is 90% guaranteed by the
Export-Import Bank of the United States ("EXIM") and is collateralized by Power
Systems' contract receivables and inventory. The line provides for borrowings up
to 90% of eligible receivables and 60% of unbilled receivables. The outstanding
borrowings under the Power Systems line at December 31, 1997 were $4,943,000.
The second line, through Process Solutions, of $7.0 million is collateralized by
substantially all of Process Solutions' assets and provides for borrowings up to
85% of eligible receivables and 20% of inventory (limited to $500,000). The
outstanding borrowings under the Process Solutions line at December 31, 1997
were $4,090,000. The weighted average interest rate on these borrowings was
8.3%, 8.25% and 8.5% for the years ended December 31, 1997, 1996 and 1995,
respectively.
In November 1997, the Process Solutions line was amended to permit the use
of loan proceeds to support the working capital needs of Erudite Software. In
connection with this amendment, Erudite Software became fully liable for amounts
outstanding under the line and substantially all of its assets were
pledged as collateral.
In March 1998, the Company entered into agreements with the bank whereby
each of the Power Systems and Process Solutions lines of credit was
conditionally extended through June 30, 1998 and a temporary $1.5 million
over-advance limit was established for the Process Solutions line. In connection
with the aforementioned agreement concerning the Process Solutions line, the
Company has arranged for certain guaranties to be provided on its behalf to the
bank by GP Strategies and ManTech. The aforementioned agreement concerning the
Process Solutions line also provides for: (i) an increase of the applicable
interest rate from the prime rate to the prime rate plus 1.00% or from LIBOR to
LIBOR plus 3.00%, as the case may be, and (ii) a reduction in the available
borrowing level, and a repayment of outstanding borrowings above such level, in
the event of the Company's sale or transfer of certain assets. The Power Systems
line continues to bear interest at the prime rate or LIBOR, at the Company's
option.
The aforementioned lines of credit also contain certain covenants which
restrict the Company from, among other things, incurring additional
indebtedness, entering into merger, consolidation or acquisition transactions,
disposing of all or substantially all of its assets, creating liens on assets,
and creating guaranty obligations. Further, the Company is required to comply
with certain financial ratios, including minimum levels of tangible net worth
and cash flow to fixed obligations, and is also required to provide the bank
with certain periodic financial reports. The Company was in violation of the
cash flow coverage ratio and the tangible net worth covenants as of December 31,
1997 and is probable of violating these covenants as of March 31, 1998. The bank
has waived such covenant
F-15
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
violations at December 31, 1997 and March 31, 1998. Should a violation of any
loan covenant occur at any future measurement date, the bank would have the
right to declare an event of default, and the loans would be payable on demand.
Other debt
The Company entered into capital lease agreements for property, furniture and
equipment, totaling $102,000, $313,000, and $90,000 during the years ended
December 31, 1997, 1996 and 1995, respectively. These obligations bear interest
at between 9% and 11% per annum and expire between 1998 and 2000.
Debt maturities
Aggregate maturities of debt as of December 31, 1997 are as follows: 1998,
$9,240,000; 1999, $169,000; 2000, $32,000; 2001, $25,000; 2002, $27,000; and
$166,000 thereafter.
11. Income taxes
The consolidated (loss) income before income tax, by domestic and foreign
sources, is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Domestic............................................................ ($ 8,850) $ 3,884 $ 3,844
Foreign............................................................. ($ 2,570) 968 1,849
-------- ------- -------
Total ($11,420) $ 4,852 $ 5,693
======== ======= =======
</TABLE>
The (benefit from) provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal............................................... $ (27) $ (23) $ 210
State................................................. -- 29 40
Foreign............................................... (413) 642 508
-------- ----- ------
(440) 648 758
-------- ----- ------
Deferred:
Federal............................................... (2,388) 186 1,160
State................................................. (229) 23 99
Foreign............................................... 340 (148) --
------- ----- ------
(2,277) 61 1,259
-------- ----- -------
$(2,717) $ 709 $ 2,017
======= ===== =======
</TABLE>
F-16
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The (benefit from) provision for income taxes varies from the amount of
income tax determined by applying the applicable U.S. statutory rate to pre-tax
(loss) income as a result of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. tax rate..................................... (34.0)% 34.0% 34.0%
State income tax, net of federal tax benefit................ (2.7) 2.7 2.8
Effect of foreign operations................................ 3.8 (6.6) 2.3
Amortization of goodwill and other intangible assets........ -- -- .5
Change in valuation allowance............................... 7.8 (19.5) (3.4)
Research and development credit............................. -- -- (1.4)
Others...................................................... 1.3 4.0 .6
----- ----- ----
Effective tax rate.......................................... (23.8)% 14.6% 35.4%
===== ===== ====
</TABLE>
At December 31, 1997, the Company had available $20,912,000 of federal net
operating loss carryforwards which expire between 2007 and 2017. In addition,
the Company had $338,000 of foreign tax credit carryforwards which expire
between 2000 and 2001. These carryforwards will be utilized to reduce taxable
income in subsequent years. A portion of the net operating losses were generated
by certain of the Predecessors prior to the formation of the Company and, as a
result, there are limitations on the amounts that can be utilized to offset
taxable income in a given year.
Deferred income taxes arise from temporary differences between the tax basis
of assets and liabilities and their reported amounts in the financial
statements. A summary of the tax effect of the significant components of
deferred income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
---- ----
Deferred Tax Deferred Tax
Asset/(Liability) Asset/(Liability)
----------------- -----------------
<S> <C> <C>
Contract loss reserves...................................................... $ 46 $ --
Property and equipment...................................................... 135 (135)
Accrued expenses............................................................ 207 230
Net operating loss carryforwards............................................ 7,152 2,013
Book reserves not deductible for tax purposes............................... 458 859
Software development costs.................................................. (2,762) (1,753)
Deferred revenue............................................................ -- 777
Cash to accrual adjustment.................................................. (71) (142)
Foreign tax credits ........................................................ 338 214
Others...................................................................... (125) 147
------- -------
5,378 2,210
Valuation allowance......................................................... (1,078) (187)
------- -------
$ 4,300 $ 2,023
======= =======
</TABLE>
During 1996 and 1995, the Company reduced the valuation allowance by
$1,033,000 and $1,619,000, respectively, of which $109,000 and $1,354,000,
respectively, reduced goodwill and other intangibles arising out of the
acquisition of Power Systems. The valuation allowance at December 31, 1997
primarily relates to the future utilization of foreign net operating loss
carryforwards and foreign tax credits that the Company has determined are not
realizable at this time.
Management believes that it is more likely than not that the net deferred tax
asset as of December 31, 1997 is realizable. The Company has tax planning
strategies available that include deferral of certain expenses for tax purposes
and the sale of certain assets, net of liabilities, of Erudite Software to
generate tax gains.
F-17
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
When combined with expected future taxable income, the tax planning
strategies will enable the Company to realize its net deferred tax asset.
Management will take these actions, if necessary, to preserve the net deferred
tax asset.
12. Capital Stock
As of December 31, 1997, the Company had 10,000,000 total shares of capital
stock authorized, of which 8,000,000 are common stock and 2,000,000 are
preferred stock. As of December 31, 1997 and 1996, there are no shares of
preferred stock outstanding. The Board of Directors has the authority to
establish one or more classes of preferred stock and to determine, within any
class of preferred stock, the preferences, rights and other terms of such class.
13. Stock options
Long term incentive plan
During 1995, the Company established the 1995 Long-Term Incentive Stock
Option Plan (the "Plan"), which includes all officers, key employees and
non-employee members of the Company's Board of Directors. All options to
purchase shares of the Company's common stock under the Plan expire ten years
from the date of grant and generally become exercisable in three installments
with 40% vesting on the first anniversary of the grant date and 30% vesting on
each of the second and third anniversaries of the grant date, subject to
acceleration under certain circumstances. Under the original terms of the Plan,
the Company had reserved 425,000 shares of common stock for issuance of stock
options, which amount was increased to 625,000 shares in 1996 by action of the
Company's directors and stockholders.
Upon a determination in 1997 by the executive and compensation committees of
the Company's board of directors that the purposes of the Company's 1995
Long-Term Incentive Plan were no longer being met with respect to those
individuals holding nonstatutory stock options with exercise prices greater than
the then-current market value of the Company's Common Stock, the Company offered
certain employees and non-management directors who were holders of outstanding
options under the 1995 Long-Term Incentive Plan as of December 1, 1997 the
opportunity to exchange such options for replacement stock options at an
exercise price of $3.875 per share, the fair market value of the Company's
Common Stock at the close of business on that date. Each option holder accepting
such offer was required to surrender his or her existing option and enter into
new stock option agreements whereby each option's three-phased vesting period
(40% vested as of the first anniversary of the date of grant, 70% vested as of
the second anniversary of the date of grant, and 100% vested as of the third
anniversary of the date of grant) would re-commence as of December 1, 1997, the
new date of grant. A total of 84 individuals were eligible to participate in
this replacement of options, and those individuals' existing options had an
average exercise price of $13.26 per share prior to the replacement. Of such
individuals, 81 participated in the replacement of options, representing a total
of 295,837 options which are included in the stock option activity table as new
options granted and options cancelled.
F-18
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock option activity under the Plan is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ---------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
period............................ 413,366 $ 13.61 297,516 $ 14.00 -- $ --
Options canceled.................... (306,044) (11.57) (26,150) (14.07) -- --
Options granted..................... 487,693 4.12 142,000 12.89 297,516 14.00
------- ------- -------
Options outstanding, end of period.. 595,015 6.89 413,366 13.61 297,516 14.00
======= ======= =======
</TABLE>
The Company accounts for grants under the Plan in accordance with APB 25,
"Accounting for Stock Issued to Employees," and related interpretations. Had
compensation expense been determined based on the fair value at the grant dates
for awards under the Plan consistent with the method of SFAS 123, "Accounting
for Stock Based Compensation," the Company's net income (loss) and basic and
diluted net income (loss) per share would have been reduced (increased) to
approximately $(10,276,000) ($(2.03) per share), $3,601,000 ($0.71 per share),
and $3,219,000 ($0.79 per share) for the years ended December 31, 1997, 1996 and
1995, respectively.
The fair value of each option is estimated on the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the years ended December 31, 1997, 1996, and
1995, respectively: dividend yield of 0%, expected volatility of 80%, risk-free
interest rates of 6.51%, 6.31%, and 6.15%, and expected terms of 6 years.
As of December 31, 1997, 1996, and 1995, respectively, there were 86,442,
119,000, and 0 stock options exercisable under the Plan, and the Company had
211,634 shares of common stock reserved for the future grants under the Plan.
The weighted average fair value of options granted during 1997, 1996 and 1995
was $3.00 per share, $9.55 per share and $10.44 per share, respectively. As of
December 31, 1997, the weighted average remaining contractual life of the
options outstanding was approximately 8 years.
In 1997, the Company granted one of its senior executives a stock option to
acquire 25,000 shares of Common Stock at an exercise price of $11.25. This grant
was not made pursuant to the Plan. This option expires ten years from the date
of grant and becomes exercisable in three installments with 40% vesting on the
first anniversary of the date of grant and 30% vesting on each of the second and
third anniversaries of the date of grant.
In 1996, in exchange for services, the Company granted stock options to two
consultants to acquire 10,000 shares of Common Stock in the aggregate at an
exercise price of $14.00. These grants were not made pursuant to the Plan. These
options expire on December 31, 2000 and became exercisable in two installments
with 50% vesting as of January 1, 1997 and the remaining 50% vesting as of
January 1, 1998.
14. Commitments and contingencies
Leases
The Company is obligated under certain noncancelable operating leases for
office facilities and equipment. Future minimum lease payments under
noncancelable operating leases as of December 31, 1997 are approximately as
follows (in thousands):
1998....................................................... 2,765
-----
1999....................................................... 2,128
-----
2000....................................................... 1,806
-----
2001....................................................... 1,502
-----
2002....................................................... 1,130
-----
2003 and thereafter........................................ $6,500
------
Total...................................................... $15,831
=======
The Company maintains its headquarters and leases a facility of
approximately 154,000 square feet in Columbia, Maryland. However, in order
to better meet the Company's expected facilities requirements for the
foreseeable future, the Company has entered into agreements whereby the
lease for its
F-19
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
existing Columbia facility will be terminated and the operations presently
occupying such facility are scheduled to relocate into two separate facilities
during the second quarter of 1998; one of these facilities will be in Columbia,
Maryland (approximately 53,000 square feet) and will be occupied by the
Company's corporate headquarters offices, the operations of Power Systems, as
well as various other Company operations; the other facility will be in
Baltimore, Maryland (approximately 33,000 square feet) and will be occupied by
the operations of Process Solutions. Each of the leases for these smaller
facilities has a term of ten (10) years. The Company recorded an accrual of
$852,000 related primarily to future lease commitments on the excess space of
the current corporate headquarters that will provide no future economic benefit
to the Company.
During 1997, the Company sold equipment to a leasing company for
approximately $521,000 and leased back the equipment under an operating lease.
The future minimum rental payments are included in the schedule above. The
Company did not record a gain or loss associated with this transaction.
Total rent expense under operating leases was $3,220,000, $1,876,000, and
$2,487,000 for the years ended December 31, 1997, 1996 and 1995. Rent expense in
1996 is net of amortization of $348,000 and reversal of $1,103,000 of remaining
excess facility costs. Rent expense in 1995 is net of amortization of $348,000
of excess facility costs. At December 31, 1995, the Company had accrued
$1,451,000 of excess facility costs.
Letters of credit
As of December 31, 1997, the Company and certain of its subsidiaries were
contingently liable under letters of credit totaling $318,000. Further, the
performance of certain of the Company's customer contracts is collateralized by
performance guarantees totaling $548,000 by its subsidiaries' respective former
parent organizations.
Contingencies
Various actions and proceedings are presently pending to which the Company is
a party. In the opinion of management, the aggregate liabilities, if any,
arising from such actions are not expected to have a material adverse effect on
the financial position of the Company.
15. Related party transactions
In 1997, a subsidiary of the Company entered into certain agreements
regarding the formation of a joint venture with a company organized in the
People's Republic of China. In connection with the initial capitalization of
this joint venture, each of ManTech and GP Strategies made advances of $126,000
on behalf of the Company. The liability for these amounts is included in accrued
expenses. These advances were made in exchange for future considerations,
including the option for direct investment in the joint venture by ManTech
and/or GP Strategies subject to necessary approvals and consents in the People's
Republic of China. The operations of this joint venture were immaterial during
the year ended December 31, 1997.
During 1997, ManTech entered into arrangements for the consulting services of
a member of the Company's finance staff. Payments to the Company for such
services were $92,000 for the year ended December 31, 1997.
A subsidiary of the Company subleases office space to ManTech at market price
based on square footage used. For the years ended December 31, 1997, 1996 and
1995, such charges amounted to $117,000, $67,000 and $46,000, respectively. A
subsidiary of the Company purchased computer run-time from ManTech until April
1996; such charges amounted to $36,000 and $63,000 in 1996 and 1995,
respectively. GPC historically has performed services as a subcontractor on
certain contracts of a subsidiary of the Company and that subsidiary may
continue to subcontract with GPC from time to time. For the years ended December
31, 1997, 1996 and 1995, such subcontract costs amounted to $0, $0, and $51,000,
respectively.
One of the Company's subsidiaries' bi-weekly payroll is processed by a
company whose owner is also a shareholder of the Company. Expenses incurred for
such payroll processing for the years ended December 31, 1997, 1996 and 1995
were $69,000, $62,000, and $42,000, respectively. The Company subleases a
portion of one of its facilities to this related party. Sublease payments by the
related party were approximately $4,700, $4,000 and $3,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
F-20
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 1993, the three founding stockholders of Erudite Software sold
an aggregate of 2,000 shares of common stock on a pro-rata basis to two other
individuals in exchange for demand notes totaling $200,000 with no stated
interest rate. These notes were collateralized by the shares of common stock
received by the two individuals. The founding stockholders immediately
transferred the $200,000 in notes receivable from the new stockholders to
Erudite Software in exchange for notes due from Erudite Software on demand with
no stated interest rate. For financial reporting purposes, the notes receivable
from the new stockholders were included as a part of stockholders' equity in the
accompanying financial statements until such time as the notes receivable were
fully collected and the shares of common stock no longer represented collateral
against the notes. For the year ended December 31, 1995, the notes receivable
from stockholders were reduced through cash receipts of $15,000 and through
services provided to Erudite Software of $58,000. The services provided to
Erudite Software have been valued based upon salaries, bonuses and commissions
earned by these two individuals. These notes receivable were reduced to $0
during the year ended December 31, 1995. For the years ended December 31, 1996
and 1995, cash payments to the founding stockholders in satisfaction of the note
payable totaled $189,000 and $11,000, respectively.
16. Employee benefits
In 1996, the Company began the process of terminating its defined benefit
plan for the union employees. The assets in this plan were distributed on
September 3, 1997. The Company has recognized expense of $124,000 during 1996
related to the termination of the plan. Net periodic pension expense of $29,000
was recognized for the year ended December 31, 1995.
The Company also has a qualified defined contribution plan that covers
substantially all employees and complies with Section 401(k) of the Internal
Revenue Code. Under this plan, the Company's stipulated basic contribution
matches a portion of the participants' contributions based upon a defined
schedule. Contributions are invested by an independent investment company in one
or more of several investment alternatives. The choice of investment
alternatives is at the election of each participating employee. The Company's
contributions to the plan were approximately $524,000, $671,000, and $484,000
the years ended December 31, 1997, 1996 and 1995, respectively.
The Company recorded a net charge for severance and other employee
obligations of $1.1 million in connection with cost reduction efforts initiated
to offset the impact of a decrease in contract revenues. Of this charge,
$976,000 was expended as of December 31, 1997.
F-21
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Financial information by geographic area
The Company operates in a single industry segment: it designs, develops and
delivers business and technology solutions to the energy, process and
manufacturing industries worldwide. Revenue, operating income and identifiable
assets for the Company's United States, European and Asian operations are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------------------------------------------------------
United States Europe Asia Eliminations Consolidated
------------- ------ ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue..................................... $ 70,580 $ 5,907 $ 3,224 $ -- $ 79,711
Transfers between geographic locations...... 1,582 -- 1,314 (2,896) --
---------- --------- -------- -------- --------
Total revenue............................... $ 72,162 $ 5,907 $ 4,538 $ (2,896) $ 79,711
========== ========= ======== ======== ========
Loss from operations........................ $ (6,930) $ (324) $ (2,173) $ -- $ (9,427)
========== ========= ======== ======== ========
Identifiable assets......................... $ 50,296 $ 3,686 $ 2,111 $ (7,731) $ 48,362
========== ========= ======== ======== ========
Year Ended December 31, 1996
---------------------------------------------------------------------------------
United States Europe Asia Eliminations Consolidated
------------- ------ ---- ------------ ------------
Revenue..................................... $ 83,263 $ 9,026 $ 3,744 $ -- $ 96,033
Transfers between geographic locations...... 659 -- 622 (1,281) --
---------- --------- -------- -------- --------
Total revenue............................... $ 83,922 $ 9,026 $ 4,366 $ (1,281) $ 96,033
========== ========= ======== ======== ========
Income from operations...................... $ 3,832 $ 1,267 $ (452) $ 198 $ 4,845
========== ========= ======== ======== ========
Identifiable assets......................... $ 54,584 $ 6,416 $ 3,057 $(13,051) $ 51,006
========== ========= ======== ======== ========
Year Ended December 31, 1995
-----------------------------------------------------------------------------
United States Europe Asia Eliminations Consolidated
------------- ------ ---- ------------ ------------
Revenue..................................... $ 87,009 $ 7,050 $ 2,001 $ -- $ 96,060
Transfers between geographic locations...... 1,173 -- -- (1,173) --
-------- --------- -------- --------- --------
Total revenue............................... $ 88,182 $ 7,050 $ 2,001 $ (1,173) $ 96,060
======== ========= ======== ========= ========
Income from operations...................... $ 5,028 $ 1,628 $ 7 $ (351) $ 6,312
======== ========= ======== ========= ========
Identifiable assets......................... $ 49,958 $ 7,298 $ 2,337 $ (4,905) $ 54,688
======== ========= ======== ========= ========
</TABLE>
The Company has intercompany distribution arrangements with its subsidiaries.
The basis of these arrangements, disclosed as transfers between geographic
locations, is principally at market prices.
F-22
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Domestic and export sales from the Company's United States operations in
thousands of dollars and as a percentage of revenue are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Domestic................................................. $ 52,365 72.6% $ 47,868 57.5% $ 45,222 52.0%
Export:
Germany............................................ 2,791 3.9 9.236 11.1 8,039 9.2
Remaining Western Europe........................... 1,748 2.4 2,806 3.4 12,400 14.3
Russia............................................. 6,074 8.4 7,716 9.2 9,135 10.5
Remaining Eastern Europe........................... 6,481 9.0 11,070 13.3 4,547 5.2
Asia............................................... 1,278 1.8 3,910 4.7 6,853 7.9
South America and others........................... 1,425 1.9 657 .8 813 0.9
-------- ----- -------- ----- -------- -----
$ 72,162 100.0% $ 83,263 100.0% $ 87,009 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
18 Fourth quarter data
During the fourth quarter of 1997, the Company made several adjustments which
are material to the fourth quarter results. These adjustments include an
$852,000 accrual related primarily to future lease commitments on excess space
of the corporate headquarters that will provide no future economic benefit to
the Company, $450,000 in litigation costs, an additional $230,000 in
amortization of capitalized software development costs, additional allowances of
approximately $800,000 to reduce accounts receivable and inventory to their
estimated net realizable value, approximately $1,000,000 in foreign currency
transaction losses associated with intercompany transactions which have been
negatively impacted by the poor financial conditions of Asian markets and
approximately $240,000 to reduce certain non-current assets to their estimated
net realizable value. The aggregate impact of these adjustments was to increase
the loss before income taxes, net loss and basic and diluted loss per common
share for the fourth quarter by approximately $3,572,000, $2,250,000 and $.44
per common share, respectively.
F-23
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
25
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PART III
The information required in response to Items 10, 11, 12 and 13 is hereby
incorporated by reference to the information under the captions "Election of
Directors", "Principal Executive Officers of the Company Who Are Not Also
Directors", "Executive Compensation", "Voting Securities and Principal
Stockholders", "Security Ownership of Management", and "Certain Related
Transactions" in the Proxy Statement for the Company's 1998 Annual Meeting of
Stockholders.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) List of Financial Statements
The following financial statements are included in Item 8:
GSE Systems, Inc. and Subsidiaries
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1997
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1997 and 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31, 1997
and 1996 and 1995
Notes to Consolidated Financial Statements
(a)(2) List of Schedules
All other schedules to the consolidated financial statements are
omitted as the required information is either inapplicable or presented in the
consolidated financial statements or related notes.
(a)(3) List of Exhibits
The Exhibits which are filed with this report or which are incorporated
by reference are set forth in the Exhibit Index hereto.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GSE Systems, Inc.
By: /s/ CHRISTOPHER M. CARNAVOS
------------------------------
Christopher M. Carnavos
Director and President
Pursuant to the requirements of the Securities Act, this report has been signed
by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ JEROME I. FELDMAN Chairman of the Board March 31, 1998
- ---------------------------------------
Jerome I. Feldman
/s/ CHRISTOPHER M. CARNAVOS Director and President March 31, 1998
- --------------------------------------- (Principal Executive Officer)
Christopher M. Carnavos
/s/ ROBERT W. STROUP Executive Vice President, Secretary & Treasurer March 31, 1998
- --------------------------------------- (Principal Financial and Accounting Officer)
Robert W. Stroup
/s/ EUGENE D. LOVERIDGE Director and Senior Vice-President March 31, 1998
- ---------------------------------------
Eugene D. Loveridge
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C>
/s/ HANS I. EBENFELT Director March 31, 1998
- ---------------------------------------
Hans I. Ebenfelt
/s/ SHELDON L. GLASHOW Director March 31, 1998
- ---------------------------------------
Sheldon L. Glashow
/s/ JOHN A. MOORE, JR. Director March 31, 1998
- ---------------------------------------
John A. Moore, Jr.
/s/ GEORGE J. PEDERSEN Director March 31, 1998
- ---------------------------------------
George J. Pedersen
/s/ MARTIN M. POLLAK Director March 31, 1998
- ---------------------------------------
Martin M. Pollak
/s/ SYLVAN SCHEFLER Director March 31, 1998
- ---------------------------------------
Sylvan Schefler
</TABLE>
29
<PAGE>
EXHIBIT INDEX
The following exhibits are either filed herewith or have been filed with the
Securities and Exchange Commission and are referred to and incorporated by
reference.
Exhibit
Number Note Description
- ------ ---- -----------
2.1 (5) Agreement and Plan of Reorganization dated as of May
17, 1996 by and among GSE Systems, Inc., GSE Erudite
Software, Inc., Erudite Software and Consulting, Inc.,
Eugene Loveridge, Daniel Masterson, Douglas Austin,
Gary Gray and Dennis Fairclough effective May 21, 1996.
2.2 (5) Agreement and Plan of Merger dated as of May 17, 1996
by and between Erudite Software and Consulting, Inc.
effective May 22, 1996.
3.1 (1) Second Amended and Restated Certificate of
Incorporation of the Company
3.2 (2) Form of Amended and Restated Bylaws of the Company
4.1 (3) Specimen Common Stock Certificate of the Company
10.1 (1) Agreement among ManTech International Corporation,
National Patent Development Corporation, GPS
Technologies, Inc., General Physics Corporation,
Vattenfall Engineering AB and GSE Systems, Inc. (dated
as of April 13, 1994)
10.2 (1) Asset Purchase Agreement among Texas Instruments
Incorporated, GSE Systems, Inc. and GSE Process
Solutions, Inc. concerning the Process Systems Business
of Texas Instruments Incorporated (dated as of December
28, 1994)
10.3 (3) * Form of Employment Agreement between William E.
Kuhlmann and GSE Systems, Inc.
10.4 (3) * Form of Employment Agreement between Rolf M. G.
Falkenberg and GSE Systems, Inc.
10.5 (3) * Form of Employment Agreement between Robert W. Stroup
and GSE Systems, Inc.
10.6 (3) * Form of Employment Agreement between Chian-Li Jen and
GSE Systems, Inc.
10.8 (6) * GSE Systems, Inc. 1995 Long-Term Incentive Plan, as
amended as of February 12, 1997.
10.9 (4) * Form of Option Agreement Under the GSE Systems, Inc.
1995 Long-Term Incentive Plan
10.10 (2) Letter of Credit, Loan and Security Agreement among
Maryland National Bank (now NationsBank, N.A.), MSHI,
Inc., and Simulation, Systems & Services Technologies
Company (dated as of March 17, 1994 and amended as of
June 29, 1994 and April 27, 1995)
10.11 (2) Letter of Credit, Loan and Security Agreement among
NationsBank, N.A., MSHI, Inc., and Simulation, Systems
& Services Technologies Company (dated as of September
29, 1994)
10.12 (2) Letter of Credit, Loan and Security Agreement between
CoreStates Bank, N.A. and GSE Process Solutions, Inc.
(dated as of January 31, 1995)
10.13 (4) Amended and Restated Letter of Credit, Loan and
Security Agreement between CoreStates Bank, N.A. and
GSE Process Solutions, Inc. (dated as of October 13,
1995 and as amended as of February 23, 1996)
10.14 (4) Letter of Credit, Loan and Security Agreement among
CoreStates Bank, N.A., MSHI, Inc., and Simulation,
Systems & Services Technologies Company (dated as of
January 30, 1996)
10.15 (1) Amended and Restated Lease Agreement between CCP
Development Limited Partnership No. 7 and Simulation,
Systems & Services Technologies Company (dated as of
January 27, 1993)
10.16 (5) * Employment Agreement dated as of May 17, 1996 by and
between GSE Systems, Inc. and Eugene Loveridge
effective May 22, 1996
30
<PAGE>
10.17 (5) * Employment Agreement dated as of May 17, 1996 by and
between GSE Systems, Inc. and Daniel Masterson
effective May 22, 1996
10.18 (6) * Employment Agreement dated as of May 2, 1996 by and
between EuroSim AB and Lars-Goran Mejvik effective July
1, 1996
10.19 (7) * Letter Agreement dated January 8, 1997 between GSE
Systems, Inc. and Christopher M. Carnavos
10.20 (7) * Agreement dated as of April 3, 1997 between GSE
Systems, Inc. and William E. Kuhlmann
10.21 (7) Amendment Number Two to Amended and Restated Letter of
Credit, Loan and Security Agreement between CoreStates
Bank, N.A. and GSE Process Solutions, Inc. (dated as of
November 11, 1997)
10.22 (7) Lease Termination Agreement between 8930 Stanford
Boulevard, L.L.C. and GSE Power Systems, Inc. (dated as
of January 30, 1998)
10.23 (7) Indemnification Agreement between Genus Corporation and
GSE Power Systems, Inc. (dated as of February 2, 1998)
10.24 (7) Office Lease Agreement between Sterling Rutherford
Plaza, L.L.C. and GSE Systems, Inc. (dated as of
February 10, 1998.)
10.25 (7) Lease Agreement between Red Branch Road, L.L.C. and GSE
Systems, Inc. (dated February 10, 1998)
10.26 (7) Letter Agreement dated March 6, 1998 between CoreStates
Bank, N.A. and GSE Power Systems, Inc.
10.27 (7) Letter Agreement dated March 6, 1998 between CoreStates
Bank, N.A. and GSE Process Solutions, Inc.
11.1 (7) Statement regarding computation of earnings per share
21.1 (7) Subsidiaries of Registrant
23.1 (7) Consent of Independent Accountants
24.1 (7) Power of Attorney for Directors' and Officers'
Signatures on SEC Form 10-K
99.1 (3) Form of Right of First Refusal Agreement
- --------------
(1) Previously filed in connection with the GSE Systems, Inc. Form S-1
Registration Statement as filed with the Securities and Exchange
Commission on April 24, 1995 and incorporated herein by reference.
(2) Previously filed in connection with Amendment No. 1 to the GSE
Systems, Inc. Form S-1 Registration Statement as filed with the
Securities and Exchange Commission on June 14, 1995 and incorporated
herein by reference.
(3) Previously filed in connection with Amendment No. 3 to the GSE
Systems, Inc. Form S-1 Registration Statement as filed with the
Securities and Exchange Commission on July 24, 1995 and incorporated
herein by reference.
(4) Previously filed in connection with the GSE Systems, Inc. Form 10-K
as filed with the Securities and Exchange Commission on March 22,
1996 and incorporated herein by reference.
(5) Previously filed in connection with the GSE Systems, Inc. Forms 8-K
and 8-K-A as filed with the Securities and Exchange Commission on
June 5, 1996 and June 13, 1996, respectively, and incorporated herein
by reference.
(6) Previously filed in connection with the GSE Systems, Inc. Form 10-K
as filed with the Securities and Exchange Commission on March 31,
1997 and incorporated herein by reference.
(7) Filed herewith.
* Management contract or compensatory plan.
31
EXHIBIT 10.19
GSE SYSTEMS, INC.
FORM 10-K
For the Year Ended December 31, 1997
January 8, 1997
Mr. Christopher M. Carnavos
Dear Chris:
I am pleased to confirm our offer and your acceptance of employment with GSE
Systems, Inc., in the position of Senior Vice President. Your responsibilities
will be to act as the general manager of the Company's Process Industry
Strategic Business Unit and other matters as reasonably requested. In this
capacity you will report directly to me.
I have set forth below the specifics of our offer. As we have discussed, the
precise terms of any stock option grant and any bonus plan are the purview of
the Executive Compensation Committee of the Board of Directors. Therefore, we
are not currently in a position to bind the Company regarding those matters.
However, the reference below to those two matters is intended to describe what
my recommendation will be to the Committee upon employment.
Your compensation shall include an annual salary of $175,000 per year. You will
also receive a hiring bonus in the gross amount of $30,000. This will be paid in
two equal installments of $15,000 on April 1 and July 1, 1997, respectively. In
addition, you will qualify for the executive bonus program which I will be
recommending to the Board's Executive Compensation Committee shortly. I expect
this program will enable you to earn as much as 30% of you salary in an annual
cash performance bonus. The performance criteria shall be tied to three
principal factors: 1) the financial performance of the Company as a whole; 2)
the financial performance of the business you will be managing; and 3) the
attainment of certain prescribed personal goals. In addition, I will recommend
to the Executive Compensation Committee that you be granted options to acquire
23,000 shares of Company stock in accordance with the Long Term Compensation
Plan. The exercise price for these options will be the market value at the time
of employment. The options shall vest over a three-year period at the rates of
40%, 30% and 30% at the end of years one, two and three. Due to the potential
for the market price to fluctuate above or below its current price of $9.50, the
Company shall have the right to adjust the number of shares based on significant
changes in the market.
As you know, this offer is for "at will" employment rather than a specified
period of time. Therefore, in response to your desire for some reasonable
severance arrangements should the circumstance arise that the Company no longer
desires your services, this offer includes a six month severance provision.
Should the Company terminate you without cause, you will be entitled to payment
of your salary for a period of six additional months. In this context "cause"
shall be defined to include only the following: 1) intentional misconduct; 2)
gross negligence; 3) commission and subsequent conviction of a criminal offense;
and 4) some other type of intentional behavior that significantly damages the
Company. This provision for severance shall not apply if you voluntarily leave
the Company.
The relocation package will consist of the reimbursement of both the moving
expenses and the closing costs for both the sale of your current home as well as
the purchase of your new home. We will "gross up" the calculation of those
reimbursement payments which will be taxable to you so as to take your payment
of income taxes into account. We will also pay for temporary living expenses for
a period of up to six months and or mortgage assistance to a combined maximum
amount of $14,400. Additionally, in the event that the sale of your Atlanta home
is less than what you paid for it approximately three and one-half years ago
(not including closing costs), the Company shall pay to you 75% of such loss up
to a total payment by the Company of $25,000. An interest free bridge loan in
1
<PAGE>
the amount of $85,000 will be provided by GSE in the event that you purchase a
new home prior to the sale of your existing home. This loan will be due and
payable on the earlier of the sale of your existing residence or six months from
the commencement of your employment. This agreement will be covered by a
promissory note that will be provided as agreed to by both parties. You will be
responsible for the tax consequences on the inputted interest of the bridge
loan.
As an executive in the Company, you will also receive the following benefits:
o Reimbursement of country club dues up to $4,000 per year
o Car allowance of $600 per month;
o Executive term life insurance coverage (3x salary)
o Company paid medical and dental plan with all pre-existing conditions waived
o Reimbursement for the use of business communications and productivity tools
such as a mobile phone and a home fax;
o Executive vacation policy.
o Company provided gas credit card
In addition, you will receive other Company benefit which are as follows:
o Participation in the Company's 401(k) Plan
o Coverage by the Company's sick leave and short-term disability policies
o Company paid holidays
o Travel insurance
o Long term disability program
o Supplemental Life Insurance
o Personal Accident Insurance
We all look forward to the commencement of your employment on Thursday, January
9, 1997. If you have any questions feel free to contact me or Debbie Caddy at
(410) 312-3644.
Sincerely,
/S/ William E. Kuhlmann
- ----------------------------
Offer accepted by: Start Date
/S/ Christopher M. Carnavos January 9, 1997
- ---------------------------- ---------------
2
EXHIBIT 10.20
GSE SYSTEMS, INC.
FORM 10-K
For the Year Ended December 31, 1997
AGREEMENT
This Agreement (this "Agreement") effective as of April 3, 1997, is made
by and between William E. Kuhlmann (the "Employee"), and GSE Systems, Inc., a
Delaware corporation (the "Company").
W I T N E S S E T H:
WHEREAS, Employee has served as Chairman of the Board of Directors and
Chief Executive Officer of the Company pursuant to the terms and conditions of
an Employment Agreement between Employee and the Company dated July 26, 1995
(the "Employment Agreement");
WHEREAS, the parties have agreed that Employee shall resign as Chairman
of the Board and Chief Executive Officer and shall assume the responsibilities
outlined hereunder; and
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants herein contained, the parties agree as follows:
1. Statement of Intentions and Resignation. The parties understand and
agree that this Agreement is intended to apply in lieu of the application of
Section 8(b) (Termination Without Cause) and Section 9 (Severance Payments) of
the Employment Agreement. Accordingly, in lieu of the invoking a Termination
without Cause (as such term is defined in the Employment Agreement), the parties
agree that the Employee hereby resigns as Chairman of the Board of Directors and
Chief Executive Officer of the Company, and hereby resigns as an officer and/or
director of any and all of the Company's subsidiaries. The parties agree that
the Employee shall no longer be a director of the Company and shall not be
entitled to participate in Board of Directors meetings.
2. Employment as Chairman Emeritus. Nothwithstanding the aforementioned
resignations of the Employee's directorships and officer positions with the
Company, Employee shall remain employed by the Company and shall be promoted to
the position of "Chairman Emeritus." In this role, Employee shall perform such
duties as are incident and commensurate with such position and as may be
mutually agreed by him and the Board of Directors of the Company and/or the
Chairman of the Board.
3. Compensation.
A. Initial Payment. In consideration of entering into this Agreement,
Employee shall receive from the Company, upon the execution hereof, an initial
lump sum payment equal to two (2) months' base salary and the present value of
any benefits Employee would normally receive under the Employment Agreement for
such period including, but not limited to, country club dues, car allowance, gas
credit card, car phone and mobile phone, insurance benefits, and 401(k) plan
matching.
B. Salary and Benefits. Through April 2, 1998, Employee shall receive a
base salary of $235,000 per annum, payable bi-weekly. In addition, Employee
shall participate in or received all benefits which he is currently receiving
under the Employment Agreement through April 2, 1998 including, but not limited
to, the payment of country club dues (payable in December 1997 with respect to
1998), car allowance, gas credit card, car phone and mobile phone, insurance
benefits, and 401(k) plan matching. In the event of a Change of Control (for
purposes of defining this term, Paragraph 1.c. of the Employee's Nonstatutory
Stock Option Agreement dated July 27, 1995 shall be incorporated herein by
reference), the Employee shall, within five (5) days, receive a lump sum
equivalent to all remaining salary and related benefits that would have
otherwise been paid through April 2, 1998.
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4. Stock Options; Bonuses. Employee has 30,000 unvested stock options
outstanding as of April 3, 1997. 15,000 of these shares shall be fully vested
and exercisable as of August 1997. The other 15,000 shares shall not vest. In
all other respects, such options shall be governed by the terms of the Company's
1995 Long Term Incentive Plan and the Employee's Option Agreement. Employee
shall not be entitled to participate in any other incentive bonus plans,
programs, arrangements and practices sponsored by the Company.
5. Mutual Releases.
A. By the Company. In consideration for the promises, undertakings and
covenants of the Employee, as set forth herein, the receipt and sufficency of
which are hereby acknowledged, the Company hereby releases, discharges, and
acquits Employee of and from any liability, contracts, suits, demands, claims,
debts, actions, losses, damages or causes of action of whatsoever kind and
nature, known or unknown, accrued or unaccrued, which the Company has or may
have against the Employee and all other related persons and entities, from the
beginning of the world up to and including the date first written above, from
every matter, cause or thing whatsoever.
B. By the Employee. In consideration for the promises, undertakings and
covenants of the Company, as set forth herein, Employee, intending to be legally
bound hereby, for himself and his heirs, successors, administrators, executors
and assigns, does hereby fully release, remise and forever discharge the
Company, all corporations controlled by, intertwining with or under common
control of the Company, its shareholders, officers, board memebers, directors,
attorneys, representatives, assigns, successors, partners, employees and other
agents, as agents and as individuals, of and from any liability, contracts,
suits, demands, claims, debts, actions, losses, damages or causes of action of
whatsoever kind and nature, known or unknown, accrued or unaccrued, which
Employee has or may have against the Company, and all other related persons and
entities, from the beginning of the world up to and including the date first
written above, from every matter, cause or thing whatsoever, including, but not
limited to, all matters arising out of or relating to Employee's employment with
the Company or his termination from said employment, including but not limited
to all claims which Employee may have under any and all federal, state and local
laws, regulations, ordinances or common law, specifically including, without
limitation, the Maryland Human Relations Act, Title VII of the Civil Rights Act
of 1964, and the Age Discrimination in Employment Act ("ADEA"), all claims for
wrongful discharge or claims that the Company dealt unfairly with Employee, in
bad faith, or in violation of any agreement expressed or implied, that may have
existed between Employee and the Company, and all claims for personal injury,
emotional distress, pain and suffering.
6. Employment Agreement. In all other respects, the terms of the
Employment Agreement, including but not limited to the covenant of
non-competition, shall apply as if there was a Termination without Cause on
April 3, 1997.
7. Entire Agreement. This Agreement represents the entire agreement
between the parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, between the parties hereto with respect to
the subject matter hereof. This Agreement cannot be modified, waived or amended
except as may be mutually agreed to by the parties in writing.
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IN WITNESS WHEREOF, this Agreement has been duly executed under seal as
of the date first above written.
GSE Systems, Inc.
/S/ MICHAEL J. CROMWELL, III (SEAL)
- ----------------------------------------
By: Michael J. Cromwell, III Director
/S/ WILLIAM E. KUHLMANN (SEAL)
- ----------------------------------------
William E. Kuhlmann
3
EXHIBIT 10.21
GSE SYSTEMS, INC.
FORM 10-K
For the Year Ended December 31, 1997
AMENDMENT NUMBER TWO TO AMENDED AND
RESTATED LETTER OF CREDIT, LOAN AND SECURITY AGREEMENT
AND PROMISSORY NOTE
This AMENDMENT NUMBER TWO ("Amendment Two") to Amended and Restated
Letter of Credit, Loan and Security Agreement and Promissory Note is made and
effective as of this 11th day of November, 1997 by and between GSE Process
Solutions, Inc., a Delaware Corporation (the "Borrower") and CoreStates Bank,
N.A. (the "Bank").
BACKGROUND
WHEREAS, the Borrower and the Bank entered into an Amended and Restated
Letter of Credit, Loan and Security Agreement dated as of October 13, 1995
pursuant to which the Bank agreed to lend up to $7,000,000 to the Borrower for
the purposes set forth in Section 11.2 thereof (the Amended and Restated Letter
of Credit, Loan and Security Agreement is herein referred to as the "Loan
Agreement") and as amended by Amendment Number One to the Loan Agreement dated
February 23, 1996 ("Amendment One"); as used hereinafter the term "Loan
Agreement" shall mean the Loan Agreement as amended by Amendment One. In
connection with Amendment One, the Borrower and the Bank amended the $7,000,000
Promissory Note dated as of October 13, 1995, (the "Note").
WHEREAS, the Borrower has requested that the Bank further amend the Loan
Agreement to permit the Borrower to advance funds to another subsidiary of its
parent company, GSE, for the purpose of furnishing working capital to such
subsidiary, GSE Erudite Software, Inc. ("Erudite").
WHEREAS, the Bank is agreeable to such an amendment on the conditions
that the advances do not exceed the amount of the Commitment, are evidenced by a
Master Note in the amount of Commitment, which Master Note is duly pledged to
the Bank, and Erudite becomes fully liable to the Bank for all amounts due under
the Loan Agreement and the Note and such liability is secured by a first lien on
the assets of Erudite. The Bank will, if such conditions are met, add the
collateral so provided by Erudite to the Collateral Value for purposes of
determining Available Commitment; and
WHEREAS, the Borrower has requested and the Bank is agreeable, to add a
LIBO Rate interest rate option for advances under the Loan.
WHEREAS the Borrower and the Bank have agreed to amend the Loan
Agreement on the terms, and subject to the conditions set forth herein.
NOW THEREFORE, the Borrower and the Bank, in consideration of the mutual
agreements herein and other good and valuable consideration, intending to be
legally bound, hereby agree as follows:
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I. DEFINED TERMS
1. All capitalized words used herein shall have the meaning ascribed to
them in the Loan Agreement, unless such terms are defined herein, in which case
they shall have the meaning ascribed to them herein.
II. DEFINITIONS
2. The following Defined Terms in Section 1.1 of the Loan Agreement are
hereby added to the Loan Agreement or, if presently in the Loan Agreement are
hereby deleted and replaced with the following:
"Application and Agreement for Standby Letter of Credit" shall
mean an Application and Agreement for a Standby Letter of Credit in
substantially the form attached hereto as Exhibit A and made a part
hereof, or in such other form which is provided by the Bank to the
Borrower or Erudite as the form of Application and Agreement which is
then in use by the Bank in connection with the issuance of its Standby
Letters of Credit, which is executed by the Borrower or Erudite and
delivered to the Bank in connection with a request for the issuance of a
Standby Letter of Credit.
"Base Receivables" shall mean the aggregate face amount of
Receivables, excluding General Intangibles, as to which the Borrower or
Erudite has acquired title, the Bank has acquired a first priority,
perfected security interest, and the Borrower or Erudite has invoiced
the Account Debtor in accordance with the terms of the relevant contract
which provides for billing on the basis of Milestone Payments and
furnished the Bank with information deemed by the Bank in the Bank's
sole discretion adequate for the purpose of evaluating whether or not
such Base Receivables are Eligible Receivables hereunder.
"Borrowing Certificate" shall mean a Certificate containing all
of the information contemplated by the form attached hereto as Exhibit
AA and made a part hereof.
"Borrower's Obligations" shall mean, collectively, the Loan
Obligations and the Letter of Credit Obligations, together with all
other sums due from the Borrower to the Bank under the terms of the
Financing Documents and the Erudite Obligations.
"Eligible Receivable" and "Eligible Receivables" shall mean, at
any time of determination thereof, the collective reference to each Base
Receivable which conforms and continues to conform to the following
criteria to the satisfaction of the Bank: (a) the account arose in the
ordinary course of the Borrower's or Erudite's respective businesses
from a bona fide outright sale or lease of goods by the Borrower, or
from services performed by the Borrower or Erudite, respectively; (b)
the account is based upon an enforceable written order or contract for
goods delivered or for services performed; (c) the respective title of
the Borrower or Erudite to the account is absolute and is not subject to
any prior assignment, claim, lien, or security interest, except
Permitted Liens or liens permitted under the Erudite Security Agreement,
and the Borrower or Erudite otherwise has the full and unqualified
respective right and power to assign and grant a security interest in it
to the Bank as security and collateral for the payment of the Borrower's
Obligations; (d) the amount shown on the respective books of the
Borrower or Erudite and on any invoice, certificate, schedule or
statement delivered to the Bank is owing to the Borrower or Erudite and
no partial payment has been received unless reflected with the delivery
of such invoice, certificate, schedule or statement; (e) the amount of
the account has been reduced by the amount of any claim of reduction,
counterclaim, setoff, recoupment, or other defense in law or equity, or
any claim for credits, allowances, or adjustments by the Account Debtor
because of returned, refused, inferior, or damaged goods or
unsatisfactory services, or for any other reason; (f) the account is not
outstanding more than 90 calendar days from the original date of the
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original invoice therefor or more than 60 calendar days from the
original due date therefor; (g) the account does not arise out of a
contract with, or order from, an Account Debtor that, by its terms,
forbids or makes void or unenforceable the assignment by the Borrower or
Erudite to the Bank of the account arising with respect thereto; (h) the
Account Debtor is not a Subsidiary or other Affiliate of the Borrower or
Erudite, without the prior written consent of the Bank; (i) neither the
Borrower nor Erudite is indebted in any manner to the Account Debtor,
with the exception of customary credits, adjustments and/or discounts
given to an Account Debtor by the Borrower or Erudite respectively in
the ordinary course of its business; (j) no part of the account
represents a retainage; (k) the Account is owed in U.S. Dollars or in
major foreign currency where an appropriate hedging transaction is in
place; (l) the account is not owing by any Account Debtor for which
fifty percent (50%) or more of such Account Debtor's total accounts due
to the Borrower or to Erudite respectively, are non-Eligible
Receivables; (m) the account is not an International Receivable, unless
the entire amount of the payment obligation represented by the account
is secured by (1) an irrevocable commercial letter of credit denominated
in Dollars (or such foreign currency as the Bank and the Borrower may
agree) in form and substance satisfactory to the Bank issued or
confirmed by a financial institution acceptable to the Bank, the
proceeds of which letter of credit have been assigned to the Bank or
which letter of credit shall specifically provide that payment
thereunder shall be negotiated only at the Bank's counters or,
alternatively, made solely and directly to a Restricted Account or (2)
foreign credit insurance in form and substance satisfactory to the Bank,
issued by the Export-Import Bank of the United States, the proceeds of
which insurance have been assigned to the Bank; (n) no notice of the
bankruptcy, receivership, reorganization or insolvency of the Account
Debtor owing such account has been received by the Bank or the Borrower
or Erudite; (o) the Account Debtor is not the federal government or any
federal governmental agency except to the extent that such agency and
the subject account are subject to the Federal Assignment of Claims Act
or the Federal Assignment of Contracts Act and the provisions of such
Acts have been fully complied with; (p) the Account Debtor is not a
state or a local government or a state or local governmental agency
unless any provision of state or local law equivalent to the Federal
Assignment of Claims Act or the Federal Assignment of Contracts Act has
been fully complied with; and (q) the Bank in the exercise of its
reasonable discretion has not deemed the account ineligible because of
uncertainty as to the creditworthiness of the Account Debtor or because
the Bank otherwise considers the collateral value thereof to the Bank to
be impaired or its ability to realize such value to be insecure. In the
event of any dispute under the foregoing criteria, as to whether an
account is, or has ceased to be, an Eligible Receivable, the decision of
the Bank in the exercise of its sole and absolute discretion shall
control.
"Erudite's Account" shall mean an account entitled "GSE Erudite
Software, Inc. Cash Collateral Account" #14190-06553 with Bank.
"Erudite's Guaranty" shall mean a Guaranty Agreement, in form
and substance satisfactory to the Bank, dated the same date as the
Amendment Two, executed and delivered by Erudite in favor of the Bank
assuring and guarantying the repayment of the Borrower's Obligations
(and thereby becoming part of Borrower's Obligations) as the same may be
amended, supplemented or otherwise modified, in accordance with the
terms thereof and the Loan Agreement.
"Erudite Master Note" shall mean the Master Note described in
the Background section hereof and in form and substance as attached
hereto as Exhibit BB and pledged to Bank.
"Erudite Master Letter of Credit" means a Master Letter Credit
Agreement executed by Erudite prior to the issuance of any Standby
Letter Credit for the account of Erudite, which shall be in form
substantially similar to the Master Letter of Credit Agreement.
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"Erudite's Obligations" shall mean Erudite's obligations to pay
the Borrower's Obligations by virtue of Erudite's Guaranty from the
proceeds of the collateral pledged to the Bank by Erudite for the
Borrower's Obligations or otherwise arising by contract or operation of
law.
"Erudite Security Agreement" shall mean that certain Security
Agreement of Erudite of even date with and in form and substance as
attached as Exhibit CC to Amendment Two.
"Eurocurrency Reserve Requirement" means for any day as applied
to a Eurodollar Loan, the aggregate of the rates (such aggregate being
expressed as a decimal) of reserve requirements in effect on such day
(including, without limitation, basic, supplemental, marginal and
emergency reserves under any regulations of the Board of Governors of
the Federal Reserve System or other Governmental Authority having
jurisdiction with respect thereto, as now and from time to time
hereafter in effect) for eurocurrency funding (currently referred to as
"eurocurrency liabilities" in Regulation D of such Board) maintained by
a member bank of the Federal Reserve System, without benefit of credit
for proration, exceptions or offsets otherwise available from time to
time under such regulations.
"Eurodollar Loan" means any advance under the Loan or portion
thereof when and to the extent the interest rate thereof is determined
by reference to the LIBO rate.
"Financing Documents" shall mean, collectively, this Agreement,
the Master Letter of Credit Agreement, all Applications and Agreements
for Standby Letters of Credit and Standby Letters of Credit issued
pursuant thereto, the Promissory Note, the GSE Guaranty, the Erudite
Guaranty, the Erudite Security Agreement and any other documents,
instruments, certificates and agreements which have been, are or are
hereafter executed and delivered by the Borrower or any other Person in
connection with any of the Borrower's Obligations.
"General Intangibles" shall mean all general intangibles of
every nature, whether presently existing or hereafter acquired or
created, including without limitation all books and records, claims
(including without limitation all claims for income tax and other
refunds), choses in action, contract rights, judgments, patents, patent
licenses, trademarks, trademark licenses, licensing agreements, rights
in intellectual property, goodwill (including goodwill of the Borrower's
or Erudite's respective business symbolized by and associated with any
and all trademarks, trademark licenses, copyrights and/or service
marks), royalty payments, licenses, contractual rights, rights as lessee
under any lease of real or personal property, literary rights,
copyrights, service names, service marks, logos, trade secrets, amounts
received as an award in or settlement of a suit in damages, deposit
accounts, interests in joint ventures or general or limited
partnerships, rights in applications for any of the foregoing, books and
records in whatever media (paper, electronic or otherwise) recorded or
stored, with respect to any or all of the foregoing and all equipment
and general intangibles necessary or beneficial or desirable to retain,
access and/or process the information contained in those books and
records, and all proceeds (cash and non-cash) of the foregoing.
"Governmental Authority or Authorities" shall mean any nation or
government, any state or other political subdivision thereof, any
governmental or quasi-governmental entity, court or tribunal including,
without limitation, any department, commission, board, bureau, agency,
administration, service or other instrumentality of any foreign or
domestic governmental entity, exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to
government.
"Instrument" shall mean a negotiable instrument (as defined
under Article 3 of the Uniform Commercial Code), a "certificated
security" (as defined under Article 8 of the Uniform Commercial Code)
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other than any certificated security evidencing ownership in the
Borrower or Erudite or any Subsidiary of either, or any other writing
which evidences a right to payment of money and is not itself a security
agreement or lease and is of a type which is in the ordinary course of
business transferred by delivery with any necessary indorsement.
"Interest Payment Date" means (A) as to any Prime Rate Loan, the
first day of each calendar month commencing on the first of such days to
occur after such Prime Rate Loan is made and (B) as to any Eurodollar
Loan, the last day of the Interest Period pertaining to such Eurodollar
Loan.
"Interest Period" means with respect to any Eurodollar Loan: (1)
initially, the period commencing on the borrowing or conversion date, as
the case may be, with respect to such Eurodollar Loan and ending one,
two or three months thereafter as selected by the Borrower in their
notice of borrowing, and (2) thereafter, each period commencing on the
last day of the immediately preceding Interest Period applicable to such
Eurodollar Loan and ending one, two or three months thereafter as
selected by the Borrower, provided that the Borrower has given its
notice of continuation; provided that, all of the foregoing provisions
relating to Interest Period are subject to the following: (a) if any
Interest Period pertaining to a Eurodollar Loan would otherwise end on a
day which is not a Working Day, such Interest Period shall be extended
to the next succeeding Working Day unless the result of such extension
would be to carry such Interest Period into another calendar month in
which event such Interest Period shall end on the immediately preceding
Working Day; and (b) if any Interest Period pertaining to a Eurodollar
Loan begins on the last Working Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month at
the end of such Interest Period), such Interest Period shall end on the
last Working Day of a calendar month.
"International Receivable" means an account which arises out of
a transaction between the Borrower or Erudite and an Account Debtor who
meets at least one of the following criteria: (A) the Account Debtor is
a non-United States (i) government, (ii) government-controlled business
or (iii) governmental agency, (B) the Account Debtor is not subject to
the jurisdictions of the court systems of the United States and any
state of the United States and/or (C) the Account Debtor does not
maintain in the United States an office to which such account is
invoiced and tangible assets with a book value equal to at least five
(5) times the aggregate accounts owed by such Account Debtor.
"Inventory" shall mean all of the respective inventory of the
Borrower or Erudite and all respective right, title and interest of the
Borrower or Erudite in and to all of its now owned and hereafter
acquired goods, merchandise and other personal property furnished under
any contract of service or intended for sale or lease, including,
without limitation, all raw materials, inventory related
work-in-progress, finished goods and materials and supplies of any kind,
nature or description which are used or consumed in its business or are
or might be used in connection with the manufacture, packing, shipping,
advertising, selling or finishing of such goods, merchandise and other
licenses, warranties, franchises, general intangibles, personal property
and all documents of title or documents relating to the same and all
proceeds (cash and non-cash) of the foregoing.
"Laws" means all ordinances, statutes, rules, regulations,
orders, injunctions, writs or decreed of any federal, state or local
government or political subdivision or agency thereof, or any court or
similar entity established by any of the foregoing.
"Letter of Credit Obligations" shall mean, in respect of each
Standby Letter of Credit, the obligation of the Borrower or Erudite to
pay to the Bank all sums required to be paid by the terms of the Master
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Letter of Credit Agreement and the Erudite Master Letter of Credit
Agreement and the related Application and Agreement for Standby Letter
of Credit and any Borrower's Obligations related to the Letters of
Credit which are described by the terms of this Agreement.
"LIBO Rate" means, with respect to each Interest Period
pertaining to a Eurodollar Loan, the rate per annum equal to the
quotient of (1) the rate (expressed as a decimal) at which the Bank is
offered Dollar deposits two Working Days prior to the beginning of such
Interest Period in the London Interbank Market at 11:00 a.m., London
time, for delivery on the first day of such Interest Period for the
number of days comprised therein and in an amount equal to the amount of
such Eurodollar Loan divided by (2) a number equal to 1.00 minus the
Eurocurrency Reserve Requirement on the day which is two Working Days
prior to the beginning of such Interest Period (such LIBO Rate to be
rounded upward to the nearest 1/16 of 1%).
"Milestone Payment" shall mean a payment made pursuant to and in
accordance with the terms of a written contract between the Borrower or
Erudite, respectively, and an Account Debtor which provides for payments
to the Borrower or Erudite, respectively, in respect of materials
supplied or to be supplied and/or services rendered or to be rendered
under such contract in amounts and at times which are readily calculated
and/or determinable by reference to facts, dates or events such that a
reasonably informed third party could identify appropriate invoice dates
and calculate the amounts of such invoices under the contract. Without
limiting the generality of the foregoing, a Milestone Payment shall not
include any payment made on a percentage of completion basis, unless the
Account Debtor has acknowledged in writing that an invoice issued for a
particular percentage of completion is presently due and owing in
accordance with the terms of the invoice.
"Prime Rate Loan" means any advance under the Loan or portion
thereof when and to the interest rate thereof is determined by reference
to the Prime Rate.
"Qualified Inventory" shall mean the aggregate value (lower of
cost, as determined by the average cost method, or market), determined
in accordance with United States generally accepted accounting
principles, of the Inventory consisting of parts and service parts used
by the Borrower to conduct its business as described in Section 7.20, or
used by Erudite to conduct its business as described in the Security
Agreement in all cases as to which the Borrower or Erudite has acquired
respective title and the Bank has acquired a first priority, perfected
security interest.
"Restricted Account" shall mean Erudite's Account over which
Restricted Account the Bank shall have sole power of withdrawal until
all of the Erudite's Obligations and the Borrower's Obligations have
been repaid and satisfied in full.
"Utilized Portion of the Commitment" shall mean the sum of (a)
all outstanding advances of the Loan with respect to which the Borrower
has not satisfied in full its Loan Obligations, and (b) all amounts
which have been drawn and not reimbursed or are then available to be
drawn by the beneficiaries of all Standby Letters of Credit with respect
to which the Borrower or Erudite has not satisfied in full its Letter of
Credit Obligations.
"Working Day" means any Business Day on which dealings in
foreign currencies and exchange between banks may be carried on in
London, England and in Philadelphia, Pennsylvania.
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3. The following term defined in Section 1.2 of the Loan Agreement is
hereby deleted and replaced with the following:
"Receivables" shall mean, collectively, the Borrower's or
Erudite's now owned or hereafter acquired or created respective
Accounts, Chattel Paper, Contract Rights, General Intangibles and
Instruments related thereto, and all cash and non-cash proceeds thereof.
III. LETTER OF CREDIT
4. Provided that all of the conditions of Erudite Security Agreement,
this Amendment Two, each other Financing Document and any other conditions
imposed by any document required or contemplated by such are met, Letters of
Credit may be issued under Article III of the Loan Agreement for which Erudite
is the account party. All reimbursement obligations as to such letters of credit
shall remain Borrower's Obligations and Letter of Credit Obligations.
IV. NEGATIVE COVENANTS
5. Section 11.2 of the Loan Agreement (Use of Loan Proceeds and Letters
of Credit) is hereby amended to read as follows:
"Use of Loan Proceeds and Letters of Credit". The Borrower will
not use the Loan proceeds or the Letters of Credit for any purposes
other than (1) to repay to Texas Instruments Incorporated the principal
outstanding under the $2,000,000 note dated December 30, 1994, which
repayment was made on January 31, 1995; (2) to repay to GSE Systems,
Inc. $1,250,000 under its $2,000,000 note dated December 30, 1994 (the
"GSE Note"), which repayment was made on January 31, 1995; and (3) to
meet working capital needs, including, without limitation, to make
advances under the Loan to fund Letter of Credit reimbursement
obligations and to make or repay its intercompany borrowings permitted
under Section 11.18 and the investment in existing Subsidiaries
permitted under Section 11.8 so long as there exists no Default or Event
of Default at the time of such repayment and such repayment would not
create a Default or an Event of Default.
6. Section 11.18 of the Loan Agreement is hereby amended to delete the
word "and" prior to clause (e) thereof and insert the following phrase at the
end of such Section:
"and (f) loans and advances to Erudite, from time to time, not
to exceed at any one time outstanding the amount of the Commitment."
V. CONDITIONS PRECEDENT
7. As conditions to the Bank's execution of this Amendment Two, the Bank
shall have received all of the following, in form and substance satisfactory to
the Bank in all respects:
(a) Copies of resolutions of the Board of Directors of each of
the Borrower and Erudite authorizing the execution, delivery and
performance of this Amendment Two, the Erudite Security Agreement, the
Erudite Guaranty and any other agreements, documents and instruments
delivered in connection therewith to which either is a party (the "Loan
Documents") certified by the Secretary or Assistant Secretary of the
Borrower or Erudite, as appropriate.
(b) A certificate of the Secretary or Assistant Secretary of
each of the Borrower and Erudite as to the incumbency and specimen
signatures of the officers of the Borrower and Erudite signing the Loan
Documents.
(c) This Amendment Two.
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(d) The Erudite Guaranty.
(e) A favorable opinion of counsel for each of the Borrower and
Erudite in form and substance satisfactory to the Bank.
(f) The Erudite Security Agreement and each document required
thereby.
(g) The Erudite Master Note.
(h) UCC financing statements.
(i) Such other agreements, documents, instruments and the like
as the Bank may request.
VI. REPRESENTATIONS AND WARRANTIES
8. The Borrower hereby represents and warrants that, as of the date
hereof and after giving effect to this Amendment Two:
(a) The Borrower is in compliance with all terms and provisions
of the Loan Agreement and the other Financing Documents.
(b) The representations and warranties set forth in the Loan
Agreement and in the other Financing Documents are true and correct in
all material respects (references to financial statements of the
Borrower and GSE shall be deemed to be references to the latest
financial statements of the Borrower and GSE) with the same effect as
though made on and as of the date thereof, except to the extent that
such representations and warranties expressly relate to an earlier date.
(c) No Default or Event of Default under the Loan Agreement, as
amended, has occurred as of this date other than in connection with
loans or advances to Erudite.
(d) This Amendment Two has been duly authorized by all requisite
action on behalf of the Borrower and constitutes the legal, valid and
binding obligation of the Borrower enforceable in accordance with its
terms, except as the same may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally and general principles of equity.
(e) The execution, delivery and performance of this Amendment
Two will not violate any applicable provision of law or judgment, order
or regulation of any court or of any public or governmental agency or
authority nor conflict with or constitute a breach of or a default under
any instrument to which the Borrower is a party or by which the Borrower
or any of the Borrower's properties is bound.
(f) No approval, consent or authorization of, or registration,
declaration or filing with, any governmental or public body or
authority, or any trustee or holder of any indebtedness, is required in
connection with the valid execution, delivery and performance by the
Borrower of this Amendment Two, except such as have been obtained.
(g) There has been no material adverse change in the financial
condition, business or prospects of the Borrower since the date of the
Loan Agreement.
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(h) The GSE Guaranty and the Subsidiary Guaranty remain in full
force and effect and are binding, valid and enforceable in accordance
with their terms.
All of the above representations and warranties shall survive the making of this
Amendment Two.
VII. WAIVER
9. The Bank hereby waives any Default or Event of Default under the Loan
Agreement arising solely from the Borrower making loans or advances to Erudite.
Nothing contained herein shall constitute a waiver of any other Default or Event
of Default whether now existing or hereafter arising and the Bank expressly
reserves all of its rights and remedies with respect to any such Default or
Event of Default.
VIII. LIBOR PROVISIONS
10. Article II of the Loan Agreement (THE LOAN) is hereby deleted and
replaced with the following:
"2.1 Advances of the Loan. Subject to the provisions of this
Agreement, including the satisfaction of the conditions precedent
described in Article VIII hereof, the Bank agrees to make advances of
the Loan in Dollars to the Borrower's Account as requested by the
Borrower from time to time during the Commitment Period, provided that
after giving effect to the Borrower's request the outstanding principal
balances of the Loan Obligations and the Letter of Credit Obligations
would not exceed the lesser of the Commitment and the Collateral Value
as reflected on the applicable Borrowing Certificate.
2.2 Procedure for Making Advances Under the Loan; Bank
Protection Advances. The Borrower may request a Prime Rate Loan to be
made on any Business Day and may request a Eurodollar Loan to be made on
any Working Day. Each such request shall be in writing and delivered to
the Bank not later than 1:00 P.M., Philadelphia time (a) at least two
Working Days prior to the date on which a Eurodollar Loan is to be made
and (b) on the Business Day on which a Prime Rate Loan is to be made,
specifying (i) the amount to be borrowed, (ii) the requested borrowing
date, (iii) whether the advance is to be a Prime Rate Loan or a
Eurodollar Loan and (iv) the length of the Interest Period for any
Eurodollar Loan (such request may be made by telephone if immediately
followed by telecopy confirmation thereof). The request for such advance
shall be irrevocable. Advances under the Loan shall be deposited to the
Borrower's Account. In addition, the Borrowers hereby irrevocably
authorize the Bank, which shall have the right, but not the obligation,
at any time and from time to time, without further request from or
notice to the Borrower, to make advances under the Loan which the Bank,
in its reasonable discretion, deems necessary or appropriate to protect
the Bank's interest under this Agreement, including, without limitation,
advances under the Loan made to cover any Borrower's Obligations,
including, without limitation, Expense Payments, prior to, on, or after
the termination of other advances under this Agreement, regardless of
whether at such time there shall exist Available Commitment or whether
the conditions precedent described in Article VIII hereof shall be
satisfied; all such advances shall constitute Prime Rate Loans.
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2.3 Interest.
(a) Subject to the terms of subsection 2.3(d) below,
each Prime Rate Loan shall bear interest for the period from and
including the date such advance is made until repayment in full
of the principal amount thereof or conversion of such advance to
a Eurodollar Loan pursuant to Section 2.4 on the unpaid
principal balance thereof at the Prime Rate, such rate to change
at the opening of business on the day of each change in the
Prime Rate.
(b) Each Eurodollar Loan shall bear interest during each
Interest Period applicable thereto on the unpaid principal
balance thereof at a rate per annum equal to the LIBO Rate
determined for such Interest Period plus 1.00%.
(c) Interest on each Prime Rate Loan and Eurodollar Loan
shall be payable on the Interest Payment Dates applicable
thereto.
(d) Any principal amount or other amounts (other than
interest) payable hereunder not paid when due (upon demand by
the Bank, if applicable, on default, or otherwise, whether or
not the Bank shall have accelerated the Borrower's Obligations)
shall bear interest thereafter until paid in full, payable on
demand, at an annual rate equal to:
(i) For each Prime Rate Loan at a rate three
percentage points in excess of the Prime Rate; and
(ii) For each Eurodollar Loan, at a rate equal
to the then applicable rate as determined under Section
2.3(b) above plus three percent from the time of default
in payment of principal until the end of the then
current Interest Period therefor, and thereafter at a
rate three percentage points in excess of the Prime
Rate.
2.4 Interest Rate Conversion/Continuation. (a) The Borrower may
elect from time to time to convert all or a part of a Prime Rate Loan or
Eurodollar Loan into the other type of loan or to continue all or part
of a Prime Rate Loan or a Eurodollar Loan for a new Interest Period by
giving the Bank written or telegraphic Notice (effective upon receipt)
not later than 1:00 P.M., Philadelphia time, on a Business Day for
conversion into a Prime Rate Loan on such day, or at least two Working
Days before a conversion into or continuation of a Eurodollar Loan,
specifying: (1) the conversion or continuation date; (2) the amount to
be converted or continued; (3) in the case of conversions, the type of
loan to be converted into; and (4) in the case of continuations of or a
conversion into Eurodollar Loans, the duration of the Interest Period
applicable thereto provided that (a) Eurodollar Loans can only be
converted on the last day of the Interest Period for such loan; (b) no
loan may be converted or continued as a Eurodollar Loan when any Default
or Event of Default has occurred and is continuing. All notices given
under this Section 2.4 shall be irrevocable and shall be given not later
than 1:00 P.M. Philadelphia time on the day which is not less than the
number of Business or Working Days specified above for such notice. If
the Borrower shall fail to give the Bank the notice as specified above
for the continuation or conversion of a Eurodollar Loan prior to the end
of the Interest Period applicable thereto, such Eurodollar Loan shall
automatically be converted into a Prime Rate Loan on the last day of the
Interest Period for such loan.
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2.5 Inability to Determine Interest Rate. In the event that the
Bank shall have determined (which determination shall be conclusive and
binding upon the Borrower) that, by reason of circumstances affecting
the London Interbank Market, adequate and reasonable means do not exist
for ascertaining the LIBO Rate for any proposed Interest Period
pertaining to any requested funding or continuation of or conversion to
a Eurodollar Loan, or if the Bank shall have determined (which
determination shall be conclusive and binding upon the Borrower) prior
to such funding, continuation, or conversion that the LIBO Rate
determined by the Bank for such Interest Period shall not adequately and
fairly reflect the cost of maintaining or funding such Eurodollar Loan
for such Interest Period, the Bank shall forthwith give notice of such
determination to the Borrower. If such notice is given, such loan shall
be funded or continued as or converted to a Prime Rate Loan. Until such
notice has been withdrawn, no further Eurodollar Loans shall be made nor
shall the Borrower have the right to convert a Prime Rate Loan to a
Eurodollar Loan.
2.6 Illegality. If, after the date of this Agreement, the
adoption of any applicable law, rule or regulation, or any change
therein or in any currently applicable law, rule or regulation, or any
change in the interpretation or administration thereof by any
Governmental Authority, central bank or comparable agency charged with
the interpretation or administration thereof, or compliance by the Bank
with any request or directive (whether or not having the force of law)
of any such Governmental Authority, central bank or comparable agency
shall make it unlawful or impossible for the Bank to make, maintain or
fund any loan at the LIBO Rate, the Bank shall so notify the Borrower.
Upon receipt of notice pursuant to this Section 2.6 from the Bank, every
Eurodollar Loan then outstanding shall automatically and without any
requirement of additional notice to the Borrower be converted to a Prime
Rate Loan, on either (a) the last day of the then current Interest
Period with respect to such loan, if the Bank may lawfully continue to
maintain and fund the loan at the rate then in effect to such day or (b)
immediately, if the Bank may not lawfully continue to fund and maintain
the loan at the rate then in effect to such day. Until the notice given
pursuant to this Section 2.6 is withdrawn by the Bank, no further
Eurodollar Loans shall be made nor shall the Borrower have the right to
convert a loan to a Eurodollar Loan.
2.7 Additional Costs. The Borrower will pay to the Bank such
amounts relating to increased costs as provided in Section 5.3(a).
2.8 Funding Loss Indemnification. The Borrower shall pay to the
Bank, upon the request of the Bank, such amount or amounts as shall be
sufficient (in the reasonable opinion of the Bank) to compensate it for
any loss, cost, or expense incurred as a result of:
(a) Any payment of a Eurodollar Loan on a date other
than the last day of the Interest Period pertaining to such loan
including, but not limited to, any such payment made as a result
of any voluntary prepayment or of acceleration by the Bank after
default; or
(b) Any failure by the Borrower to borrow or convert, as
the case may be, a Eurodollar Loan on the date for borrowing or
conversion, as the case may be, specified in the relevant
notice.
2.9 Calculations. Interest on the advances under the Loan shall
be calculated on the basis of a year of 360 days for the actual number
of days elapsed.
2.10 Other Provisions Regarding Eurodollar Loans.
(a) At no time shall there be more than six different
Interest Periods pertaining to Eurodollar Loans.
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(b) Each Eurodollar Loan shall be in an original
principal amount of $500,000, or an integral multiple of
$100,000 in excess thereof.
2.11 Payment Due on Non-Business Days. Whenever any payment to
be made hereunder or under any other Financing Document (other than
interest on a Eurodollar Loan) shall be stated to be due on a day which
is not a Business Day, such payment may be made on the next succeeding
Business Day, and such extension of time shall in such case be included
in the calculation of interest payable hereunder or under any other
Financing Document, as the case may be.
2.12 Repayment of Advances of the Loan. Each advance of the
Loan, together with interest thereon, shall be repaid, and may be
prepaid, in accordance with the provisions hereof and of the Promissory
Note; provided, however, that the Borrower's Loan Obligations must be
repaid to the extent that the Borrower or the Bank receive any Proceeds
of the Collateral.
For purposes of this Section, Proceeds of the Collateral
shall not be deemed to include the Proceeds of any intercompany
Receivables which are collected by the Borrower in the ordinary
course of business until the occurrence of an Event of Default.
Intercompany Receivables constitute Collateral for the
Borrower's Obligations to the Bank; however, intercompany
Receivables do not qualify as Eligible Receivables for purposes
of determining the amount of Available Commitment from time to
time. Accordingly, until the occurrence of an Event of Default,
the Borrower shall be entitled to collect and utilize Proceeds
of any intercompany Receivables for any purposes within the
ordinary course of business.
Amounts which are advanced under the Loan and repaid by
the Borrower shall thereafter be available to be readvanced to
the Borrower under the Loan, in accordance with the terms of
this Agreement, at any time prior to the Termination Date, on
which date the entire balance of principal, all accrued and
unpaid interest and all other amounts owing hereunder or under
any other Financing Document shall be due and payable."
11. Section 3.2 (Reimbursement of Drawings under the Letters of Credit)
and Section 5.1(b) (Payments) are each hereby amended to add at the end thereof
the following phrase:
"; all such advances shall constitute Prime Rate Loans."
12. Section 5.3(a)(iii) (Increased Costs and Reduced Return) is hereby
deleted and replaced with the following:
(iii) does or shall impose on the Bank or any Parent any other
condition (including without limitation a condition affecting a loan or
a note or the cost of Dollar deposits obtained by the Bank in the London
Interbank Market or other applicable markets);
IX(A) ERISA PROVISIONS
12A. Section 7.15 of the Loan Agreement is hereby deleted and replaced
with the following:
7.15 ERISA and Code. Neither the Borrower nor any Commonly
Controlled Entity maintains and/or contributes to, or has ever
maintained or contributed to, any Defined Benefit Plan other than the
Simulation, Systems & Services Technologies Company Union Pension Plan
(the "Union Plan"), which was terminated effective August 4, 1996. All
assets of the Union Plan were distributed on or before September 3,
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1994. Except as specifically disclosed to the Bank in writing prior to
the date of this Agreement:
(a) no Reportable Event has occurred with respect to the
Union Plan;
(b) [intentionally omitted]
(c) no liability (whether or not such liability is being
litigated) has been asserted against the Borrower or any
Commonly Controlled Entity in connection with the Union Plan by
the PBGC or by a trustee appointed pursuant to Section 4042(b)
or (c) of ERISA, and no lien has been attached and no person has
threatened to attach a lien to any property of the Borrower or
any Commonly Controlled Entity as a result of any failure of the
Union Plan to comply with the Code or ERISA;
(d) neither the Borrower nor any Commonly Controlled
Entity maintains any employee welfare benefit plan providing for
retiree health and/or life benefits other than (i) such
continuation of benefit coverage as is required by law, (ii)
coverage for a closed group of four retired former employees
(and their families, if any) under the health benefit program
for active employees, which coverage will continue only until
each retiree attains age 65 (at which time, such persons shall
become eligible for benefits under the Medicare supplemental
program referred to in subparagraph (iii) below), (iii) a
Medicare supplemental program for a present group of seven
retirees (and a maximum group of 11 retirees) with a lifetime
claim maximum of $15,000 per retiree; and (iv) a death benefit
for each retiree described in subparagraphs (ii) and (iii) above
not to exceed $10,000 per retiree, except for one retiree having
a death benefit not to exceed $30,000; and
(e) neither the Borrower nor any Commonly Controlled
Entity maintains or makes contributions to, or has ever been
required to make contributions to, any Multiemployer Plan.
12B. Section 9.13 of the Loan Agreement is hereby deleted and replaced
with the following:
9.17 Pension Matters. The Borrower and each Commonly Controlled
Entity will comply in all material respects with the provisions of ERISA
and the Code with respect to any "employee benefit plan," as defined in
Section 3(3) of ERISA. Neither the Borrower nor any Commonly Controlled
Entity will adopt any employee pension benefit plan subject to the
minimum funding standards of ERISA and the Code or become obligated to
contribute to any Multiemployer Plan. Neither the Borrower nor any
Commonly Controlled Entity will adopt any employee welfare benefit plan
that provides for post-employment life and/or health benefits (other
than such continuation of benefit coverage as is required by law and the
plan described in Section 7.15). The Borrower will not acquire or permit
the acquisition by any Commonly Controlled Entity of any trade or
business which maintains or contributes to any plan described above.
12C. Section 11.1 of the Loan Agreement is hereby replaced with the
following:
11.1 ERISA Compliance. Neither the Borrower nor any Commonly
Controlled Entity shall fail to maintain at all times such bonding as is
required by ERISA.
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IX. AMENDMENT TO NOTE
13. Paragraph (a) of the Promissory Note is hereby deleted and replaced
with the following:
"(a) interest on the unpaid principal balance at the rates
provided in the Loan Agreement (the interest rate options are set forth
in Article II of the Loan Agreement), shall be due and payable at the
time provided in the Loan Agreement, until the principal sum is paid in
full; and"
X. MISCELLANEOUS
14. Upon the effectiveness of this Amendment Two, on and after the date
hereof, each reference in the Loan Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import, and each reference in the Financing
Documents shall mean and be a reference to the Loan Agreement as amended hereby.
15. The execution, delivery and effectiveness of this Amendment Two
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of the Bank under any of the Financing Documents, nor
constitute a waiver of any provision of any of the Financing Documents.
16. The Borrower agrees to pay on demand all costs and expenses of the
Bank in connection with the preparation, reproduction, execution and delivery of
this Amendment Two and the other instruments and documents to be delivered
hereunder, including the fees and out-of-pocket expenses of counsel for the Bank
with respect thereto.
17. Recognizing and in consideration of the Bank's agreement to consent
to the amendments set forth herein, the Borrower hereby waives and releases the
Bank and its officers, attorneys, agents, and employees from any liability,
suit, damage, claim, loss or expense of any kind or nature whatsoever and
howsoever arising that it ever had or now has against the Bank arising out of or
relating to the Bank's acts or omissions with respect to this Amendment Two, the
Loan Agreement, the Loan, the Letters of Credit, the Note, the Erudite Security
Agreement, the Erudite Guaranty, the Erudite Master Note and any other Financing
Document or any other matters described or referred to herein.
18. All of the terms, conditions, provisions (including, without
limitation, provisions relating to Events of Default) and covenants in the Loan
Agreement, the Note, and all other Financing Documents and obligations secured
thereby shall remain unaltered and in full force and effect without defense,
counterclaim or offset by the Borrower, except as specifically modified by this
Amendment Two.
19. The headings of any paragraph of this Amendment Two are for
convenience only and shall not be used to interpret any provision hereof.
20. This Amendment Two, the Loan Agreement, the Note and each document
incident thereto shall be governed by and construed in accordance with the laws
of the Commonwealth of Pennsylvania.
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IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute this Amendment Two as of the day and year first above
written.
Attest: GSE PROCESS SOLUTIONS, INC.
By: /s/ Thomas K. Milhollan By /s/ Robert W. Stroup
- ----------------------------- --------------------------------
Title: Assistant Secretary Title: Executive Vice President
CORESTATES BANK, N.A.
By /s/ Derrick Davis
-----------------------------------
Title: Vice President
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GSE SYSTEMS, INC.
FORM 10-K
For the Year Ended December 31, 1997
SECURITY AGREEMENT
THIS (this "Agreement") is made as of this 11th day of November, 1997,
between GSE Erudite Software, Inc., a Delaware corporation (the "Debtor") and
CORESTATES BANK, N.A., a national banking association (the "Bank").
BACKGROUND
WHEREAS, the GSE Process Solutions, Inc. ("Borrower") and the Bank
entered into an Amended and Restated Letter of Credit, Loan and Security
Agreement dated as of October 13, 1995 pursuant to which the Bank agreed to lend
up to $7,000,000 to the Borrower for the purposes set forth in Section 11.2
thereof (the "Loan Agreement") and amended the Loan Agreement by Amendment
Number One to the Loan Agreement dated February 23, 1996 ("Amendment One"); as
used hereinafter the term "Loan Agreement" shall mean the Loan Agreement as
amended by Amendment One. In connection with Amendment One, the Borrower and the
Bank amended the $7,000,000 Promissory Note dated as of October 13, 1995, (the
"Promissory Note").
WHEREAS, the Borrower has requested that the Bank further amend the Loan
Agreement to permit the Borrower to advance funds to the Debtor for the purpose
of furnishing working capital to the Debtor.
WHEREAS, the Bank is agreeable to such an amendment on the conditions
that the advances do not exceed the amount of the Commitment, are evidenced by a
Master Note in the amount of Commitment, which Master Note is duly pledged to
the Bank, and the Debtor becomes fully liable to the Bank for all amounts due
under the Loan Agreement and the Promissory Note and such advances secured by a
first lien on the assets of the Debtor. The Bank will, if such conditions are
met, add the collateral so provided by the Debtor to the Collateral Value for
purposes of determining Available Commitment; and
WHEREAS the Debtor and the Bank have agreed to the grant of the first
lien on the Debtor's assets pursuant to this Security Agreement set forth
herein.
AGREEMENTS
NOW, THEREFORE, in consideration of the mutual agreements herein and
other good and valuable consideration, the Debtor and the Bank hereby agree as
follows:
ARTICLE I
DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the following terms shall
have the following meanings:
"Account" individually and "Accounts" collectively shall mean
all presently existing or hereafter acquired or created accounts,
accounts receivable, contract rights, notes, drafts, instruments,
acceptances, chattel paper, leases and writings evidencing a monetary
obligation or a security interest in or a lease of goods, all rights to
receive the payment of money or other consideration under present or
future contracts (including, without limitation, all rights to receive
payments under presently existing or hereafter acquired or created
letters of credit), or by virtue of merchandise sold or leased, services
rendered, loans and advances made or other considerations given, by or
set forth in or arising out of any present or future chattel paper,
note, draft, lease, acceptance, writing, bond, insurance proceeds from
claims, instrument or document, and all extensions and renewals of any
thereof, all rights under or arising out of present or future contracts,
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agreements or general interest in merchandise which gave rise to any or
all of the foregoing, including all goods, all claims or causes of
action now existing or hereafter arising in connection with or under any
agreement or document or by operation of law or otherwise, all
collateral security of any kind (including real property mortgages)
given by any person with respect to any of the foregoing, all books and
records in whatever media (paper, electronic or otherwise) recorded or
stored, with respect to any or all of the foregoing and all equipment
necessary or beneficial or desirable to retain, access and/or process
the information contained in those books and records, and all proceeds
(cash and non-cash) of the foregoing.
"Account Debtor" shall mean any Person who is obligated on a
Receivable and "Account Debtors" shall mean all Persons who are
obligated on the Receivables.
"Affiliate" shall mean, with respect to the Debtor, any Person,
directly or indirectly controlling, directly or indirectly controlled
by, or under direct or indirect common control with the Debtor or any
Subsidiary. Without in any way limiting the generality of the foregoing,
"Affiliate" includes the Borrower, GSE Systems, Inc. and each of the
following shareholders of GSE Systems, Inc.: ManTech International
Corporation, SGLG, Inc. (formerly GPS Technologies, Inc.), General
Physics Corporation and Vattenfall AB.
"Application and Agreement for Standby Letter of Credit" shall
mean an Application and Agreement for Standby Letter of Credit in
substantially the form attached hereto as Exhibit A and made a part
hereof, or in such other form which is provided by the Bank to the
Debtor as the form of Application and Agreement which is then in use by
the Bank in connection with the issuance of its Standby Letters of
Credit, which is executed by the Debtor and delivered to the Bank in
connection with a request for the issuance of a Standby Letter of
Credit.
"Borrower's Obligations" shall mean, collectively, the Loan
Obligations and the Letter of Credit Obligations, together with all
other sums due from the Borrower to the Bank under the terms of the
Financing Documents.
"Business Day" shall mean a day on which commercial banking
institutions are open for business in Philadelphia, Pennsylvania.
"Chattel Paper" shall mean a writing or writings which evidence
both a monetary obligation and a security interest in or lease of
specific goods; any returned, rejected or repossessed goods covered by
any such writing or writings and all proceeds (in any form including,
without limitation, accounts, contract rights, documents, chattel paper,
instruments and general intangibles) of such returned, rejected or
repossessed goods; and all proceeds (cash and non-cash) of the
foregoing.
"Collateral" shall mean the collateral for the Debtor's
Obligations and the Borrower's Obligations which is described in Section
3.1 of this Agreement or otherwise.
"Debtor's Account" shall mean GSE Erudite Software, Inc.'s Cash
Collateral Account #14190-06553 with the Bank.
"Debtor's Guaranty" shall mean a Guaranty Agreement, in form and
substance satisfactory to the Bank, dated the same date as the Amendment
Two, executed and delivered by Debtor in favor of the Bank assuring and
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guarantying the repayment of the Borrower's Obligations (and thereby
becoming part of Debtor's Obligations) as the same may be amended,
supplemented or otherwise modified, in accordance with the terms thereof
and the Loan Agreement.
"Debtor's Master Note" shall mean the Master Note described in
the Background section hereof and in form and substance as attached
hereto as Exhibit B and pledged to Bank.
"Debtor's Master Letter of Credit" means a Master Letter of
Credit Agreement executed by Debtor prior to the issuance of any Standby
Letter of Credit for the account of Debtor, which shall be in form
substantially similar to the Master of Letter of Credit Agreement.
"Debtor's Obligations" shall mean Debtor's obligations to pay
the Borrower's Obligations by virtue of Debtor's Guaranty from the
proceeds of the collateral pledged to the Bank by Debtor for the
Borrower's Obligations or otherwise arising by contract or operation of
law.
"Default" shall mean any of the events specified in Section 8.1
hereof, whether or not any requirement for the giving of notice, the
lapse of time, or both, or any other condition, has been satisfied.
"Dollars" and the sign "$" shall mean dollars in lawful money of
the United States of America.
"Environmental Laws" shall mean any federal, state or local
statute, law, rule, ordinance, regulation, standard, permit or
requirement concerning or relating to the protection of health and the
environment.
"Event of Default" shall mean any of the events specified in
Section 8.1 hereof, provided that any requirement for the giving of
notice, the lapse of time, or both, or any other condition, has been
satisfied.
"Expense Payments" shall have the meaning given to such term in
Section 8.2(f) of this Agreement.
"Financing Documents" shall mean, collectively, this Agreement,
the Master Letter of Credit Agreement, all Applications and Agreements
for Standby Letters of Credit and Standby Letters of Credit issued
pursuant thereto, the Promissory Note, the GSE Guaranty, the Debtor's
Guaranty, this Security Agreement, Debtor's Master Note and any other
documents, instruments, certificates and agreements which have been, are
or are hereafter executed and delivered by the Borrower or the Debtor or
any other Person in connection with any of the Borrower's or Debtor's
Obligations.
"GSE" means GSE Systems, Inc.
"Letter of Credit" shall mean a Standby Letter of Credit.
"Letter of Credit Obligations" shall mean, in respect of each
Standby Letter of Credit, the obligation of the Debtor to pay to the
Bank all sums required to be paid by the terms of the Master Letter of
Credit Agreement and the related Application and Agreement for Standby
Letter of Credit and any Borrower's or Debtor's Obligations related to
the Letters of Credit which are described by the terms of the Loan
Agreement.
"Loan" shall mean the direct loan advances to be made available
by the Bank to the Borrower in accordance with the provisions of Article
II of the Loan Agreement.
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"Loan Obligations" shall mean the obligation of the Borrower to
repay to the Bank the principal amount of the Loan, together with
interest thereon, in accordance with the terms of the Promissory Note,
and any Borrower's Obligations related to the Loan which are described
by the terms of the Loan Agreement and the Promissory Note.
"Master Letter of Credit Agreement" shall mean the Master Letter
of Credit Agreement in substantially the form attached hereto as Exhibit
C and made a part hereof.
"Permitted Liens" means (a) liens in connection with workers'
compensation, unemployment insurance or other social security or similar
obligations arising in the ordinary course of business; (b) deposits or
pledges securing the performance of bids, tenders, contracts (other than
contracts for the payment of money), leases, statutory obligations,
surety and appeal bonds and other obligations of like nature made in the
ordinary course of business and not affecting the Collateral; (c)
mechanics', carriers', landlords', warehousemen's, workers',
materialmen's or other like liens arising in the ordinary course of
business with respect to obligations which shall not at the time be due
or payable and the validity of which is being contested in good faith,
by appropriate proceedings, and without a materially adverse effect on
the Debtor or on the Collateral; (d) liens for taxes imposed upon the
Debtor or any of its properties, operations, income, products or
profits, which shall not at the time be due or payable and the validity
of which is being contested in good faith, by appropriate proceedings,
and without a materially adverse effect on the Debtor or on the
Collateral; (e) reservations, exceptions, encroachments, easements,
rights of way, covenants, conditions, restrictions, and other similar
title exceptions or encumbrances affecting real property which do not
have a materially adverse effect on the Debtor or on the Collateral; (f)
attachment, judgment and other similar liens not affecting the
Collateral which arise in connection with court proceedings, as to which
the execution or other enforcement thereof is effectively stayed, or
which are fully covered by applicable insurance (which shall not include
any bonding or other arrangement in connection with which the Debtor may
be liable to any extent); (g) liens in favor of the Bank; (h) purchase
money security interests as provided for in Section 7.4(b) of this
Agreement; and (i) liens, if any, consented to by the Bank in writing.
"Person" shall mean an individual, a partnership, a corporation,
a trust, any other organization or entity or any government or
governmental body or authority.
"Proceeds" or "proceeds" means, when used with respect to any of
the Collateral, all cash and non-cash proceeds within the meaning of the
Uniform Commercial Code and shall include the proceeds of any and all
insurance policies.
"Promissory Note" shall mean the Promissory Note of October 13,
1995 executed by the Borrower in favor of the Bank and containing the
terms and conditions under which the principal amount of the Loan,
together with interest thereon, will be repaid, as the same may from
time to time be amended, supplemented or otherwise modified in
accordance with the terms thereof and of the Loan Agreement.
"Registered Properties" shall have the meaning given to such
term in Section 3.1 of this Agreement.
"Restricted Account" shall mean the Debtor's Account
#14190-06553 over which Restricted Account the Bank shall have sole
power of withdrawal until all of the Debtor's Obligations and the
Borrower's Obligations have been repaid and satisfied in full.
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"Security Agreement" shall mean this Security Agreement, as it
may from time to time be amended, supplemented or otherwise modified in
accordance with the terms hereof.
"Standby Letter of Credit" shall mean a Standby Letter of Credit
issued by the Bank (in accordance with the provisions of Uniform Customs
and Practice for Documentary Credits, 1993 Revision, ICC Publication No.
500, or such subsequent revisions as may be adopted by the International
Chamber of Commerce Executive Board from time to time) to a designated
beneficiary for the account of the Debtor, upon receipt of an executed
Application and Agreement for Standby Letter of Credit, which Standby
Letter of Credit will be in form and content satisfactory to the Bank in
all respects.
"Subsidiary" shall mean any present or future corporation at
least a majority of whose outstanding Voting Stock shall at the time be
owned by the applicable Person; or by one or more Subsidiaries of the
applicable Person; or by the applicable Person and one or more of its
respective Subsidiaries.
1.2 Uniform Commercial Code Terms.
"Accounts," "Chattel Paper," "Contract Rights," "Documents,"
"Equipment," "General Intangibles," "Instruments" and "Inventory" shall,
in addition to any meaning given to such term in this Security
Agreement, have the respective meanings as are given to those terms in
the Uniform Commercial Code as presently adopted and in effect in the
Commonwealth of Pennsylvania and in any other states in which any
portion of the Collateral may be located, and shall also cover, without
limitation, (a) any property specifically included in those respective
terms in this Security Agreement or in the other Financing Documents
executed in connection with this Security Agreement, (b) all property
included in these respective terms, whether now owned or existing or
hereafter acquired or created and wherever located, and (c) all proceeds
(cash and non-cash) and products of the foregoing.
"Receivables" shall mean, collectively, the Debtor's now owned
or hereafter acquired or created Accounts, Chattel Paper, Contract
Rights, General Intangibles and Instruments related thereto, and all
cash and non-cash proceeds thereof.
1.3 Certain Terms Defined in Loan Agreement. All capitalized words used
herein shall have the meaning ascribed to them in the Loan Agreement, unless
there are defined herein, in which case they shall have the meaning ascribed to
them herein.
1.4 ERISA Terms. Certain terms used in this Agreement are defined in the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") or are
otherwise defined in the Internal Revenue Code of 1986, as amended (the "Code").
When and if used in this Agreement, such terms shall have the meanings given
them in ERISA or the Code. Specifically, the following terms shall have the
following meanings:
"Commonly Controlled Entity" means any Subsidiary or any other
trade or business (whether or not incorporated) which is part of a group
of trades or businesses under "common control" (as defined in Code
414(c)) and of which GSE, the Borrower, the Debtor or any of their
Subsidiaries is a part.
"Defined Benefit Plan" means an employee pension benefit plan
(as defined in Section 3(2) of ERISA) covered by Title IV of ERISA
(other than a Muliemployer Plan), as provided in Section 4021 of ERISA,
and maintained by the Debtor, the Borrower, GSE and/or by any Commonly
Controlled Entity.
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"Multiemployer Plan" means a multiemployer plan (as defined in
Section 4001(a)(3) of ERISA), to which GSE, the Borrower or the Debtor
or any Commonly Controlled Entity, as appropriate, has or had an
obligation to contribute.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Reportable Event" means a "reportable event" as defined in
Section 4043(c) of ERISA.
"Responsible Officer" means the chief executive officer of the
Debtor, the president of the Debtor, the executive vice president of the
Debtor, or, with respect to financial matters, the vice president of
finance of the Debtor.
1.5 Other Definitional Provisions.
(a) All terms defined in this Security Agreement shall have
their defined meanings when used in any certificate or other document
made or delivered pursuant hereto.
(b) The words "hereof," "herein" and "hereunder" and words of
similar import, when used in this Security Agreement shall refer to this
Security Agreement as a whole and not to any particular provision of
this Security Agreement, and section, subsection, schedule and exhibit
references are to this Security Agreement unless otherwise specified.
(c) In the event of any conflict between the meanings given to
"Accounts," "Chattel Paper," "Contract Rights," "Documents,"
"Equipment," "General Intangibles," "Instruments," and "Inventory" in
the Uniform Commercial Code and as otherwise set forth in this Security
Agreement, the respective meanings given to such terms in the Uniform
Commercial Code shall prevail with respect to all matters relating to
the grant, existence and perfection of security interests in the
Collateral; for all other purposes, the respective meanings shall be as
otherwise set forth in this Security Agreement.
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ARTICLE II
LOCKBOX, ETC.
2.1 Lockbox. While any of the Borrower's Obligations or the Debtor's
Obligations remain outstanding, or the Bank has any obligation under the Loan
Agreement, the Debtor shall maintain a post office box which will be under the
exclusive control of the Bank (the "Lockbox") into which the Debtor shall cause
all payments of any of the Debtor's Receivables (other than intercompany
Receivables prior to the occurrence of an Event of Default) and Documents to be
made, and the Debtor shall indicate on all invoices and other correspondence
with Account Debtors (other than intercompany Account Debtors) to make all
payments to the Debtor in care of the Lockbox and hereby appoints the Bank, as
the Debtor's true and lawful attorney-in-fact to receive all incoming mail, open
all such mail, remove all collections and remittances therefrom in payment of or
on account of any of the Debtor's Receivables and Documents and use the Bank's
reasonable efforts to forward all other mail so received to the Debtor's place
of business. Any Proceeds of Collateral received by the Debtor, including,
without limitation, payments on Receivables (other than intercompany Receivables
so long as there exists no Event of Default, it being understood and agreed that
any such payments on intercompany Receivables will be treated as any other
Receivable after the occurrence of an Event of Default) and Documents and other
payments from sales or leases of Inventory, shall be held by the Debtor in trust
for the Bank in the same medium in which received, shall not be commingled with
any assets of the Debtor, and shall be delivered immediately to the Bank. The
Debtor agrees to pay to the Bank promptly when billed the Bank's standard fees
for operating the Lockbox. The Debtor hereby grants, bargains, conveys and sets
over to the Bank a security interest in and lien upon the Lockbox, the
Restricted Account, the Debtor's Account and any other account established by
the Debtor with the Bank or any affiliate thereof, and all cash and any other
assets at any time hereafter contained therein. Amounts received in the Lockbox
shall be deposited upon collection into the Restricted Account, and the Bank
will apply all amounts so received against the Borrower's Obligations or the
Debtor's Obligations on a daily basis, as collected.
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ARTICLE III
SECURITY
3.1 Collateral. As security and collateral for the repayment of the
Debtor's Obligations and the Borrower's Obligations and the payment of all other
liabilities of the Debtor or the Borrower to the Bank, whether absolute or
contingent, matured or unmatured, direct or indirect, similar or dissimilar, due
or to become due or heretofore or hereafter contracted or acquired, however and
wherever arising and whether or not arising hereunder, under any of the other
Financing Documents, or in connection with any of the transactions described
herein or therein or under any other documents, instruments or agreements, the
Debtor hereby assigns, pledges and grants to the Bank, and agrees that the Bank
shall have a perfected (except as the Bank's remedies may be limited at any time
by the absence of full compliance with the Federal Assignment of Claims Act, the
Federal Assignment of Contracts Act, any state or local law equivalent of either
of the foregoing, and as a result of matters relating to copyrights, trademarks
and patents set forth in the next paragraph) and a continuing security interest
in, and lien on, all of the following (collectively, the "Collateral"): (a) all
of the Debtor's Accounts, Inventory, Chattel Paper, Documents, Instruments,
General Intangibles, and Equipment (whether or not fixtures), whether now owned
or existing or hereafter acquired or arising, other than vehicle leases and
equipment leases, (b) all returned, rejected or repossessed goods, the sale or
lease of which shall have given or shall give rise to an Account or Chattel
Paper, (c) all insurance policies relating to the foregoing, (d) all books and
records in whatever media (paper, electronic or otherwise) recorded or stored,
with respect to the foregoing and all equipment and general intangibles
necessary or beneficial to retain, access and/or process the information
contained in those books and records, (e) the Lockbox, the Debtor's Account, the
Restricted Account and any other account maintained by the Debtor with the Bank
and all cash held therein; and (f) all cash and non-cash proceeds and products
of the foregoing.
Except as set forth in Schedule 3.1, the Debtor has no ownership
interest in any of the following (hereinafter collectively referred to as
"Registered Properties"): (i) any patent issued by, or any invention for which a
patent application is pending in, the U.S. Patent and Trademark Office; (ii) any
trademark registered by, or for which an application for registration is pending
in, the U.S. Patent and Trademark Office; or (iii) any copyright registered by,
or for which an application for registration is pending in, the U.S. Copyright
Office. If any inventions, trademarks or copyrights of the Debtor hereafter
become Registered Properties or if the Debtor hereafter obtains an ownership
interest in any Registered Properties, the Debtor will immediately notify the
Bank in writing. If the Bank requests, the Debtor will cause the Bank's first
priority security interest in any or all such Registered Properties to be
appropriately recorded in the appropriate office pursuant to documentation in
form and substance satisfactory to the Bank in its sole and absolute discretion.
The Debtor further agrees that the Bank shall have in respect of the
Collateral all of the rights and remedies of a secured party under the Uniform
Commercial Code of Pennsylvania and of all other states in which any portion of
the Collateral may be located, as well as those provided in this Security
Agreement, under each of the other Financing Documents and under applicable
laws.
3.2 Location of Collateral; Principal Place of Debtor's Business. The
Debtor agrees to keep the Bank informed as to the location of the Collateral and
the address of its principal place of business (which are, and will be, as set
forth on Schedule 4.12, subject to the provisions of this section all allowing
for changes in certain circumstances), give the Bank prior notice of any
contemplated change of location or the address of its principal place of
business, and not change the location of any of the Collateral or the address of
its principal place of business, without, in the case of a change to another
location in the continental United States, 30 days' prior written notice to the
Bank and, in the case of a change to another location outside the continental
United States, 30 days' prior written notice to and the prior written consent of
the Bank. Without limiting the generality of the foregoing, (a) the Debtor's
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principal place of business and chief executive office shall at all times be
within the State of Utah and (b) the Debtor shall notify the Bank in writing
immediately (i) if and when the aggregate value (as determined in accordance
with United States generally accepted accounting principles) of Collateral (in
the case of Inventory, the lower of cost, as determined by the average cost
method, or market) in any state of the United States equals or exceeds $500,000
(other than Tempe, Arizona, where the Debtor now maintains assets); and (ii) if
and when the aggregate value (as determined in accordance with United States
generally accepted accounting principles) of assets (in the case of inventory,
the lower of cost, as determined by the average cost method, or market) of its
Subsidiaries exceeds $1,500,000.
3.3 Loss of Collateral. The Bank shall not be liable for any loss of any
Collateral in its possession, nor shall such loss diminish the debt due, except
to the extent such loss is caused by the Bank's willful misconduct or gross
negligence.
3.4 Filing of Financing Statements; Perfection of Security Interest in
Collateral. The security interest created by this Security Agreement shall be
perfected by the filing of financing statements which fully comply with Article
9 of the Uniform Commercial Code, as adopted by each of the states in which the
Collateral may be located, in such form and in such offices as may be required
by the Bank. The parties agree that:
(a) with respect to any such financing statement, a carbon,
photographic or other reproduction of a security agreement or a
financing statement is sufficient as a financing statement for purposes
of Section 9-402 of the Uniform Commercial Code;
(b) if at any time any of the information contained in any
financing statement filed in connection with the security interests
created by this Security Agreement, including without limitation, the
location or description of the Collateral or the Debtor's name or
address of its principal place of business, or chief executive office
shall change in such manner as to cause such financing statement to
become misleading in any material respect or as may impair the
perfection of the security interests intended to be created by this
Security Agreement, then the Debtor will cooperate with the Bank in
promptly preparing and executing an amendment to such financing
statement, or a new financing statement, as may be necessary to continue
the perfection of the security interest intended to be created by this
Security Agreement which amendment or new financing statement will be
filed in any office where such amendment or financing statement is
required to be filed to continue the perfection of the security
interests created by this Security Agreement;
(c) upon the request of the Bank, the Debtor shall prepare, have
executed and file any amendments to the financing statements filed with
respect to the security interests created by this Security Agreement in
such form as the Bank may require;
(d) the Bank may, and the Debtor hereby irrevocably appoints the
Bank as the Debtor's attorney-in-fact to, take any action the Bank deems
necessary to perfect or maintain perfection of any security interest
granted to the Bank herein or in connection herewith (but only to the
extent that the perfection is contemplated hereunder), including the
execution of any document on the Debtor's behalf, granting unto the
Debtor's said attorney full power to do any and all things necessary to
be done with respect to the above transactions as fully and effectually
as the Debtor might or could do, and hereby ratifying all that said
attorney shall lawfully do or cause to be done by virtue hereof; this
power of attorney is coupled with an interest and irrevocable until all
of the Debtor's Obligations and Borrower's Obligations are paid in full
and the Bank has no further obligation under the Loan Agreement;
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(e) the Debtor shall bear all costs, fees and expenses of or
relating to any and all of the filings described in this Section 3.4,
including any recordation taxes payable as a result of such filings; and
(f) upon request by the Bank, the Debtor shall provide, at its
expense, an opinion of counsel as to the effectiveness and perfection of
the Bank's lien on the Collateral or any portion thereof.
3.5 Waivers. If any of the Collateral or any of the books and records
relating thereto are at any time to be located on premises leased by the Debtor
or on premises owned by the Debtor subject to a mortgage or other lien in favor
of a Person other than the Bank, the Debtor shall use its best efforts in good
faith to obtain and deliver to the Bank, prior to the delivery of any Collateral
or books and records to said premises, or as soon thereafter as possible, an
agreement in form satisfactory to the Bank, waiving the landlord's or
mortgagee's or lienholder's rights to enforce any claim against the Debtor for
moneys due under the lease, mortgage or other lien by levy of distraint or other
similar proceeding against the Collateral or the books and records relating
thereto and assuring the Bank's ability to have access to the Collateral and the
books and records relating thereto to exercise its rights hereunder to take
possession thereof.
3.6 Bank's Rights with Respect to Accounts, Chattel Paper, General
Intangibles and Instruments. (a) With respect to any Accounts, Chattel Paper,
General Intangibles and Instruments, the Bank shall have the right at any time
and from time to time, whether or not there then exists a Default or Event of
Default: (i) to endorse in the name of the Debtor all proceeds of the Accounts,
Chattel Paper, Instruments and General Intangibles payable to the Debtor that
may come to the Bank and (ii) to take control of any cash or noncash proceeds of
any Account, Chattel Paper, Instrument, and/or General Intangibles for the
purpose of application to pay down the Debtor's Obligations or the Borrower's
Obligations.
(a) With respect to any Accounts, Chattel Paper, General Intangibles and
Instruments, the Bank shall have the right at any time and from time to time,
after an Event of Default: (i) to compromise, extend or renew any Account,
Chattel Paper, Instrument, or General Intangible or deal with the Debtor's
Accounts, Chattel Paper, Instruments and General Intangibles as the Bank may
deem advisable; (ii) to make exchanges, substitutions, or surrenders of
collateral; (iii) to communicate with Account Debtors and the Debtor's
accountant to verify account balances and any information provided by the
Debtor; and (iv) to notify an Account Debtor that the Account or General
Intangible payable by such Account Debtor has been assigned to the Bank and is
to be paid directly and solely to the Bank.
3.7 Accounts. (a) With respect to each Account, the Debtor represents
that: (i) such Account is not evidenced by a judgment, an Instrument or Chattel
Paper or secured by a letter of credit (except (A) such judgment as has been
assigned to the Bank, or (A) such Instrument or Chattel Paper as has been
endorsed and delivered to the Bank or (C) such letter of credit as provides for
payment to be negotiated only at the Bank's counters, or, alternatively,
provides that payment be made solely to the Restricted Account) and represents a
bona fide transaction; (ii) the amount thereof shown on the Debtor's books and
records and on any list, invoice or statement furnished to the Bank is owing to
the Debtor; (iii) the title of the Debtor to the Account and, except as against
the Account Debtor, to any goods represented thereby is absolute; (iv) the
Account has not been transferred to any other Person, and no Person except the
Debtor has any claim thereto or, with the sole exception of the Account Debtor
therefor, to the goods represented thereby; (v) except as previously disclosed
to the Bank and/or stated on the Debtor's financial statements previously
delivered to the Bank, no partial payment against any Account has been made by
anyone; (vi) except as previously disclosed to the Bank and/or stated on the
Debtor's financial statements previously delivered to the Bank, no set-off or
counter-claim in a material amount to such Account exists, and no agreement has
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been made with any Person under which any deduction or discount in a material
amount may be claimed; and (vii) the Debtor has notified and shall notify all
Account Debtors and has indicated and shall indicate on all billings and
statements to Account Debtors that payments thereon are to be made solely to the
Lockbox. All invoices shall direct payment to the address set forth in the
Lockbox Agreement.
(a) The Debtor will (i) furnish to the Bank, upon the Bank's request,
copies, with such duplicate copies as the Bank may request, of any invoice
applicable to each of its Accounts; (ii) make no material change in the payment
terms of any Account, Chattel Paper or Instrument in an amount or evidencing an
obligation equal to $250,000 or more without notifying the Bank of the change in
writing; (iii) furnish the Bank upon the Bank's request with all information
received by the Borrower affecting the financial standing of any Account Debtor;
(iv) if requested by the Bank, mark the Debtor's records concerning each of its
Accounts, Chattel Paper, Instruments, or General Intangibles in a manner
satisfactory to the Bank so as to show that each Account, Chattel Paper,
Instrument or General Intangible has been assigned to the Bank; (v) if requested
by the Bank, furnish the Bank with evidence satisfactory to the Bank of the
shipment and receipt of any goods and the performance of any services
represented by any Accounts; and (vi) inform the Bank immediately of any default
by any Account Debtor in connection with any Account, Chattel Paper, Instrument,
or General Intangible.
3.8 Chattel Paper; Letters of Credit and Instruments. The Debtor
represents and warrants to the Bank that it has delivered to the Bank and
covenants that it will deliver to the Bank promptly on receipt all originals of
(a) letters of credit securing Accounts, (b) Chattel Paper and (c) Instruments
now in its possession or hereafter acquired, each properly assigned and/or
endorsed over to the Bank, which letters of credit, Chattel Paper and
Instruments shall be held by the Bank as security hereunder, or, at the Bank's
option, endorsed for payment. The Debtor shall remain solely responsible for the
observance and performance of all of the Debtor's covenants and obligations
under all Chattel Paper and Instruments, and the Bank shall not be required to
observe or perform any such covenants or obligations.
3.9 Equipment and Inventory. The Debtor represents, warrants and agrees
that (a) the Debtor is the absolute owner of its Inventory, Equipment and
Documents, subject only to the security interests created hereby and Permitted
Liens; (b) the Debtor will sell its Inventory only in the ordinary course of
business and as otherwise permitted hereunder; (c) after the occurrence of an
Event of Default, the Bank shall have the right to take possession of Inventory
and the Debtor hereby assigns to the Bank its right of stoppage in transit with
respect to such Inventory; the Debtor will repay the Bank promptly for all
reasonable costs of transportation, packing, storage and insurance of any such
possession, together with interest at the highest rate payable hereunder, at the
time the Bank pays such costs; and the Debtor's liability to the Bank for such
repayment with interest shall be included in the Debtor's Obligations and the
Borrower's Obligations; (d) if any such Inventory is or becomes represented by a
Document, the Bank may require that such Document be in such form as to permit
the Bank or anyone to whom the Bank may negotiate the same to obtain delivery to
it of the Inventory represented thereby; and (e) all of the Debtor's Equipment
as of the date hereof is set forth on Schedule 3.9 attached hereto and is of a
type in which a security interest is to be perfected solely by filing a
financing statement under the Uniform Commercial Code, as adopted in the various
states, except for motor vehicles owned by the Debtor, and if in the future the
Debtor acquires any equipment of a type in which a security interest is to be
perfected in a manner other than by or in addition to filing a financing
statement under the Uniform Commercial Code, as adopted in the various states,
the Debtor shall promptly notify the Bank thereof and take such steps as are
necessary to perfect the Bank's security interest therein.
3.10 Condition of Inventory and Equipment. The Debtor will promptly
notify the Bank of any casualty or similar event which results in a material
decline in the value of any substantial portion of its Inventory or Equipment
and the amount of such decline in value.
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3.11 Notices. If notice of sale, disposition or other intended action by
the Bank with respect to the Collateral is required by the Uniform Commercial
Code or other applicable law, any notice thereof sent to the Debtor at the
address listed in Section 9.1 or such other address of the Debtor as may from
time to time be shown on the records of the Bank, at least five Business Days
prior to such action, shall constitute reasonable notice to the Debtor.
3.12 Discharge of Taxes, Etc. The Bank shall have the right, at any time
and from time to time, without notice to the Debtor to (a) discharge taxes,
liens, security interests or other encumbrances at any time levied or placed on
any of the Collateral, and (b) pay for the maintenance and preservation of any
of the Collateral. The Debtor will reimburse the Bank, on demand, with interest
thereon at the highest rate payable under the Loan Agreement, for any payment
the Bank makes, or any expense the Bank incurs, under this authorization.
3.13 Waiver and Release by the Debtor. The Debtor (a) waives protest of
all commercial paper at any time held by the Bank on which the Debtor is in any
way liable, notice of nonpayment at maturity of any and all Accounts,
Instruments, Chattel Paper or General Intangibles of the Debtor and, except
where required hereby or by law, notice of action taken by the Bank, and (b)
releases the Bank from all claims for loss or damage caused by any failure to
collect any Account, Instrument, Chattel Paper or General Intangible or by any
act or omission on the part of the Bank or its officers, agents and employees,
except for gross negligence and willful misconduct.
3.14 Custody of Inventory and Equipment. Upon demand by the Bank after
the occurrence of an Event of Default, the Debtor shall assemble its Inventory
and Equipment and make it available to the Bank at the Debtor's place of
business. At the request of the Bank, after the occurrence of an Event of
Default, the Debtor shall provide warehousing space in its own premises to the
Bank for the purpose of taking Inventory and Equipment into the custody of the
Bank without removal thereof from such premises and will post such signs as the
Bank may reasonably require to place such Inventory and Equipment under the
exclusive control of the Bank.
3.15 Records and Reports. The Debtor shall keep accurate and complete
records of its Accounts (and the collection thereof), Chattel Paper,
Instruments, Documents, Equipment, Inventory, and General Intangibles
(including, without limitation, making all necessary entries therein to reflect
the quantities, costs, values and location of its Inventory, and the
transactions and facts giving rise to its Accounts, General Intangibles, Chattel
Paper, Instruments and Documents and payments, credits and adjustments
applicable thereto), and furnish the Bank such information about the Debtor's
Accounts, Chattel Paper, Instruments, Documents, Equipment, Inventory and
General Intangibles, as the Bank may reasonably request.
3.16 Application of Proceeds of Collateral. After an Event of Default,
all proceeds of Collateral shall be applied (a) to the costs of preservation and
liquidation of such Collateral and the Bank's exercise of its rights hereunder,
then (b) to principal, interest and other amounts owing hereunder or in
connection herewith in such order as the Bank, in its sole discretion, shall
determine, then (c) into the Debtor's Account.
3.17 Continuing Collateral. The Bank shall be under no obligation to
proceed first against any part of the Collateral before proceeding against any
other part of the Collateral. It is expressly agreed that all of the Collateral
stands as equal security for all Debtor's Obligations and Borrower's Obligations
and the Bank shall have the right to proceed against or sell any and/or all of
the Collateral in any order, or simultaneously, as it, in its sole discretion,
shall determine.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into the amendment to the Loan Agreement
described in the Background section hereof and to allow advances by the Borrower
to the Debtor, the Debtor represents and warrants to the Bank as follows:
4.1 Ownership; Subsidiaries; etc. (a) Schedule 4.1 attached hereto
states as of the date hereof the authorized capitalization of the Debtor and
each of its Subsidiaries (including capital stock of the Debtor and each
Subsidiary held in Treasury), the number of shares of each class of capital
stock issued and outstanding of the Debtor and each Subsidiary and the number
and percentage of outstanding shares of each such class of capital stock and the
names of the record and beneficial owners of such shares. The outstanding shares
have been duly authorized and validly issued and are fully paid and
nonassessable. Schedule 4.1 to this Security Agreement describes as of the date
hereof all outstanding options, rights and warrants issued by the Debtor and
each Subsidiary for the acquisition of shares of the capital stock of the Debtor
or such Subsidiary, as the case may be, all outstanding securities or
obligations convertible into such shares and all agreements by the Debtor or
such Subsidiary, as the case may be, to issue or sell such shares. Schedule 4.1
to this Security Agreement describes as of the date hereof all options, sale
agreements, pledges, proxies, voting trusts, powers of attorney and other
agreements or instruments binding upon the Debtor's and/or each Subsidiary's
shareholders with respect to beneficial or record ownership of or voting rights
with respect to shares of the capital stock of the Debtor and each Subsidiary.
(a) The Debtor has no Subsidiaries other than as set forth on Schedule
4.1.
4.2 Good Standing. The Debtor (a) is a corporation duly organized and
existing, in good standing, under the laws of the jurisdiction of its
incorporation, (b) has the corporate power to own its property and to carry on
its business as now being conducted, and (c) is duly qualified to do business
and is in good standing in each jurisdiction in which the character of the
properties owned by it therein or in which the transaction of its business makes
such qualification necessary.
4.3 Corporate Authority. The Debtor has full corporate power and
authority to enter into and execute and deliver this Security Agreement and each
of the other Financing Documents executed and delivered by the Debtor, and to
incur and perform the Debtor's Obligations and the Borrower's Obligations
provided for herein and therein, all of which have been duly authorized by all
proper and necessary corporate action and all material governmental licenses,
authorizations, consents and approvals required. No consent or approval of
stockholders or of any other person or public authority or regulatory body is
required as a condition to the validity or enforceability of this Security
Agreement or any of the other Financing Documents, or if required the same has
been duly obtained.
4.4 Binding Obligations. This Security Agreement and each of the other
Financing Documents executed and delivered by the Debtor have been properly
executed by the Debtor, constitute valid and legally binding obligations of the
Debtor, and are fully enforceable against the Debtor in accordance with their
respective terms, subject only to the effect upon enforceability of applicable
bankruptcy, insolvency, and other similar laws affecting the rights of creditors
generally and the exercise of judicial discretion in accordance with general
principles of equity.
4.5 Litigation. There is no litigation or proceeding pending or, so far
as the Debtor knows, threatened before any court or administrative agency which,
in the opinion of the officers of the Debtor, will materially adversely affect
the financial condition or operations of the Debtor, or the ability of the
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Debtor to pay and perform in full the Debtor's Obligations or the Borrower's
Obligations or the authority of the Debtor to enter into, or the validity or
enforceability of, this Security Agreement or any of the other Financing
Documents executed and delivered by the Debtor.
4.6 No Conflicting Agreements. There is (a) no charter, bylaw or
preference stock provision of the Debtor and no provision of any existing
contract or agreement binding on the Debtor or affecting its properties, and (b)
to the knowledge of the Debtor, no law binding upon the Debtor or affecting any
of its property, which would conflict with or in any way prevent the execution,
delivery or performance of the terms of this Agreement or of any of the other
Financing Documents executed and delivered by the Debtor, or which would be in
default or violated as a result of such execution, delivery or performance.
4.7 Financial Condition. (a) The audited consolidated and consolidating
financial statements of GSE and its Subsidiaries as of December 31, 1996, and
the interim, management-prepared consolidated and consolidating financial
statements of GSE and its Subsidiaries as of March 31, 1997, and (b) the
financial statements of the Debtor, as of March 31, 1997, together with
statements of profit and loss and of surplus for the periods then ended, all of
which have been delivered to the Bank, are complete and correct and fairly
present the financial position of the Debtor and GSE and the results of their
operations and transactions in their equity account(s) as of the dates and for
the periods referred to and have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
period involved except as previously disclosed to the Bank. There are no
liabilities (of the type required to be reflected on balance sheets prepared in
accordance with generally accepted accounting principles), direct or indirect,
fixed or contingent, of the Debtor or GSE as of the dates of such balance sheets
which are not reflected therein or in the notes thereto, except as previously
disclosed to the Bank in writing. There has been no material adverse change in
the financial condition or operations of the Debtor or GSE since the date of the
financial statements referenced above (and to the Debtor's knowledge no such
material adverse change is pending or threatened) except as previously disclosed
to the Bank in writing, and neither the Debtor nor GSE has guaranteed the
obligations of, or made any investment in or loans to, any Person except as
disclosed in such balance sheets. Each of the Debtor and GSE have good and
marketable title to all of their properties and assets, and all of such
properties and assets are free and clear of encumbrances, except as reflected on
such balance sheets or in the notes thereto.
4.8 Tax Returns. The Debtor has filed or caused to be filed all required
federal, state and local tax returns and has paid all taxes as shown on such
returns to the extent that such taxes have become due or has obtained valid
extensions of time in which to file such federal, state or local tax returns. No
claims have been assessed and are unpaid with respect to such taxes except as
shown in the financial statements referred to in Section 4.7 above.
4.9 Compliance with Laws Generally. The Debtor is not in violation of
any law, ordinance, governmental rule or regulation to which the Debtor is
subject (including, without limitation, any laws relating to employment
practices or to environmental, occupational and health standards and controls)
and the violation of which would have a material adverse effect on the conduct
of the Debtor's business, and the Debtor has obtained any and all licenses,
permits, franchises and other governmental authorizations necessary for the
ownership and operation of its properties and business.
4.10 Licenses. The Debtor has obtained all necessary licenses, permits
and authorizations required for the conduct of its business.
4.11 Liens on Collateral. Other than the Permitted Liens, the Collateral
and the other assets of the Debtor are free and clear of mortgages, pledges,
liens, charges and other encumbrances.
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4.12 Names under which Debtor Does Business; Principal Place of
Business. The Debtor has never done business under any other name. The principal
place of business of the Debtor, within the meaning of the Uniform Commercial
Code, which is its chief executive office and the office in which it keeps all
of its records concerning Receivables and Inventory, is located at Salt Lake
City, Utah. The Debtor maintains no other place of business except as set forth
on Schedule 4.12.
4.13 Real Property. The Debtor owns no real estate.
4.14 Margin Stock. None of the proceeds of the Loan or the Letters of
Credit will be used, directly or indirectly, by the Debtor for the purpose of
purchasing or carrying, or for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase or carry, any "margin
security" within the meaning of Regulation G (12 CFR Part 207), or "margin
stock" within the meaning of Regulation U (12 CFR Part 221), of the board of
Governors of the Federal Reserve System (herein called "margin security" and
"margin stock") or for any other purpose which might make the transactions
contemplated herein a "purpose credit" within the meaning of said Regulation G
or Regulation U, or cause this Agreement to violate any other regulation of the
Board of Governors of the Federal Reserve System or the Securities Exchange Act
of 1934 or the Small Business Investment Act of 1958, as amended, or any rules
or regulations promulgated under any of such statutes.
4.15 ERISA and Code. Neither the Debtor nor any Commonly Controlled
Entity maintains and/or contributes to, or has ever maintained or contributed
to, any Defined Benefit Plan other than the Simulation, Systems & Services
Technologies Company Union Pension Plan (the "Union Plan"), which was terminated
effective August 4, 1996. All assets of the Union Plan were distributed on or
before September 3, 1994. Except as specifically disclosed to the Bank in
writing prior to the date of this Agreement:
(a) no Reportable Event has occurred with respect to the Union
Plan;
(b) [intentionally omitted]
(c) no liability (whether or not such liability is being
litigated) has been asserted against the Debtor or any Commonly
Controlled Entity in connection with the Union Plan by the PBGC or by a
trustee appointed pursuant to Section 4042(b) or (c) of ERISA, and no
lien has been attached and no person has threatened to attach a lien to
any property of the Debtor or any Commonly Controlled Entity as a result
of any failure of the Union Plan to comply with the Code or ERISA;
(d) neither the Debtor nor any Commonly Controlled Entity
maintains any employee welfare benefit plan providing for retiree health
and/or life benefits other than (i) such continuation of benefit
coverage as is required by law, (ii) coverage for a closed group of four
retired former employees (and their families, if any) under the health
benefit program for active employees, which coverage will continue only
until each retiree attains age 65 (at which time, such persons shall
become eligible for benefits under the Medicare supplemental program
referred to in subparagraph (iii) below), (iii) a Medicare supplemental
program for a present group of seven retirees (and a maximum group of 11
retirees) with a lifetime claim maximum of $15,000 per retiree; and (iv)
a death benefit for each retiree described in subparagraphs (ii) and
(iii) above not to exceed $10,000 per retiree, except for one retiree
having a death benefit not to exceed $30,000; and
(e) neither the Debtor nor any Commonly Controlled Entity
maintains or makes contributions to, or has ever been required to make
contributions to, any Multiemployer Plan.
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4.16 Governmental Consents. Neither the nature of the Debtor's business
or properties, nor any relationship between the Debtor and any other entity or
person, nor any circumstance in connection with the extension of the Loan,
advances to the Debtor by the Borrower or the issuance of the Letters of Credit
is such as to require a consent, approval or authorization of, or filing,
registration or qualification with, any Governmental Authority, on the part of
the Debtor, as a condition to the execution and delivery of this Security
Agreement or any of the other Financing Documents.
4.17 No Default or Event of Default. No event has occurred which would
constitute a Default or an Event of Default under this Security Agreement or any
of the other Financing Documents. The Debtor is not in default under the terms
of any other agreement or instrument to which the Debtor may be a party or by
which any of the Collateral may be bound or subject and which would have a
material adverse effect on the Debtor's ability to pay or perform its
obligations under this Security Agreement or any of the other Financing
Documents.
4.18 Full Disclosure. To the best of the Debtor's knowledge, no
representation or warranty by the Debtor in this Security Agreement and no
information in any other Financing Document or any statement, certificate,
schedule or other document furnished or to be furnished to the Bank pursuant
hereto, or in connection with the transactions contemplated hereby, contains or
will contain any untrue statement of a material fact or fails or will fail to
state a material fact necessary to make the statements contained herein or
therein not misleading. Except as disclosed in this Security Agreement, there is
no fact known to the Debtor which the Debtor has not disclosed to the Bank in
writing which materially adversely affects, or, so far as the Debtor can now
foresee, may materially adversely affect, the business, financial condition or
results of operations of the Debtor.
4.19 Officers and Directors of the Debtor. Schedule 4.19 attached hereto
states as of the date hereof the officers and directors of the Debtor.
4.20 Business. The business of the Debtor as presently conducted and
presently planned to be conducted is (i) technical training for professional and
continuing education students which includes Novell, Microsoft and other similar
types of database and computer tool training; (ii) computer hardware sales,
including mid-range computer, workstations and network computing; (iii) computer
software sales ranging from the complete line of Microsoft products to Sybase,
Oracle and other computer database and tool producers; (iv) client/server,
Internet, and database software consulting and development, including the
creation of custom applications, custom upgrades and professional testing
services; and (v) staff augmentation, where consultants are sent to a client
site under the client's supervision.
4.21 Employee Controversies. There are no material controversies pending
or, to the knowledge of the Debtor, threatened or anticipated between the Debtor
and any of its employees, and there are no labor disputes, grievances,
arbitration proceedings or any strike, work stoppages or slow downs pending or,
to the Debtor's knowledge, threatened between the Debtor and its employees and
representatives which could impair the ability of the Debtor to perform its
obligations hereunder or under any other Financing Document, or which has had,
or is likely to have, a material adverse effect on the financial condition of
the Debtor.
4.22 Environmental Matters.
(a) The Debtor and all of its operations are in material compliance with
all of the Environmental Laws. To the extent necessary for the conduct of its
business, the Debtor is in possession of, and in material compliance with, all
permits, licenses, registrations, and authorizations required under the
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Environmental Laws. All such permits, licenses, registrations, and
authorizations are currently in effect; no proceeding is pending or, to the best
of the Debtor's knowledge, threatened to modify, suspend, revoke, withdraw, or
otherwise limit such permits, licenses, registrations, and authorizations; and
no administrative or governmental action has been taken or, to the best of the
Debtor's knowledge, threatened in connection with the expiration or renewal of
such permits, licenses, registrations or authorizations. The Debtor has not
received any notice of violation, citation, complaint, request for information,
order, directive, compliance schedule, notice of claim, proceeding, or
litigation, from any party, relating to its compliance with the Environmental
Laws.
(b) The Debtor does not generate, store, recycle, process, transport,
dispose of or release any "Hazardous Substances," as defined herein, except in
compliance with the Environmental Laws. To the best of the Debtor's knowledge,
there are no conditions on, about or arising from any properties where the
Debtor conducts business which may give rise to liability, the imposition of a
statutory lien, or require "Response," "Removal" or "Remedial Action," as
defined herein, under any of the Environmental Laws which would have a material
adverse effect on the Debtor, its business or its properties.
(c) The Debtor has not received any request for information, claim,
demand, or other notification that it is or may be potentially responsible or
liable for any Response, Removal or Remedial Action at any site, including
properties not owned, operated or leased by or to the Debtor. Hazardous
Substances generated by the Debtor have never, directly or indirectly, to the
best of the Debtor's knowledge, been sent, transferred, or transported to, or
treated, stored or disposed of at any site listed or formally proposed for
listing on the National Priorities List promulgated pursuant to CERCLA.
(d) There are no pending, or, to the best of the Debtor's knowledge,
past or threatened investigations, actions, claims and proceedings of any nature
whatsoever against the Debtor, including third party claims based upon
negligence, trespass, strict liability, nuisance or toxic tort, arising out of
or in any way related to any Hazardous Substance or any alleged violation of the
Environmental Laws.
ARTICLE V
CONDITIONS PRECEDENT
5.1 General Conditions Precedent. It is a condition to the effectiveness
of this Security Agreement that the Borrower and the Bank shall have entered
into the amendment to the Loan Agreement described in the Background section
hereof that the Bank shall have received all of the following, in form and
substance satisfactory to the Bank:
(a) A copy, certified in writing by the Secretary or an
Assistant Secretary of the Debtor, of (1) resolutions of the Board of
Directors of the Debtor evidencing approval of the Financing Documents
by the Debtor and the matters contemplated thereby, and (2) each
document evidencing other necessary corporate action and governmental
approvals, if any, with respect to the Financing Documents;
(b) A favorable opinion of counsel for the Debtor and its
Subsidiaries covering such matters as the Bank shall reasonably require;
(c) A written certificate by the Secretary or an Assistant
Secretary of the Debtor as to the names and signatures of the officers
of the Debtor authorized to sign the Financing Documents to which the
Debtor is a party and the other documents or certificates of the Debtor
to be executed and delivered pursuant thereto;
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(d) Recent certificates, issued by the Secretary of State of
each jurisdiction where the Debtor is incorporated or is, or is required
to be, authorized to do business, stating that the Debtor is a
corporation duly incorporated or authorized to do business (as the case
may be) and in good standing under the laws of such jurisdictions;
(e) This Security Agreement executed by the Debtor;
(f) The Debtor's Master Note executed by the Debtor;
(g) Confirming letter re: Master Letter of Credit Agreement
executed by the Debtor;
(h) Confirming letter re: Lockbox Agreement in the form attached
hereto as Exhibit 5.1(H);
(i) The Debtor's Guaranty;
(j) Payment by the Debtor of the fees referred to in Section 9.3
hereof;
(k) Certificates of insurance issued in the name of the Bank,
showing the Bank as a lender loss payee and/or additional insured, as
the case may be, evidencing all insurance coverage as required hereunder
together with copies of the underlying policies (each policy of
insurance must be issued by an insurance company satisfactory to the
Bank, must have premiums therefor prepaid through the first quarter
ending after the date of this Security Agreement, and must provide that
it will not be terminated or otherwise modified adversely to the Bank
without at least 30 days' prior written notice to the Bank) and an
assignment of the proceeds of the business interruption insurance;
(l) A certificate of the Debtor (with supporting evidence if
reasonably required by the Bank) representing to the Bank that (1) the
Debtor has fully complied with all applicable federal, state and local
laws and regulations, including without limitation all Environmental
Laws where failure to so comply could have a material and adverse effect
on the Debtor, its business or its properties; (2) there is no pending
or threatened litigation which, if adversely decided against the Debtor,
could result in a material adverse change in the financial condition or
operations of the Debtor; (3) the representations and warranties
contained herein are true and correct as of the date of this Security
Agreement; (4) no material adverse change has occurred since the date of
the most recent financial statements reviewed by the Bank; (5) no
Default or Event of Default has occurred; (6) no casualty or
condemnation has occurred which affects the Debtor's property; (7) the
Debtor has no Subsidiaries other than as set forth in Section 4.1; and
(8) the Bank has received true and correct copies of all documents
evidencing, executed in connection with, or, in any way, related to the
Debtor's Obligations or Borrower's Obligations;
(m) Each other document required by Article III hereof as to the
Collateral and any other documents or condition which the Bank may
reasonably request, including without limitation, a comprehensive list
of all of the Debtor's Inventory and Equipment, its fair market value
and location, and any other document for filing or otherwise in order to
perfect the Bank's security interest in the Collateral as determined by
the Bank in its sole and absolute discretion;
(n) If Collateral is located at a facility that is not owned by
the Debtor, or owned by the Debtor subject to a mortgage or other lien
in favor of a Person other than the Bank, (1) copies of all leases,
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mortgages or other similar agreements relating to such facility; and (2)
a lien waiver executed by the landlord, mortgagee or other lienholder of
each such facility (provided that such lien waivers will be delivered on
a best efforts in good faith basis);
(o) Satisfactory results of Uniform Commercial Code, judgment
and lien searches, trade checkings and bank audits; and
(p) Such other documents and information as the Bank may
reasonably request.
5.2 Continuing Conditions Precedent. The obligation of the Bank to make
any advance under the Loan Agreement or issue any Letter of Credit, is subject
to the further conditions precedent that:
(a) the representations and warranties contained in this
Security Agreement and in the other Financing Documents shall be correct
and accurate on and as of that date unless the Bank shall otherwise
agree;
(b) no Default or Event of Default shall have occurred; and
(c) no event shall have occurred which, in the Bank's reasonable
opinion, impairs the financial responsibility of the Debtor such that a
material adverse change in the financial condition or operations of the
Debtor could result and there shall not have occurred any material
adverse change in the financial condition or operations of the Debtor.
ARTICLE VI
AFFIRMATIVE COVENANTS
Until payment and performance in full of the Debtor's Obligations and
the Borrower's Obligations, and until the Bank has no further obligation under
the Loan Agreement, the Debtor will perform each of the covenants contained in
this Article VI:
6.1 Financial Statements. The Debtor shall cause to be provided to the
Bank the following financial information, all of which must contain detail
reasonably satisfactory to the Bank:
(a) as soon as available but in no event more than 120 days
after the end of each fiscal year, consolidated balance sheets and
income and expense statements of GSE together with its Subsidiaries
(including, without limitation, the Borrower, the Debtor and their
Subsidiaries), examined and unqualifiedly certified by such independent
accountant as may be satisfactory to the Bank, and consolidating
management- prepared balance sheets and income and expense statements of
GSE and its Subsidiaries (including the Borrower, the Debtor and their
Subsidiaries), prepared in accordance with United States generally
accepted accounting principles consistently applied and certified by the
principal financial officer of GSE and accompanied by a certificate of
that officer stating whether any Default or Event of Default has
occurred under this Security Agreement or any of the other Financing
Documents, and, if so, stating the facts with respect thereto; and
(b) as soon as available but in no event more than 45 days after
the end of each fiscal quarter, consolidated balance sheets of GSE
together with its Subsidiaries (including, without limitation, the
Borrower, the Debtor and their Subsidiaries) and consolidating balance
sheets of all of its Subsidiaries (including, without limitation, the
Borrower, the Debtor and their Subsidiaries), as of the close of such
period and income and expense statements for such period, prepared in
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accordance with United States generally accepted accounting principles
consistently applied and certified by the principal financial officer of
GSE, and accompanied by a certificate of that officer stating whether
any Default or Event of Default has occurred under this Security
Agreement or any of the other Financing Documents, and, if so, stating
the facts with respect thereto; and
(c) such additional information, reports or statements as the
Bank may from time to time reasonably request.
6.2 Taxes and Claims. The Debtor shall pay and discharge all taxes and
assessments, whether general or special, ordinary or extraordinary, due and
owing by the Debtor to all Governmental Authorities in respect to the Debtor,
any of its properties or assets, franchises, businesses, income or profit, prior
to the date on which penalties attach thereto, and all lawful claims which, if
unpaid, might become a lien or encumbrance upon any of its properties, other
than those taxes and assessments which are being contested in good faith and for
which adequate reserves in accordance with generally accepted accounting
principles have been set aside.
6.3 Insurance. The Debtor shall provide or cause to be provided to the
Bank, and shall maintain, or cause to be maintained, in full force and effect at
all times prior to the payment and performance in full of the Debtor's
Obligations and the Borrower's Obligations and until the Bank has no further
obligations under the Loan Agreement, such policies of insurance as are normally
maintained by similar businesses operating in the same vicinity as the Debtor,
which are underwritten by a company or companies and are in form and amounts
satisfactory to the Bank, including, by way of example and not by way of
limitation, at least the following:
(a) permanent fire and hazard insurance or property damage
insurance covering any real property improvements owned by the Debtor
and all Equipment and Inventory and other personal property of the
Debtor wherever located, affording protection against at least loss or
damage by fire or other hazards covered by the standard all-risk
"extended coverage" endorsement (non-reporting form), including
vandalism and malicious mischief and such other risks as shall be
customarily covered with respect to similar property or as the Bank may
from time to time otherwise require, in amounts not less than the lesser
of (i) the aggregate principal amount of the Commitment (whether or not
the entire amount of the Commitment is fully utilized by the Borrower
from time to time) and (ii) the maximum amount of such insurance which
is available to the Debtor, containing a standard noncontributing,
non-reporting mortgagee or loss payee clause naming the Bank as
mortgagee and loss payee, as its interest may appear and specifying that
"such policy will not be cancelled without 30 days' prior written notice
to the Bank";
(b) public liability and property damage insurance for the
Debtor to afford protection in amounts of not less than (i) $500,000 per
occurrence and $1,000,000 for all annual occurrences in respect of
bodily injury, and (ii) $250,000 per occurrence and $500,000 for all
annual occurrences in respect of property damage, together with an
endorsement naming the Bank as an additional insured;
(c) business interruption insurance for the Debtor to afford
protection against such events as are customarily covered by such
insurance issued with respect to businesses similar to those conducted
by the Debtor; and
(d) workers' compensation insurance of the Debtor with coverage
limits in accordance with the requirements of applicable laws or
regulations.
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All of such insurance shall be evidenced by binders or properly endorsed
policies and not merely by certificates.
6.4 Corporate Existence. The Debtor shall maintain in good standing its
existence as a corporation under the laws of the jurisdiction of its
incorporation and its qualification to do business in each jurisdiction in which
such qualification is necessary for the conduct of its business in such
jurisdiction, including, without limitation, the State of Utah.
6.5 Maintenance of Properties. The Debtor shall maintain all of its
properties (including Inventory and Equipment) in good working order and
condition and cause replacements and repairs to be made when necessary for the
proper and advantageous conduct of its business.
6.6 Compliance With Laws Generally. The Debtor shall comply with all
applicable laws, ordinances, governmental rules or regulations to which the
Debtor is or becomes subject (including, without limitation, any laws relating
to employment practices or to environmental, occupational and health standards
and controls).
6.7 Maintenance of Licenses. The Debtor will take all steps necessary to
maintain all licenses, permits, franchises and other governmental authorizations
required for the operation of its business, including but not limited to
validated licenses or permits in connection with its export operations.
6.8 Books and Records; Inspection. (a) The Debtor will keep adequate
records and books of account with respect to its business, in accordance with
generally accepted accounting principles; and permit the Bank, by any of its
respective accountants, attorneys, officers or other agents, to examine such
records and books of account and to discuss the affairs, finances and accounts
relating thereto with officers of the Debtor at its offices at any time during
normal business hours. As part of this requirement, the Debtor will keep such
records as may be necessary to track its working capital needs, by any
appropriate measure as may be approved by the Bank.
(b) The Debtor will permit representatives of the Bank to inspect,
examine and/or audit the Collateral, any of its other property and/or its books
and records and to make extracts therefrom at all reasonable times for purposes
of examination, verification, inspection and appraisal thereof. The Debtor will
permit representatives of the Bank to conduct field examinations of the
Collateral at any time and from time to time during normal business hours. The
Debtor agrees to reimburse the Bank for the cost of such inspections,
examinations and/or audits; provided, however, that prior to an Event of Default
such reimbursed inspections, examinations or audits by representatives of the
Bank shall not occur more frequently than twice annually.
6.9 Notification of Certain Events; Events of Default and Adverse
Developments. The Debtor shall promptly (and in any event within five Business
Days of obtaining knowledge thereof) notify the Bank in writing of the
occurrence of any of the following (in each case describing in detail
satisfactory to the Bank the nature thereof and the action the Debtor proposes
to take with respect thereto):
(a) any Default or Event of Default under this Security
Agreement or any of the other Financing Documents;
(b) litigation or other actions, suits or proceedings before any
court or any governmental or regulatory agency, domestic or foreign,
affecting the Debtor which, if adversely decided, would materially
adversely affect the conduct of its business, the Collateral, its
ability to perform its obligations under any of the Financing Documents,
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its financial condition, or in any manner impair or affect the security
for the Debtor's Obligations or the Borrower's Obligations or the
ability of the Debtor to pay or perform in full the Debtor's Obligations
or the Borrower's Obligations;
(c) any notice, claim or demand from any Governmental Authority
which alleges that the Debtor is in violation of any of the terms of, or
has failed to comply with, any applicable order issued pursuant to any
federal or state statute regulating its operation of business,
including, but not limited to, the Occupational Safety and Health Act
and the Environmental Protection Act;
(d) the occurrence of any event which the Debtor reasonably
believes may adversely affect the collectibility of any Receivable in
the amount of or evidencing an obligation equal to $250,000 or more,
including (without limitation) the occurrence of an event under any
accounts receivable insurance maintained by the Debtor with respect to
any of the Receivables or the deterioration of the financial condition
of any bank issuing a letter of credit to secure any of the Receivables;
and
(e) any other development in the business or affairs of the
Debtor which could have a material adverse effect on the Debtor or could
adversely affect the security for the Debtor's Obligations or the
Borrower's Obligations or the ability of the Borrower to pay or perform
in full the Debtor's Obligations or the Borrower's Obligations.
6.10 Performance of All Contracts. The Debtor shall perform all of its
obligations under all purchase orders and contracts substantially in accordance
with their terms, as they may be modified from time to time.
6.11 Conditions Precedent to Right to Receive Payment under Purchase
Orders and Contracts. The Debtor shall, as soon as possible, take all actions
necessary to entitle the Debtor to receive any payments due in respect of all
purchase orders and contracts, including (without limitation) the timely drawing
of drafts under any letters of credit issued for the benefit of the Debtor in
connection therewith.
6.12 Further Assurances and Corrective Instruments. The Debtor shall
execute, acknowledge and deliver, or cause to be executed, acknowledged and
delivered, from time to time, such supplements hereto and such further
instruments as may reasonably be required by the Bank for carrying out the
intention of the parties to, or facilitating the performance of, this Security
Agreement or any of the other Financing Documents.
6.13 Lockbox Notices. The Debtor shall from time to time at the request
of the Bank deliver to the Bank evidence satisfactory to the Bank in its sole
and absolute discretion that the Debtor has notified all Account Debtors (other
than intercompany Account Debtors) that all payments are to be made to the
Lockbox and evidence that the Debtor has indicated on all billings and
statements (other than those provided to intercompany Account Debtors) that
payments are to be made solely to the Lockbox.
6.14 Equal Employment. The Debtor shall prohibit discrimination on the
basis of (i) political or religious opinion or affiliation, marital status,
race, color, creed, or national origin, or (ii) sex or age, except where sex or
age constitutes a bona fide occupational qualification, or (iii) the physical or
mental disability of a qualified individual with a disability.
6.15 Management. The Debtor shall notify the Bank promptly and in any
event within two Business Days if there shall occur any change in the identity
of the persons occupying the offices of chief executive officer, president or
executive vice president (or their equivalents).
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6.16 Environmental Matters.
(a) The Debtor shall comply with all Environmental Laws and, to the
extent necessary for the conduct of its business, shall obtain, maintain, and
comply with all permits, licenses, registrations and authorizations required
under the Environmental Laws. The Debtor shall comply with all governmental
orders, directives, judgments, decrees, awards, administrative consent orders,
settlement agreements, or other settlement documents entered into with any
administrative or governmental agency or entity concerning compliance with the
Environmental Laws.
(b) The Debtor shall not generate, store, recycle, process, transport,
dispose of or release any Hazardous Substances, except in compliance with the
Environmental Laws. The Debtor shall not operate its business in a manner which
may give rise to liability, the imposition of a statutory lien, or require any
Response, Removal or Remedial Action under any of the Environmental Laws. In the
event that conditions are discovered in connection with the operation of the
Debtor's business which may give rise to liability, the imposition of a
statutory lien, or require Response, Removal or Remedial Action under any of the
Environmental Laws, the Debtor shall promptly take all actions, required under
the Environmental Laws. The requirements of this Section and Section 6.16(a) do
not affect the Debtor's rights to defend or take any other action relative to
any claims of any kind instituted against it.
(c) The Debtor shall immediately notify the Bank, in writing, of its
receipt, knowledge or discovery of: (i) any notice of violation, citation,
complaint, request for information, order, directive, compliance schedule,
notice of claim, proceeding, or litigation, from any party, relating to its
compliance with the Environmental Laws; (ii) any request for information, claim,
demand, or notification that it is or may be potentially responsible or liable
for any Response, Removal or Remedial Action at any site, including properties
not owned, operated or leased by or to the Debtor; (iii) any notice of claim,
action, or proceeding of any nature whatsoever against the Debtor, including
third-party claims based upon negligence, trespass, strict liability, nuisance
or toxic tort, arising out of or in any way related to any Hazardous Substance
or any alleged violation of the Environmental Laws and; (iv) any other
information which may give rise to liability of the Debtor, the imposition of a
statutory lien against the Debtor, or require Response, Removal or Remedial
Action by the Debtor under any of the Environmental Laws.
(d) The Debtor indemnifies, defends and holds harmless the Bank, its
parents, subsidiaries, successors, assigns, officers, directors, shareholders,
employees, and agents (the "Bank Parties"), from and against any and all claims,
liabilities, penalties, fines, damages, judgments, losses, suits, actions, legal
or administrative proceedings, interest, costs (including without limitation,
all costs of any required Response, Removal or Remedial Action) and expenses
(including attorneys' fees, consultants fees and expert fees) arising out of or
in any way relating to: (i) the presence of Hazardous Substances on, about,
beneath or arising from any properties where the Debtor conducts its business;
(ii) the failure of the Debtor or any of its Subsidiaries to comply with the
Environmental Laws; and (iii) the Debtor's breach of any of the representations,
warranties and covenants contained herein. The Debtor's Obligations under this
Section shall not include claims arising solely out of the actions of the Bank
Parties. The indemnities contained in this Section shall survive the discharge
of the Borrower's Obligations, foreclosure, or deed in lieu of foreclosure.
6.17 Pension Matters. The Debtor and each Commonly Controlled Entity
will comply in all material respects with the provisions of ERISA and the Code
with respect to any "employee benefit plan," as defined in Section 3(3) of
ERISA. Neither the Debtor nor any Commonly Controlled Entity will adopt any
employee pension benefit plan subject to the minimum funding standards of ERISA
and the Code or become obligated to contribute to any Multiemployer Plan.
Neither the Debtor nor any Commonly Controlled Entity will adopt any employee
welfare benefit plan that provides for post-employment life and/or health
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benefits (other than such continuation of benefit coverage as is required by law
and the plan described in Section 4.15). The Debtor will not acquire or permit
the acquisition by any Commonly Controlled Entity of any trade or business which
maintains or contributes to any plan described above.
ARTICLE VII
NEGATIVE COVENANTS
Until payment and performance in full of all of the Debtor's Obligations
and the Borrower's Obligations, and until the Bank has no further obligation
under the Loan Agreement, the Debtor agrees that it will not fail to comply with
any of the following covenants:
7.1 ERISA Compliance. Neither the Debtor nor any Commonly Controlled
Entity shall fail to maintain at all times such bonding as is required by ERISA.
7.2 Use of Certain Funds and Letters of Credit. The Debtor will not use
the proceeds of any advances from the Borrower or the Letters of Credit on which
the Debtor is the account party for any purposes other than to meet working
capital needs, including, without limitation, funding to meet reimbursement
obligations under such Letters of Credit.
7.3 Borrowings. The Debtor will not create, incur, assume or suffer to
exist any liability for borrowed money, except:
(a) indebtedness to GSE, Borrower or to any of the stockholders
of GSE, which is created in the normal course of business, subject to
the provisions of Section 7.10; and
(b) indebtedness of the Debtor secured by any purchase money,
lien or permitted by subsection (h) of the definition of "Permitted
Lien".
7.4 Collateral. The Debtor will not sell, transfer or otherwise dispose
of any portion of the Collateral, other than inventory in the ordinary course of
business and as otherwise permitted hereunder, or create, incur, assume or
suffer to exist any mortgage, pledge, lien or encumbrance of any kind upon the
Collateral or any of its other property or assets, whether now owned or
hereafter acquired, except:
(a) Permitted Liens; and
(b) any lien on any property, or interest therein, hereafter
acquired by the Debtor, which is created contemporaneously with such
acquisition to secure or provide for the payment or financing of any
part of the purchase price thereof, and which liens do not, in the
aggregate together with similar liens on such property or interest of
the Borrower, secure indebtedness exceeding $500,000.
7.5 Merger, Acquisition, Dissolution or Sale of Assets. The Debtor will
not, and will not permit any Subsidiary to (a) enter into any merger or
consolidation or dissolution, or (b) acquire, directly or indirectly, any of the
assets (other than inventory, equipment and real estate in the ordinary course
as permitted by the Financing Documents to conduct its business as conducted on
the date of this Security Agreement) of any Person (including without limitation
any division or other operating unit of any Person), (c) sell, lease, or
otherwise dispose of any of its assets, as identified in accordance with United
States generally accepted accounting principles (except inventory and equipment
disposed of in the ordinary course of business, except for obsolete inventory as
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determined by the board of directors of the Debtor and except for inventory with
a fair market value of no more than $250,000 in the aggregate), (d) make any
material change in its corporate structure or identity, or (e) enter into any
agreement to do any of the foregoing without the prior written consent of the
Bank.
7.6 Change in Nature of Business. The Debtor will not make any material
changes in the basic nature of its business.
7.7 Additional Stock. The Debtor will not issue any additional stock of
any class (except to its existing stockholder as a stock dividend).
7.8 Subsidiaries. The Debtor will not create any Subsidiaries other than
those set forth on Schedule 4.1. The Bank may, in its sole and absolute
discretion, require at any time, or from time to time, that the assets of one or
more of the Subsidiaries become part of the Collateral for the Borrower's
Obligations or the Debtor's Obligations pursuant to documentation that shall be
in form and substance satisfactory to the Bank in its sole and absolute
discretion. The Debtor's aggregate investment in its Subsidiaries shall not
exceed $50,000, provided that for purposes of this Section 7.8 only "investment"
shall not include intercompany Accounts arising from transactions for the
delivery of goods and services with any of its Subsidiaries in the ordinary
course on terms no less favorable to the Debtor or such Subsidiary than would be
obtainable from a Person not an Affiliate (and in any event payment for goods or
services arising from the lending of personnel, selling of merchandise, or
otherwise performing services shall be made on a timely basis (120 days
maximum)), as permitted by Section 7.16(b).
7.9 Contingent Liabilities. Except as specifically permitted by the
terms of this Security Agreement, the Debtor will not assume, guarantee,
endorse, contingently agree to purchase or otherwise become liable upon the
obligation of any Person, except by the endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
business.
7.10 Subordination of Amounts Owing to GSE, Subsidiaries or Affiliates.
(a) In the event that the Debtor incurs any obligations to GSE, a
Subsidiary or an Affiliate other than the Borrower (and the Debtor shall incur
no such obligations other than those permitted in Section 7.16), no payments
shall be made in respect to such obligations during any period of time in which
any Debtor's Obligations or Borrower's Obligations remain outstanding, except as
provided in this Section 7.10; and
(b) In the event that the Debtor incurs any obligations to GSE, a
Subsidiary or an Affiliate other than the Borrower as permitted by Section 7.16
(and the Debtor shall incur no such obligations other than those permitted in
Section 7.16), payments may be made in respect of any such obligations, provided
that no Default or Event of Default shall have occurred and the making of any
such payment does not create a Default or Event of Default; no payments shall be
made in respect of any such obligations after the occurrence of a Default or an
Event of Default; and
(c) The Debtor may declare and pay dividends permitted under Section
7.13, provided that no Default or Event of Default shall have occurred and the
declaring or paying of any such dividend does not create a Default or Event of
Default; no dividends shall be declared or paid after the occurrence of a
Default or an Event of Default; and
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(d) In the event the Debtor has incurred, or in the future incurs, any
obligation to GSE, GSE shall subordinate such obligation as provided as to the
Borrower in Section 1.8 of the GSE Guaranty, in form and substance satisfactory
to the Bank, subject to the provisions hereof.
7.11 Loans. The Debtor will not make loans or advances to any Person,
except for reasonable travel advances to officers and employees made in the
ordinary course of business.
7.12 Investments. The Debtor will not purchase or acquire the
obligations or stock of, or any other or additional interest in, any Person,
except (a) general obligations of, or obligations unconditionally guaranteed as
to principal and interest by, the United States of America, (b) bonds,
debentures, participation certificates or notes issued by any agency or
corporation which is or may hereafter be created by Act of the Congress of the
United States as an agency or instrumentality thereof, (c) public housing bonds,
temporary notes or preliminary loan notes, fully secured by contracts with the
United States, (d) certificates of deposit issued by the Bank, (e) its
Subsidiaries in existence on the date of this Security Agreement, as such levels
may change as a result of stock dividends permitted under the Financing
Documents and (f) any other investments as permitted by the Bank.
7.13 Dividends and Purchase of Stock. The Debtor may declare dividends
on any shares of any class of its stock, or set apart any sum for the payment of
dividends on any shares of any class of capital stock, provided that any amounts
payable as a result thereof shall be subject to Section 7.10 and shall be
treated as subordinated indebtedness under Section 1.8 of the GSE Guaranty as if
the dividends were declared by the Borrower. The Debtor shall obtain GSE's
acknowledgement of such subordination in such event in form and substance
satisfactory to the Bank. The Debtor shall not apply any of its property or
assets to the purchase, redemption, or other retirement of, or set apart any sum
for the purchase, redemption or other retirement of, or make any other
distribution by reduction of capital or otherwise in respect of any shares of
its capital stock.
7.14 Sale and Leaseback. The Debtor will not directly or indirectly
enter into any arrangement whereby the Debtor shall sell or transfer all or any
substantial part of its fixed assets then owned by it and shall thereupon or
within one year thereafter rent or lease the assets so sold or transferred.
7.15 Sale of Accounts Receivable. The Debtor will not sell, discount,
transfer, assign, or otherwise dispose of any of its Receivables or any other
rights to receive income, revenues or moneys, however evidenced, except in
connection with currently existing extensions of credit by the Bank.
7.16 Transactions with Affiliates and Subsidiaries. The Debtor will not
use any of the proceeds of any advances from the Borrower or the Letters of
Credit on which it is the account party for the benefit of any Subsidiary or
Affiliate except as permitted by the use of proceeds set forth in Section 7.2.
The Debtor will not, and will not permit any of its Subsidiaries to, engage in
any transaction with any Affiliate or Subsidiary of the Debtor unless such
transaction is made on substantially same terms and conditions as the Debtor
would have required in a substantially similar arms length transaction.
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ARTICLE VIII
EVENTS OF DEFAULT; REMEDIES
8.1 Events of Default. Any one or more of the following events shall
constitute an Event of Default under this Agreement:
(a) Failure to Pay Borrower's Obligations or Debtor's
Obligations. (i) The Debtor shall fail to pay the amount of any of the
Borrower's Obligations as and when the same are due and payable in
accordance with the terms of the Loan Agreement or (ii) fail to pay the
Borrower's Obligations or the Debtor's Obligations as and when the same
are due and payable under the other Financing Documents.
(b) Breach of Representations and Warranties. Any representation
or warranty made herein or in any of the Financing Documents, or in any
report, certificate, opinion (including any opinion of counsel for the
Debtor), financial statement or other instrument delivered in connection
with this Security Agreement or any of the other Financing Documents
shall prove to be false or misleading in any material respect when made
(or deemed made) with respect to the Debtor.
(c) Failure to Comply with Covenants. Default shall be made in
the due observance or performance of any covenant, conditions or
agreement contained in Section 6.2, Section 6.3, Section 6.13 (unless
such Default is capable of being cured by a capital contribution or by a
borrowing permitted under Section 7.3 and such Default is so cured
within thirty (30) days after the earlier to occur of (i) a Responsible
Officer shall have become aware of such default or (ii) written notice
of such default shall have been given to the Debtor by the Bank), or
Article VI hereof or there shall exist an Event of Default under and as
defined in the GSE Guaranty or Subsidiary Guaranty.
(d) Other Defaults. Either (i) default shall be made in the due
observance or performance of any other term, covenant or agreement
contained in this Security Agreement and such default shall have
continued unremedied for a period of thirty (30) days after the earlier
to occur of (A) a Responsible Officer shall have become aware of such
default or (B) written notice of such default shall have been given to
the Debtor by the Bank, or (ii) an event of default shall occur under
any of the other Financing Documents.
(e) Default Under Other Indebtedness. Default shall be made with
respect to any other evidence of indebtedness or liability for borrowed
money of the Debtor (i) to the Bank, or any financial institution into
which the Bank is merged or to which it is related or affiliated by
direct or indirect common ownership, or (ii) to any other Person if the
effect of such default is to accelerate the maturity of such evidence of
indebtedness or liability or to permit the holder or obligee thereof to
cause any indebtedness to become due prior to its stated maturity, or
any such indebtedness shall not be paid as and when due and payable.
(f) Receiver; Bankruptcy. The Debtor or the Borrower, GSE or any
Subsidiary of any of such Persons or any Subsidiary shall (i) apply for
or consent to the appointment of a receiver, trustee or liquidator of
itself or any of its property, (ii) admit in writing its inability to
pay its debts as they mature, (iii) make a general assignment for the
benefit of creditors, (iv) be adjudicated as bankrupt or insolvent, or
(v) file a voluntary petition in bankruptcy, or a petition or an answer
seeking reorganization or an arrangement with creditors or to take
advantage of any bankruptcy, reorganization, insolvency, readjustment of
debt, dissolution or liquidation law or statute, or an answer admitting
the material allegations of a petition filed against it in any
proceeding under any such law, or if corporate action shall be taken by
any of them for the purposes of effecting any of the foregoing, or (vi)
by any act indicate its consent to, approval or acquiescence in any such
proceeding or the appointment of any receiver of or trustee for it or
any substantial part of its property, or suffers any such receivership,
trusteeship or proceeding to continue undischarged for a period of 30
days.
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(g) Involuntary Receiver; Bankruptcy. An order, judgment or
decree shall be entered, without the application, approval or consent of
the Debtor or the Borrower, GSE or any Subsidiary of any of such
Persons, as the case may be, by any court of competent jurisdiction,
approving a petition seeking reorganization of such entity, or of all or
a substantial part of its assets or appointing a receiver, trustee or
liquidator of such entity, and such order, judgment or decree shall
continue unstayed and in effect for a period of 30 days.
(h) Judgments. Judgments in excess of $250,000 in the aggregate,
or any attachment or other levy against the property of the Debtor with
respect to a claim, remains unpaid, unstayed on appeal, undischarged,
unbonded, or undismissed for a period of 30 days.
(i) Execution; Attachment. Any execution on a judgment or
attachment in respect of a judgment shall be levied against any of the
Collateral, and such judgment, either alone or when aggregated with any
other such judgments, shall exceed $100,000 in amount and such
executions or attachments shall not be set aside, discharged or stayed
within thirty (30) days after the same shall have been levied.
(j) Transfers of Stock. Any shares, or interests in the shares,
of the capital stock of the Debtor are sold, encumbered, purchased,
redeemed or otherwise transferred.
(k) Liquidation; Dissolution. The Debtor shall begin any
procedure for its liquidation or dissolution or any such procedure is
commenced against it.
(l) Change of Control. There shall occur a Change of Control.
8.2 Remedies. Notwithstanding any provision to the contrary contained in
this Agreement, upon the occurrence of a Default or any Event of Default or upon
receipt by the Bank of any notice which the Debtor is required to give under
Section 6.9 of this Agreement, the Bank may discontinue making advances of the
Loan (except to fund reimbursement obligations under issued and outstanding
Letters of Credit as they arise) and issuing Letters of Credit under the Loan
Agreement in its sole and absolute discretion and will automatically discontinue
making advances of the Loan (except to fund reimbursement obligations under
issued and outstanding Letters of Credit as they arise) and issuing Letters of
Credit under the Loan Agreement if the Default or Event of Default is under
Sections 8.1(f) or (g) of this Agreement.
In addition, upon the occurrence of any Event of Default, and in every
such Event of Default and at any time thereafter, unless such Event of Default
shall be cured to the satisfaction of the Bank, the Bank may exercise any one or
more of the following remedies and will be deemed to exercise the remedies under
Sections 8.2(a) and (b) of this Agreement automatically upon an Event of Default
under Sections 8.1(f) or (g) of this Agreement.
(a) Accelerate Termination Date. Accelerate the Termination Date,
whereupon the Commitment shall terminate as of the accelerated Termination Date,
and all Letters of Credit shall be prefunded as required by Section 3.4(c) of
the Loan Agreement.
(b) Accelerate the Debtor's Obligations. Demand immediate payment in
full of all of the Debtor's Obligations under this Security Agreement and the
other Financing Documents and the Borrower's Obligations under the Loan
Agreement and the other Financing Documents, including (without limitation) all
accrued and unpaid interest thereon, whether or not (i) the Loan has become due
and payable, or (ii) the Standby Letters of Credit may remain outstanding
following repayment of the Borrower's Obligations or the Debtor's Obligations
relating thereto, whereupon all outstanding Debtor's Obligations and Borrower's
Obligations shall become immediately due and payable without presentment,
demand, protest, or any other notice of any kind, all of which are hereby
expressly waived, anything contained in this Security Agreement or in the other
Financing Documents to the contrary notwithstanding. In addition, all Letters of
Credit shall be prefunded as required by Section 3.4(c) of the Loan Agreement.
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The occurrence or non-occurrence of an Event of Default under this Security
Agreement shall in no way affect or condition the right of the Bank to demand
payment at any time of any of the Debtor's Obligations or the Borrower's
Obligations which are payable on demand regardless of whether or not an Event of
Default has occurred.
(c) Liquidation of Security Interest in Collateral. Upon the occurrence
of any Event of Default, and at any time during the continuance thereof, the
Bank shall have, in addition to all other rights and remedies, the remedies of a
secured party under the Uniform Commercial Code, or under any other governing
laws, including, without limitation, the right to take possession of the
Collateral (to which the Debtor hereby specifically consents), and for that
purpose the Bank may, so far as the Debtor can give authority therefor, enter
upon any premises on which the Collateral may be situated and remove the same
therefrom. Upon request of the Bank, the Debtor shall assemble and make the
Collateral available to the Bank at a place to be designated by the Bank. Unless
the Collateral is perishable or threatens to rapidly decline in value, or is of
a type customarily sold on a recognized market, the Bank shall give the Debtor
at least five (5) days' prior notice of the time and place of any public sale or
the time after which any private sale or any other intended disposition is to be
made. The Bank may at any time in its discretion transfer any securities (i.e.,
stock or bonds) or other property constituting the Collateral into its own name
or that of its nominee and receive the income thereon and hold the same as
collateral for Debtor's Obligations and the Borrower's Obligations or apply it
to principal, or interest or other costs, fees or charges due on, or with
respect to, Debtor's Obligations and the Borrower's Obligations. The Debtor
hereby irrevocably constitutes and appoints the Bank as the Debtor's true and
lawful attorney in fact, with full power of substitution, at the sole cost and
expense of the Debtor, but for the sole benefit of the Bank, to convert the
Collateral to cash, including without limitation, completing the manufacturing
process of work in process, and the sale (either public or private) of all or
any portion of the Collateral, to enforce collection of the Collateral, either
in its own name or in the name of the Debtor, compromising or settling with any
account debtors and prosecuting, defending, compromising or releasing any action
relating to the Collateral; to receive, open and dispose of all mail addressed
to the Debtor and to take therefrom any remittances on or proceeds of the
Collateral in which Bank has a security interest; to notify United States Post
Office authorities to change the address for delivery of mail addressed to the
Debtor to such address as the Bank may designate; to indorse the name of the
Debtor in favor of the Bank upon any and all checks, drafts, money orders,
notes, acceptances or other instruments of the same or different nature; to sign
and indorse the name of the Debtor on and to receive as secured party any of the
Collateral, any invoices, schedules of collateral, freight or express receipts
and/or other documents of title of the same or different nature relating to the
Collateral; to sign the name of the Debtor on any notice to the account debtors
or on verification of the Collateral; and to sign and file or record on behalf
of the Debtor any financing or continuation statements or other statements in
order to perfect, keep perfected or protect the Bank's security interest in the
Collateral. The Bank shall not be obliged to do any of the acts or exercise any
of the powers hereinabove authorized, but if the Bank elects to do any such act
or exercise any such power, it shall not be responsible to the Debtor except for
the Bank's own willful misconduct or gross negligence. All powers conferred upon
the Bank by this Security Agreement, being coupled with an interest, shall be
irrevocable as long as any of the Debtor's Obligations or the Borrower's
Obligations to the Bank shall remain unpaid or the Bank shall have any
obligations under the Loan Agreement.
(d) Setoff. Without limiting any other right of the Bank, whenever the
Bank has the right to declare any of the Debtor's Obligations to be immediately
due and payable (whether or not it has so declared), the Bank at its sole
election may setoff against the Debtor's Obligations any and all monies then or
thereafter owed to the Debtor by the Bank in any capacity, whether or not the
Debtor's Obligations have been declared due, or the obligation to pay such
monies owed by the Bank is then due, and the Bank shall be deemed to have
exercised such right of setoff immediately at the time of such election even
though any charge therefor is made or entered on the Bank's records subsequent
thereto.
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(e) Other Rights and Remedies. In addition to any other rights or
remedies specifically set forth herein, the Bank shall have available to it all
rights and remedies under any other of the Financing Documents and any other
rights and remedies afforded to it at law or in equity.
(f) Performance by Bank. If the Debtor shall fail to pay any of the
Debtor's Obligations or the Borrower's Obligations or the Debtor shall otherwise
fail to perform, observe or comply with any of the conditions, covenants, terms,
stipulations or agreements contained in this Security Agreement or any of the
other Financing Documents, the Bank, without notice to or demand upon the
Debtor, and without waiving or releasing any of the Debtor's Obligations or the
Borrower's Obligations or any Event of Default, and in addition to any rights or
remedies available to it under any of the other Financing Documents, may (but
shall be under no obligation to) at any time thereafter make such payment or
perform such act for the account and at the expense of the Debtor, and may, to
the extent permitted by law, enter upon the premises of the Debtor for that
purpose and take all such action thereon as the Bank may consider necessary or
appropriate for such purpose. All sums so paid or advanced by the Bank and all
costs and expenses (including, without limitation, reasonable attorneys' fees
and expenses) incurred in connection therewith (the "Expense Payments") together
with interest thereon from the date of payment of the advance or the date on
which the expense was incurred until paid in full at the rate of three percent
(3%) per annum in excess of the rate of interest otherwise payable on the
Borrower's Obligations shall be paid by the Debtor to the Bank on demand and
shall constitute and become a part of the Debtor's Obligations and the
Borrower's Obligations.
(g) No Conditions Precedent to Exercise of Remedies. The Debtor shall
not be relieved of any obligation by reason of the failure of the Bank to comply
with any request of the Debtor or of any other Person, to sell any portion of
the Collateral, or otherwise to enforce any provision of the Financing
Documents, or by reason of the release, regardless of consideration, of all or
any part of the Collateral, or other security for the Debtor's Obligations or
the Borrower's Obligations, or by reason of any agreement or stipulation between
any subsequent owner of the Collateral or other security for the Debtor's
Obligations or the Borrower's Obligations, or the Bank extending the time of
payment or modifying the terms of the Financing Documents without first having
obtained the consent of the Debtor; and in the latter event, the Debtor shall
continue to be liable to make payments according to the terms of any such
extension or modification agreement, unless expressly released and discharged in
writing by the Bank.
(h) Remedies Cumulative and Concurrent. No remedy herein conferred upon
or reserved to the Bank is intended to be exclusive of any other remedies
provided for in the Financing Documents, and each and every such remedy shall be
cumulative, and shall be in addition to every other remedy given hereunder, or
under the Financing Documents, or now or hereafter existing at law or in equity
or by statute. Every right, power and remedy given by the Financing Documents to
the Bank shall be concurrent and may be pursued separately, successively or
together against the Debtor or the Collateral or other security for the Debtor's
Obligations or the Borrower's Obligations or any part thereof, and every right,
power and remedy given by the Financing Documents may be exercised from time to
time as often as may be deemed expedient by the Bank.
(i) No Waiver. No delay or omission of the Bank to exercise any right,
power or remedy accruing upon the happening of an Event of Default shall impair
any such right, power or remedy or shall be construed to be a waiver of any such
Event of Default or any acquiescence therein. No delay or omission on the part
of the Bank to exercise any remedy hereunder, or acceptance by the Bank of any
partial payment on account of the Debtor's Obligations or Borrower's Obligations
shall constitute a waiver of any such Event of Default and each of the remedies
herein provided shall remain continuously available to the Bank.
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ARTICLE IX
MISCELLANEOUS
9.1 Notices. All communications between the parties or notices in
connection with this Agreement and any of the other Financing Documents shall be
in writing (unless otherwise specified herein), hand delivered or sent by
registered airmail, postage prepaid, or by telex, telecopy or other electronic
transmission, or by reliable overnight service, addressed to the intended
recipient at the address therefor set forth below. All such communications and
notices shall be effective upon delivery. Any party may change its address or
other information for notices by giving notice to the other parties in
accordance with the provisions of this Section.
(a) if to the Debtor:
GSE Erudite Software, Inc.
8930 Columbia Boulevard
Columbia, MD 21045
Attn: Robert W. Stroup
Telephone: 410-312-3500
Telecopy: 410-312-3611
with copies to:
Thomas K. Milhollan, Esquire
Corporate Counsel
GSE Systems, Inc.
8930 Stanford Boulevard
Columbia, Maryland 21045
Telephone: 410-312-3500
Telecopy: 410-312-3611
(b) if to the Bank:
CoreStates Bank, N.A.
1345 Chestnut Street
3rd Floor
Philadelphia, PA 19107
Attn: Derrick Davis
Telephone: 215-973-6765
Telecopy: 215-973-5387
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with a copy to:
Drinker Biddle & Reath
1345 Chestnut Street
Suite 1100
Philadelphia, PA 19107-3496
Attn: Bruce D. Shuter, Esq.
Telephone: 215-988-2947
Telecopy: 215-988-1809
9.2 Survival of Agreement; Successors and Assigns.
(a) All covenants, agreements, representations and warranties made
herein and in the certificates delivered pursuant hereto shall survive the
making of the Loan and the issuance of any Letters of Credit, and the execution
and delivery to the Bank of this Security Agreement and all of the other
Financing Documents and shall continue in full force and effect until all of the
Debtor's Obligations have been paid and performed in full and the Bank shall
have no further obligation under the Loan Agreement.
(b) Whenever in this Agreement any of the parties hereto is referred to,
such reference shall be deemed to include the successors and assigns of such
party; and all covenants, promises and agreements by or on behalf of the Debtor
which are contained in this Agreement or in the other Financing Documents shall
inure to the benefit of the successors and assigns of the Bank.
9.3 Payment of Fees and Expenses. The Debtor will pay on demand all
costs and expenses (including the reasonable fees and out-of-pocket expenses of
the Bank's counsel and the Bank's auditors and consultants) incurred by the Bank
in connection with (i) audits and Collateral review, (ii) the preparation and
negotiation of this Security Agreement and any other Financing Documents or any
other documents contemplated, required or necessary in connection therewith, and
any amendments or modifications thereof, (iii) the taking, perfection,
preservation and protection of the Collateral and any other security for the
repayment of the Debtor's Obligations or the Borrower's Obligations, and (iv)
the enforcement and protection of the rights of the Bank in connection with this
Security Agreement or any of the other Financing Documents.
9.4 Applicable Law; Jurisdiction, Consent to Service of Process. This
Agreement and all of the other Financing Documents (except where expressly
indicated therein to the contrary) shall be construed in accordance with and
governed by the laws of the the State of Maryland. The Bank and the Debtor
hereby submit to the nonexclusive jurisdiction of any Pennsylvania court or
federal court sitting in Philadelphia over any suit, action or proceeding
arising out of or relating to this Agreement. The Debtor hereby submits to the
nonexclusive jurisdiction of any Utah court or federal court sitting in Utah
over any suit, action or proceeding arising out of or relating to this Security
Agreement. The Debtor hereby agrees that it may be served with process at the
address for notices provided in Section 9.1 of this Security Agreement.
9.5 Waiver of Trial by Jury. The Debtor and the Bank hereby waive trial
by jury in any action or proceeding to which the Debtor and the Bank may be
parties, arising out of or in any way pertaining to this Security Agreement or
any of the other Financing Documents. It is agreed and understood that this
waiver constitutes a waiver of trial by jury of all claims against all parties
to such actions or proceedings, including claims against parties who are not
parties to this Security Agreement.
This waiver is knowingly, willingly and voluntarily made by the Debtor
and the Bank, and the Debtor hereby represents that no representations of fact
or 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. The Debtor further
47
<PAGE>
represents that it has had the opportunity to be represented in the signing of
this Security Agreement and in the making of this waiver by independent legal
counsel, selected of its own free will, and that it has had the opportunity to
discuss the waiver with counsel.
9.6 Modifications. No modification or waiver of any provision of this
Agreement or of any of the other Financing Documents, nor consent to any
departure by the Debtor therefrom, shall be effective unless the same shall be
in writing, and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which it is given. No notice to or
demand on the Debtor in any case shall entitle the Debtor to any other or
further notice or demand in the same, similar or other circumstances.
9.7 No Waiver of Rights by Bank. Neither any failure nor any delay on
the part of the Bank in exercising any right, power or privilege hereunder or
under this Security Agreement or any of the other Financing Documents shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise or the exercise of any other right, power
or privilege.
9.8 No Liability of Bank. The Bank shall not be liable for any act or
omission by it pursuant to the provisions of this Agreement, in the absence of
fraud or gross negligence. The Debtor hereby agrees that the Bank shall not be
chargeable for any negligence, mistake, act or omission of any accountant,
examiner, agency or attorney employed by them in making examinations,
investigations or collections, or otherwise perfecting, maintaining, protecting
or realizing upon any lien or security interest in the Collateral or any other
interest in security for the Debtor's Obligations or the Borrower's Obligations.
The Bank shall not incur any liability to the Debtor or to any other Person in
connection with the acts or omissions of the Bank in reliance upon any
certificate or other paper believed by the Bank to be genuine or with respect to
any other thing which the Bank may do or refrain from doing, unless such act or
omission amounts to fraud or gross negligence.
By accepting or approving anything required to be observed performed or
fulfilled by the Debtor or to be given to the Bank pursuant to this Agreement,
including, without limitation, any certificate, balance sheet, statement of
profit and loss or other financial statement, survey, receipt, appraisal or
insurance policy, the Bank shall not be deemed to have warranted or represented
the sufficiency, legality, effectiveness or legal effect of the same, or of any
term, provision or condition thereof and any such acceptance or approval thereof
shall not be or constitute any warranty or representation with respect thereto.
9.9 Indemnification. All acts, including any failure to act, relating to
the Collateral and any other security for the Debtor's Obligations or the
Borrower's Obligations by any agent, representative or designee of the Bank are
performed solely for the benefit of the Bank to assure repayment of the Debtor's
Obligations or the Borrower's Obligations and are not for the benefit of the
Debtor, or for the benefit of any other Person, including without limitation,
purchasers, tenants or other occupants. The Debtor agrees to indemnify the Bank
and to hold the Bank harmless against any loss or expense (including reasonable
attorneys' fees) resulting from any and all claims, actions, settlements, or
liability for acts or failure to act in connection with the Collateral and any
other security for the Debtor's Obligations or the Borrower's Obligations. In
addition to all amounts payable hereunder, the Debtor hereby protects,
indemnifies and holds harmless the Bank from and against, and hereby agrees to
defend the Bank against, any and all claims, damages, losses, liabilities, costs
or expenses whatsoever which the Bank may, at any time, sustain or incur by
reason of or in consequence of or arising out of the making of the Loan or the
issuance of the Letters of Credit, it being the intention of the parties that
this Security Agreement shall be construed and applied to protect and indemnify
the Bank against any and all risks involved in the transactions contemplated by
this Security Agreement and the other Financing Documents, all of which risks
are hereby assumed by the Debtor. The provisions of this Section shall survive
the expiration of this Security Agreement and the other Financing Documents.
Notwithstanding the foregoing, the Debtor shall have no obligation to indemnify
the Bank for the Bank's own gross negligence or willful misconduct.
48
<PAGE>
9.10 No Partnership. Nothing contained in this Security Agreement shall
be construed in a manner to create any relationship among the Debtor and the
Bank other than the relationship of obligor and lender, and the Debtor and the
Bank shall not be considered partners or co-venturers for any purpose on account
of this Security Agreement or the Financing Documents.
9.11 Time of Essence. Time shall be of the essence for each and every
provision of this Agreement of which time is an element.
9.12 Illegality. If fulfillment of any provision hereof or any
transaction related hereto or to any of the other Financing Documents, at the
time performance of such provision shall be due, shall involve transcending the
limit of validity prescribed by law, then ipso facto, the obligation to be
fulfilled shall be reduced to the limit of such validity; and if any clause or
provisions herein contained other than the provisions hereof pertaining to
repayment of the Debtor's Obligations operates or would prospectively operate to
invalidate this Security Agreement in whole or in part, then such clause or
provision only shall be void, as though not herein contained, and the remainder
of this Security Agreement shall remain operative and in full force and effect;
and if such provision pertains to repayment of the Debtor's Obligations, then,
at the option of the Bank, all of the Debtor's Obligations to the Bank shall
become immediately due and payable.
9.13 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be considered an original for all purposes;
provided, however, that all such counterparts shall together constitute one and
the same instrument.
9.14 Captions and Headings. The captions and headings contained in this
Agreement are included herein for convenience of reference only and shall not be
considered a part hereof and are not in any way intended to limit or enlarge the
terms hereof.
49
<PAGE>
9.15 Debtor's Obligations Absolute and Unconditional. All of the
Debtor's Obligations shall be absolute and unconditional, irrespective of any
set-off or counterclaim or the genuineness, validity, priority or enforceability
of this Security Agreement or any of the other Financing Documents or any other
circumstance which might otherwise constitute a legal or equitable discharge.
IN WITNESS WHEREOF, the Debtor and the Bank have caused this Security
Agreement to be duly executed, sealed and delivered by their duly authorized
officers, all as of the day and year first above written.
ATTEST/WITNESS: GSE ERUDITE SOFTWARE, INC.
/S/ Thomas K. Milhollan By: /S/ Eugene D. Loveridge
- ------------------------ -----------------------------
CORESTATES BANK, N.A.
By: /S/ Derrick Davis
-----------------------------
Title: Vice President
50
EXHIBIT 10.22
GSE SYSTEMS, INC.
FORM 10-K
For the Year Ended December 31, 1997
LEASE TERMINATION AGREEMENT
THIS LEASE TERMINATION AGREEMENT (the "Termination Agreement") is made
and entered into as of the 30th day of January 1998, and is by and between GSE
POWER SYSTEMS, INC., a Delaware corporation (formerly known as Simulation,
Systems and Services Technologies Company (the " Tenant " or " GSE ") and 8930
STANFORD BOULEVARD, LLC, a Delaware limited liability company (the "Landlord").
The Tenant and the Landlord are sometimes hereafter collectively referred to as
the "parties."
RECITALS:
R-1 Pursuant to an Amended and Restated Lease Agreement dated January
27, 1993 (the "Lease") by and between Tenant and CCP Development Limited
Partnership No. 7, a Maryland limited partnership (the "Original Landlord"),
Tenant did lease from the Original Landlord those certain premises consisting of
an office building containing approximately one hundred fifty-four thousand
three hundred ninety-four (154,394) square feet of space, including a parking
lot and other appurtenant facilities, located at 8930 Stanford Boulevard,
Columbia, Maryland, within the Columbia Corporate Park, as said premises are
more particularly described in the Lease (collectively, the Premises").
R-2 The term of the Lease (the "Term") expires on January 9, 2002,
subject to Tenant's renewal option as set forth in Section 39 of the Lease.
R-3 Landlord has entered into an agreement to acquire the Premises and
the real estate on which is it located from the Original Landlord in a
transaction scheduled to close on February 5, 1998. Upon consummation of such
transaction, Landlord shall succeed to all of the Original Landlord's rights
under the Lease.
R-4 Tenant has requested that the Lease be terminated, effective April
30, 1998, at which time all of Tenant's rights and obligations under the Lease
shall cease and terminate (except for those obligations which, pursuant to the
terms and provisions of the Lease, survive expiration of the Term and
termination of the Lease).
R-5 Landlord has secured Genus Corporation, a Maryland corporation
"Genus"), as a replacement tenant for the Premises, and has entered into a
separate lease agreement with Genus for the Premises (the "Replacement Lease").
The effectiveness of the Replacement Lease is conditioned upon, among other
things, Tenant's execution and delivery of this Termination Agreement and
Landlord's acquisition of the Premises and the real estate on which it is
located.
NOW, THEREFORE, in consideration of the above premises and other good
and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereby agree as follows:
1. The Lease shall terminate at 11:59 p.m. on April 30, 1998 (the
"Termination Date") at which time: (a) the Term, and all of Tenant's right to
possession of the Premises, shall terminate; (b) Tenant shall surrender
possession of the entirety of the Premises to Landlord in the condition required
by the Lease; and (c) all of Tenant's rights and obligations under the Lease
shall cease and terminate. The fixtures, equipment, alterations and other
improvements to the Premises that shall be removed by Tenant at the expiration
of the Term of the Lease is set forth in Exhibit A attached hereto. All other
fixtures, equipment, alterations and other improvements to the Premises in place
as of the date hereof shall remain with the Premises at the expiration of the
1
<PAGE>
Term of the Lease, and shall not be removed by Tenant. Attached hereto as
Exhibit B is a true and correct first of all management, supply, maintenance,
service and other contracts binding on GSE with respect to the Property. Unless
Landlord gives written notice to GSE within sixty (60) days of the date hereof,
which notice describes those contracts which Landlord desires to continue beyond
the Lease Termination Date, all such contracts shall terminate as of the
Termination Date (or, if earlier, the Early Termination Date).
2. In the event that Tenant surrenders possession of the entirety of the
Premises in the condition required prior to the Termination Date specified above
and provides advance written notice thereof to Landlord (such date of surrender
of possession of the Premises being referred to herein as the "Early Termination
Date 11"), the Early Termination Date shall be the date upon which the Lease
and all of Tenant's obligations thereunder including, without limitation, the
obligation to pay rent and other sums due pursuant to the Lease, shall cease and
terminate.
3. All payments required to be made by Tenant to the Landlord pursuant
to the Lease (including, without limitation, Rent and an additional rent) shall
be pro-rated to the Termination Date or the Early Termination Date (as
appropriate), and Landlord shall refund any excess payment(s) to Tenant.
4. In the event that Tenant does not surrender possession of the
Premises in the condition required on or before the Termination Date, such
failure shall be deemed a holdover for purposes of the Lease, and Landlord shall
be entitled to all remedies provided for in the Lease or available at law or in
equity as a result of such holdover by Tenant. In addition, Tenant shall be
liable to Landlord for the damages, if any, which Landlord may suffer or incur
in accordance with Article 3 of the Replacement Lease (including, without
limitation, damages resulting from termination of the Replacement Lease pursuant
to the provisions of Article 3 of the Replacement Lease) or otherwise as a
result of Tenant's holdover beyond the Termination Date. Notwithstanding
anything to the contrary herein, in the event that Tenant's failure to timely
surrender possession of the Premises does not result in a termination of the
Replacement Lease pursuant to Article 3 of such lease, then Landlord's damages
shall be limited to the damages which Landlord suffers or incurs in accordance
with Article 3 of the Replacement Lease, and Landlord's sole remedy for Tenant's
failure to timely surrender possession of the Premises which does not result in
termination of the Replacement Lease shall be its recovery of such damages.
5. As a material inducement to Landlord's agreement to a termination of
the Lease and the execution of the Replacement Lease as contemplated hereby, at
Closing of Landlord's acquisition of the Premises and the real estate on which
it is located (the "Acquisition Date"), Tenant shall deliver to Landlord an
irrevocable sight draft letter of credit to secure Tenant's obligations to
surrender possession of the Premises in the condition required by the
Termination Date, as well as Genus' obligations pursuant to the Replacement
Lease for a period of five (5) years, which letter of credit shall be
substantially is in the form of Exhibit "C" attached hereto and issued by a bank
reasonably acceptable to Landlord (the "Tenant Letter of Credit"). The Tenant
Letter of Credit shall have an initial term of not less than one (1) year and
shall be continuously renewed no later than thirty (30) days prior to the stated
term thereof as necessary so that it remains in effect for the following periods
and, subject to draws thereunder, for the following amounts:
(a) initially, the amount of the Tenant Letter of Credit shall
be $630,000 (the "Original Amount"); (b) at the expiration of the first
full lease year of the term of the Replacement Lease the amount of the
Tenant Letter of Credit may be reduced to an amount equal to the
Original Amount less the greater of (x) $75,000 or (y) the amount
previously drawn under the Tenant Letter of Credit; (c) at the
expiration of the second full lease year of the term of the Replacement
Lease the amount of the Tenant Letter of Credit may be reduced to an
amount equal to the Original Amount less the greater of (x) $175,000 or
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<PAGE>
(y) amounts previously drawn under the Tenant Letter of Credit; (d) at
the expiration of the third full lease year of the term of the
Replacement Lease the amount of the Tenant Letter of Credit may be
reduced to an amount equal to the Original Amount less the greater of
(x) $300,000 or (y) amounts previously drawn under the Tenant Letter of
Credit; (e) at the expiration of the fourth full lease year of the term
of the Replacement Lease the amount of the Tenant Letter of Credit be
reduced to an amount equal to the Original Amount less the greater of
(x) $450,000 or (y) amounts previously drawn under the Tenant Letter of
Credit) and (of at the expiration of the fifth full lease year of the
term of the Replacement Lease the Tenant Letter of Credit shall be
terminated to the extent not already drawn upon.
6. (a) In the event that an Event of Default (as hereinafter defined)
shall have occurred and be continuing Landlord shall have the right to draw
against the Tenant Letter of Credit as hereinafter described.
(b) The following shall be an "Event of Default" hereunder: (i) Tenant
shall fail to surrender possession of the Premises by the Termination Date in
the condition required by the Lease, or (ii) Genus shall have committed a
default under the Replacement Lease (which has continued beyond the expiration
of any notice or cure periods provided with reference thereto), or (iii) Tenant
shall fail to renew the Tenant Letter of Credit as required hereby at least
thirty (30) days prior to the expiration of the stated term thereof.
(c) Upon the occurrence of an Event of Default under clause (b)(ii)
above, Landlord shall give notice to Tenant of such Event of Default and the
amount of damages to Landlord as a result of such Event of Default. In the event
that Tenant shall fail to cause Genus to cure such Event of Default within three
(3) business days after such notice, Landlord shall have the right to draw
against the Tenant Letter of Credit, in an amount not to exceed the amount of
damages set forth in Landlord's notice, and apply the amount so drawn to
Landlord's damages. In the event that Tenant cures such an Event of Default by
making a payment of damages to Landlord, such payment will be deemed the
equivalent of a draw upon the Tenant Letter of Credit and Landlord will
cooperate with Tenant to permit the Tenant Letter of Credit to be reduced by the
amount of such payment. Upon the occurrence of an Event of Default under clause
(b)(i) above Landlord shall be permitted to draw upon the Tenant Letter of
Credit up to the amount of Landlord's damages as a result thereof. Upon the
occurrence of an Event of Default under clause (b)(iii) above, Landlord may draw
upon the full amount of the Tenant Letter of Credit and shall hold the proceeds
thereof, in lieu of the Tenant Letter of Credit, as security for the obligations
secured by the Tenant Letter of Credit.
(d) Any draw on the Tenant Letter of Credit, or payment by Tenant in
lieu thereof, shall be without prejudice to any other rights and/or remedies of
Landlord with reference to such Event of Default, including, without limitation,
Landlord's rights and remedies under the Replacement Lease to the extent that
the Event of Default is as a result of a default by Genus under the Replacement
Lease, or against Tenant to the extent that the Event of Default is as a result
of Tenant's failure to surrender possession of the Premises by the Termination
Date in the condition required by the Lease (except as otherwise provided in
Section 4 above).
(e) Notwithstanding the preceding, if and to the extent that Genus cures
its default under the Replacement Lease which gave rise to an Event of Default
and, as a result thereof, Landlord recovers the amount of damages for which
Landlord has drawn against the Tenant Letter of Credit, or received a payment
from Tenant in lieu thereof, Landlord shall notify Tenant of such recovery and,
provided that Tenant causes the Tenant Letter of Credit to be restored to the
amount which it would have been absent such draw or payment, Landlord will
refund to Tenant the amount of such draw or payment.
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<PAGE>
7. It is further acknowledged and agreed that in the event that Tenant
has failed to surrender possession of the Premises in the condition required by
the Termination Date, that Landlord shall have no obligation to satisfy all or
any portion of its damages as a result thereof by a draw upon the Tenant Letter
of Credit (and may retain the full amount thereof to secure Genus' obligations
pursuant to the Replacement Lease). In addition, in the event that Tenant should
fail to surrender possession of the Premises in the condition required by the
Termination Date, and Landlord elects to draw upon the Tenant Letter of Credit
to recoup all or a portion of its damages as a result thereof (in accordance
with Section 4 above), then the Tenant shall, within ten (10) days of receipt of
notice from Landlord of any such draw upon the Tenant Letter of Credit,
replenish the amount available to be drawn thereunder (by providing a
supplemental or replacement letter of credit) to the respective amounts set
forth in paragraph 5 hereof, and if Tenant shall fail to do so, it shall not be
entitled to any further periodic reduction in the amount of the Tenant Letter of
Credit provided for in paragraph 5 hereof.
8. Nothing herein contained shall be deemed to release Tenant from any
obligations under the Lease as of the Termination Date or, as appropriate, the
Early Termination Date, which, by the terms and provisions of the Lease, are
intended to survive expiration of the Term thereof.
9. Tenant hereby waives and releases Landlord from any and all claims,
demands and causes of action ("Claim") it may have pursuant to the Lease and all
matters related thereto, whether against the Original Landlord or the Landlord
(as Original Landlord's successor) and whether now known or within the
contemplation of Tenant or otherwise. In addition, Tenant acknowledges that, as
of the date hereof, it is aware of no basis for any Claims against Original
Landlord pursuant to the Lease or any basis for claiming a defense or right of
offset against rent or any other sum due and payable by it pursuant to the
Lease. Tenant agrees hereby that, from and after the date that Landlord acquires
the Premises and the real estate on which it is located from Original Landlord,
and thereby succeeds to the Original Landlord's rights under the Lease, all rent
and other sums payable by it pursuant to the Lease shall be paid to Landlord
without offset or defense.
10. Notwithstanding any provisions being to the contrary, this
Termination Agreement, and the parties' rights and obligations hereunder, shall
become effective on the date that Landlord acquires the Premises and the real
estate on which it is located from Original Landlord (such date being the
"Effective Date"). In the event the Effective Date does not occur by February 5,
1998, this Termination Agreement, and each and every provision hereof, shall be
deemed void and of no legal force and effect, ab initio as if this Termination
Agreement had never been entered into.
11. As of the Effective Date, the following Sections of the Lease are
hereby deleted in their entirety: (a) Section 33 (Option to Expand); (b) Section
39 (Renewal Options) and (c) Section 40 (Purchase Option). Without limitation of
the foregoing, Tenant hereby consents to Landlord's acquisition of the Premises
and the real estate on which it is located from Original Landlord and, to the
extent that such acquisition may in any way be inconsistent with, or violate or
conflict with, any provision of the Lease (including, without limitation,
Section 40 thereof), Tenant hereby waives the applicability of, or its right to
enforce, any such provision.
12. This Termination Agreement shall be construed and governed in
accordance with the laws of the State of Maryland.
13. Unless otherwise specified herein, initially capitalized terms shall
have the meanings given them by the Lease,
14. Except only as expressly modified hereby, the Lease remains in full
force and effect, unmodified by this Termination Agreement.
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<PAGE>
15. This Termination Agreement may be entered into in counterparts.
IN WITNESS WHEREOF, the parties have entered into this Termination
Agreement as of the date first above-written.
WITNESS: TENANT:
GSE Power Systems, Inc.
a Delaware corporation
/s/ Thomas K. Milhollan By: /s/ Robert W. Stroup
- ------------------------ -------------------------
Title: Executive Vice President
LANDLORD:
8930 Stanford Boulevard, LCC, a Delaware
limited liability company
By: /s/ John M. Schemer
-------------------------------
Title: Managing Member
---------------------------
JOINDER OF PARENT
By its execution hereof, GSE Systems, Inc., a Delaware corporation,
parent of Tenant, hereby guarantees to Landlord Tenant's payment in full of
Tenant's obligations to Landlord pursuant to Section 4 of this Lease Termination
Agreement (less amounts drawn by Landlord under the Letter of Credit therefor).
GSE Systems, Inc.
By: /s/ Robert W. Stroup
----------------------------------
Title: Executive Vice President
------------------------------
5
EXHIBIT 10.23
GSE SYSTEMS, INC.
FORM 10-K
For the Year Ended December 31, 1997
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT ("Agreement") is made as of this 2nd day
of February, 1998 by and between GENUS CORPORATION, a Maryland corporation
("Genus") and GSE POWER SYSTEMS, INC., a Delaware corporation ("GSE").
RECITALS:
A. Pursuant to that certain Amended and Restated Lease Agreement dated
January 27, 1993 (the "Lease") between GSE, as tenant, and CCP Development
Limited Partnership No., LLC, a Maryland limited liability company ("CCP"), as
landlord, GSE leased certain space in an office building located at 8930
Stanford Boulevard, Columbia, Maryland (the " Building ").
B. 8930 Stanford Boulevard, LLC, a Delaware limited liability company
("Allied") has entered into an agreement to purchase the Building from CCP. Upon
closing of that transaction, Allied will succeed to all of CCP's rights under
the Lease.
C. Pursuant to that certain Lease Termination Agreement between GSE and
Allied, executed simultaneously herewith, (the "Termination Agreement") GSE and
Allied have agreed that the Lease shall terminate on April 30, 1998, and that
GSE shall vacate the Building on or before April 30, 1998.
D. Simultaneously with the termination of the Lease, Allied shall enter
into a new lease with Genus for the Building (the "New Lease").
E. As a condition to its entering into the New Lease, Allied has
required that GSE provide Allied a letter of credit (the "Letter of Credit") in
the initial amount of Six Hundred Thirty Thousand Dollars ($630,000.00) to
secure Genus's obligations under the New Lease for five (5) years.
F. GSE is willing to give Allied the Letter of Credit to secure Genus's
obligations under the New Lease in consideration for Genus's agreement to
indemnify, hold harmless and defend GSE on the terms and conditions hereinafter
set forth.
NOW, THEREFORE, in consideration of the foregoing premises, Genus, GSE
and GSE Systems hereby agree as follows:
1. Genus' Indemnification of GSE. Genus shall indemnify, hold harmless
and defend GSE from and against, to the extent arising pursuant to Section
6(b)(ii) of the Termination Agreement: (a) any and all amounts drawn by Allied
on the Letter of Credit or any replacement thereof; and (b) all reasonable costs
and expenses (including reasonable attorney's fees) incurred by GSE in
connection with any action, suit, proceeding, demand or judgment incident to any
draw or attempt by Allied to draw on the Letter of Credit or any replacement
thereof.
2. Liquidated Damages and Expenses on Account of Holdover. In the event
that (i) GSE does not vacate the Building on or before September 15, 1998, (ii)
that Allied fails to deliver the Building to Genus in accordance with Article 3
of the New Lease as a result of GSE's failure to timely vacate as required under
the Termination Agreement, and (iii) Genus terminates the New Lease in
accordance with Article 3 of the New Lease, GSE shall pay to Genus, an amount
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<PAGE>
equal to the Annual Base Rental that would have been abated pursuant to Article
3 of the New Lease on account of delay in delivery of the Building by Allied,
which amount is stipulated as one million one hundred seventy thousand eight
hundred twenty-one and 10/100 dollars ($1,170,821.10) it being agreed that such
payment is liquidated damages and not a penalty and such liquidated damages are
a reasonable estimation of Genus' damages on account of such termination); and
(b) all reasonable costs and expenses (including reasonable attorneys' fees)
incurred by Genus in connection with any action, suit, proceeding, demand or
judgment incident to GSE failure to timely vacate the Building.
3. Payments and Interest. Genus shall pay to GSE any and all amounts due
pursuant to Section 1 within ten days of written notice from GSE that Allied has
made a draw on the Letter of Credit or that GSE has incurred the costs and
expenses identified in Section l(b). GSE shall pay to Genus any and all amounts
pursuant to Section 2 herein thirty days after written notice from Genus that
all of the preconditions in Section 2 have been satisfied. Any amount not paid
within such ten-day or thirty-day period, as appropriate, shall bear interest
from the date due until paid at a rate per annum equal to three (3) percentage
points above the prime rate of interest charged by U.S. money center commercial
banks as published in The Wall Street Journal, such prime rate to change from
time to time as and when the change is reported.
5. Miscellaneous. This Agreement (a) shall be governed by and construed
in accordance with the laws of the State of Maryland, (b) may be executed in
multiple counterparts, each of which shall constitute an original and all of
which shall constitute one and the same agreement, (c) constitutes the final and
entire agreement between Genus and GSE with respect to the matters set forth
herein, and (d) shall be binding upon and inure to the benefit of the parties
hereto, and their respective heirs, successors and assigns. If any provision
shall be deemed severable, the remaining provisions hereof shall continue in
full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
GENUS CORPORATION
By: /S/ Bernaldo J. Dancel
-----------------------------
Title: President
-----------------------------
GSE POWER SYSTEMS, INC.
By: /S/ Robert W. Stroup
-----------------------------
Title: Executive Vice President
-----------------------------
2
<PAGE>
JOINDER OF PARENT
By its execution hereof, GSE Systems, Inc., a Delaware corporation,
parent of GSE Power Systems, Inc., hereby guarantees to Genus, GSE's payment in
full of its obligations to Genus under this Indemnification Agreement and all
reasonable out-of-pocket costs and expenses (including reasonable attorneys'
fees) incurred by Genus in connection with collecting any amounts not paid by
GSE when due to Genus hereunder.
GSE SYSTEMS, INC.
By: /S/ Robert W. Stroup
-----------------------------
Title: Executive Vice President
-----------------------------
3
EXHIBIT 10.24
GSE SYSTEMS, INC.
FORM 10-K
For the Year Ended December 31, 1997
RUTHERFORD PLAZA
Suite 110, 1st Floor
&
Suite 200, 2nd Floor
OFFICE LEASE
by and between
STERLING RUTHERFORD PLAZA, L.L.C.
(Landlord)
and
GSE SYSTEMS, INC.
(Tenant)
1
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TABLE OF CONTENTS
Section 1. Definitions ...........................................
Section 2. Premises; Measurement .................................
Section 3. Term ..................................................
Section 4. Rent; Security Deposit ................................
Section 5. Taxes .................................................
Section 6. Use of Premises and Common Areas ......................
Section 7. Insurance and Indemnification .........................
Section 8. Services and Utilities ................................
Section 9. Repairs and Maintenance ...............................
Section 10. Improvements ..........................................
Section 11. Landlord's Right of Entry .............................
Section 12. Damage or Destruction .................................
Section 13. Condemnation ..........................................
Section 14. Assignment and Subletting .............................
Section 15. Rules and Regulations .................................
Section 16. Subordination and Attornment ..........................
Section 17. Defaults and Remedies .................................
Section 18. Estoppel Certificate ..................................
Section 19. Quiet Enjoyment .......................................
Section 20. Notices ...............................................
Section 21. Option to Terminate ...................................
Section 22. Renewal Option ........................................
Section 23. Expansion Space .......................................
Section 24. General ...............................................
Exhibits
- --------
A Drawing showing approximate location of Premises
B Landlord's Work
C Current Rules and Regulations
2
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EXHIBIT 10.24
GSE SYSTEMS, INC.
FORM 10-K
For the Year Ended December 31, 1997
OFFICE LEASE
THIS LEASE ("Lease") is made on this 10th day of February, 1998 (the
"Effective Date"), by and between STERLING RUTHERFORD PLAZA, L.L.C., a Delaware
limited liability company (the "Landlord"), and GSE SYSTEMS, INC., a publicly
traded Maryland corporation (the "Tenant").
IN CONSIDERATION of the agreements and covenants hereinafter set forth,
Landlord and Tenant mutually agree as follows:
1. DEFINITIONS.
1.1. As used herein, the following terms shall have the following
meanings:
"Additional Rent" has the meaning given it in subsection 4.2.
"Alterations" has the meaning given it in subsection 10.2.
"Base Operating Costs" means Operating Costs incurred during the
first twelve (12) full calendar months after the Rent Commencement Date.
"Base Rent" has the meaning given it in subsection 4.1.
"Base Taxes" means Taxes incurred for the Tax Year 1998/99.
"Building" means the building known as Rutherford Plaza and
located at 7133 Rutherford Road in Baltimore County, Maryland.
"Building Service Equipment" means all apparatus, machinery,
devices, fixtures, appurtenances, equipment and personal property now or
hereafter located on the Premises and owned by the Landlord.
"Common Areas" has the meaning given it in subsection 6.5.1.
"Condemnation" has the meaning given it in subsection 13.1.
"Event of Default" has the meaning given it in subsection 17.1.
"Insurance Premiums" means the aggregate of any and all premiums
paid by the Landlord for hazard, liability, loss-of-rent, workmens' compensation
or similar insurance upon any or all of the Property.
"Landlord" means the Person hereinabove named as such and its
successors and assigns.
"Interest Rate" has the meaning given it in Section 4.4.3.
"Landlord's Work" has the meaning given to it in subsection
10.1.
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"Lease Year" means (a) the period commencing on the Rent
Commencement Date and terminating at 11:59 p.m. on the first anniversary of the
last day of the fifteenth (15th) full calendar month after the Rent Commencement
Date; and (b) each successive period of twelve (12) calendar months thereafter
during the Term.
"Liquidated Damages" has the meaning given it in subsection
17.3.
"Mortgage" has the meaning given it in subsection 16.1.
"Mortgagee" has the meaning given it in subsection 16.1.
"Operating Costs" means any and all costs and expenses
reasonably incurred (consistent with the customary practice in the Baltimore
area) by the Landlord for services performed by the Landlord or by others on
behalf of the Landlord with respect to the operation and maintenance of the
Property and the Common Areas located therein, adjusted to reflect the greater
of actual or a minimum of ninety (90%) occupancy of the Building, including,
without limitation, all costs and expenses of:
(a) operating, maintaining, repairing, lighting, signing,
decorating, cleaning, removing trash from, painting, striping, controlling of
traffic in, controlling of rodents in, policing and securing the Property
(including, without limitation, the costs of uniforms, equipment, assembly
permits, supplies, materials, alarm and life safety systems, and maintenance and
service agreements);
(b) purchasing and maintaining in full force insurance
(including, without limitation, liability insurance for personal injury, death
and property damage, rent insurance, insurance against fire, theft or other
casualties, extended coverage insurance, workers' compensation insurance
covering personnel, fidelity bonds for personnel, insurance against liability
for defamation and claims of false arrest occurring on or about the Property,
and plate glass insurance);
(c) removing snow, ice, water, litter and debris;
(d) operating, maintaining and repairing machinery, furniture,
accessories and equipment used in the operation and maintenance of the Property,
and the personal property taxes and other charges reasonably incurred in
connection with such machinery, furniture, accessories and equipment;
(e) maintaining and repairing roofs, awnings, paving, curbs,
walkways, sidewalks, drainage pipes, ducts, conduits, grease traps and lighting
fixtures throughout the Property.
(f) planting, replanting and replacing flowers, shrubbery,
trees, grass, planters and general landscape maintenance;
(g) providing electricity, heating, ventilation and air
conditioning to the Common Areas, but not the Premises, and operating,
maintaining and repairing any equipment used in connection therewith, including,
without limitation, costs incurred in connection with determining the
feasibility of installing, maintaining, repairing or replacing any facilities,
equipment, systems or devices which are intended to reduce utility expenses of
the Property as a whole;
(h) water and sanitary sewer services and other services, if
any, furnished to the Common Areas for the non-exclusive use of tenants;
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(i) janitorial services for the Building;
(j) enforcing any operating agreements pertaining to the Common
Areas or any portions thereof, and any easement and/or rights agreements entered
into by the Landlord for the benefit and use of the Landlord with reference to
the Property, the Property or tenants thereof, or any arbitration or judicial
actions undertaken with respect to the same;
(k) maintaining and repairing the Property, including, without
limitation, exhaust systems, sprinkler systems, pumps, fans, switchgear, loading
docks and ramps, freight elevators, escalators, passenger elevators, stairways,
service corridors, delivery passages, utility plants, transformers, doors,
walls, floors, skylights, ceilings, windows and fences;
(l) accounting, audit and management fees and expenses (provided
that such management fees and expenses shall be consistent with fees and
expenses customarily charged in the Baltimore, Maryland area, but in no event
shall exceed five percent (5%) of the total of all revenue generated from the
Property), payroll, payroll taxes, employee benefits and related expenses of all
personnel engaged in the operation, maintenance, security and management of the
Property, including, without limitation, security and maintenance personnel,
secretaries and bookkeepers (including, specifically, uniforms and working
clothes and the cleaning thereof, tools, equipment and supplies used by such
personnel, and the expenses imposed on or allocated to the Landlord or its
agents pursuant to any collective bargaining or other agreement); and
(m) the cost and expense of complying with all federal, state
and local laws, orders, regulations and ordinances applicable to the Property
which are now in force, or which may hereafter be in force.
Notwithstanding anything to the contrary contained herein, Operating Costs shall
not include the following: (1) any ground lease rents; (2) any and all fines and
penalties (including but not limited to capital expenditures) incurred or
required to be paid due to Landlord's failure to comply with applicable laws or
to timely pay taxes or utilities; (3) costs incurred by Landlord for the repair
of damage to the Property to the extent that Landlord is reimbursed by insurance
(or would have been entitled had Landlord carried the insurance required to be
carried hereunder by Landlord); (4) depreciation and amortization of any type,
except on materials, tools, supplies and vendor type equipment purchased by
Landlord to enable Landlord to supply services Landlord might otherwise contract
for with a third party where such depreciation and amortization would otherwise
have been included in the charge for such third party's services, all as
determined according to generally accepted accounting principles ("GAAP") and
when depreciation or amortization is permitted or required, the item shall be
amortized over its reasonably anticipated useful life; (5) leasing commissions,
marketing expenses, tenant improvement expenses, attorney's fees, and other
costs and expenses incurred in connection with negotiations or disputes with
present or prospective tenants or other occupants of the Building; (6) costs of
a capital nature, including, without limitation, capital improvements, capital
repairs, capital equipment and capital tools, all as determined under GAAP
except for capital costs for improvements which reduce the Operating Costs of
the Property, which capital improvements shall be amortized over their useful
life; (7) interest, principal, points and fees on debt or amortization on any
mortgage or mortgages or any other debt instrument encumbering the Building; (8)
such other expenses as are not customarily considered to be Operating Costs
under GAAP for comparable office buildings in the Baltimore metropolitan area.
"Operating Year" means each respective calendar year or part
thereof during the Term, or, at the Landlord's option, any other 12-month period
or part thereof designated by the Landlord during the Term.
"Parking Areas" has the meaning given it in subsection 6.5.1.
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"Person" means a natural person, a trustee, a corporation, a
limited liability company, a partnership and/or any other form of legal entity.
"Premises" means that certain space having a rentable area of
3,579 square feet, located on the first floor of the Building and known as Suite
110, and 28,272 square feet located on the second floor of the Building and
known as Suite 200, as more particularly depicted on Exhibit A; provided, that
if at any time hereafter any portion of the Premises becomes no longer subject
to this Lease, "Premises" shall thereafter mean so much thereof as remains
subject to this Lease. The exact rentable area of the Premises shall be
determined by Heath Design in accordance with BOMA standards as soon as
reasonably possible after final completion of the Space Improvements. If such
determination discloses that the actual rentable area of the Premises is other
than 31,851 square feet, then: (i) the Base Rent to be paid by the Tenant
pursuant to Section 4.1 hereof shall be increased or decreased, as applicable,
at the rate of $13.60 per square foot; and (ii) the Tenant's Proportionate Share
shall be recomputed to reflect the increase or decrease in rentable area.
"Property" means that certain parcel of land containing
approximately 4.6 acres, more or less, together with the Building thereon. The
Property is more particularly shown on Exhibit A.
"Rent" means all Base Rent and all Additional Rent.
"Rent Commencement Date" has the meaning given to it in
subsection 3.1.
"Rules and Regulations" has the meaning given to it in section
15.
"Tax Year" means the 12-month period beginning July 1 of each
year or such other 12-month period (deemed for the purposes of this Lease to
have 365 days) established as a real estate tax year by the taxing authority
having lawful jurisdiction over the Property.
"Taxes" means the aggregate of any and all real property and
other taxes, metropolitan district charges, front-foot benefit assessments,
special assessments and other taxes or public or private assessments or charges
levied against any or all of the tax parcel containing the Premises, including
but not limited to any such charges imposed under any private covenants
encumbering the title to any or all of the Property, and regardless of whether
any of the same are ordinary or extraordinary, foreseen or unforeseen, recurring
or nonrecurring, or special or general.
"Tenant" means the Person hereinabove named as such and its
successors and permitted assigns hereunder.
"Tenant's Proportionate Share" (a) means the percentage assigned
to the Premises for purposes of allocating Operating Costs and Taxes to the
Premises (and the rest of the net rentable spaces within the Property), (b)
represents the approximate and (for purposes of this Lease) hereby agreed upon
proportion which the rentable floor area of the Premises (31,851 square feet)
bears to the aggregate rentable floor area of the Building, which shall be in
accordance with BOMA (79,306 square feet), and (c) as of the Effective Date
shall be 40.16%.
"Tenant's Share of Increased Operating Costs" has the meaning
given it in subsection 4.3.2.
"Tenant's Share of Increased Taxes" has the meaning given it in
subsection 5.1.
"Term" has the meaning given it in subsection 3.1.
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"Termination Damages" has the meaning given it in subsection
17.3.
"Termination Date" has the meaning given it in subsection 3.1.
"Transfer" has the meaning given it in subsection 14.1.
1.2. Other Terms. Any other term to which meaning is expressly
given in this Lease shall have such meaning.
2. PREMISES. The Landlord hereby leases to the Tenant, and the Tenant
hereby leases from the Landlord, the Premises in "AS IS, WHERE IS" condition
(subject, however, to the Landlord's obligations set forth in subsection 10.1),
together with the right to use, in common with others, the Common Areas.
3. TERM.
3.1. Original Term; Rent Commencement Date. This Lease shall be
for a term (the "Term") commencing on the Effective Date and ending at 11:59
p.m. on the expiration of the one hundred twenty-third (123rd) full calendar
month after the last day of the month in which the Rent Commencement Date shall
occur (which date is hereinafter referred to as the "Termination Date"). Monthly
rent payments shall commence on the earlier of: (a) fifteen (15) days after the
date on which the Landlord notifies the Tenant that the Landlord's Work and
Space Improvements have been substantially completed, but in no event earlier
than May 15, 1998 (unless the Tenant elects, in its sole discretion, to take
occupancy prior to May 15th); or (b) June 1, 1998, provided, that if the Space
Improvements are not substantially complete by May 15th due to causes
attributable to the Landlord or the General Contractor and not to Tenant, then
said June 1st date shall be extended one day for each day of delay attributable
to the Landlord or the General Contractor. The earlier of the dates set forth in
(a) and (b) above is hereinafter referred to as the "Rent Commencement Date").
Notwithstanding the foregoing, Base Rent shall abate for the first ninety (90)
days after the Rent Commencement Date.
3.2. Confirmation of Commencement and Termination. The Landlord
and the Tenant at the Landlord's option and request after (a) the Rent
Commencement Date or (b) the expiration of the Term or any earlier termination
of this Lease by action of law or in any other manner, shall confirm in writing
by instrument in recordable form that, respectively, such rent commencement or
such termination has occurred, setting forth therein, respectively, the Rent
Commencement Date and the Termination Date.
3.3. Surrender. The Tenant, at its expense at the expiration of
the Term or any earlier termination of this Lease, shall (a) promptly surrender
to the Landlord possession of the Premises (including any fixtures or other
improvements which are owned by the Landlord) in good order and repair (ordinary
wear and tear and damage by fire or casualty excepted) and broom clean, (b)
remove therefrom all signs, goods, effects, machinery, fixtures and equipment
used in conducting the Tenant's trade or business which are neither part of the
Building Service Equipment nor owned by the Landlord, and (c) repair any damage
caused by such removal.
3.4. Holding Over. If the Tenant continues to occupy the
Premises after the expiration of the Term or any earlier termination of this
Lease after obtaining the Landlord's express, written consent thereto, then:
(a) such occupancy (unless the parties hereto otherwise
agree in writing) shall be deemed to be under a month-to-month tenancy, which
shall continue until either party hereto notifies the other in
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writing, at least one month before the end of any calendar month, that the
notifying party elects to terminate such tenancy at the end of such calendar
month, in which event such tenancy shall so terminate;
(b) anything in this section to the contrary
notwithstanding, the Rent payable for each such monthly period shall equal the
sum of (a) one-twelfth (1/12) of that amount which is equal to 150% of the Base
Rent for the Lease Year during which such expiration of the Term or termination
of this Lease occurs, plus (b) the Additional Rent payable under subsection 4.2;
and
(c) except as provided herein, such month-to-month tenancy
shall be on the same terms and subject to the same conditions as those set forth
in this Lease; provided, however, that if the Landlord gives the Tenant, at
least one month before the end of any calendar month during such month-to-month
tenancy, written notice that such terms and conditions (including any thereof
relating to the amount and payment of Rent) shall, after such month, be modified
in any manner specified in such notice, then such tenancy shall, after such
month, be upon the said terms and subject to the said conditions, as so
modified.
4. RENT; SECURITY DEPOSIT. As Rent for the Premises, the Tenant shall
pay to the Landlord all of the following:
4.1. Base Rent. An annual rent (the "Base Rent") as follows:
Monthly Installment
Lease Year Base Rent of Base Rent
---------- --------- ------------
1 $541,467.00 $36,097.80
2 $433,173.60 $36,097.80
3 $448,334.68 $37,361.22
4 $464,026.39 $38,668.87
5 $480,267.31 $40,022.28
6 $497,076.67 $41,423.06
7 $514,474.35 $42,872.86
8 $532,480.96 $44,373.41
9 $551,117.79 $45,926.48
10 $570,406.91 $47,533.91
4.2. Additional Rent. Additional rent ("Additional Rent") shall
include any and all charges or other amounts which the Tenant is obligated to
pay to the Landlord under this Lease, other than the Base Rent, regardless of
whether such charges or amounts are designated as additional rent.
4.3. Operating Costs.
4.3.1. Computation. Within one hundred twenty (120)
days after the end of each calendar year during the Term, the Landlord shall
compute the total of the Operating Costs incurred for the Property during such
calendar year, and the Landlord shall allocate them to each separate rentable
space within the Property in proportion to the respective operating costs
percentages assigned to such spaces; provided that anything in this subsection
4.3 to the contrary notwithstanding, wherever the Tenant and/or any other tenant
of space within the Property has agreed in its lease or otherwise to provide any
item of such services partially or entirely at its own expense, or wherever in
the Landlord's judgment any such significant item of expense is not incurred
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with respect to or for the benefit of all of the net rentable space within the
Building in allocating the Operating Costs pursuant to this subsection, the
Landlord shall make an appropriate adjustment, using generally accepted
accounting principles, as aforesaid, so as to avoid allocating to the Tenant or
to such other tenant (as the case may be) those Operating Costs covering such
services already being provided by the Tenant or by such other tenant at its own
expense, or to avoid allocating to all of the net rentable space within the
Building those Operating Costs incurred only with respect to a portion thereof,
as aforesaid. Within ten (10) days after the end of each 120 day computation
period during the Term, Landlord shall submit to Tenant a statement prepared and
certified as accurate by Landlord ("Expense Statement") setting forth in
reasonable detail the Operating Costs for such calendar year and the amount (if
any) of Tenant's Proportionate Share of such Operating Costs for such calendar
year. If the amount of Tenant's Proportionate Share of Operating Costs stated in
the Expense Statement is less than the amount Tenant paid by Tenant as Operating
Costs for the period covered by the Expense Statement, then Tenant shall deduct
the overpayment from its next payments(s) of Operating Costs. If the amount of
Tenant's Proportionate Share of Operating Costs stated in such Expense Statement
exceeds the amount paid by Tenant as Operating Expenses, Tenant shall pay
Landlord the excess with its next payment of Base Rent. The Tenant shall have
the right, during normal business hours at the Landlord's offices, to review the
books and records of the Landlord with respect to the calculation of: (a) either
Base Operating Costs; or (b) Operating Costs for the prior calendar year
applicable, at the Tenant's sole expense, provided (i) the Tenant provides at
least ten (10) days' advance written notice to the Landlord of its desire to
inspect such books and records, and (ii) such request is made within sixty (60)
days after either: (a) the end of the twelve (12) months during which Base
Operating Costs are determined; or (b) the Expense Statement is delivered by the
Landlord to the Tenant. If the Tenant does not notify the Landlord within such
60-day period, then all sums included as Base Operating Costs, or Operating
Costs, as applicable, shall be deemed acceptable to the Tenant and thereafter
the Tenant shall have no right to dispute in any manner any sums included within
Base Operating Costs, or Operating Costs prior calendar year, as applicable. If
the Tenant in good faith wishes to dispute the determination of Base Operating
Costs or Operating Costs or the calculation of any amount payable by the Tenant,
the Tenant will give the Landlord written notice of such dispute within two (2)
months after Tenant's review of the Landlord's books and records. As soon as
reasonably practicable after receiving such written notice, the Landlord will
meet with the Tenant in an attempt to reconcile the dispute. If such efforts do
not, in the reasonable determination of the Landlord and Tenant, resolve all
outstanding disputes, the Tenant may cause to be made a complete audit of the
Landlord's records relating to the matter in dispute by a firm of independent
certified public accountants selected by the Tenant with the approval of
Landlord, which approval shall not be unreasonably withheld. If such audit
reveals that the amount previously determined by the Landlord was incorrect, a
correction will be made, and either the Landlord will promptly return to the
Tenant any overpayment or the Tenant will promptly pay to the Landlord any
underpayment which was based on such incorrect amount. If Tenant's Proportionate
Share of Operating Costs was overstated by an amount in excess of five percent
(5%), Landlord shall also pay one-half (1/2) of the reasonable costs incurred by
Tenant in conducting such audit.
4.3.2. Payment. For each Operating Year (or portion
thereof in the event Base Operating Costs are determined on other than a
calendar year basis), the Tenant shall pay to the Landlord, in the manner
provided herein, "Tenant's Share of Increased Operating Costs" which shall be
computed by subtracting the Base Operating Costs from the Operating Costs for
the Operating Year in question, and multiplying the difference by Tenant's
Proportionate Share. The Landlord shall send to the Tenant an annual statement
setting forth the Operating Costs for the applicable calendar year.
Notwithstanding anything to the contrary contained in this Lease, the Landlord
represents that the cumulative annual increase per Operating Year of the
controllable portion of Operating Costs shall not be more than five percent
(5%). By way of example but not of limitation, if the controllable portion of
such costs increases by 4% in the second Lease Year and 3% in the third Lease
Year, then the controllable portion of such costs may increase by no more than
8% in the fourth Lease Year [3 x 5 = 4 + 3 + 8]. In no event, however, shall the
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first increase of the controllable portion of such costs exceed 5%.
Non-controllable Operating Costs shall be deemed to include insurance costs,
utility costs (including HVAC), the costs of snow and ice removal and other
similar costs which, under industry custom and practice, are deemed
non-controllable.
4.3.3. Proration. If only part of any calendar year
falls within the Term, the amount computed as Tenant's Share of Increased
Operating Costs for such calendar year (or portion thereof in the event Base
Operating Costs are determined on other than a calendar year basis) under this
subsection shall be prorated in proportion to the portion of such calendar year
falling within the Term (but the expiration of the Term before the end of a
calendar year shall not impair the Tenant's obligation hereunder to pay such
prorated portion of Tenant's Share of Increased Operating Costs for that portion
of such calendar year falling within the Term, which amount shall be paid on
demand).
4.3.4. Landlord's Right to Estimate. Anything in this
subsection to the contrary notwithstanding, the Landlord, at its reasonable
discretion, may (a) make from time to time during the Term a reasonable estimate
Tenant's Share of Increased Operating Costs which may become due under this
subsection for any calendar year, (b) require the Tenant to pay to the Landlord
for each calendar month during such year one twelfth (1/12) of such Tenant's
Share of Increased Operating Costs, at the time and in the manner that the
Tenant is required hereunder to pay the monthly installment of the Base Rent for
such month, and (c) increase or decrease from time to time during such calendar
year the amount initially so estimated for such calendar year, all by giving the
Tenant written notice thereof, accompanied by a schedule setting forth in
reasonable detail the expenses comprising the Operating Costs, as so estimated.
4.4. When Due and Payable.
4.4.1. Base Rent. The Base Rent for any Lease Year
shall be due and payable in twelve (12) consecutive, equal monthly installments,
in advance, on the first (1st) day of each calendar month during such Lease
Year. In addition, the Base Rent for the first full calendar month of the Term
shall be due and payable within three (3) days after the Landlord delivers a
fully executed copy of this Lease to the Tenant. Rent for any partial calendar
month shall be due and payable three (3) days after the Rent Commencement Date.
4.4.2. Additional Rent. Any regularly scheduled
Additional Rent accruing to the Landlord under this Lease, except as is
otherwise set forth herein, shall be due and payable when the installment of
Base Rent next falling due after such Additional Rent accrues and becomes due
and payable. Tenant shall pay any other, non-scheduled amounts of Additional
Rent, within thirty (30) days after notice (accompanied by reasonable
documentation evidencing such Additional Rent) from Landlord that such amount is
due.
4.4.3. No Set-Off; Late Payment. Any payment of Base
Rent or regularly scheduled Additional Rent shall be made promptly when due,
without any deduction or setoff whatsoever, and without demand, failing which
the Tenant shall pay to the Landlord as Additional Rent, after the tenth (10th)
day after such payment remains due but unpaid, a late charge equal to five
percent (5%) of such payment which remains due but unpaid. In addition, any
payment that is not paid by the tenth (10th) day after such payment is due shall
bear interest at the rate equal to the sum of the "prime rate", as quoted in the
Wall Street Journal's money rates section, plus two percent (2%) per annum (the
"Interest Rate") on the date of default if applicable to a default, otherwise,
on the date of determination. Any payment made by the Tenant to the Landlord on
account of Rent may be credited by the Landlord to the payment of any Rent then
past due before being credited to Rent currently falling due. Any such payment
which is less than the amount of Rent then due shall constitute a payment made
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on account thereof, the parties hereto hereby agreeing that the Landlord's
acceptance of such payment (whether or not with or accompanied by an endorsement
or statement that such lesser amount or the Landlord's acceptance thereof
constitutes payment in full of the amount of Rent then due) shall not alter or
impair the Landlord's rights hereunder to be paid all of such amount then due,
or in any other respect.
4.5. Where Payable. The Tenant shall pay the Rent, in lawful
currency of the United States of America, to the Landlord by delivering or
mailing it to the Landlord's agent at the following address, or to such other
address or in such other manner as the Landlord from time to time specifies by
written notice to the Tenant:
MacKenzie
Suite 200
2328 West Joppa Road
Lutherville, Maryland 21093
4.6. Tax on Lease. If federal, state or local law now or
hereafter imposes any tax, assessment, levy or other charge (other than
Landlord's income or franchise taxes) directly or indirectly upon (a) the
Landlord with respect to this Lease or the value thereof, (b) the Tenant's use
or occupancy of the Premises, (c) the Base Rent, Additional Rent or any other
sum payable under this Lease, or (d) this transaction, then the Tenant shall pay
the amount thereof as Additional Rent to the Landlord upon demand, unless the
Tenant is prohibited by law from doing so, in which event the Landlord at its
election may terminate this Lease by giving written notice thereof to the
Tenant.
4.7. Security Deposit. Simultaneously upon the execution and
delivery of this Lease by the parties hereto, the Tenant shall deposit with the
Landlord the sum of Thirty-five Thousand, Nine Hundred Sixty- five Dollars and
Nine Cents ($35,965.09), which (a) shall be retained by the Landlord as security
for the Tenant's payment of the Rent and performance of all of its other
obligations under this Lease, and (b) shall not be deemed to represent payment
of any Rent and shall not be construed as liquidated damages. If an Event of
Default occurs, the Landlord shall be entitled, at its sole discretion, (a) to
apply any or all of such sum in payment of (i) any Rent then due and unpaid,
(ii) any expense incurred by the Landlord in curing any such default, and/or
(iii) any damages incurred by the Landlord by reason of such default (including
but not limited to that of reasonable attorneys' fees), in which event the
Tenant, immediately on its receipt of a written demand therefor from the
Landlord, shall pay to the Landlord a sum equaling the amount so applied, so as
to restore such sum to its original amount; and/or (b) to retain any or all of
such sum in liquidation of any or all damages suffered by the Landlord by reason
of such default. On the termination of this Lease, any of such sum which is not
so applied or retained shall be returned to the Tenant. Such sum shall not bear
interest while being held by the Landlord. Landlord shall be entitled to the
full use of the Security Deposit and shall not be required to keep the Security
Deposit in a separate account. Any Mortgagee or purchaser of the Property shall
be relieved and released from any obligation to return the Security Deposit in
the event such Mortgagee or purchaser comes into possession of the Property by
reason of foreclosure (including deed in lieu thereof) or proceeding in lieu of
foreclosure unless the Security Deposit actually has been delivered to such
Mortgagee or purchaser.
4.7.1 Performance Bond. A condition precedent to the
performance of Landlord's obligations under this Lease is the delivery of a Six
Hundred Thousand Dollar ($600,000.00) performance and payment bond to Landlord
within fifteen (15) days after the date of execution hereof. Such bond shall:
(i) be written by a surety acceptable to Landlord in its sole discretion; (ii)
extend from the Effective Date until the end of the second Lease Year; and (iii)
provide that the Landlord may, from time to time, draw on the bond by the
submission of a certified statement from the managing member stating: (a) that
Tenant is in default of a monetary obligation under this Lease beyond any
applicable notice and cure period; and (b) the amount necessary to cure such
default; which shall be the amount which Landlord shall be entitled to draw. If
such bond is not delivered within said 15 day period, then Landlord shall have
the right to terminate this Lease on written notice to Tenant. Notwithstanding
the foregoing, Tenant shall have the right to initially deliver a bond which
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extends for a period of twenty-four (24) months after the Effective Date. In
such event, Tenant shall deliver a replacement bond for the balance of the term
specified in (ii) on or before thirty (30) days prior to the expiration of such
24 month period. If Tenant fails to deliver the replacement bond as aforesaid,
then such failure shall be an event of default and Landlord shall have the right
to immediately draw the full amount of the bond and retain the same until the
replacement bond is delivered; subject to Landlord's right to use any of the
drawn funds to cure any other monetary default by the Tenant that remains
uncured after any applicable notice and cure period.
5. TAXES.
5.1. Payment. For each Tax Year from and after the Rent
Commencement Date, the Tenant shall pay to the Landlord, in the manner provided
herein, "Tenant's Share of Increased Taxes" which shall be computed by
subtracting the Base Taxes from the Taxes for the Tax Year in question, and
multiplying the difference by Tenant's Proportionate Share.
5.2. Proration. If only part of any Tax Year falls within the
Term, the amount computed as Tenant's Share of Increased Taxes for such Tax Year
under this subsection shall be prorated in proportion to the portion of such Tax
Year falling within the Term (but the expiration of the Term before the end of a
Tax Year shall not impair the Tenant's obligations hereunder to pay such
prorated portion of Tenant's Share of Increased Taxes for that portion of such
Tax Year falling within the Term, which amount shall be paid on demand).
5.3. Method of Payment. Tenant's Share of Increased Taxes shall
be paid by the Tenant, at the Landlord's election (i) in advance, in equal
monthly installments in such amounts as are estimated and billed for each Tax
Year by the Landlord at the commencement of the Term and at the beginning of
each successive Tax Year during the Term, each such installment being due on the
first day of each calendar month or (ii) in a lump sum, following the Landlord's
receipt of the tax bill for the Tax Year in question, and calculation of
Tenant's Share of Increased Taxes with respect thereto. If the Landlord has
elected that the Tenant pay Tenant's Share of Increased Taxes in installments,
in advance, then, at any time during a Tax Year, the Landlord may re- estimate
Tenant's Share of Increased Taxes and thereafter adjust the Tenant's monthly
installments payable during the Tax Year to reflect more accurately Tenant's
Share of Increased Taxes. Within forty-five (45) days after the Landlord's
receipt of tax bills for each Tax Year, the Landlord will notify the Tenant of
the amount of Taxes for the Tax Year in question and the amount of Tenant's
Share of Increased Taxes thereof. Any overpayment or deficiency in the Tenant's
payment of Tenant's Share of Increased Taxes for each Tax Year shall be adjusted
between the Landlord and the Tenant; the Tenant shall pay the Landlord or the
Landlord shall credit to the Tenant's account (or, if such adjustment is at the
end of the Term, the Landlord shall pay the Tenant), as the case may be, within
fifteen (15) days after such notice to the Tenant, such amount necessary to
effect such adjustment. The Landlord's failure to provide such notice within the
time prescribed above shall not relieve the Tenant of any of its obligations
hereunder. Landlord shall pay all installments of taxes by their due date and
shall provide Tenant with evidence of such payment upon request.
5.4. Taxes on Rent. In addition to Tenant's Share of Increased
Taxes, the Tenant shall pay to the appropriate agency any sales, excise and
other tax (not including, however, the Landlord's income and franchise taxes)
levied, imposed or assessed by the State of Maryland or any political
subdivision thereof or other taxing authority upon any Rent payable hereunder.
The Tenant shall also pay, prior to the time the same shall become delinquent or
payable with penalty, all taxes imposed on its inventory, furniture, trade
fixtures, apparatus, equipment, leasehold improvements installed by the Tenant
or by the Landlord on behalf of the Tenant and any other property of the Tenant.
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5.5 Permitted Contests. If during the Term, but after the tax
year used to calculate Base Taxes: (i) the Property is reassessed in a manner
which results in an increase in the amount of Taxes applicable to the Property;
and (ii) Landlord elects, in its sole discretion, not to contest such increase
in Taxes, then the Tenant shall have the right, at its sole expense and only
after prior written notice to and consultation with the Landlord, to contest
such increase in Taxes by appropriate proceedings conducted with due diligence;
provided, that any such contest by Tenant shall not relieve or postpone Tenant's
obligation to pay Tenant's Share of Increased Taxes as provided for in Sections
5.1 - 5.3 above. If Tenant's contest results in the amount of Taxes applicable
to the Property being increased above what would otherwise have been payable but
for Tenant's contest, then Tenant shall be obligated to pay (in the manner
specified in this Section 5) one hundred percent (100%) of the difference
between such increased amount which is applicable to the entire Property, not
just the Premises, and the amount which would otherwise have been payable; it
being the parties intention that such increased amount not be passed through to
either the Landlord or other tenants. The Landlord shall cooperate in such
contest proceedings, but any costs or expenses incurred by Landlord shall be
payable by Tenant as Additional Rent.
6. USE OF PREMISES AND COMMON AREAS.
6.1. Nature of Use. The Tenant shall use the Premises only for
general office purposes (including computer system integration purposes), and
for no other purpose whatsoever.
6.2. Compliance with Law and Covenants.
6.2.1 Tenant's Compliance. The Tenant, throughout the
Term and at its sole expense, in its use and possession of the
Premises, shall:
(a) comply promptly and fully with (i) all laws,
ordinances, notices, orders, rules, regulations and
requirements of all federal, state and municipal
governments and all departments, commissions, boards and
officers thereof, including but not limited to The
Americans with Disabilities Act, 42 U.S.C. 12101 et.
seq., and the ADA Disability Guidelines promulgated with
respect thereto, and (ii) all requirements (Y) of the
National Board of Fire Underwriters (or any other body
now or hereafter constituted exercising similar
functions) which are applicable to any or all of the
Premises, or (Z) imposed by any policy of insurance
covering any or all of the Premises and required by
section 7 to be maintained by the Tenant, and (iii) all
covenants and restrictions which may encumber the title
to any or all of the Premises, all if and to the extent
that any of such requirements relate to any or all of
the Premises;
(b) (without limiting the generality of the
foregoing provisions of this subsection) keep in force
throughout the Term all licenses, consents and permits
necessary for the lawful use of the Premises for the
purposes herein provided;
(c) pay when due all personal property taxes,
income taxes, license fees and other taxes assessed,
levied or imposed upon the Tenant or any other person in
connection with the Tenant's operation of its business
upon the Premises or Tenant's use thereof in any other
manner;
(d) not obstruct or interfere with the rights of
other tenants; and
(e) not allow the transmission of any loud or
objectionable sounds or noises from the Premises.
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Notwithstanding anything to the contrary contained herein, with respect
to The Americans with Disabilities Act and the ADA Disability Guidelines
thereto, after substantial completion the Tenant shall be responsible for the
entire Premises, including all Premises entry doors and signage (subject,
however, to the provisions of subsection 10.2), and the Landlord shall be
responsible for the Building and the Common Areas.
6.2.2 Landlord's Compliance. Notwithstanding anything to
the contrary contained herein, the Landlord, throughout the Term, shall comply
with (i) all laws, ordinances, notices, orders, rules, regulations and
requirements of federal, state and municipal governments and all departments,
commissions, board and officers thereof, including but not limited to The
Americans with Disabilities Act, and (ii) all covenants and restrictions which
may encumber the title to any or all of the Property.
6.3. Mechanics' Liens.
6.3.1. Without limiting the generality of the foregoing
provisions of this section, the Tenant shall not create or permit to be created,
and if created shall discharge or have released, any mechanics' or materialmens'
lien arising while this Lease is in effect and affecting any or all of the
Premises, the Building and/or the Property, and the Tenant shall not permit any
other matter or thing whereby the Landlord's estate, right and interest in any
or all of the Premises, the Building and/or the Property might be impaired. The
Tenant shall defend, indemnify and hold harmless the Landlord against and from
any and all liability, claim of liability or expense (including but not limited
to that of reasonable attorneys' fees) incurred by the Landlord on account of
any such lien or claim.
6.3.2. If the Tenant fails to discharge any such lien
within fifteen (15) days after it first becomes effective against any of the
Premises, the Building and/or the Property, then, in addition to any other right
or remedy held by the Landlord on account thereof, the Landlord may (a)
discharge it by paying the amount claimed to be due or by deposit or bonding
proceedings, and/or (b) in any such event compel the prosecution of any action
for the foreclosure of any such lien by the lienor and pay the amount of any
judgment in favor of the lien or with interest, costs and allowances. The Tenant
shall reimburse the Landlord for any amount paid by the Landlord to discharge
any such lien and all expenses incurred by the Landlord in connection therewith,
together with interest thereon at the Interest Rate from the respective dates of
the Landlord's making such payments or incurring such expenses (all of which
shall constitute Additional Rent).
6.3.3. Nothing in this Lease shall be deemed in any way
(a) to constitute the Landlord's consent or request, express or implied, that
any contractor, subcontractor, laborer or materialman provide any labor or
materials for any alteration, addition, improvement or repair to any or all of
the Premises, the Building and/or the Property, or (b) to give the Tenant any
right, power or authority to contract for or permit to be furnished any service
or materials, if doing so would give rise to the filing of any mechanics' or
materialmens' lien against any or all of the Premises, the Building and/or the
Property, or the Landlord's estate or interest therein, or (c) to evidence the
Landlord's consent that the Premises, the Building and/or the Property be
subjected to any such lien.
6.4. Signs. The Tenant shall have no right to erect signs
upon the Premises or the remainder of the Building or the Property unless the
Landlord has given its express, written consent thereto, which consent may be
withheld in the Landlord's sole discretion; provided, however, that Tenant shall
have the right, at its sole cost and expense, to erect one exterior sign on the
Building: (a) at a location mutually agreeable to Landlord and Tenant; and (b)
subject to Landlord's approval as to type, size and color, which consent shall
not be unreasonably withheld; subject, however, to Tenant's full compliance with
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all laws, rules and regulations of governmental authorities having jurisdiction
over such signage, and compliance with any restrictive covenants applicable to
the Property (including the obtainment of any consents required by such
covenants). The Landlord shall provide: (a) at the Landlord's sole expense, two
(2) lines in the lobby directory of the Building identifying the Tenant or its
business, at Landlord's sole expense; and (b) three (3) additional lines at
Tenant's sole expense.
6.5. License.
6.5.1. Grant of License. The Landlord hereby grants to
the Tenant a non-exclusive license to use (and to permit its officers,
directors, agents, employees and invitees to use), in the course of conducting
business at the Premises, those areas and facilities of the Property which may
be designated by the Landlord from time to time as common areas (portions of
which may from time to time be relocated and/or reconfigured by the Landlord in
its sole discretion so long as reasonable access to and from the Premises is
maintained) (the "Common Areas"), which Common Areas include footways,
sidewalks, Parking Areas, lobbies, elevators, stairwells, corridors, restrooms
and certain exterior areas on the Property, subject, however, to the Rules and
Regulations. "Parking Areas" shall mean those portions of the Common Areas which
from time to time are designated by the Landlord for the parking of automobiles
and other automotive vehicles while engaged in business upon the Premises (other
than while being used to make deliveries to and from the Premises). The Tenant
shall be permitted access to the Premises twenty-four (24) hours a day, seven
(7) days a week.
6.5.2. Non-Exclusive License. Such license shall be
exercised in common with the exercise thereof by the Landlord, the other tenants
or occupants of the Property, and their respective officers, directors, agents,
employees and invitees.
6.5.3. Parking Areas; Changes. The Landlord reserves
the right to change the entrances, exits, traffic lanes, boundaries and
locations of the Parking Areas. All Parking Areas and facilities which may be
furnished by the Landlord in or near the Property, including any employee
parking areas, truckways, loading docks, pedestrian sidewalks and ramps,
landscaped areas and other areas and improvements which may be provided by the
Landlord for the Tenant's exclusive use or for general use, in common with other
tenants, their officers, agents, employees and visitors, shall at all times be
subject to the Landlord's exclusive control and management, and the Landlord
shall have the right from time to time to establish, modify and enforce
reasonable rules and regulations with respect thereto. The Landlord shall have
the right to (a) police the Common Areas, (b) establish and from time to time to
change the level of parking surfaces, (c) close all or any portion of the Common
Areas to such extent as, in the opinion of the Landlord's counsel, may be
legally sufficient to prevent a dedication thereof or the accrual of any rights
to any person or to the public therein, provided that such closure does not
deprive Tenant of access to the Premises, (d) close temporarily all or any
portion of the Parking Areas, (e) discourage non-tenant parking, other than
Tenant's invitees; and (f) do and perform such other acts in and to the Common
Areas as, in the use of good business judgment, the Landlord determines to be
advisable with a view to the improvement of the convenience and use thereof by
tenants, their officers, agents, employees and visitors. The Tenant shall cause
its officers, agents and employees to park their automobiles only in such areas
as the Landlord from time to time may designate by written notice to the Tenant
as employee parking areas, and the Tenant shall not use or permit the use of any
of the Common Areas in any manner which will obstruct the driveways or
throughways serving the Parking Areas or any other portion of the Common Areas
allocated for the use of others. The Tenant shall not keep parked vehicles on
the Parking Areas overnight except for occasional non-recurring employee
overnight parking. The Landlord shall not charge Tenant's employees for the use
of the Parking Areas. The Tenant shall have the right to utilize no less than
forty percent (40%) of the number of parking spaces located on the Property on
the Effective Date; and Landlord shall designate five (5) of the aforementioned
spaces as reserved spaces reasonably close to the Building entrance for Tenant's
use; but Landlord shall not be required to monitor the use of such spaces.
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6.5.4. Alterations. The Landlord reserves the right at
any time and from time to time (i) to change or alter the location, layout,
nature or arrangement of the Common Areas or any portion thereof, including but
not limited to the arrangement and/or location of entrances, passageways, doors,
corridors, stairs, lavatories, elevators, Parking Areas, and other public areas
of the Building, and (ii) to construct additional improvements on the Property
and make alterations thereof or additions thereto and build additional stories
on or in any such buildings adjoining the same; provided, however, that no such
change or alteration shall deprive the Tenant of access to the Premises, or
otherwise materially interfere with Tenant's use of the Premises.
6.5.5. Use of Common Areas.
(a) The Landlord shall at all times have
full and exclusive control, management and direction of the Common Areas.
Without limiting the generality of the foregoing, the Landlord shall maintain
and operate lighting facilities on all of the Common Areas.
(b) The Tenant shall use that area
designated by the Landlord as the refuse collection area, and shall not place or
maintain anywhere within the Property, other than within the area which may be
designated by Landlord from time to time as such refuse collection area, any
trash, garbage or other items, except as may otherwise be expressly permitted by
this Lease.
(c) In its use of the Common Areas, the
Tenant shall take reasonable efforts to prevent its agents, employees, invitees,
visitors and guests from taking any of the following actions:
(i) the parking or storage of automobiles, or
other automotive vehicles anywhere within the Property
if such vehicles lack current, valid license plates, or
other than in the Parking Areas (and the individual
parking spaces from time to time designated therein), or
anywhere within the Property if the body, windows or
other exterior portions of such vehicles are in an
obvious state of damage or disrepair;
(ii) the performance of any body work,
maintenance or other repairs to vehicles, or the
painting of any vehicle, anywhere within the Premises or
the rest of the Property; or
(iii) the parking or storage of any trucks or
vans weighing over three-quarters (3/4) of one ton,
except for purposes of temporary loading and unloading
and occasional overnight parking.
6.6. Liability of Landlord. The Landlord and its agents and
employees shall not be liable to the Tenant or any other person whatsoever (a)
for any injury to person or damage to property caused by any defect in or
failure of equipment, pipes, wiring or broken glass, or the backing up of any
drains, or by gas, water, steam, electricity or oil leaking, escaping or flowing
into the Premises, or (b) for any loss or damage that may be occasioned by or
through the acts or omissions of any other tenant of the Property or of any
other person whatsoever, other than for any injury or loss resulting from the
gross negligence or intentional wrongdoing of the Landlord's duly authorized
employees or agents.
6.7. Floor Load. The Tenant shall not place a load upon any
floor of the Premises exceeding the floor load per square foot area which such
floor was designed to carry. The Landlord reserves the right to prescribe the
weight and position of all safes and other heavy equipment, and to prescribe the
reinforcing necessary, if any, which in the opinion of the Landlord may be
required under the circumstances, such reinforcing to be at the Tenant's sole
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expense. Business machines and mechanical equipment shall be placed and
maintained by the Tenant in settings sufficient in the Landlord's judgment to
absorb and prevent vibration and noise, and the Tenant shall, at its sole
expense, take such steps as the Landlord may direct to remedy any such
condition.
6.8. Hazardous Materials. The Tenant warrants and agrees that
the Tenant shall not cause or permit any Hazardous Materials to be brought upon,
kept or used in or about the Premises by the Tenant, its agents, employees,
contractors or invitees. If the Tenant breaches the obligations stated in the
preceding sentence, then the Tenant shall indemnify, defend and hold the
Landlord harmless from and against any and all claims, judgments, damages,
penalties, fines, costs, liabilities or losses (including, without limitation,
diminution in value of the Premises, the Building and the Property generally,
damages for the loss or restriction on use of rentable or usable space or of any
amenity of the Building or the Property generally, damages from any adverse
impact on marketing of space in the Building, and sums paid in settlement of
claims, attorneys' fees, consultant fees and expert fees) which arise during or
after the Term as a result of such contamination. This indemnification of the
Landlord by the 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 governmental authority because of
Hazardous Material present in the soil or ground water or under the Premises or
the Property generally. As used herein (i) "Environmental Laws" means the Clean
Air Act, the Resource Conservation Recovery Act of 1976, the Hazardous Material
Transportation Act, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the Resource Conservation and Recovery Act, the Toxic
Substances Control Act, the Occupational Safety and Health Act, the Consumer
Product Safety Act, the Clean Water Act, the Federal Water Pollution Control
Act, the National Environmental Policy Act, Md. Nat. Res. Code Ann., Title 8,
and Md. Env. Code Ann., Title 7, as each of the foregoing shall be amended from
time to time, and any similar or successor laws, federal, state or local, or any
rules or regulations promulgated thereunder; and (ii) "Hazardous Materials"
means and includes asbestos; "oil, petroleum products and their by-products;"
"hazardous substances;" "hazardous wastes" or "toxic substances," as those terms
are used in Environmental Laws; or any substances or materials listed as
hazardous or toxic in the United States Department of Transportation, or by the
Environmental Protection Agency or any successor agency under any Environmental
Laws. The Landlord represents and warrants that to its knowledge no Hazardous
Materials are located on the Property or effect the Premises and that the
Property is not now in violation of any Environmental Laws. Landlord shall
defend, indemnify and save Tenant harmless from any claims, fines, penalties,
liabilities, losses, damages, costs and expenses (including reasonable
attorney's fees, and other costs of defense) which arise from the violation of
any Environmental Laws or any leak, spill, release, discharge, disposal or
emission of Hazardous materials that has occurred on the Premises or the
Property prior to the Commencement Date, or caused subsequent thereto by the
Landlord, its agents, employees or invitees, that does not result from Tenant's
breach of its obligations under this Section 6.8.
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7. INSURANCE AND INDEMNIFICATION.
7.1. Insurance. At all times from and after the earlier of (i)
the entry by the Tenant into the Premises, and (ii) the Rent Commencement Date,
the Tenant shall take out and keep in full force and effect, at its expense:
(a) commercial general liability insurance,
including Blanket Contractual Liability, Broad Form Property Damage, Completed
Operations/Products Liability, Personal Injury Liability, Premises Medical
Payments, Interest of Employees as additional insureds, Incidental Medical
Malpractice and Broad Form General Liability Endorsement, with a combined single
limit of not less than One Million Dollars ($1,000,000) per occurrence and Two
Million Dollars ($2,000,000) in the aggregate;
(b) special form property insurance (including but
not limited to burglary and theft insurance and plate glass insurance) written
at full replacement cost value and with replacement cost endorsement in an
amount not less than One Million Dollars ($1,000,000.00) covering all of
Tenant's property, including, without limitation, inventory, trade fixtures,
floor coverings, furniture, electronic data processing equipment and any other
property removable by Tenant under the provisions of this Lease, except for
improvements which are part of the Landlord's Work;
(c) worker's compensation or similar insurance in
form and amounts required by law; and
(d) such other insurance in such types and amounts
as Landlord may reasonably require.
7.2. Tenant's Contractor's Insurance. The Tenant shall require
any contractor of the Tenant performing physical facilities-related work in, on
or about the Premises on behalf of Tenant to take out and keep in full force and
effect, at no expense to the Landlord:
(a) commercial general liability insurance, including
Contractor's Liability coverage, Blanket Contractual Liability coverage, Broad
Form Property Damage Endorsement, Contractor's Protective Liability, Completed
Operations/Products Liability (Completed Operations/Products Liability coverage
to be provided for at least two (2) years after final completion of work),
Personal Injury, Premises Medical Payments, Interest of Employees as additional
insureds, Incidental Medical Malpractice and Broad Form General Liability
Endorsement, in an amount not less than One Million Dollars ($1,000,000)
combined single limit per occurrence and Two Million Dollars ($2,000,000) in the
aggregate;
(b) comprehensive automobile liability insurance,
with a combined single limit of not less than One Million Dollars ($1,000,000)
covering all owned, non-owned or hired automobiles to be used by the contractor;
(c) worker's compensation or similar insurance in form and amounts required by
law; and
(d) employers liability coverage, including All
States Endorsement, in an amount not less than One Million Dollars ($1,000,000).
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7.3. Policy Requirements.
7.3.1. The company or companies writing any insurance
which the Tenant is required to take out and maintain or cause to be taken out
or maintained pursuant to subsections 7.1 and/or 7.2, shall be licensed to do
business in the State of Maryland and have a rating of at least A or better and
a financial size rating of XII or larger from Best's Key Rating Guide and
Supplemental Service (or comparable rating from a comparable insurance rating
service). Public liability and all-risk casualty insurance policies evidencing
such insurance shall name the Landlord, and their designees (including, without
limitation, any Mortgagee) as additional insureds, shall be primary and
noncontributory, and shall also contain a provision by which the insurer agrees
that such policy shall not be cancelled, materially changed, terminated or not
renewed except after thirty (30) days' advance written notice to the Landlord
and/or such designees. All such policies, or certificates thereof, shall be
deposited with the Landlord promptly upon commencement of the Tenant's
obligation to procure the same. None of the insurance which the Tenant is
required to carry and maintain or cause to be carried or maintained pursuant to
subsections 7.1 and/or 7.2 shall contain deductible provisions in excess of Two
Thousand Five Hundred Dollars ($2,500), unless approved in writing in advance by
the Landlord. If the Tenant fails to perform any of its obligations pursuant to
this section 7, the Landlord may perform the same and the cost thereof shall be
payable by the Tenant as Additional Rent upon the Landlord's demand therefor.
7.3.2. The Landlord and the Tenant agree that on January
1 of the second (2nd) full calendar year during the Term and on January 1 of
every second (2nd) calendar year thereafter, the Landlord will have the right to
request commercially reasonable changes in the character and/or amounts of
insurance required to be carried by the Tenant pursuant to the provisions of
this section 7, and the Tenant shall comply with any requested change in
character and/or amount within thirty (30) days after the Landlord's request
therefor.
7.4. Indemnities by Tenant and Landlord.
7.4.1. Subject to the provisions of Sections 7.4.3 and
7.8, the Tenant, for itself and its successors and assigns, to the extent
permitted by law, shall defend, indemnify and hold harmless the Landlord, the
Landlord's agents, representatives and employees, and any Mortgagee against and
from any and all liability or claims of liability by any person asserted against
or incurred by the Landlord and/or such agent or Mortgagee in connection with
(i) the use, occupancy, conduct, operation or management of the Premises by the
Tenant or any of its agents, contractors, servants, employees, licensees,
concessionaires, suppliers, materialmen or invitees during the Term; (ii) any
work or thing whatsoever done or not done on the Premises during the Term; (iii)
any breach or default in performing any of the obligations under the provisions
of this Lease and/or applicable law by the Tenant or any of its agents,
contractors, servants, employees, licensees, suppliers, materialmen or invitees
during the Term; (iv) any negligent, intentionally tortuous or other act or
omission by the Tenant or any of its agents, contractors, servants, employees,
licensees, concessionaires, suppliers, materialmen or invitees during the Term;
or (v) any injury to or death of any person or any damage to any property
occurring upon the Premises (whether or not such event results from a condition
existing before the execution of this Lease or resulting in the termination of
this Lease), and from and against all costs, expenses and liabilities incurred
in connection with any claim, action, demand, suit at law, in equity or before
any administrative tribunal, arising in whole or in part by reason of any of the
foregoing (including, by way of example rather than of limitation, the fees of
attorneys, investigators and experts), all regardless of whether such claim,
action or proceeding is asserted before or after the expiration of the Term or
any earlier termination of this Lease.
7.4.2. If any such claim, action or proceeding is
brought against the Landlord and/or any agent or Mortgagee, the Tenant, if
requested by the Landlord or such agent or Mortgagee, and at the Tenant's
expense, promptly shall resist or defend such claim, action or proceeding or
cause it to be resisted or defended by
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an insurer. The Landlord, at its option, shall be entitled to participate in the
selection of counsel, settlement and all other matters pertaining to such claim,
action or proceeding, all of which shall be subject, in any case, to the prior
written approval of the Landlord.
7.4.3. Subject to the provisions of subsection 7.8, the
Landlord hereby agrees for itself and its successors and assigns to indemnify
and save the Tenant, its agents, representatives and employee, harmless from and
against any liability or claims of liability arising solely out of the gross
negligence or intentional acts and omissions of the Landlord, its agents or
employees.
7.5. Landlord Not Responsible for Acts of Others. The Landlord
shall not be responsible or liable to the Tenant, or to those claiming by,
through or under the Tenant, for any loss or damage which may be occasioned by
or through the acts or omissions of persons occupying or using space adjoining
the Premises or any part of the premises adjacent to or connecting with the
Premises or any other part of the Building or the Property, or for any loss or
damage resulting to the Tenant (or those claiming by, through or under the
Tenant) or its or their property, from (a) the breaking, bursting, stoppage or
leaking of electrical cable and/or wires, or water, gas, sewer or steam pipes,
(b) falling plaster, or (c) dampness, water, rain or snow in any part of the
Building. To the maximum extent permitted by law, the Tenant agrees to use and
occupy the Premises, and to use such other portions of the Property as the
Tenant is herein given the right to use, at the Tenant's own risk.
7.6. Landlord's Insurance. During the Term, the Landlord shall
maintain: (a) all risk insurance on the Property at full replacement cost
against loss or damage by fire and all of the hazards included in the extended
coverage endorsement, (b) commercially reasonable amounts of comprehensive
liability and property damage insurance with respect to the Property and all
improvement other than those required to be insured by Tenant or other tenants,
against claims for personal injury or death, or property damage suffered by
others occurring in, on or about the Property, and (c) any other insurance, in
such form and in such amounts as are deemed reasonable by the Landlord,
including, without limitation, rent continuation and business interruption
insurance, theft insurance and workers' compensation, flood and earthquake, and
boiler and machinery insurance. The costs and expenses of any and all insurance
carried by the Landlord pursuant to the provisions of this subsection 6.6 shall
be deemed a part of Operating Costs.
7.7. Increase in Insurance Premiums. The Tenant shall not do or
suffer to be done, or keep or suffer to be kept, anything in, upon or about the
Premises, the Building or the Property which will contravene the Landlord's
policies of hazard or liability insurance or which will prevent the Landlord
from procuring such policies from companies acceptable to the Landlord. If
anything done, omitted to be done, or suffered by the Tenant to be kept in, upon
or about the Premises, the Building or the Property shall cause the rate of fire
or other insurance on the Premises, the Building or the Property to be increased
beyond the minimum rate from time to time applicable to the Premises or to any
such other property for the use or uses made thereof, the Tenant shall either:
(a) cease or modify such activity so as to eliminate such increase in insurance
rate; or (b) pay to the Landlord, as Additional Rent, the amount of any such
increase upon the Landlord's demand therefor.
7.8. Waiver of Right of Recovery. To the extent that any loss or
damage to the Premises, the Building the Property, any building, structure or
other tangible property, or resulting loss of income, or losses under workers'
compensation laws and benefits, are covered by insurance, neither party shall be
liable to the other party or to any insurance company insuring the other party
(by way of subrogation or otherwise), even though such loss or damage might have
been occasioned by the negligence of such party, its agents or employees;
provided, however, that if, by reason of the foregoing waiver, either party
shall be unable to obtain any such insurance, then such waiver shall be deemed
not to have been made by such party. Notwithstanding the
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foregoing, in the event that such waiver of subrogation shall not be available
to either party except through the payment of additional premium therefor, the
other party shall pay such additional premium.
8. SERVICES AND UTILITIES. As long as an Event of Default shall not
exist, the Landlord shall provide the following services and utilities:
(a) nightly janitorial services Monday through Friday in and
about the Premises, which shall include normal cleaning and upkeep services,
normal removal of trash and rubbish, and vacuuming of carpeting;
(b) electric current for lighting and the operation of HVAC and
office equipment;
(c) two (2) elevators to be used in common with other tenants
and available on call twenty-four hours a day, seven days a week, provided that
such service may be reduced to one (1) elevator during periods of repairs,
construction or tenant move-in.
(d) restroom facilities and necessary lavatory supplies,
including hot and cold running water at the points of supply, as provided for
general use of all tenants in the Building; and
(e) the provision and installation of replacement tubes for all
Building Standard light fixtures.
As use herein, "normal business hours" shall be deemed to mean
the periods from 8:00 a.m. until 6:00 p.m. on business days (Monday through
Friday except legal holidays) and from 8:00 a.m. until 1:00 p.m. on Saturdays.
The Landlord reserves the right to reduce or discontinue, upon
five (5) days' prior written notice to the Tenant, any such services and
utilities at any time after the occurrence of an Event of Default. The Landlord
shall not be liable for any damages resulting from or arising out of any such
termination or interruption, and the same shall not constitute a termination of
this Lease or an eviction of the Tenant. Any failure by the Landlord to furnish
any of the foregoing services or utilities, resulting from circumstances beyond
the Landlord's reasonable control or from interruption of such services due to
repairs or maintenance, shall not render the Landlord liable in any respect for
damages to either person or property, nor be construed as an eviction of the
Tenant, nor cause an abatement of rent hereunder, nor relieve the Tenant from
any of its obligations hereunder. Notwithstanding the foregoing, in the event of
an interruption in utilities or services for a period greater than seven (7)
consecutive days, that renders any portion of the Premises unusable for the
normal conduct of Tenant's business, then all Base Rent and Additional Rent
payable hereunder with respect to such portion of the Premises which is unusable
shall thereafter be abated retroactively to the first day of interruption (but
only to the extent such business interruption is not otherwise covered by
insurance carried by Tenant), and such abatement shall continue until full use
of such portion of the Premises is restored to Tenant. Landlord shall endeavor
in good faith to promptly commence and diligently pursue to completion any work
reasonably necessary to restore the utility or service so interrupted. If any
public utility or governmental body shall require the Landlord or the Tenant to
restrict the consumption of any utility or reduce any service for the Premises
or the Building, the Landlord and the Tenant shall comply with such
requirements, whether or not the services and utilities referred to in this
section 8 are thereby reduced or otherwise affected, without any liability on
the part of the Landlord to the Tenant or any other person or any reduction or
adjustment in rent payable hereunder. The Landlord and its agents shall be
permitted reasonable access to the Premises for the purpose of installing and
servicing systems within the Premises deemed necessary by the Landlord to
provide the services and utilities referred to in this section 8 to the Tenant
and other tenants in the Building.
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With respect to the electrical service for normal business usage
supplied to the Premises pursuant to subsection (b) of this Section 8, the
Tenant's use of electrical service furnished by the Landlord will be subject to
the following limitations:
(i) Design Load. The Tenant's lighting will not have a
design load greater than an average of two (2) watts per
square foot and four (4) watts per square foot
electrical power. Collectively, the Tenant's equipment
and lighting will not have an electrical design load
greater than the lesser of actual current Building
capacity, or an average of six (6) watts per square
foot. If the Building's electrical service does not
currently have sufficient capacity to permit Tenant to
draw an average of six (6) watts per square foot, then
the parties shall implement a mutually acceptable course
of action to increase Building capacity.
(ii) Primary Consumption. The Base Rent set forth in Section
4.1 hereof includes an allowance of One and 75/100ths
Dollars ($1.75) per square foot of the Premises for
electrical service (the "Electrical Expense Stop") for
HVAC, lighting and electrical power for the Premises and
such of the Common Areas as are located on the second
floor of the building (collectively, the "Electrical
Service Area"). In connection with the construction of
the Landlord's Work and Space Improvements, Landlord and
Tenant shall undertake the installation of a submeter to
measure all electrical service for the Electrical
Service Area. The cost of such installation shall be
allocated as follows: (a) Landlord shall pay the first
Seven Hundred Fifty Dollars ($750.00); (b) Tenant shall
pay, or reimburse Landlord for the next Seven Hundred
Fifty Dollars (($750.00); and (c) the parties shall each
pay (or reimburse Landlord) one-half of any amount in
excess of (b). If the cost of the electrical service
supplied to the Electrical Service Area during any
calendar quarter, prorated for partial calendar
quarters, exceeds $.4375 per square foot, then Tenant
shall reimburse the Landlord for the cost of such excess
service. Notwithstanding the foregoing, Tenant shall not
be required to pay any such excess costs for any
calendar quarter if the excess costs for such quarter,
together with the electrical service costs for prior
quarters, are less than the product of $.4375 times the
number of calendar quarters that have expired in the
current year. By way of example, but not of limitation,
if the cost of electrical service for the first quarter
of the Lease year is $.40 per square foot and the cost
of electrical service for the second quarter is $.4750,
then the Tenant shall not be required to pay the
difference between $.4375 and $.4750 for excess
electrical service costs for said second calendar
quarter. The Landlord will bill the Tenant no more
frequently than quarterly for such excess service and
the Tenant will pay each such invoice within thirty (30)
days following the Tenant's receipt thereof. The Tenant
will have the right for a period of thirty (30) days
following receipt of a statement for such services to
inspect at reasonable times and places the Landlord's
records forming the basis for such statements. Within
sixty (60) days after the end of each calendar year
during the Term, the Landlord shall compute the annual
cost of electrical service for the Electrical Service
Area for the preceding calendar year, prorated for any
partial calendar year, and shall submit to Tenant a
statement certified as accurate by Landlord setting
forth such cost and the amount of quarterly payments
made by the Tenant during the preceding calendar year
(the "Electrical Expense Statement"). If the cost of
electrical service stated in the Electrical Expense
Statement is less than the electrical Expense Stop
(prorated for any partial calendar year), then no
adjustment shall
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be made unless during the preceding calendar year the
Tenant had made a quarterly payment for excess service
pursuant to the foregoing provisions of this subsection;
in which event the amount of such prior payment shall be
credited to the Tenant's next accruing quarterly payment
(or payments) for excess electrical service. If the cost
of electrical service stated in the Electrical Expense
Statement is greater than the Electrical Expense Stop
(prorated for any partial calendar year), then the
amount of all quarterly payments made by the Tenant
during the preceding calendar year shall be subtracted
from such excess and the balance remaining due to
Landlord, if any, shall be paid by Tenant with its next
payment of Base Rent. If, however, the total amount of
quarterly payments made by Tenant during the preceding
calendar year are greater than the difference between
the actual cost of electrical service and the Electrical
Expense Stop, then the amount by which Tenant's
quarterly payments exceed such difference shall be
credited to the Tenant's next accruing quarterly payment
(or payments) for excess electrical service.
(iii) Excess Consumption. If the Tenant's consumption of
electrical service exceeds the design loads prescribed
by subparagraph (i) above, the Tenant will remove such
equipment and/or design lighting to achieve such
compliance within ten (10) days after receiving a
request do so from the Landlord. Alternatively, such
equipment and/or lighting may remain in the Premises,
subject to the following: (a) the Tenant will pay to the
Landlord as Additional Rent, within thirty (30) days
after the Landlord's delivery of an invoice therefor,
all reasonable costs of installation and maintenance of
wiring, air conditioning and other items required by the
Landlord, in the Landlord's reasonable discretion, to
accommodate the Tenant's excess design loads and
capacities; (b) the Tenant will pay to the Landlord as
Additional Rent, within thirty (30) days after the
delivery of an invoice therefor, the cost of a
professional engineer's services and survey to determine
the excess demand and consumption of electrical service;
(c) the Tenant will pay to the Landlord as Additional
Rent, within thirty (30) days after the Landlord's
delivery of an invoice therefor, the cost of the excess
demand and consumption of electrical service at actual
rates assessed by the public utility serving the
Building, which reimbursement to the Landlord will be in
accordance with any applicable laws; and (d) not less
than thirty (30) days prior written notice delivered to
the Tenant, discontinue the availability of such
extraordinary electrical service, provided such
electrical service is available directly to the Tenant
from the public utility serving the Building. If the
Landlord gives any such notice, the Tenant will contract
directly with the public utility serving the Building to
supply such electrical service to the Premises.
9. REPAIRS AND MAINTENANCE.
9.1. Landlord's Duty to Maintain Structure. The Landlord shall
maintain or cause to be maintained in good operating condition: (a) the Building
(outside the Premises except to the extent otherwise provided in Section 9.2.1)
and Common Areas mechanical, electrical and plumbing systems; and (b) the
structure of the Building and shall be responsible for all structural repairs to
the exterior walls, load bearing elements, foundations, roofs, windows,
structural columns and structural floors with respect thereto, and the Landlord
shall make all required repairs thereto, provided, however, that if the
necessity for such repairs shall have arisen, in whole or in part, from the
negligence or willful acts or omissions of the Tenant, its agents,
concessionaires, officers, employees, licensees, invitees or contractors, or by
any unusual use of the Premises by the Tenant, then the Landlord may collect the
cost of such repairs, as Additional Rent, upon demand.
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9.2. Tenant's Duty to Maintain Premises.
9.2.1. Except as provided in subsection 9.1, the Tenant
shall keep and maintain the Premises and all fixtures, equipment, light
fixtures, doors (including, but not limited to, entrance doors to the Premises),
door hardware, carpeting, floor and wall tiles, window and door glass, security
systems, ventilation fans, window and door treatments (including, but not
limited to, blinds, shades, screens and curtains), plumbing fixtures and drains,
ceiling tiles and grids, counters, shelving, light switches, base cove and
moldings, locks, kitchen equipment and appliances (including, but not limited
to, tissue dispensers, handrails, mirrors, cabinets, disposals, dishwashers,
sinks, faucets, drinking fountains and water purifiers) located therein in a
good, safe, clean and sanitary condition, ordinary wear and tear excepted, and
in compliance with all legal requirements with respect thereto. Except as
provided in subsection 9.1, all injury, breakage and damage to the Premises (and
to any other part of the Building and/or the Property, if caused by any act or
omission of the Tenant, its agents, concessionaires, officers, employees,
licensees, invitees or contractors) shall be repaired or replaced by the Tenant
at its expense (to the extent not covered by Landlord's insurance). Except for
Building systems serving all or other tenants, the Tenant shall keep and
maintain all pipes and conduits and all mechanical, electrical and plumbing
systems installed or contained within the Premises which serve the Premises in
good, safe, clean and sanitary condition and shall make all required repairs
thereto; provided, however, that the Landlord shall maintain and repair the HVAC
system which exclusively serves the Premises and the bathrooms and transformers
located on the second floor of the Building. In the event the Landlord agrees,
upon request by the Tenant, to repair or maintain any of the items listed in
this subsection 9.2.1, the Tenant shall pay all costs and expenses in connection
with the Landlord's repair or maintenance services, including, but not limited
to, wages, materials and mileage reimbursement. Tenant shall have the option of
making said repairs with: (1) its own employees; (2) a service or repair
organization acceptable to the Landlord or Landlord's management agent; or (3)
Landlord's in house or contract management staff. Tenant will promptly reimburse
Landlord for costs Landlord incurred, plus 5%, in making or arranging for the
making of the repair.
9.2.2. The Tenant shall keep the Premises in a neat,
clean and orderly appearance to a standard of cleanliness and hygiene reasonably
satisfactory to the Landlord. The Tenant also shall maintain the Premises free
of all pests. The Tenant shall surrender the Premises at the expiration of the
Term or at such other time as the Tenant may vacate the Premises in as good
condition as when received, except for (i) ordinary wear and tear, (ii) damage
by casualty (other than such damage by casualty which is caused, in whole or in
part, by the negligence or willful act or omissions of the Tenant, its agents,
officers, employees, licensees, invitees or contractors and which is not wholly
covered by the Landlord's hazard insurance policy), or (iii) acts of God.
10. IMPROVEMENTS.
10.1. By Landlord. The Landlord shall make the improvements to
the Premises which are set forth in the plans and specifications listed in
Exhibit B (the " Landlord's Work"). The Landlord shall also make the
improvements to the Premises (the "Space Improvements") which are to be set
forth on plans and specifications to be submitted by the Tenant to the Landlord
for its approval (the "Tenant's Plans and Specifications"). The Tenant shall
submit the Tenant's Plans and Specifications to the Landlord on or before
February 27, 1998, and within five (5) days after receipt of the Tenants Plans
and Specifications the Landlord shall provide to the Tenant any comments the
Landlord may have to the Tenant's Plans and Specifications. Within five (5) days
after the receipt of the Landlord's comments, the Tenant shall cause the
Tenant's Plans and Specifications to be: (a) revised to incorporate the
Landlord's comments; and (b) submitted to Baltimore County for its approval. The
Landlord and the Tenant shall work cooperatively to cause the Tenant's Plans and
Specifications to be approved as promptly as possible. The Landlord shall not
unreasonably withhold its approval of the Tenant's Plans and Specifications. The
Landlord shall pay for the cost of such Space
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Improvements up to Seventeen and 50/100ths Dollars ($17.50) per rentable square
foot of the Premises; provided, that Landlord shall not be required to pay more
than $1.50 of said $17.50 for electrical, computer and telephone wiring of
modular furniture. In the event the cost of the Space Improvements, together
with the design fees and the cost of the construction drawings in connection
therewith, exceeds $17.50 per square foot, the Tenant shall pay to the Landlord
the amount incurred by the Landlord in excess thereof, which excess amount shall
be paid by the Tenant to the Landlord within fifteen (15) days after the
Landlord notifies the Tenant of such excess cost and supplies the Tenant with
appropriate documentation showing excess cost.
10.1.1 Construction Agreement. On or before March 20,
1998, the Landlord and the Tenant will select a contractor (the "General
Contractor") for the construction of the Space Improvements and the Landlord
will prepare and submit to the contractor a construction agreement acceptable to
Landlord and Tenant (the "Construction Agreement"). To select the General
Contractor the Landlord and the Tenant will each provide to the other a list of
no more than two (2) potential contractors to the other party on or before
February 20, 1998. On or before March 9, 1998, the Landlord and the Tenant will
then extend an invitation to bid on the construction of the Space Improvements
to no fewer than three (3) of the potential contractors which will be jointly
selected by the Landlord and the Tenant from the parties' combined list of
potential contractors. Firm bids from the three contractors selected shall be
due on or before March 16, 1998. Within four (4) business days after the bids
are received, the Landlord and the Tenant will examine the bids and jointly
select the bid which will most accurately achieve the purposes and interests of
both the Landlord and the Tenant, even if such bid is not the lowest bid.
10.1.2 Construction. The Construction Agreement shall
provide for the commencement of construction on or before April 1, 1998. If the
commencement of construction of the Space Improvements has not occurred by May
1st, then the Tenant shall have the right for a period commencing on May 1st and
ending at midnight on May 6th, to terminate this Lease on written notice to the
Landlord delivered to Landlord by midnight on May 6th, and in such event this
Lease shall be null and void and neither party shall have any further obligation
hereunder except as hereinafter set forth in this Section 10.1.2.
Notwithstanding the foregoing, if the failure to commence construction by May 1,
1998: (a) results from the Tenant's failure to comply with the schedule set
forth in Section 10.1.1 above; or (b) is otherwise attributable to the actions
or omissions of the Tenants, including, without limitation, the issuance of
change orders by Tenant; then said May 1st and May 6th dates shall be extended
by one day for each day of delay in the commencement of construction beyond May
1st resulting therefrom. In order to expedite construction of the Space
Improvements, the Tenant may by written notice delivered to the Landlord on or
before March 1, 1998, authorize and direct the Landlord to proceed with the
demolition of all or a portion of the improvements located in the Premises on
the Effective Date with such forces as the Landlord may elect, in its sole
discretion. If Tenant so authorizes and directs the Landlord to proceed with
demolition and thereafter terminates this Lease pursuant to the foregoing
provisions of this Section 10.1.2, then within two (2) business days after such
termination Tenant shall pay Landlord all costs and expenses of demolition
incurred by the Landlord up to, but not exceeding, Fifty Thousand Dollars
($50,000.00). Tenant's payment shall be a condition subsequent to the
effectiveness of Tenant's termination of this Lease. Notwithstanding anything
contained in this Lease to the contrary, substantial completion of the Space
Improvements shall not be contingent on the delivery or installation or any of
Tenant's modular furniture, or other fixtures or equipment; and any delay in
achieving substantial completion which results from or arises out of such
failure of delivery or installation shall be attributable to the Tenant for
purposes of Section 3.1 hereof.
10.1.3 Change Orders; Inspection. Any change orders for
construction of Space Improvements, work in addition to the work shown in the
Tenant's Plans and Specifications, deletion of work shown in the Tenant's Plans
and Specifications, the use of any construction materials for construction of
Space Improvements other than as provided in the Tenant's Plans and
Specifications will be subject to the prior written
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approval of the Landlord and the Tenant. Any change order must be presented to
the other party in writing. Such approval by each of the parties will not be
unreasonably withheld or delayed.
10.1.4 Asbestos. If asbestos is uncovered during the
construction of the Space Improvements, then the Landlord shall remediate the
same in compliance with applicable laws at Landlord's sole expense; and the cost
of such remediation shall not be charged against the amount paid by Landlord for
Space Improvements pursuant to Section 10.1 hereof.
10.2. Landlord Approval. The Tenant shall not make any
alteration, improvement or addition (collectively "Alterations") to the Premises
without first (a) presenting to the Landlord plans and specifications therefor
and obtaining the Landlord's written consent thereto (which shall not, in the
case of (i) non-structural interior Alterations (excluding systems furniture
alteration and non-structural alterations less than $7,500 in each instance), or
(ii) Alterations which would not affect any electrical, mechanical, plumbing or
other Building systems, be unreasonably withheld so long as such Alterations
will not violate applicable law or the provisions of this Lease, or impair the
value of the Premises, the Building or the rest of the Property or be visible
from the exterior of the Building) and (b) obtaining any and all governmental
permits or approvals for such Alterations, which are required by applicable law;
provided, that (i) any and all contractors or workmen performing such
Alterations must first be approved by the Landlord, (ii) all work is performed
in a good and workmanlike manner in compliance with all applicable codes, rules,
regulations and ordinances, and (iii) the Tenant shall restore the Premises to
its condition immediately before such Alterations were made, by not later than
the date on which the Tenant vacates the Premises or the Termination Date,
whichever is earlier. The Tenant, at its own expense, shall repair promptly any
damage to the Building caused by bringing therein any property for its use, or
by the installation or removal of such property, regardless of fault or by whom
such damage is caused. As a condition for approving any Alterations on the
Premises by the Tenant, the Landlord shall have the right to require the Tenant,
or the Tenant's contractor, to furnish a bond in an amount equal to the
estimated cost of construction with a corporate surety approved by the Landlord
for (i) completion of the construction and (ii) indemnification of the Landlord
and the Tenant, as their interests may appear, against liens for labor and
materials, which bond shall be furnished before any work has begun or any
materials are delivered.
10.3. Acceptance of Possession. The Tenant shall for all
purposes of this Lease be deemed to have accepted the Premises and the Building
and to have acknowledged them to be in the condition called for hereunder except
with respect to those punch list items and defects of which the Tenant notifies
the Landlord within thirty (30) days after the Rent Commencement Date; and
except with respect to latent defects so long as Tenant notifies Landlord in
writing within thirty (30) days after discovering any such latent defects.
10.4. Fixtures. Any and all improvements, repairs, alterations
and all other property attached to, used in connection with or otherwise
installed within the Premises by the Landlord or the Tenant shall become the
Landlord's property without payment therefor by the Landlord, immediately on the
completion of their installation; provided that any machinery, equipment or
fixtures installed by the Tenant and used in the conduct of the Tenant's trade
or business (rather than to service the Premises, the Building or the Property
generally) and not part of the Building Service Equipment shall remain the
Tenant's property; but further provided that if any leasehold improvements made
by the Tenant replaced any part of the Premises, such leasehold improvements
that replaced any part of the Premises shall be and remain the Landlord's
property.
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11. LANDLORD'S RIGHT OF ENTRY. The Landlord and its authorized
representatives shall be entitled to enter the Premises without interference
with Tenant's business operation, at any reasonable time during the Tenant's
usual business hours, after giving the Tenant at least twenty-four (24) hours'
oral or written notice thereof, (a) to inspect the Premises, (b) to exhibit the
Premises (i) to any existing or prospective purchaser or Mortgagee thereof, or
(ii) during the last twelve (12) months of the Term (or at any time if Tenant is
in default after notice and applicable cure periods) to any prospective tenant
thereof, provided that in doing so the Landlord and each such invitee observes
all reasonable safety standards and procedures which the Tenant may require, and
(c) to make any repair thereto and/or to take any other action therein which the
Landlord is permitted to take by this Lease or applicable law (provided, that in
any situation in which, due to an emergency or otherwise, the Landlord
reasonably believes the physical condition of the Premises, the Building or any
part of the Property would be unreasonably jeopardized unless the Landlord were
to take such action immediately, the Landlord shall not be required to give such
notice to the Tenant and may enter the same at any time). Nothing in this
section shall be deemed to impose any duty on the Landlord to make any such
repair or take any such action which it is not otherwise obligated to make or
take under the terms of that Lease, and the Landlord's performance thereof shall
not constitute a waiver of the Landlord's right hereunder to have the Tenant
perform such work. The Landlord shall not in any event be liable to the Tenant
for any inconvenience, annoyance, disturbance, loss of business or other damage
sustained by the Tenant by reason of the making of such repairs, the taking of
such action or the bringing of materials, supplies and equipment upon the
Premises during the course thereof, and the Tenant's obligations under this
Lease shall not be affected thereby; provided, however, that if Tenant is unable
to use all of a substantial portion of the Premises for forty-five (45) days for
its business purposes, Tenant shall be deemed to be constructively evicted from
the Premises or the relevant portion thereof, and Tenant's obligation to pay
Base Rent shall be abated from the date all or such relevant portion of the
Premises becomes unusable until rendered usable again.
12. DAMAGE OR DESTRUCTION.
12.1. Option to Terminate. If during the Term either the
Premises or any portion of the Building or the Property are substantially
(meaning more than 20% of the floor area of either) damaged or destroyed by fire
or other casualty, the Landlord shall restore the Premises as soon thereafter as
is reasonably possible to their condition on the date of completion of the
Landlord's Work, taking into account any delay experienced by the Landlord in
recovering the proceeds of any insurance policy payable on account of such
damage or destruction and in obtaining any necessary permits. If, however,
Landlord determines that it can not complete such restoration within one-hundred
fifty (150) days after the occurrence of such casualty then either party shall
have the right to terminate this Lease upon written notice to the other party
delivered within forty-five (45) days after the date of determination that the
restoration cannot be completed within said 150-day period; and Tenant shall
vacate the Premises within thirty (30) days after the date of termination. If
this Lease is not terminated pursuant to this Section 12.1, then until such
restoration of the Premises are substantially complete, Tenant shall be required
to pay the Rent for only the portion of the Premises that is usable for Tenant's
business, unless such casualty was caused by an act or omission of Tenant.
Notwithstanding anything to the contrary herein, Landlord shall have the right
to terminate this Lease if (a) insurance proceeds are insufficient to pay the
full costs of such restoration or (b) zoning or other laws do not permit such
restoration.
12.2. No Termination of Lease. Except as is otherwise expressly
permitted by subsection 12.1, no total or partial damage to or destruction of
any or all of the Premises shall entitle either party hereto to surrender or
terminate this Lease, and the Tenant hereby waives any right now or hereafter
conferred upon it by statute or otherwise, on account of any such damage or
destruction, to surrender this Lease, to quit or surrender any or all of the
Premises; provided, however, that the Tenant shall be proportionately relieved,
as set forth in Section 12.1, from its liability hereunder to pay in full the
Base Rent, any Additional Rent and all other sums and
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charges which are otherwise payable by the Tenant hereunder; and Landlord shall
restore the Premises to the condition required by Section 12.1.
13. CONDEMNATION.
13.1. Termination of Lease. If ten percent (10%) or more of the
Premises and/or of that portion of the Property underlying the Premises is taken
by the exercise of any power of eminent domain or is conveyed to or at the
direction of any governmental entity under a threat of any such taking (each of
which is herein referred to as a "Condemnation"), this Lease shall terminate on
the date on which the title to so much of the Premises as is the subject of such
Condemnation vests in the condemning authority, unless the parties hereto
otherwise agree in writing. If all or any substantial portion of the Building or
the Property other than that portion thereof underlying the Premises is taken or
conveyed in a Condemnation, then either party shall be entitled, by giving
written notice thereof to the other party, to terminate this Lease on the date
on which the title to so much thereof as is the subject of such Condemnation
vests in the condemning authority. If this Lease is not terminated pursuant to
this subsection, the Landlord shall restore any of the Premises damaged by such
Condemnation substantially to its condition immediately before such
Condemnation, as soon after the Landlord's receipt of the proceeds of such
Condemnation as is reasonably possible under the circumstances.
13.2. Condemnation Proceeds. Regardless of whether this Lease is
terminated under this section, the Tenant shall have no right in any such
Condemnation to make any claim on account thereof against the condemning
authority, except that the Tenant may make a separate claim for the Tenant's
moving expenses and the value of the Tenant's trade fixtures, provided that such
claim does not reduce the sums otherwise payable by the condemning authority to
the Landlord. Except as aforesaid, the Tenant hereby (a) waives all claims which
it may have against the Landlord or such condemning authority by virtue of such
Condemnation, and (b) assigns to the Landlord all such claims (including but not
limited to all claims for leasehold damages or diminution in value of the
Tenant's leasehold interest hereunder).
13.3. Effect on Rent. If this Lease is terminated under this
Section, any Base Rent, any Additional Rent and all other sums and charges
required to paid by the Tenant hereunder shall be apportioned and paid to the
date of such termination. If this Lease is not so terminated in the event of a
Condemnation, then this Lease shall continue in full force and effect as to the
part of the Premises not condemned, and the Base Rent (and each installment
thereof) and the Additional Rent shall be abated from the date on which the
title to so much, if any, of the Premises as is the subject of such Condemnation
vests in the condemning authority, through the Termination Date, in proportion
to the floor area of such portion of the Premises as is the subject of such
Condemnation.
13.4. No Termination of Lease. Except as otherwise expressly
provided in this section, no total or partial Condemnation shall entitle either
party hereto to surrender or terminate this Lease, or shall relieve the Tenant
from its liability hereunder to pay in full the Base Rent, any Additional Rent
and all other sums and charges which are otherwise payable by the Tenant
hereunder, or from any of its other obligations hereunder, and the Tenant hereby
waives any right now or hereafter conferred upon it by statute or otherwise, on
account of any such Condemnation, to surrender this Lease, to quit or surrender
any or all of the Premises, or to receive any suspension, diminution, abatement
or reduction of the Base Rent or any Additional Rent or other sum payable by the
Tenant hereunder.
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14. ASSIGNMENT AND SUBLETTING.
14.1. Landlord's Consent Required. The Tenant shall not assign
this Lease, in whole or in part, nor sublet all or any part of the Premises, nor
license concessions or lease departments therein, nor otherwise permit any other
person to occupy or use any portion of the Premises, nor enter into a management
or other similar agreement transferring control of the business operations of
Tenant (collectively, a "Transfer"), without in each instance first obtaining
the written consent of the Landlord, which consent may be withheld. This
prohibition includes any subletting or assignment which would otherwise occur by
operation of law, merger, consolidation, reorganization, transfer or other
change of the Tenant's corporate or proprietary structure (including, without
limitation, the transfer of partnership interests, the creation of additional
partnership interests or the transfer of corporate shares or beneficial
interests), or an assignment or subletting to or by a receiver or trustee in any
federal or state bankruptcy, insolvency or other similar proceedings. Consent by
the Landlord to any assignment, subletting, licensing or other transfer shall
not (i) constitute a waiver of the requirement for such consent to any
subsequent assignment, subletting, licensing or other Transfer, (ii) relieve the
Tenant from its duties, responsibilities and obligations under this Lease, or
(iii) relieve any guarantor of this Lease from such guarantor's obligations
under its guaranty agreement. Notwithstanding anything to the contrary in
subsections 14.1 or 14.2, the Landlord shall not unreasonably withhold its
consent to a Transfer provided that (i) the tangible net worth (as determined in
accordance with generally accepted accounting principles and is evidenced by a
certified financial statement to be submitted to the Landlord) of the assignee
or sublessee is not less than the greater of the tangible net worth of the
Tenant (a) on the Effective Date and (b) on the day before such Transfer, (ii)
such assignee or sublessee continues to operate the business in the Premises in
accordance with the permitted use and pursuant to all of the terms and
provisions of this Lease, (iii) the Tenant continues to remain liable for the
performance of all of the Tenant's obligations under this Lease, including the
payment of Rent, (iv) the Tenant is not in default (beyond applicable cure
periods, if any) of any of the terms or provisions of this Lease on the
effective date of such assignment or subletting, and (v) such assignment or
subletting will not result in an increase in demand for parking.
14.2. Permitted Transfers. Notwithstanding the provisions of
Paragraph 14.1 of this Lease to the contrary, the Landlord specifically consents
to a Transfer to: (a) any entity resulting from a merger or consolidation with
the Tenant; (b) any entity succeeding to all or substantially all of the
business and assets of the Tenant; or (c) any person, partnership, corporation,
joint venture or other business entity which directly or indirectly through one
or more intermediaries controls, is controlled by or is under common control
with the Tenant. In the event of an assignment or subletting pursuant to this
Paragraph 14.2, the Tenant will provide the following to the Landlord at least
ten (10) days prior to any such assignment or subletting: (a) the name of the
proposed assignee, sub-tenant or occupant; (b) the nature of the proposed
assignee's, sub-tenant's or occupant's business to be carried on in the
Premises; and (c) the terms and provisions of the proposed assignment or
sublease and a copy of such document.
14.3. Acceptance of Rent from Transferee. The acceptance by the
Landlord of the payment of Rent from any person following any act, assignment or
other Transfer prohibited by this section shall not constitute a consent to such
act, assignment or other Transfer, nor shall the same be deemed to be a waiver
of any right or remedy of the Landlord's hereunder.
14.4. Conditions of Consent.
14.4.1. If the Tenant receives consent to a Transfer
under subsection 14.1 above, then, in addition to any other terms and conditions
imposed by the Landlord in the giving of such consent, the Tenant and the
transferee shall execute and deliver, on demand, an agreement prepared by the
Landlord providing that the
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transferee shall be directly bound to the Landlord to perform all obligations of
the Tenant hereunder including, without limitation, the obligation to pay all
Rent and other amounts provided for herein; acknowledging and agreeing that
there shall be no subsequent Transfer of this Lease or of the Premises or of any
interest therein without the prior consent of the Landlord pursuant to
subsection 14.1 above; acknowledging that the Tenant as originally named herein
(and any guarantor) shall remain fully liable for all obligations of the tenant
hereunder, including the obligation to pay all Rent provided herein, jointly and
severally with the transferee.
14.4.2. All reasonable costs incurred by the Landlord in
connection with any request for consent to a Transfer, including costs of
investigation and the fees of the Landlord's counsel, shall be paid by the
Tenant on demand as a further condition of any consent which may be given.
14.5. Profits from Use or Transfer.
14.5.1. Neither the Tenant nor any other person having
an interest in the use, occupancy or other utilization of space in the Premises
shall enter into any lease, sublease, license, concession or other Transfer
which provides for rent or other payment for such use, occupancy or utilization
based in whole or in part on the net income or profits derived from the
Premises, and any such purported lease, sublease, license, concession or other
Transfer shall be absolutely void and ineffective as a conveyance or creation of
any right or interest in the possession, use, occupancy or utilization of any
part of the Premises.
14.5.2. The Tenant agrees that in the event of a
Transfer, the Tenant shall pay the Landlord, within ten (10) days after receipt
thereof, fifty percent (50%) of the net excess of: (i) any and all
consideration, money or thing of value, however characterized, received by the
Tenant or paid to the Tenant in connection with or arising out of such Transfer,
over (ii) all amounts otherwise paid by the Tenant to the Landlord pursuant to
this Lease (after deduction for costs of brokers and tenant improvements
incurred by Tenant in connection with any Transfers).
15. RULES AND REGULATIONS. The Landlord shall have the right to
prescribe, at its sole discretion, reasonable rules and regulations (the "Rules
and Regulations") having uniform applicability to all tenants of the Property
and governing their use and enjoyment of the Property; provided, that the Rules
and Regulations shall not materially interfere with the Tenant's use and
enjoyment of the Premises in accordance with this Lease for the purposes listed
in subsection 6.1. The Rules and Regulations may govern, without limitation, the
use of sound apparatus, noise or vibrations emanating from machinery or
equipment, obnoxious fumes and/or odors, the parking of vehicles, lighting and
storage and disposal of trash and garbage. The Tenant shall adhere to the Rules
and Regulations and shall cause its agents, employees, invitees, visitors and
guests to do so. A copy of the Rules and Regulations in effect on the date
hereof is attached hereto as Exhibit C. The Landlord shall have the right to
amend the Rules and Regulations from time to time.
16. SUBORDINATION AND ATTORNMENT.
16.1. Subordination.
16.1.1. Unless a Mortgagee otherwise shall elect as
provided in subsection 16.2, the Tenant's rights under this Lease are and shall
remain subject and subordinate to the operation and effect of any mortgage, deed
of trust or other security instrument constituting a lien upon the Premises,
and/or the Property, whether the same shall be in existence on the date hereof
or created hereafter (any such lease, mortgage, deed of trust or other security
instrument being referred to herein as a "Mortgage," and the party or parties
having the benefit of the same, whether as beneficiary, trustee or noteholder,
being referred to hereinafter collectively as
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"Mortgagee"). The Tenant's acknowledgment and agreement of subordination as
provided for in this section is self-operative and no further instrument of
subordination shall be required; however, the Tenant shall execute, within ten
(10) days after request therefor, a document providing for such further
assurance thereof and for such other matters as may be requested from time to
time by the Landlord or any Mortgagee, which matters may include, without
limitation, additional notice and cure periods for the Mortgagee and a
prohibition on lease amendments without the Mortgagee's prior written consent.
16.1.2. The Landlord hereby directs the Tenant, upon (i)
the occurrence of any event of default by the Landlord, as mortgagor under any
Mortgage, (ii) the receipt by the Tenant of a notice of the occurrence of such
event of default under such Mortgage from the Landlord or such Mortgagee, or
(iii) a direction by the Mortgagee under such Mortgage to the Tenant to pay all
Rent thereafter to such Mortgagee, to make such payment to such Mortgagee, and
the Landlord agrees that in the event that the Tenant makes such payments to
such Mortgagee, as aforesaid, the Tenant shall not be liable to the Landlord for
the same.
16.2. Mortgagee's Unilateral Subordination. If a Mortgagee shall
so elect by notice to the Tenant or by the recording of a unilateral declaration
of subordination, this Lease and the Tenant's rights hereunder shall be superior
and prior in right to the Mortgage of which such Mortgagee has the benefit, with
the same force and effect as if this Lease had been executed, delivered and
recorded prior to the execution, delivery and recording of such Mortgage,
subject, nevertheless, to such conditions as may be set forth in any such notice
or declaration.
16.3. Attornment. If any Person shall succeed to all or any part
of the Landlord's interest in the Premises, whether by purchase, foreclosure,
deed in lieu of foreclosure, power of sale, termination of lease or otherwise,
and if such successor-in-interest requests or requires, the Tenant shall attorn
to such successor-in-interest and shall execute within ten (10) days after
receipt thereof an agreement in confirmation of such attornment in a form as may
be reasonably requested by such successor-in-interest. Failure to respond within
such (10) day period shall be deemed to be a confirmation by the Tenant of the
facts and matters set forth therein.
16.4 Non-Disturbance Agreement. As a condition to Tenant's
agreement hereunder to subordinate Tenant's interest in this Lease to any
Mortgage made between Landlord and such Mortgagee, and to attorn to and
recognize any successor landlord, Landlord shall obtain from such Mortgagee and
delivered to Tenant an agreement, in recordable form, pursuant to which such
Mortgagee shall agree that if and so long as no Event of Default hereunder shall
have occurred and be continuing, the leasehold estate granted to Tenant and the
rights of Tenant pursuant to this Lease to quiet and peaceful possession of the
Premises shall not be terminate, modified, affected or disturbed by any action
which such Mortgagee may take to foreclose any such Mortgage, and that any
successor landlord shall recognize this Lease as being in full force and effect
as if it were between such successor landlord and Tenant upon all of the terms,
covenants, conditions and options granted to Tenant under this Lease. If
Landlord shall not have obtained such agreement from the Mortgagee within thirty
(30) days after either the Effective Date (for any current Mortgage), or the
date of recordation of any future Mortgage, then Tenant shall notify the
Landlord of such failure and Landlord shall proceed with due diligence to obtain
such agreement.
17. DEFAULTS AND REMEDIES.
17.1. "Event of Default" Defined. Any one or more of the
following events shall constitute a default under the terms of this Lease
("Event of Default"):
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(a) the failure of the Tenant to pay any Rent or other
sum of money due hereunder within ten (10) days after the same is due; provided,
however, that the first such failure to pay in any 12-month period shall not be
an Event of Default until the Landlord has given the Tenant five (5) days'
advance notice (which may be in the form of a late notice) of the same and the
Tenant fails to pay such Rent within such 5-day period;
(b) the sale of the Tenant's interest in the Premises
under attachment, execution or similar legal process without the Landlord's
prior written approval;
(c) the filing of a petition proposing the adjudication
of the Tenant as a bankrupt or insolvent, or the reorganization of the Tenant,
or an arrangement by the Tenant with its creditors, whether pursuant to the
Federal Bankruptcy Act or any similar federal or state proceeding, unless such
petition is filed by a party other than the Tenant and is withdrawn or dismissed
within sixty (60) days after the date of its filing;
(d) the admission in writing by the Tenant of its
inability to pay its debts when due;
(e) the appointment of a receiver or trustee for the
business or property of the Tenant, unless such appointment is vacated within
sixty (60) days of its entry;
(f) the making by the Tenant of an assignment for the
benefit of its creditors;
(g) the failure to provide the performance bond
described in Section 4.7.1 within the required fifteen (15) day period;
(h) a default by the Tenant in the performance or
observance of any covenant or agreement of this Lease to be performed or
observed by the Tenant (other than as set forth in clauses (a) through (g)
above), which default is not cured within thirty (30) days after the giving of
written notice thereof by the Landlord, unless such default is of such nature
that it cannot be cured within such 30-day period, in which event an Event of
Default shall not be deemed to have occurred if the Tenant institutes a cure
within the 30-day period and thereafter diligently and continuously prosecutes
the curing of the same until completion, but in no event shall such cure period
exceed one hundred twenty (120) days; provided, however, that if the Tenant
defaults in the performance in any material respect of any such covenant or
agreement more than two (2) times during the Term, then notwithstanding that
such defaults have each been cured by the Tenant, any further defaults shall be
deemed an Event of Default without the ability to cure; or
(i) the vacating or abandonment of the Premises by the
Tenant at any time during the Term, but in such event Landlord's sole remedy
shall be to terminate this Lease upon written notice to the Tenant.
17.2. Landlord's Remedies. Upon the occurrence of an Event of
Default, the Landlord, without notice to the Tenant in any instance (except
where expressly provided for below), may do any one or more of the following:
(a) perform, on behalf and at the expense of the Tenant,
any obligation of the Tenant under this Lease which the Tenant has failed to
perform beyond any applicable grace or cure periods and of which the Landlord
shall have given the Tenant notice (except in an emergency situation in which no
notice is required), the cost of which performance by the Landlord, together
with interest thereon at the Interest Rate from
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the date of such expenditure, shall be deemed Additional Rent and shall be
payable by the Tenant to the Landlord as otherwise set forth herein; (b) elect
to terminate this Lease and the tenancy created hereby by giving notice of such
election to the Tenant without any right on the part of the Tenant to save the
forfeiture by payment of any sum due or by other performance of condition, term,
agreement or covenant broken, or elect to terminate the Tenant's possessory
rights and all other rights of the Tenant without terminating this Lease, and in
either event, at any time thereafter without notice or demand and without any
liability whatsoever, re-enter the Premises by force, summary proceedings or
otherwise, and remove the Tenant and all other persons and property from the
Premises, and store such property in a public warehouse or elsewhere at the cost
and for the account of the Tenant without resort to legal process and without
the Landlord being deemed guilty of trespass or becoming liable for any loss or
damage occasioned thereby;
(c) accelerate the Rent and any other charges, whether
or not stated to be Additional Rent, for the entire balance of the Term, or any
part of such Rent, and any costs, whether chargeable to the Landlord or the
Tenant, as if by the terms of this Lease the balance of the Rent and other
charges and expenses were on that date payable in advance;
(d) cause an attorney for the Landlord to proceed in any
competent court for judgment in ejectment against the Tenant and all persons
claiming under the Tenant for the recovery by the Landlord of possession of the
Premises, and if for any reason after such action has been commenced it is
canceled or suspended and possession of the Premises remains in or is restored
to the Tenant, the Landlord shall have the right upon any subsequent default or
upon the expiration or termination of this Lease, or any renewal or extension
hereof, to bring one or more actions to recover possession of the Premises; and
(e) exercise any other legal and/or equitable right or
remedy which it may have at law or in equity, including rights of specific
performance and/or injunctive relief, where appropriate.
In any action for possession of the Premises or for monetary
damages, including Termination Damages and Liquidated Damages, or for the
recovery of Rent due for the balance of the Term, the Landlord may cause to be
filed in such action an affidavit setting forth the facts necessary to authorize
the entry of judgment. If a true copy of this Lease (and of the truth of the
copy, such affidavit shall be sufficient proof) must be filed in such action, it
shall not be necessary to file the original, notwithstanding any law, rule of
court, custom or practice to the contrary.
17.3. Damages.
(a) If this Lease is terminated by the Landlord pursuant to
subsection 17.2, the Tenant nevertheless shall remain liable for any Rent and
damages which may be due or sustained prior to such termination, as well as all
reasonable costs, fees and expenses, including, without limitation, sheriffs' or
other officers' commissions whether chargeable to the Landlord or the Tenant,
watchmen's wages, brokers' and attorneys' fees, and repair and renovation costs
incurred by the Landlord in pursuit of its remedies hereunder, and/or in
connection with any bankruptcy proceedings of the Tenant, and/or in connection
with renting the Premises to others from time to time (all such Rent, damages,
costs, fees and expenses being referred to herein as "Termination Damages"),
plus additional damages for all Rent treated as in arrears ("Liquidated
Damages"); provided, however, that Landlord shall use its good faith efforts to
relet all or any portion of the Premises in order to mitigate Tenant's damages.
At the election of the Landlord, Termination Damages shall be an amount equal to
either:
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(i) the Rent which, but for the termination of this
Lease, would have become due during the remainder of the Term, less the amount
or amounts of rent, if any, which the Landlord receives during such period from
others to whom the Premises may be rented (other than any additional rent
received by the Landlord as a result of any failure of such other person to
perform any of its obligations to the Landlord), in which case Termination
Damages shall be computed and payable in monthly installments, in advance, on
the first business day of each calendar month following the termination of this
Lease and shall continue until the date on which the Term would have expired but
for such termination, and any action or suit brought to collect any such
Termination Damages for any month shall not in any manner prejudice the right of
the Landlord to collect any Termination Damages for any subsequent months by
similar proceeding; or
(ii) the present worth (as of the date of such
termination) of the Rent which, but for the termination of this Lease, would
have become due during the remainder of the Term, less the fair rental value of
the Premises, as determined by an independent real estate appraiser or broker
selected by the Landlord, in which case such Termination Damages shall be
payable to the Landlord in one lump sum on demand, and shall bear interest at
the Interest Rate. "Present worth" shall be computed by discounting such amount
to present worth at a rate equal to one percentage point above the discount rate
then in effect at the Federal Reserve Bank of Richmond.
(b) Notwithstanding anything to the contrary set forth in this
subsection 17.3, in the event (i) the Landlord must initiate legal action to
enforce any one or more of the provisions of this Lease against the Tenant, its
successors or assigns, or (ii) the Landlord must consult with and/or engage an
attorney(s) in order (A) to enforce any one or more of the provisions of this
Lease against the Tenant, its successors or assigns, or (B) in connection with
any bankruptcy proceeding of the Tenant, whether or not such consultation and/or
engagement results in the initiation of any judicial action or termination of
this Lease, then and in any of such events, the Tenant, its successors and
assigns, undertakes and agrees to pay any and all reasonable costs incurred by
the Landlord in connection therewith, including, by way of illustration and not
of limitation, all reasonable attorneys' fees (inclusive of consultation fees,
research costs and correspondence fees), court costs (if awarded post- judgment)
and any similar professional fees or costs associated therewith.
17.4. Waiver of Jury Trial. Each party hereto hereby waives any
right which it may otherwise have at law or in equity to a trial by jury in
connection with any suit or proceeding at law or in equity brought by the other
against the waiving party or which otherwise relates to this lease, as a result
of an event of default or otherwise. The Tenant further agrees that in the event
the Landlord commences any summary proceeding for nonpayment of rent or
possession of the Premises, the Tenant will not, and hereby waives, all right to
interpose any counterclaim of whatever nature in any such proceeding.
18. ESTOPPEL CERTIFICATE. The Tenant shall, without charge, at any time
and from time to time, within ten (10) days after receipt of request therefor
from the Landlord, execute, acknowledge and deliver to the Landlord, and to such
Mortgagee or other party as may be designated by the Landlord, a written
estoppel certificate in form and substance as may be requested from time to time
by the Landlord, the other party or any Mortgagee, certifying to the other
party, any Mortgagee, any purchaser of Landlord's interest in all or any part of
the Property, or any other person or entity designated by the other party, as of
the date of such estoppel certificate, the following: (a) whether the Tenant is
in possession of the Property; (b) whether this Lease is in full force and
effect; (c) whether there are any amendments to this Lease, and if so,
specifying such amendments; (d) whether there are any then-existing setoffs or
defenses against the enforcement of any rights hereunder, and if so, specifying
such matters in detail; (e) the dates, if any, to which any rent or other sums
due hereunder have been paid in advance and the amount of any security deposit
held by the Landlord; (f) that the Tenant has no knowledge of any then-existing
defaults of the Landlord under this Lease, or if there are such defaults,
specifying
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them in detail; (g) that the Tenant has no knowledge of any event having
occurred that authorized the termination of this Lease by the Tenant, or if such
event has occurred, specifying it in detail; (h) the address to which notices to
the Tenant should be sent; and (i) any and all other matters reasonably
requested by the Landlord, any Mortgagee and/or any other person or entity
designated by the Landlord. Any such estoppel certificate may be relied upon by
the person or entity to whom it is directed or by any other person or entity who
could reasonably be expected to rely on it in the normal course of business. The
failure of the Tenant to execute, acknowledge and deliver such a certificate in
accordance with this section within fifteen (15) days after a request therefor
by the Landlord shall constitute an acknowledgment by the Tenant, which may be
relied on by any person or entity who would be entitled to rely upon any such
certificate, that such certificate as submitted by the requesting party to the
other party is true and correct, and the requesting party is hereby authorized
to so certify.
19. QUIET ENJOYMENT. The Landlord hereby warrants that, so long as all
of the Tenant's obligations hereunder are timely performed, the Tenant will have
during the Term quiet and peaceful possession of the Premises and enjoyment of
such rights as the Tenant may hold hereunder to use the Common Areas, except if
and to the extent that such possession and use are terminated pursuant to this
Lease.
20. NOTICES. Except as may be otherwise provided in this Lease, any
notice, demand, consent, approval, request or other communication or document to
be provided hereunder to the Landlord or the Tenant (a) shall be in writing, and
(b) shall be deemed to have been provided (i) two (2) days following the date
sent as certified mail in the United States mails, postage prepaid, return
receipt requested, (ii) on the day following the date it is deposited prior to
the close of business with FedEx or another national courier service or (iii) on
the date of hand delivery (if such party's receipt thereof is acknowledged in
writing), in each case to the address of such party set forth hereinbelow or to
such other address as such party may designate from time to time by notice to
each other party hereto.
If to the Landlord, notice shall be sent to:
Sterling Rutherford Plaza, L.L.C.
c/o Sterling Advisors
Suite 200
31 Light Street
Baltimore, Maryland 21202
Attention: Mr. Brian Doyle
If to the Tenant, notice shall be sent to:
8930 Stanford Boulevard
Columbia, Maryland 21045
Attention: Corporate Office
21. EXPANSION SPACE. Provided the Tenant is not in default under any of
the provisions of this Lease, the Tenant shall have the right to lease (the
"Expansion Right") any other office space located within Rutherford Plaza
Building which is not on the Effective Date subject to a right of expansion in
favor of another tenant in the Building. The Landlord shall give notice to the
Tenant when any space becomes available for lease (the "Notice"). The Tenant
shall exercise the Expansion Right by giving written notice thereof to the
Landlord within twenty (20) days after the Landlord gives Notice to the Tenant.
If the Tenant fails to exercise the Expansion Right for the applicable space
within such 20-day period, then the same shall terminate and the Landlord shall
be free to lease such space to another tenant. The Tenant shall lease the
Expansion Space upon
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the terms, covenants and conditions as are offered by Landlord in its Notice,
provided that such terms, covenants and conditions shall be at least as
favorable as what Landlord would offer to third-party tenants comparable to
Tenant. If the Tenant exercises the Expansion Right, the Landlord and the Tenant
shall enter into an appropriate amendment to this Lease, subjecting such
Expansion Space to the terms of this Lease, within fifteen (15) days after the
expiration of the 20-day period set forth above. In the event that the Tenant
exercises its right to obtain the Expansion Space, the lease term for the
Expansion Space shall commence on the date the Landlord tenders possession of
the Expansion Space to the Tenant and shall terminate simultaneously with the
term for the Premises.
22. GENERAL.
22.1. Effectiveness. This Lease shall become effective on and
only on its execution and delivery by each party hereto.
22.2. Complete Understanding. This Lease represents the complete
understanding between the parties hereto as to the subject matter hereof, and
supersedes all prior negotiations, representations, guaranties, warranties,
promises, statements and agreements, either written or oral, between the parties
hereto as to the same.
22.3. Amendment. This Lease may be amended by and only by an
instrument executed and delivered by each party hereto, provided, however, that
the Landlord shall have the right at any time, and from time to time, during the
Term to amend the provisions of this Lease if the Landlord (or any of its
partners) is advised by its counsel that all or any portion of the monies paid,
directly or indirectly, by the Tenant to the Landlord (and/or its partners)
hereunder are, or may be deemed to be, unrelated business income within the
meaning of the United States Internal Revenue Code or regulations issued
thereunder, (but only to the extent necessary to address such issue) and the
Tenant agrees that it will execute all documents or instruments necessary to
effect such amendment or amendments, provided that no such amendment shall
result in the Tenant having to pay in the aggregate a larger sum of money on
account of its occupancy of the Premises under the terms of this Lease as so
amended, and provided further that no such amendment or amendments shall result
in the Tenant receiving under the provisions of this Lease less services than it
is entitled to receive, nor services or a lesser quality. Furthermore, the
Tenant agrees not to take any steps or actions knowingly which may jeopardize
the Landlord's (and/or its partners') tax-exempt status.
22.4. Waiver. No party hereto shall be deemed to have waived the
exercise of any right which it holds hereunder unless such waiver is made
expressly and in writing (and, without limiting the generality of the foregoing,
no delay or omission by any party hereto in exercising any such right shall be
deemed a waiver of its future exercise). No such waiver made in any instance
involving the exercise of any such right shall be deemed a waiver as to any
other such instance or any other such right. Without limiting the generality of
the foregoing provisions of this subsection, the Landlord's receipt or
acceptance of any Base Rent, Additional Rent or other sum from the Tenant or any
other person shall not be deemed a waiver of the Landlord's right to enforce any
of its rights hereunder on account of any default by the Tenant in performing
its obligations hereunder.
22.5. Applicable Law. This Lease shall be given effect and
construed by application of the laws of Maryland, and any action or proceeding
arising hereunder shall be brought in the courts of Maryland; provided, however,
that if any such action or proceeding arises under the Constitution, laws or
treaties of the United States of America, or if there is a diversity of
citizenship between the parties thereto, so that it is to be brought in a United
States District Court, it may be brought only in the United States District
Court for Maryland or any successor federal court having original jurisdiction.
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22.6. Commissions. The parties hereto hereby acknowledge and
agree that, in connection with the leasing of the Premises hereunder, they have
used the services of Miller Corporate Real Estate Services, Inc., Casey &
Associates and Julian J. Studley, Inc. Any and all commissions due such brokers
shall be paid by Landlord in accordance with the terms and conditions set forth
in a separate written agreement or agreements between the Landlord and Miller
Corporate Real Estate Services, Inc., Casey & Associates and Julian J. Studley.
Subject to the foregoing, each party hereto hereby represents and warrants to
the other that, in connection with such leasing, the party so representing and
warranting has not dealt with any real estate broker, agent or finder, and there
is no commission, charge or other compensation due on account thereof. Each
party hereto shall indemnify and hold harmless the other against and from any
inaccuracy in such party's representation.
22.7. Landlord's Liability. No Person holding the Landlord's
interest hereunder (whether or not such Person is named as the "Landlord"
herein) shall have any liability hereunder after such Person ceases to hold such
interest, except for any such liability accruing while such Person holds such
interest. No Mortgagee not in possession of the Premises shall have any
liability hereunder. Neither the Landlord nor any principal of the Landlord,
whether disclosed or undisclosed, shall have any personal liability under this
Lease. If the Landlord defaults in performing any of its obligations hereunder
or otherwise, the Tenant shall look solely to the Landlord's equity, interest
and rights in the Property to satisfy the Tenant's remedies on account thereof.
22.8. Disclaimer of Partnership Status. Nothing in this Lease
shall be deemed in any way to create between the parties hereto any relationship
of partnership, joint venture or association, and the parties hereto hereby
disclaim the existence of any such relationship.
22.9. Remedies Cumulative. No reference to any specific right or
remedy shall preclude the Landlord from exercising any other right or from
having any other remedy or from maintaining any action to which it may otherwise
be entitled at law or in equity. No failure by the Landlord to insist upon the
strict performance of any agreement, term, covenant or condition hereof, or to
exercise any right or remedy consequent upon a breach thereof, and no acceptance
of full or partial Rent during the continuance of any such breach, shall
constitute a waiver of any such breach, agreement, term, covenant or condition.
No waiver by the Landlord of any breach by the Tenant under this Lease or of any
breach by any other tenant under any other lease of any portion of the Building
shall affect or alter this Lease in any way whatsoever.
22.10. Severability. No determination by any court, governmental
or administrative body or agency or otherwise that any provision of this Lease
or any amendment hereof is invalid or unenforceable in any instance shall affect
the validity or enforceability of (a) any other provision hereof, or (b) such
provision in any circumstance not controlled by such determination. Each such
provision shall remain valid and enforceable to the fullest extent allowed by,
and shall be construed wherever possible as being consistent with, applicable
law.
22.11. Authority. If the Tenant is a corporation, partnership,
limited liability company or similar entity, the person executing this Lease on
behalf of the Tenant represents and warrants that (a) the Tenant is duly
organized and validly existing and (b) this Lease (i) has been authorized by all
necessary parties, (ii) is validly executed by an authorized officer or agent of
the Tenant and (iii) is binding upon and enforceable against the Tenant in
accordance with its terms.
22.12. Joint and Several Liability. If the Tenant shall be one
or more individuals, corporations or other entities, whether or not operating as
a partnership or joint venture, then each such
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individual, corporation, entity, joint venturer or partner shall be deemed to be
both jointly and severally liable for the payment of the entire Rent and other
payments specified herein.
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22.13. Recordation. Neither this Lease, any amendment to this
Lease, nor any memorandum, affidavit or other item with respect thereto shall be
recorded by the Tenant or by anyone acting through, under or on behalf of the
Tenant, and the recording thereof in violation of this provision shall (i) be
deemed an Event of Default and (ii) at the Landlord's election, make this Lease
null and void.
22.14. Time of Essence. Time shall be of the essence with
respect to the performance of the parties' obligations under this Lease.
22.15. Interpretation. The Landlord and the Tenant hereby agree
that both parties were equally influential in negotiating this Lease, and each
had the opportunity to seek the advice of legal counsel prior to the execution
of this Lease. Therefore, the Landlord and the Tenant agree that no presumption
should arise construing this Lease more unfavorably against any one party.
22.16. Headings. The headings of the sections, subsections,
paragraphs and subparagraphs hereof are provided herein for and only for
convenience of reference and shall not be considered in construing their
contents.
22.17. Construction. As used herein, all references made (a) in
the neuter, masculine or feminine gender shall be deemed to have been made in
all such genders; (b) in the singular or plural number shall be deemed to have
been made, respectively, in the plural or singular number as well; and (c) to
any section, subsection, paragraph or subparagraph shall be deemed, unless
otherwise expressly indicated, to have been made to such section, subsection,
paragraph or subparagraph of this Lease.
22.18. Exhibits. Each writing or drawing referred to herein as
being attached hereto as a schedule, an exhibit or otherwise designated herein
as a schedule or an exhibit hereto is hereby made a part hereof.
22.19 Lien Waiver. Notwithstanding anything to the contrary,
Landlord hereby waives any lien that Landlord may have, under applicable law or
otherwise, in or with respect to any property of Tenant in the Premises which
from time to time, encumbered by a security interest in favor of an unrelated
third party lender, and Landlord agrees to confirm such waiver upon Tenant's
request from time to time using forms supplied by Tenant.
22.20 Representations and Warranties of Landlord. To induce
Tenant to execute this Lease and perform its obligations hereunder, Landlord
hereby represents and warrants to Tenant as of the date hereof as follows:
(a) Landlord is a limited liability company, duly
organized and validly existing under the laws of the State of Delaware. Landlord
has all requisite power to own, lease and operate its assets, and to carry on
its business as now conducted. Landlord has full power to execute, deliver and
carry out the terms and provisions of this Lease and all documents required on
its part to be executed and has taken all necessary limited liability company
action to authorize the execution, delivery and performance of this Lease and
all other agreements and instruments executed in connection herewith and the
performance of those provisions of this Lease required on its part to be carried
out. The persons executing this Lease (and all other agreements and instruments
entered into by Landlord in furtherance hereof), on behalf of Landlord, have the
authority to bind Landlord to the terms and conditions of this Lease (and all
said agreements and instruments). To Landlord's knowledge, neither the execution
and delivery of this Lease and said agreements and instruments to be executed
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by landlord in connection herewith, nor the incurrence by Landlord of the
obligations herein set forth, nor the consummation by Landlord of the
transactions herein contemplated, nor compliance by Landlord with the terms of
this Lease and said agreements and instruments will conflict with or result in a
breach of any of the terms, conditions or provisions of, or constitute a default
under, the limited liability company agreement of Landlord, or to the knowledge
of Landlord, any bond, note or other evidence of indebtedness, contract,
indenture, mortgage, deed of trust, loan agreement, lease or other agreement or
instrument, to which Landlord is a party or by which the Property may be bound.
(b) To Landlord's knowledge, there is (i) no pending or
threatened condemnation to all or any part of the Property and (ii) no denial of
access to the Property from any point of access to the Property, and neither
Landlord nor any of its agents or affiliates has received any notice of any of
the same.
(c) To Landlord's knowledge, Landlord has not received
any legal notice which remains uncured, and Landlord has no knowledge, that the
Property violates any laws affecting the Property as modified by any duly issued
variance.
(d) Landlord owns fee simple title to the Property.
(e) To Landlord's knowledge, the Property is in
compliance with the ADA. To Landlord's knowledge, there is no asbestos or
material containing asbestos in the Property.
(f) To Landlord's knowledge, Landlord is not in default
or violation of any order, writ injunction, decree or demand of any governmental
authority.
(g) Landlord (i) is not in receivership or dissolution,
(ii) has not made an assignment for the benefit of creditors or admitted in
writing its inability to pay its debts as they mature, (iii) has not been
adjudicated a bankrupt or filed a petition in voluntary bankruptcy or a petition
or answer seeking reorganization or an arrangement with creditors under the
Federal bankruptcy law or any other similar law or statute of the United States
or any jurisdiction and no such petition has been filed against Landlord, and
(iv) to the best of its knowledge, none of the foregoing are pending or
threatened.
(h) To Landlord's knowledge, there are no judgments,
liens, claims, litigation, proceedings (zoning or otherwise) or investigations
by an governmental authorities, pending at law or in equity or threatened in
writing against or relating to the Premises or Building, the Landlord or the
transactions contemplated by this Lease.
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IN WITNESS WHEREOF, each party hereto has executed and ensealed this
Lease, or caused it to be executed and ensealed on its behalf by its duly
authorized representatives, on the date first above written.
WITNESS or ATTEST: LANDLORD:
STERLING RUTHERFORD PLAZA, L.L.C.
_____________________________ By: /s/ Brian Doyle (SEAL)
----------------
Title: Managing Member
--------------------
WITNESS or ATTEST: TENANT:
GSE SYSTEMS, INC.
_____________________________ By: /s/ Robert W. Stroup (SEAL)
---------------------
Title: Executive Vice President
-------------------------
This Lease must be executed for the Tenant, if a corporation, by the president
or vice president and be attested by the secretary or assistant secretary,
unless the bylaws or a resolution of the board of directors shall provide that
other officers are authorized to execute this Lease, in which event, a certified
copy of the bylaws or resolutions, as the case may be, must be furnished to the
Landlord. The Tenant's corporate seal must be affixed hereto.
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EXHIBIT 10.25
LEASE
THIS LEASE (this "Lease") is made as of January 30, 1998, between RED
BRANCH ROAD, L.L.C., a Maryland limited liability company ("Landlord"), and GSE
SYSTEMS, INC., a Delaware corporation ("Tenant").
ARTICLE I
DEFINITIONS
1.1 Building: a one (1) story building containing approximately
fifty-two thousand six hundred eighty-two (52,682) square feet of rentable area
and located on approximately 4.779 acres of land at 9189 Red Branch Road,
Columbia, Maryland.
1.2 Premises: approximately fifty-two thousand six hundred eighty-two
(52,682) square feet of rentable area located on the first floor of the
Building.
1.3 Initial Lease Term: one hundred twenty (120) months.
1.4 Anticipated Occupancy Date: June 1, 1998.
1.5 Base Rent: five hundred twenty-six thousand eight hundred twenty
($526,820.00) for the first Lease Year (which amount is based on ten dollars
($10.00) per square foot of rentable area).
1.6 Base Rent Annual Escalation Percentage: three percent (3%).
1.7 Security Deposit: forty-three thousand nine hundred one dollars and
sixty-seven cents ($43,901.67).
1.8 Broker(s): Julien J. Studley, Inc. and Atlantic Realty Associates,
Inc.
1.9 Tenant Address for Notices: 8930 Stanford Boulevard, Columbia,
Maryland 21045 until Tenant has commenced beneficial use of the Premises, and
9189 Red Branch Road, Columbia, Maryland 21045 after Tenant has commenced
beneficial use of the Premises.
1.11 Guarantor(s): none.
ARTICLE II
PREMISES
2.1 Tenant leases the Premises from Landlord upon the terms
herein. The foregoing notwithstanding, Tenant's right to use the Premises is
subject to Head Sports Wear, Inc.'s temporary rights pursuant to Head Sports
Wear, Inc.'s lease, a copy of which lease has been provided to Tenant. Landlord
shall use commercially reasonable efforts to require Head Sports Wear, Inc. to
vacate in accordance with its lease and shall attempt to have Head Sports Wear,
Inc. vacate by March 31, 1998. Landlord and Tenant shall use commercially
reasonable efforts to accommodate Tenant's and Head Sports Wear, Inc.'s shared
use of facilities as contemplated by Head Sports Wear, Inc.'s lease. If Landlord
collects money from Head Sports Wear, Inc. as a result of Head Sports Wear,
Inc.'s holdover in the Building, then Landlord shall pay to Tenant the lesser of
(a) one half of (1) the money so collected from Head Sports Wear, Inc., minus
(2) all damages paid by Landlord to
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Head Sports Wear, Inc. pursuant to Head Sports Wear, Inc.'s lease as a result of
interference with Head Sports Wear, Inc.'s occupancy, or (b) the damages
suffered by Tenant as a result of Head Sports Wear, Inc.'s holdover.
ARTICLE III
TERM
3.1 The term of this Lease (the "Lease Term") shall commence on the
Lease Commencement Date specified in Section 3.2. If the Lease Commencement Date
is not the first day of a month, then the Lease Term shall be the period set
forth in Section 1.3 plus the partial month in which the Lease Commencement Date
occurs. The Lease Term shall also include any renewal or extension of the
Initial Lease Term.
3.2 The Lease Commencement Date means the earlier of (a) the date the
work and materials to be provided pursuant to Exhibit B are deemed substantially
complete as determined pursuant to Exhibit B, or (b) the date Tenant commences
beneficial use of the Premises. Tenant shall be deemed to have commenced
beneficial use of the Premises when Tenant begins to move furniture,
furnishings, inventory, equipment or trade fixtures other than modular furniture
into the Premises. If Tenant is in breach of any obligation hereunder, then
Tenant shall not have any right to commence beneficial use of the Premises.
3.3 Delivery of the Premises is anticipated on or about the Anticipated
Occupancy Date. If the Premises are not delivered by such date, then Landlord
shall not have any liability whatsoever, and this Lease shall not be rendered
voidable, on account thereof. If the Lease Commencement Date does not occur
within 90 days after Head Sports Wear, Inc. fully vacates the Building, then
Tenant shall have the right to install the improvements pursuant to Exhibit B
and Landlord shall reimburse Tenant for all reasonable out-of-pocket expenses
incurred by Tenant in installing such improvements.
3.4 Lease Year means a period of one year commencing on the first day of
the month in which the Lease Commencement Date occurs and each successive one
year period.
3.5 Landlord hereby grants to Tenant the right to renew the Initial
Lease Term for one five-year term (the "Renewal Term"). If exercised, the
Renewal Term shall commence immediately following the end of the Initial Lease
Term. Such right shall be subject to the following conditions: Tenant may
exercise such right only by giving Landlord written notice not later than twelve
(12) months prior to the expiration of the Initial Lease Term. If Tenant's
renewal notice is not given timely, then Tenant's right of renewal shall be of
no further force or effect. The parties shall have thirty (30) days after
Landlord's timely receipt of such notice in which to agree on the base rent,
escalation factor and additional rent which shall be payable during the Renewal
Term. Among the factors to be considered by the parties during such negotiations
shall be the general office rental market in Columbia and the rents being
offered similar tenants for similar space in similar buildings. If during such
thirty (30) day period the parties agree on such base rent, escalation factor
and additional rent payable during each year of the Renewal Term, then they
shall promptly execute an amendment to this Lease stating the rent so agreed
upon. If during such thirty (30) day period the parties are unable, for any
reason whatsoever, to agree on such base rent, escalation factor and additional
rent payable, then within five (5) days thereafter (or, if later, by the
beginning of the tenth Lease Year) the parties shall each appoint an appraiser
who shall be licensed in the State of Maryland and who specializes in the field
of appraising commercial space in the Columbia market, has at least ten (10)
years of experience and is recognized within the field as being reputable and
ethical. Such two individuals shall each determine within ten (10) business days
after their appointment such base rent, escalation factor and additional rent
(to be not less than the same payable during the last year of the Initial Lease
Term). If such individuals do not agree on such items, then the two individual
shall, within five (5) days, render separate written reports of their
determinations and together appoint a third similarly qualified individual. The
third
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individual shall within ten (10) days after his or her appointment make a
determination of such base rent, escalation factor and additional rent. The base
rent, escalation factor and additional rent applicable during the first Lease
Year of the Renewal Term shall equal the median of the three determinations and
shall be final. Each party shall bear the cost of its broker. The cost of the
third broker shall be shared equally. The parties shall promptly execute an
amendment to this Lease stating the rent so determined. If an Event of Default
exists under Section 19.1(a) of this Lease on the date Tenant sends a renewal
notice or any time thereafter until the Renewal Term is to commence, then, at
Landlord's election, the Renewal Term shall not commence and the Lease Term
shall expire at the expiration of the Initial Lease Term.
ARTICLE IV
BASE RENT
4.1 Tenant shall pay the Base Rent in equal installments in advance on
the first day of each month during a Lease Year. On the first day of the second
and subsequent Lease Years, the Base Rent in effect shall be increased by the
product of (a) the Base Rent Annual Escalation Percentage, multiplied by (b) the
Base Rent in effect. When Tenant executes this Lease, Tenant shall pay an amount
equal to one (1) monthly installment of the Base Rent, which amount shall be
credited toward the installment of the Base Rent payable for the Lease Term's
first full calendar month.
ARTICLE V
OPERATING CHARGES AND REAL ESTATE TAXES
5.1 Tenant shall pay Tenant's proportionate share (100%) of Operating
Charges (defined in Section 5.2) during each calendar year falling entirely or
partly within the Lease Term .
5.2 Operating Charges mean the following expenses incurred by Landlord
in the ownership and operation of the Building and the land upon which the
Building is located (the "Land"): (a) water, sewer and other utility charges but
excluding charges for electricity; (b) hazard, rent loss and liability insurance
premiums; (c) management fees equal to 3% of gross rents from the Building; (d)
costs of service and maintenance contracts; (e) maintenance, repair and
replacement expenses; (f) amortization (on a straight-line basis over the useful
life), with interest at two percentage points over the prime rate specified in
Section 19.6 at the time the expenditure was made) of capital expenditures made
by Landlord to (1) reduce operating expenses if Landlord reasonably estimates
that the annual reduction in operating expenses shall exceed such amortization,
or (2) comply with laws or insurance requirements enacted or imposed after the
date hereof; (g) Real Estate Taxes (defined in Section 5.3); (h) charges for
janitorial services; (i) reasonable reserves for repairs and contingencies
relating to the HVAC systems; and (j) any other expense incurred by Landlord in
owning, maintaining, repairing or operating the Building and the Land.
"Operating Charges" shall mean only those expenses, charges and fees consistent
with similar office buildings in Howard County, Maryland which are actually
incurred by Landlord but only to the extent incurred in connection with the
management, operation, maintenance, servicing, cleaning, and insuring of the
Premises or the Building. All Operating Charges shall be determined according to
generally accepted accounting principles, consistently applied ("GAAP").
Notwithstanding anything to the contrary contained in this Lease (other than
Section 5.2(f)), in the event there exists a conflict as to an expense which is
specified to be included in Operating Charges and is also specified to be
excluded from Operating Charges as hereinafter described, the exclusions listed
below prevail and the expenses shall be deemed excluded. Notwithstanding
anything to the contrary contained in this Lease (other than Section 5.2(f)),
"Operating Charges" shall not include the following: (1) any ground lease rents;
(2) any and all fines and penalties (including but not limited to capital
expenditures) incurred or required to be paid due to Landlord's failure to
comply with applicable Laws (hereinafter defined in Section 6.1); (3) costs
incurred by Landlord for the repair of damage to
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the Building to the extent that Landlord is entitled to be reimbursed by
insurance (or would have been entitled had Landlord carried the insurance
required to be carried hereunder by Landlord); (4) depreciation and amortization
of any type, except on materials, tools, supplies and vendor type equipment
purchased by Landlord to enable Landlord to supply services Landlord might
otherwise contract for with a third party where such depreciation and
amortization would otherwise have been included in the charge for such third
party's services, all as determined according to GAAP, and when depreciation or
amortization is permitted or required, the item shall be amortized over its
reasonably anticipated useful life; (5) leasing commissions, attorney's fees,
and other costs and expenses incurred in connection with negotiations or
disputes with present or prospective tenants or other occupants of the Building;
(6) costs of a capital nature, including, without limitation, capital
improvements, capital repairs, capital equipment and capital tools, all as
determined under GAAP; (7) interest, principal, points and fees on debt or
amortization on any mortgage or mortgages or any other debt instrument
encumbering the Building; (8) advertising and promotional expenditures, and
costs of signs in or on the Building identifying the owner of the Building or
any tenant of the Building; (9) electric power costs for which any tenant
directly contracts with the local public service company; (10) costs incurred in
connection with replacing, repairing, retrofitting or upgrading the Building to
comply with ADA, handicapped, life and safety codes as in effect as of the date
hereof; (11) wages, salaries, fees and fringe benefits paid to administrative or
executive personnel or officers or partners of Landlord or management agent or
anyone else over the level of building supervisor; (12) the cost of any repair
made by Landlord because of the total or partial destruction of the Building or
the condemnation of a portion of the Building; (13) the cost of overtime or
other expense to Landlord due to Landlord's defaults or incurred while
performing work expressly provided in this Lease to be borne at Landlord's
expense (without recovery pursuant to this Article); (14) allowances,
concession, permits, licenses, inspections, and other costs and expenses
incurred in completing, fixturing, renovating or otherwise improving, decorating
or redecorating space for tenants (including Tenant), prospective tenants or
other occupants or prospective occupants of the Building, or vacant leasable
space in the Building or constructing or finishing demising walls and public
corridors with respect to any such space whether such work or alteration is
performed for the initial occupancy by such tenant or occupant or thereafter;
(15) any cost representing an amount paid for first class services and/or
materials to a related person, firm or entity to the extent such amount exceeds
the amount that would be paid for such first class services and/or materials at
the then existing market rates to an unrelated person, firm or entity; (16)
provided Tenant is not in default hereunder, costs incurred due to the late
payment of taxes, utility bills or other amounts owing, so long as Landlord was
obligated to make such payments and did not in good faith dispute the amount of
such payments; (17) general overhead and general administrative expenses and
accounting record-keeping and clerical support of Landlord or the management
agent, except reasonable expenses incurred in connection with the operations of
the property management office (on an appropriately prorated basis to the extent
such operations are directly servicing the Building and other buildings); (18)
increased insurance premiums caused by Landlord's or any tenant's hazardous acts
or omissions; (19) costs incurred for any items to the extent Landlord recovers
under a manufacturer's, materialmen's, vendor's or contractor's warranty; (20)
costs of acquisition of sculpture, paintings or other objects of art; (21) costs
directly resulting from the negligence or misconduct of Landlord or its agents;
(22) costs or fees relating to the defense of Landlord's title or interest in
the real estate containing the Building; and (23) costs or expenses incurred by
Landlord in financing, refinancing, pledging, selling, granting or otherwise
transferring or encumbering ownership rights in the Building or the Land.
Operating Charges shall be reduced by all cash discounts, trade discounts or
quantity discounts received by Landlord or Landlord's managing agent in the
purchase of any goods, utilities or services in connection with the prudent
operation of the Building. Landlord shall use its reasonable efforts in good
faith to effect an equitable proration of bills for services rendered to the
Building and to any other property owned by Landlord or an affiliate of
Landlord.
5.3 Real Estate Taxes mean (a) real estate taxes (including special
assessments) imposed upon Landlord or assessed against the Building or the Land,
(b) future taxes or charges imposed upon Landlord
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or assessed against the Building or the Land which are in the nature of or in
substitution for real estate taxes, including any tax levied on or measured by
rents payable, and (c) expenses incurred in reviewing or seeking a reduction of
real estate taxes. Notwithstanding anything to the contrary contained in this
Lease, "Real Estate Taxes" shall not include any of the following: (1) tax upon
Landlord's net income or profits; (2) federal, state or local income taxes,
franchise, gift, transfer, excise, capital stock, estate, succession or
inheritance taxes; (3) any fines, interest or penalties incurred by Landlord by
reason of Landlord's failure to pay in a timely manner any Real Estate Taxes;
and (4) any taxes based on increases in assessed value due to increases in the
rentable area of the Building and additions to the area of the Land.
Notwithstanding anything to the contrary contained in this Lease, in the event
any Real Estate Taxes are payable in installments over time, then Landlord shall
elect (or shall be deemed for purposes hereof to have elected) to pay such taxes
over the maximum permissible number of installments. Any interest or fee charged
by the taxing authority as a condition to Landlord's right to pay such taxes in
installments shall be included in Real Estate Taxes. Landlord shall pay all Real
Estate Taxes by the date due, and shall upon Tenant's written request furnish
Tenant with evidence of such payment. Real Estate Taxes shall be deemed to
assume that the Building and the Land upon which the Building is located
constitute a separate tax lot, and that the Building is the only building on the
Land. Notwithstanding anything to the contrary contained in this Lease, Tenant
shall have the right to contest tax assessments if Landlord does not do so
despite Tenant's written request and to recover amounts earlier paid resulting
from the net proceeds of a successful contest. Landlord shall reasonably
cooperate with any such contest by Tenant.
5.4 At the beginning of the Lease Term and each calendar year
thereafter, Landlord may submit a statement indicating the amount of Operating
Charges that Landlord reasonably expects to be incurred during such year and
Tenant's proportionate share of such amount. Tenant shall pay to Landlord on the
first day of each month after receipt of such statement, until Tenant's receipt
of a succeeding statement, an amount equal to one-twelfth (1/12) of such share.
Landlord reserves the right to submit a revised statement if Landlord expects
Operating Charges to differ from the prior estimation. If a statement is
submitted after the beginning of a year, then the first payment thereafter shall
be adjusted to account for any underpayment or overpayment based on the prior
statement and subsequent payments shall be based on the latest statement.
5.5 Within approximately one hundred twenty (120) days after the end of
1998 and each subsequent calendar year, Landlord shall submit a categorized
statement indicating (a) Tenant's proportionate share of the amount of Operating
Charges incurred during such year, and (b) the sum of Tenant's estimated
payments for such year. If such statement indicates that such sum exceeds
Tenant's actual obligation, then Tenant shall deduct the overpayment from its
next payment(s) pursuant to this Article. If such statement indicates that
Tenant's actual obligation exceeds such sum, then Tenant shall pay the excess
within thirty (30) days.
5.6 If the Lease Term commences or expires on a day other than January 1
or December 31, respectively, then Tenant's liability for Operating Charges
incurred during the applicable year shall be proportionately reduced based on
the number of days in the Lease Term falling within such year. Notwithstanding
anything to the contrary contained in this Lease, after receipt of Landlord's
annual reconciliation statement, Tenant at its expense shall have the right at
all reasonable times and upon five (5) business days notice to audit Landlord's
books and records relating to Operating Charges for the prior calendar year(s);
provided, however, that Tenant's right to audit shall expire unless within one
hundred twenty (120) days after Landlord has furnished to Tenant such statement
of Operating Charges Tenant has notified Landlord in writing of Tenant's
election to conduct an audit. If Tenant has timely exercised its option to
conduct an audit, Tenant shall have a period of ninety (90) days in which to
complete the audit, which ninety (90) day period shall commence only after
Landlord has afforded Tenant access to such documents as are in Landlord's
possession or control and which are necessary to conduct the audit, including
(to the extent within Landlord's possession and control) work papers prepared by
Landlord's accountants, canceled checks, invoices and such other documents as
may be
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reasonably required, and reconciliation of amortized capital expenditures made
by Landlord to reduce operating expenses with the resulting operating expenses
and the former corresponding operating expenses. Tenants shall have the right to
review the documentation described above for the prior calendar year in order to
have a basis for comparison of Operating Charges. In the event that it is
ultimately determined that a refund of Operating Charges which exceeds one
percent (1%) of the total Operating Charges for such year is due and Tenant has
not previously conducted an audit for the two (2) years preceding the calendar
year for which the audit is being conducted, Tenant shall have the right to
audit such two prior years to determine whether refunds (relating to same
category of expenses to which the errors determined to have been made relate)
are due for such two prior years. Landlord shall fully cooperate with Tenant and
its auditor so as to facilitate the performance of Tenant's audit. Tenant may
review and (at Tenant's reasonable expense) copy such documentation during
normal business hours. Tenant agrees to endeavor in good faith and use its
reasonable efforts to conduct the audit in a manner which will cause minimum
disruption to the operation of the Building and the management office. In the
event that it is ultimately determined (by agreement of the parties or by a
final court determination) that the actual Operating Charges for any calendar
year, as chargeable to Tenant under this Lease, are less than the amount set
forth in the Landlord's reconciliation statement of actual Operating Charges
submitted by Landlord for such year, then Landlord shall reimburse Tenant for
such overcharge within thirty (30) days of receipt of notice thereof together
with interest thereon at the Default Rate until paid. If Operating Charges have
been overstated by an amount in excess of three (3%) percent, Landlord shall
also pay Tenant's reasonable cost incurred in conducting such audit.
ARTICLE VI
USE OF PREMISES
6.1 Tenant shall use the Premises solely for office (non-medical and
non-governmental) and warehouse purposes and for no other use or purpose.
Landlord represents that the zoning regulations applicable to the Building and
any covenants, conditions and restrictions appertaining to the Building permit
the use of the Premises for the uses specified in the preceding sentence. Tenant
shall not use the Premises for any unlawful purpose, or in any manner that in
Landlord's reasonable opinion will constitute waste or in any manner that will
increase the number of parking spaces required for the Building or its full
occupancy pursuant to present and future laws (including the Americans with
Disabilities Act), ordinances, regulations and orders (collectively "Laws").
Tenant shall comply with all Laws concerning the use, occupancy and condition of
the Premises and all machinery, equipment and furnishings therein. Landlord
shall comply with all Laws concerning the base building systems and the portions
of the Building (excluding the Premises) Landlord is required hereunder to
maintain and repair. If any Law requires an occupancy or use permit for the
Premises, then Tenant shall obtain and keep current such permit at Tenant's
expense and promptly deliver a copy thereof to Landlord. Tenant shall not use
the Premises in a manner that would (a) violate the terms of any occupancy or
use permit, or (b) impair or interfere with any base building system or
facility.
6.2 Tenant shall pay timely any business, rent or other tax or fee that
is now or hereafter assessed or imposed upon Tenant's use or occupancy of the
Premises, the conduct of Tenant's business in the Premises or Tenant's fixtures,
furnishings, inventory or personal property. If any such tax or fee is imposed
upon Landlord or Landlord is responsible for collection or payment thereof, then
Tenant shall pay to Landlord the amount of such tax or fee.
6.3 Notwithstanding anything to the contrary contained in this Lease,
Landlord represents that to the best of its knowledge and belief, there are no
Hazardous Materials on, in or under the Land or Building. Landlord and Tenant
shall not generate, use, release, store or dispose of any Hazardous Materials in
or about the Building. Hazardous Materials mean (a) "hazardous wastes" as
defined by the Resource Conservation and
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Recovery Act of 1976, (b) "hazardous substances" as defined by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, (c) "toxic
substances" as defined by the Toxic Substances Control Act, (d) "hazardous
materials" as defined by the Hazardous Materials Transportation Act (as any of
such Acts may be amended from time to time), (e) petroleum products, (f)
chlorofluorocarbons, and (g) substances whose presence could be detrimental to
the Building or hazardous to health or the environment. Hazardous Materials
shall exclude reasonable quantities of customary office and cleaning supplies,
provided such items are stored, used and disposed of in accordance with Laws.
ARTICLE VII
ASSIGNMENT AND SUBLETTING
7.1 Tenant shall not sublet or permit occupancy of (collectively
"sublease") the Premises or part thereof, or assign or otherwise transfer
(collectively "assign") this Lease or any of Tenant's rights or obligations,
without Landlord's prior written consent, which consent shall not be
unreasonably withheld or conditioned. If Landlord fails to respond to Tenant's
request for such consent within ten business days after receipt of the
information specified in Section 7.3, then Landlord shall be deemed to have
granted such consent. No assignment of this Lease may be effected by operation
of law without Landlord's prior written consent. Any assignment or sublease,
Landlord's consent thereto or Landlord's collection of rent from any assignee or
subtenant shall not be construed as (a) a waiver or release of Tenant from
liability hereunder, or (b) relieving Tenant, any assignee or subtenant from the
obligation of obtaining Landlord's prior written consent to any other assignment
or sublease. Tenant assigns to Landlord any amount due from any assignee or
subtenant as security for performance of Tenant's obligations pursuant to this
Lease. Tenant directs each such assignee or subtenant to pay such amount
directly to Landlord if such assignee or subtenant receives written notice from
Landlord specifying that Tenant is in default under this Lease and that such
amount shall be paid directly to Landlord. Each assignee and subtenant shall pay
as so directed. Landlord's collection of such amount shall not be construed as
an acceptance of such assignee or subtenant as a tenant or as a permitted
assignee or subtenant. Tenant's obligations pursuant to this Lease shall be
deemed to extend to any subtenant or assignee. Tenant shall cause each subtenant
or assignee to comply with such obligations. Any assignee shall be deemed to
have assumed obligations as if such assignee had originally executed this Lease
and at Landlord's request shall execute promptly a document confirming such
assumption. Each sublease is subject to the condition that if the Lease Term is
terminated or Landlord succeeds to Tenant's interest in the Premises by
voluntary surrender or otherwise, at Landlord's option the subtenant shall be
bound to Landlord for the balance of the term of such sublease and shall attorn
to and recognize Landlord as its landlord under the then executory terms of such
sublease. Tenant shall not mortgage this Lease without Landlord's prior written
consent, which consent may be granted or withheld in Landlord's sole and
absolute discretion. Tenant shall pay the costs (including reasonable attorneys'
fees not to exceed $500.00 per request) incurred by Landlord in connection with
Tenant's request for Landlord to consent to any assignment, sublease or
mortgage.
7.2 If Tenant is a partnership, then any event(s) (whether or not
voluntary, concurrent or related) which results in a dissolution of Tenant or a
withdrawal or change of partners who, on the date of this Lease, own a
controlling interest, shall be deemed a voluntary assignment of this Lease. Each
general partner shall be deemed to own a controlling interest. If Tenant is a
corporation, then any event(s) (whether or not voluntary, concurrent or related)
which results in a dissolution, merger, consolidation or other reorganization of
Tenant, or sale, transfer or relinquishment of the interest of shareholders who,
on the date of this Lease, own a controlling interest, shall be deemed a
voluntary assignment of this Lease. The preceding sentence shall not apply to
corporations whose stock is traded through a national or regional exchange or an
over-the-counter market. Anything in this Article to the contrary
notwithstanding, provided no Event of Default has occurred and is continuing,
Tenant may, upon prior written notice to Landlord but without Landlord's prior
written consent and
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without being subject to Landlord's rights and Tenant's obligations set forth in
Section 7.4, assign or sublease to a "Permitted Transferee." For purposes of
this Lease, a "Permitted Transferee" shall mean a corporation or other business
entity: (a) into or with which Tenant shall be merged or consolidated, or to
which substantially all of the assets of Tenant may be transferred, provided
that the successor shall have a net worth of at least $20,000,000.00 and
reasonable liquidity, and provided that such successor shall assume in writing
all of the obligations and liabilities of Tenant under this Lease; or (b) which
shall control, be controlled by or be under common control with Tenant. In the
event of any such assignment or subletting, Tenant shall remain fully liable as
a primary obligor. For purposes of clause (b) above, control shall be deemed to
be ownership of fifty percent (50%) or more of the stock and voting interest.
7.3 If Tenant wants to assign or sublet all or part of the Premises or
this Lease, then Tenant shall give Landlord written notice ("Tenant's Request
Notice") specifying the proposed assignee or subtenant and its business, the
commencement date of the proposed assignment or sublease (the "Proposed Sublease
Commencement Date"), the area proposed to be assigned or sublet (the "Proposed
Sublet Space"), any premium or other consideration being paid for the proposed
assignment or sublease and all other terms of the proposed assignment or
sublease, and including (if available) the most recent financial statement and
Dun and Bradstreet report of such assignee or subtenant and reasonably detailed
information regarding such assignee or subtenant's reputation and business
experience.
7.4 If pursuant to any agreement effecting or relating to any sublease
or assignment (other than a sublease or assignment pursuant to Section 7.2) the
subtenant or assignee is to pay any amount in excess of the sum of (a) the rent
and other amounts due under this Lease plus (b) the reasonable out-of-pocket
expenses (e.g., brokerage, advertising and improvements for the subtenant)
incurred by Tenant in connection with the sublease or assignment, then, whether
such excess is in the form of an increased rental, lump sum payment, payment for
the sale or lease of fixtures or other leasehold improvements or any other form
(and if the applicable space does not constitute the entire Premises, then such
excess shall be determined on a pro rata basis), Tenant shall pay to Landlord
one half of any such excess upon such terms as shall be specified by Landlord
and in no event later than ten (10) days after Tenant's receipt (or deemed
receipt) thereof. Landlord shall have the right to inspect Tenant's books and
records relating to any sublease or assignment upon not less than ten days'
prior written notice. The foregoing notwithstanding, Tenant shall have the right
to retain all amounts paid by subtenants or assignees for occupancy during the
first two years of the Lease Term.
ARTICLE VIII
MAINTENANCE AND REPAIRS
8.1 Except as provided in Section 8.2 below, Tenant shall maintain the
Premises and all fixtures and equipment located therein in clean, safe and
sanitary condition, take good care thereof, make all repairs and replacements
thereto and suffer no waste or injury thereto. Tenant shall give Landlord prompt
written notice of any defect in or damage to the Building or any part thereof.
Except as otherwise provided in Article XVII, all damage to the Premises or to
any other part of the Building or the Land caused by any act or omission of any
invitee, agent, employee, subtenant, assignee, contractor, client, family
member, licensee, customer or guest of Tenant (collectively "Invitees") or
Tenant, shall be repaired by and at Tenant's expense, except that Landlord shall
have the right to make any such repair at Tenant's expense. At the expiration or
earlier termination of the Lease Term, Tenant shall surrender the Premises broom
clean and in good order, condition and repair, except for ordinary wear and tear
and as otherwise provided in Article XVII. Landlord shall provide and install
replacement tubes for building standard fluorescent light fixtures (subject to
reimbursement per Article V); all other bulbs and tubes for the Premises shall
be provided and installed at Tenant's expense.
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8.2 Landlord shall keep the exterior and demising walls, load bearing
elements, foundations and roof and the base building mechanical, electrical,
HVAC and plumbing systems, pipes and conduits that are provided by Landlord in
the operation of the Building, clean and in good operating condition and,
promptly after becoming aware of any such item needing repair, will make all
necessary repairs thereto. Landlord shall cleanup the landscaping during the
construction of the initial tenant improvements.
ARTICLE IX
ALTERATIONS
9.1 The original improvement of the Premises shall be accomplished in
accordance with Exhibit B. Landlord is under no obligation to make any
alterations, decorations, additions, improvements or other changes (collectively
"Alterations") in or to the Premises except as otherwise expressly provided
herein.
9.2 Tenant shall not make or permit anyone to make any Alteration in or
to the Premises or the Building without Landlord's prior written consent, which
consent may be granted or withheld in Landlord's absolute discretion with
respect to structural Alteration and any Alteration which affects base Building
systems, but which consent shall not be unreasonably withheld with respect to
other Alterations and which consent shall not be required with respect to purely
cosmetic Alterations. Any Alteration made by Tenant shall be made: (a) in a
good, workmanlike, first-class and prompt manner; (b) using new materials only;
(c) by a contractor, on days and at times and (if the Alteration requires a
building permit or will cost more than $100,000) under the supervision of an
architect approved in writing by Landlord; (d) in accordance with plans and
specifications prepared by an engineer or architect approved by Landlord and
reviewed (at Landlord's standard charge) by Landlord; (e) in accordance with
Laws, requirements of any firm insuring the Building and Building standards; (f)
after obtaining a worker's compensation insurance policy approved in writing by
Landlord and any bonds required by Landlord; (g) after delivering to Landlord
written, unconditional waivers of mechanics' and materialmen's liens against the
Premises and the Building from all proposed contractors, subcontractors,
laborers and material suppliers; and (h) with respect to electrical and
mechanical work, by a contractor designated by Landlord. If a lien (or a
petition to establish a lien) is filed in connection with any Alteration, then
such lien (or petition) shall be discharged by Tenant at Tenant's expense within
ten (10) days thereafter by the payment thereof or filing of a bond acceptable
to Landlord. Landlord's consent to an Alteration shall be deemed not to
constitute Landlord's consent to subjecting its interest in the Premises or the
Building to liens which may be filed in connection therewith. Tenant shall hire
Landlord (or its designee) to perform any Alteration, provided that the charge
to Tenant therefor is reasonable and consistent with third party proposals
and/or bids received by Tenant. Promptly after the completion of an Alteration,
Tenant at its expense shall deliver to Landlord three (3) sets of accurate
as-built drawings showing such Alteration.
9.3 If an Alteration is made without Landlord's prior written consent,
then Landlord shall have the right at Tenant's expense to remove such Alteration
and restore the Premises and the Building to their condition immediately prior
thereto or to require Tenant to do the same. All Alterations to the Premises or
the Building made by Tenant shall become Landlord's property at the expiration
or earlier termination of the Lease Term and shall be surrendered with the
Premises at the expiration or earlier termination of the Lease Term, except that
(a) if Tenant is not in default under this Lease, then Tenant shall have the
right to remove, prior to the expiration or earlier termination of the Lease
Term, movable furniture, movable furnishings and movable trade fixtures
installed in the Premises by Tenant solely at Tenant's expense, and (b) Tenant
shall be required to remove all Alterations to the Premises or the Building
which Landlord designates in writing for removal. At Tenant's written request,
Landlord shall notify at the time Tenant requests Landlord's approval or any
Alteration whether Tenant will be required to remove such Alteration. Landlord
waives any lien right with respect to any of Tenant's personal property which is
leased or financed. Movable furniture, furnishings and trade fixtures shall be
deemed
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to exclude without limitation any item the removal of which might cause damage
to the Premises or the Building or which would normally be removed from the
Premises with the assistance of any tool or machinery other than a dolly.
Landlord shall have the right to repair at Tenant's expense any damage to the
Premises or the Building caused by such removal or to require Tenant to do the
same. If any such item is not removed prior to the expiration or earlier
termination of the Lease Term, then such item shall become Landlord's property
and shall be surrendered with the Premises as a part thereof; provided, however,
that Landlord shall have the right to remove such item from the Premises at
Tenant's expense.
ARTICLE X
SIGNS
10.1 Landlord will list Tenant's name in the Building directory. So long
as Tenant is the sole tenant of the Building, Tenant shall have sole use of the
directory (but Landlord may list its name and the Building manager's name
thereon). Subject to Tenant's obtaining Landlord's approval (which approval
shall not be unreasonably withheld) and any necessary governmental or Columbia
approval, Tenant shall have the right to install a sign on the exterior of the
Building. Tenant shall pay for maintenance of such sign and shall remove such
sign at the expiration or earlier termination of the Lease Term. Except as
provided herein, Tenant shall not paint, affix or otherwise display on any part
of the exterior or interior of the Building any sign, advertisement or notice.
ARTICLE XI
SECURITY DEPOSIT
11.1 Tenant shall deliver the Security Deposit when Tenant
executes this Lease. Landlord shall not be required to pay interest on the
Security Deposit or to maintain the Security Deposit in a separate account.
Within three (3) days after notice of Landlord's use of the Security Deposit,
Tenant shall restore the Security Deposit to its prior amount. Within
approximately ninety (90) days after the expiration or earlier termination of
the Lease Term, Landlord shall return the Security Deposit less such portion
thereof as Landlord may have used to satisfy Tenant's obligations with respect
to an Event of Default. If Landlord transfers the Security Deposit to a
transferee of the Building or Landlord's interest therein, then such transferee
(and not Landlord) shall be liable for its return. Tenant shall have the right
to deliver to Landlord an unconditional, irrevocable letter of credit in
substitution for the cash Security Deposit. Tenant shall cause such letter of
credit to be: (a) in form and substance reasonably satisfactory to Landlord; (b)
issued by a commercial bank reasonably acceptable to Landlord in the Washington,
D.C. metropolitan area (or if issued by a bank not in the Washington, D.C.
metropolitan area, then confirmed by a bank in the Washington, D.C. metropolitan
area); (c) made expressly transferable and assignable to the owner from time to
time of the Building; (d) automatically renewed (without necessity of the
issuer's or any one else's taking any action) from time to time through the
ninetieth (90th) day after the expiration or earlier termination of the Lease
Term unless the issuer gives Landlord thirty (30) days prior written notice of
nonrenewal; and (e) replaced with cash in the amount of the Security Deposit
within five (5) days after receipt of any notice pursuant to Section 11.1(d).
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ARTICLE XII
HOLDING OVER
12.1 Tenant acknowledges that it is extremely important that Landlord
have substantial advance notice of the date Tenant will vacate the Premises
because Landlord will (a) require an extensive period to secure a replacement
tenant, and (b) plan its entire leasing and renovation program for the Building
in reliance on its lease expiration dates. If the Premises are not surrendered
at the expiration or earlier termination of Tenant's right of possession, then
it will be conclusively presumed that the value of possession, and the resulting
loss that will be suffered by Landlord, far exceed the Base Rent and additional
rent that would have been payable had the Lease Term continued during such
holdover period. Therefore if upon the expiration or earlier termination of
Tenant's right of possession Tenant (or anyone claiming through Tenant) does not
surrender immediately the Premises (or portion thereof), then the rent shall be
increased to equal the greater of the following percentage of the Base Rent,
additional rent and other sums that would have been payable pursuant to the
provisions of this Lease (assuming the Lease Term for the entire Premises had
continued during such holdover period): one hundred three percent (103%) if
Landlord has given Tenant written permission to holdover; one hundred
twenty-five percent (125%) if Landlord has not given Tenant written permission
to holdover but Landlord does not have a lease or purchase agreement executed
with another party and does not intend for itself or its affiliates to occupy;
or one hundred fifty percent (150%) in any other case. Such rent shall be
computed on a monthly basis and shall be payable on the first day of such
holdover period and the first day of each calendar month thereafter during such
holdover period until the Premises have been vacated. Nothing herein shall limit
Landlord's right to recover possession of the Premises upon the expiration or
earlier termination of the Lease Term.
ARTICLE XIII
INSURANCE
13.1 Tenant shall not conduct any activity or place any item in or about
the Building which may violate the requirements or increase the rate of any
insurance covering the Building. If any increase in such rate is due to any such
activity or item, then (whether or not Landlord has consented to such activity
or item) Tenant shall pay such increase. The statement of any insurance company
or insurance rating or similar organization that such an increase is due to any
such activity or item shall be conclusive evidence thereof.
13.2 Tenant shall maintain throughout the Lease Term with a company
licensed to do business in the jurisdiction in which the Building is located,
approved in writing by Landlord and having a rating equal to or exceeding A:XI
in Best's Insurance Guide (a) broad form commercial general liability insurance
(written on an occurrence basis and including contractual liability coverage
insuring Tenant's obligations pursuant to Section 15.2, premises and operations,
broad form property damage and independent contractors coverages, and an
endorsement for personal injury), and (b) all-risk property insurance. Such
liability insurance shall be in minimum amounts typically carried by prudent
tenants engaged in similar operations, but in no event shall be in an amount
less than two million dollars ($2,000,000) combined single limit per occurrence.
Such property insurance shall be in an amount not less than that required to
replace all Alterations and all other contents of the Premises (other than the
improvements installed pursuant to Exhibit B). All such insurance shall name
Landlord (and, at Landlord's option, its partners, members, employees and
building manager) and the holder of any Mortgage as additional named insureds,
contain an endorsement that such insurance shall remain in full force and effect
notwithstanding that the insured may have waived its claims against any person
prior to the occurrence of a loss, provide that the insurer waives all right of
recovery by way of subrogation against Landlord, its partners, agents and
employees, be primary and noncontributory, and contain an endorsement
prohibiting cancellation, failure to renew, reduction in amount or change of
coverage (1) as to the interests of Landlord or the holder of any Mortgage by
reason of any act or omission of Tenant, and (2) without the insurer's giving
Landlord thirty
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(30) days' prior written notice of such action. Tenant shall deliver a
certificate of such insurance and receipts evidencing payment of the premium for
such insurance (and, upon request, copies of all required insurance policies,
including endorsements and declarations) to Landlord on or before the Lease
Commencement Date and at least annually thereafter. Landlord reserves the right
to increase reasonably (and in accordance with industry practice for similar
tenants in similar buildings) from time to time the minimum amounts of insurance
Tenant is required to maintain.
13.3 Landlord shall maintain all risk property insurance (with
replacement cost coverage) on the base Building in an amount sufficient to avoid
the application of any coinsurance provision. Landlord waives its right of
recovery against Tenant and releases Tenant from any and all liabilities claims
and losses for which Tenant may otherwise be liable to the extent Landlord is
covered by such insurance (or would have been covered by insurance if Landlord
had maintained the insurance required hereunder). Landlord shall secure a waiver
of subrogation endorsement from its insurance carrier.
ARTICLE XIV
SERVICES AND UTILITIES
14.1 Landlord will furnish to the Premises air-conditioning and heating
during the seasons they are required in Landlord's reasonable judgment. Landlord
will provide: janitorial service on Monday through Friday (excluding holidays);
electricity; water; elevator service; and exterior window-cleaning service. The
Building's normal operating hours are 8:00 a.m. to 6:00 p.m. on Monday through
Friday (excluding holidays) and 9:00 a.m. to 1:00 p.m. on Saturday (excluding
holidays) and such other hours as Landlord and Tenant reasonably determine.
Notwithstanding anything to the contrary contained in this Lease, if any
interruption of utilities or services shall continue for more than three (3)
consecutive business days and shall render any portion of the Premises unusable
for the normal conduct of Tenant's business, then all Base Rent and additional
rent payable hereunder with respect to such portion of the Premises which Tenant
does not occupy shall be abated retroactively to the first (1st) business day of
such interruption and such abatement shall continue until full use of such
portion of the Premises is restored to Tenant. Except in the case of an
emergency, Landlord will give Tenant at least three (3) business days prior
notice if Landlord intends to interrupt any services required to be furnished by
the Landlord. Landlord shall endeavor in good faith and use its commercial best
efforts to promptly commence and diligently pursue to completion any work
reasonably necessary to restore the utility or service so interrupted.
Notwithstanding any of the foregoing to the contrary, Tenant and Tenant's
employees shall have access to the Building and Premises twenty-four (24) hours
a day, seven (7) days a week, 365 days a year.
14.2 Tenant shall pay directly to BG & E for all electricity consumed in
the Building or on the Land.
ARTICLE XV
LIABILITY OF LANDLORD
15.1 Landlord, its employees and agents shall not be liable to Tenant,
Invitees or any other person or entity for any damage (including indirect and
consequential damage), injury, loss or claim (including claims for the
interruption of or loss to business) based on or arising out of any cause
whatsoever, including without limitation: repair to any portion of the Premises
or the Building; interruption in the use of the Premises or any equipment
therein; accident or damage resulting from any use or operation (by Landlord,
Tenant or any other person or entity) of heating, cooling, electrical, sewerage
or plumbing equipment; termination of this Lease by reason of damage to or
condemnation of the Premises or the Building; fire, robbery, theft, vandalism,
mysterious disappearance or any other casualty; actions of any other tenant of
the Building or other person or entity; failure or inability to furnish or
interruption in any utility or service specified in this Lease; and leakage in
any part of
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the Premises or the Building. If a condition exists which may be the basis of a
claim of constructive eviction, then Tenant shall give Landlord written notice
thereof and a reasonable opportunity to correct such condition, and in the
interim Tenant shall not claim that it has been constructively evicted or is
entitled to a rent abatement. Any property placed by Tenant or Invitees in or
about the Premises or the Building shall be at the sole risk of Tenant, and
Landlord shall not in any manner be responsible therefor. Any person receiving
an article delivered for Tenant shall be acting as Tenant's (not Landlord's)
agent. For purposes of this Article, the term "Building" shall be deemed to
include the Land. The foregoing notwithstanding, Landlord shall not be released
from liability for physical injury to natural persons caused by Landlord's
negligence or willful misconduct.
15.2 Except for Landlord's negligence or willful misconduct, Tenant
shall reimburse Landlord, its employees and agents for, and shall indemnify,
defend upon request and hold them harmless from and against, all costs, damages,
claims, liabilities, expenses (including attorneys' fees), losses and court
costs suffered by or claimed against them, directly or indirectly, based on or
arising out of, in whole or in part, (a) use and occupancy of the Premises or
the business conducted therein, (b) any act or omission of Tenant or any
Invitee, (c) any breach of Tenant's obligations or warranties under this Lease,
including failure to surrender the Premises upon the expiration or earlier
termination of the Lease Term, or (d) entry by Tenant or Invitees upon the Land
prior to the Lease Commencement Date.
15.3 A landlord shall not be liable for any obligation or liability
based on or arising out of any event or condition occurring during any period
such landlord was not the owner of the Building. A landlord shall be relieved of
an obligation or liability incurred during its period of ownership if and only
if and to the extent the successor landlord agrees to assume such obligation or
liability of the prior landlord. If a landlord transfers its interest in the
Building, then Tenant shall attorn to the transferee and execute, acknowledge
and deliver within five (5) days after request any document submitted to Tenant
to confirm the attornment.
15.4 Tenant shall not have the right to offset, deduct or assert a
counterclaim for any amount owed or allegedly owed to it, against any payment to
Landlord. Tenant's sole remedy for recovery of such amount is to institute an
independent action.
15.5 If Tenant is awarded a money judgment against Landlord or with
respect to any breach of Landlord's obligations, then recourse for satisfaction
of such judgment shall be limited to execution against Landlord's estate and
interest in the Building. No other asset of Landlord, any officer, director,
partner or member of Landlord (collectively "Officer") or any other person or
entity shall be available to satisfy or subject to such judgment, nor shall any
Officer or other person or entity have personal liability for satisfaction of
any claim or judgment against Landlord or any Officer. Nothing in this Section
shall limit Tenant's rights and remedies pursuant to the last sentence of
Section 22.1.
15.6 Neither party shall be liable for punitive damages.
ARTICLE XVI
RULES
16.1 Tenant shall observe: the rules specified in Exhibit A; and any
other reasonable rule that Landlord may promulgate for the Building, provided
notice thereof is given and such rule is not inconsistent with this Lease.
Landlord shall have no duty to enforce such rules or any provision of any other
lease against any other tenant.
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ARTICLE XVII
DESTRUCTION
17.1 If the Premises are rendered totally or partially inaccessible or
unusable by fire or other casualty, then Landlord shall diligently restore the
Premises and the Building to substantially the same condition they were in prior
to such casualty, except that if in Landlord's judgment such restoration cannot
be completed within one year after the occurrence of such casualty (taking into
account the time needed for effecting a settlement with any insurance company,
removal of debris, preparation of plans and issuance of all required
governmental permits), then either party shall have the right to terminate the
Lease Term as of the sixtieth (60th) day after such casualty by giving written
notice within forty-five (45) days after the occurrence of such casualty. If
this Lease is not terminated pursuant to this Article, then until such
restoration of the Premises are substantially complete Tenant shall be required
to pay the Base Rent for only the portion of the Premises that in Landlord's
judgment is usable while such restoration is being made, except that if such
casualty was caused by the act or omission of Tenant or an Invitee, then Tenant
shall not be entitled to any rent reduction. After receipt of the insurance
proceeds (including proceeds of any insurance maintained by Tenant), Landlord
shall restore the Premises and the Building, except that (a) if such casualty
was caused by the act or omission of Tenant or an Invitee, then Tenant shall pay
the amount by which such expenses exceed any property insurance proceeds
actually received by Landlord on account of such casualty, and (b) Landlord
shall not be required to repair or restore any Alteration previously made by
Tenant or any of Tenant's trade fixtures, furnishings, equipment or personal
property. Anything to the contrary notwithstanding, Landlord shall have the
right to terminate this Lease if (1) insurance proceeds are insufficient to pay
the full cost of such restoration, (2) any Mortgage holder does not make such
proceeds available for such restoration, (3) zoning or other Laws do not permit
such restoration, or (4) restoration costs exceed twenty-five percent (25%) of
the Building's replacement value.
ARTICLE XVIII
CONDEMNATION
18.1 If ten percent or more of the Premises or occupancy thereof is
condemned or sold under threat of condemnation (collectively "condemned"), then
this Lease shall terminate on the day prior to the date title vests in the
condemnor (the "Vesting Date"). If less than such ten percent is condemned, then
this Lease shall continue in full force and effect as to the part of the
Premises not condemned, except that as of the Vesting Date rent shall be reduced
proportionately.
18.2 All awards, damages and compensation paid on account of such
condemnation shall belong to Landlord. Tenant assigns to Landlord all rights
thereto. Tenant shall not make any claim against Landlord or the condemnor for
any portion thereof attributable to damage to the Premises, value of the
unexpired portion of the Lease Term, loss of profits or goodwill, leasehold
improvements or severance damages. The foregoing shall not prevent Tenant from
pursuing a separate claim against the condemnor for the value of movable
furnishings and movable trade fixtures installed in the Premises solely at
Tenant's expense and relocation expenses, provided that such claim in no way
diminishes any award, damages or compensation payable to Landlord.
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ARTICLE XIX
DEFAULT
19.1 An Event of Default is (a) Tenant's failure to make when due any
payment of the Base Rent, additional rent or other amount, which failure
continues for five (5) days after written notice, (b) Tenant's breach of any
other covenant or warranty, which breach continues for thirty (30) days after
written notice (or such longer period of time as may be reasonably required to
cure such breach provided Tenant diligently pursues such cure during such period
and thereafter diligently pursues such cure to completion), (c) an Event of
Bankruptcy as specified in Article XX, or (d) Tenant's dissolution or
liquidation.
19.2 This Lease is on the express condition that if an Event of Default
occurs (even if prior to the Lease Commencement Date), then this Section shall
apply. Except as otherwise provided in this Section, Landlord's obligations
pursuant to this Lease shall cease and failure to perform such obligations shall
not relieve Tenant from any obligation. Landlord shall have the right to
terminate this Lease. In addition, with or without terminating this Lease,
Landlord may re-enter, terminate Tenant's right of possession and take
possession of the Premises. The provisions of this Article shall operate as a
notice to quit. Tenant waives any other notice to quit or of Landlord's
intention to re-enter the Premises or terminate this Lease. If necessary,
Landlord may proceed to recover possession of the Premises under applicable law,
or by such proceedings, including re-entry and possession, as may be applicable.
Landlord may relet the Premises or any part thereof, alone or together with
other space, for such term(s) (which may extend beyond the date on which the
Lease Term would have expired but for any termination thereof) and on such terms
and conditions (which may include concessions) as Landlord, in its sole
discretion, may determine, but Landlord shall not be liable for, nor shall
Tenant's obligations be diminished by reason of, Landlord's failure to relet all
or any portion of the Premises or collect any rent due upon such reletting.
Whether or not this Lease is terminated or any suit is instituted, Tenant shall
be liable for: (a) the Base Rent, additional rent, damages or other sums which
may be due or sustained prior to such default, and for all costs, fees and
expenses (including without limitation reasonable attorneys' fees, brokerage
fees, advertising expenses, expenses incurred in placing the Premises in
first-class rentable condition and concessions granted by Landlord) incurred by
Landlord in pursuit of its remedies and in renting the Premises to others from
time to time; and (b) additional damages which at Landlord's election shall be
either: (1) an amount equal to the Base Rent and additional rent which would
have become due from the date of Tenant's default through the expiration (or
what but for any termination thereof would have been such expiration), less the
amount of rental, if any, which Landlord receives during such period from others
to whom the Premises may be rented (other than any additional rent received as a
result of any failure of such other person to perform any of its obligations),
which amount shall be computed and payable in monthly installments, in advance,
on the first day of each calendar month following Tenant's default and
continuing until the expiration of the Lease Term (or what but for any
termination thereof would have been such expiration). Separate suits may be
brought from time to time to collect any such damages for any month(s) (and any
such suit shall not in any manner prejudice Landlord's right to collect any such
damages for any subsequent month(s)) or Landlord may defer initiating any such
suit until after the expiration of the Lease Term (in which event such deferral
shall not be construed as a waiver of Landlord's rights as set forth herein and
Landlord's cause of action shall be deemed not to have accrued until the
expiration of the Lease Term); or (2) an amount equal to the present value (as
of the date of Tenant's default) of (c) the Base Rent and additional rent due or
which would have become due from time to time through the expiration of the
Lease Term (or what but for any termination thereof would have been such
expiration), minus (d) the net rental value (as determined by an appraiser
selected by Landlord) of the Premises through the expiration of the Lease Term,
which liquidated and agreed final damages shall be payable to Landlord in a lump
sum on demand. For purpose of this Section, present value shall be computed by
discounting at a rate equal to one (1) whole percentage point above the discount
rate in effect (as of the date of payment) at the Federal Reserve Bank located
in Richmond, Virginia. Landlord may bring suit to collect any such damages at
any time after an Event of Default. Tenant
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waives any right of redemption, re-entry or restoration of the operation of this
Lease under any present or future law, including any such right which Tenant
would otherwise have if Landlord obtains possession of the Premises after an
Event of Default. Whether or not the Lease Term and/or Tenant's right of
possession is terminated, Landlord shall have the right to terminate any renewal
or expansion right and to withhold any consent or approval in its sole and
absolute discretion. If Landlord is entitled, or Tenant is required, pursuant to
any provision hereof to take any action upon the termination of the Lease Term,
then Landlord shall be entitled, and Tenant shall be required, to take such
action also upon the termination of Tenant's right of possession. Provided
Tenant has vacated fully the Premises and has given Landlord written notice
thereof, Landlord shall use reasonable efforts to mitigate damages.
19.3 Landlord's rights and remedies set forth in this Lease are
cumulative and in addition to Landlord's other rights and remedies at law or in
equity, including those available as a result of any anticipatory breach.
Landlord's exercise of any such right or remedy shall not prevent the concurrent
or subsequent exercise of any other right or remedy. Landlord's delay or failure
to exercise or enforce any of Landlord's rights or remedies or Tenant's
obligations shall not constitute a waiver of any such rights, remedies or
obligations. Landlord's acceptance of any payment with knowledge of a breach
shall not constitute a waiver of such breach. Landlord shall be deemed not to
have granted any waiver unless such waiver is set forth expressly in an
instrument signed by Landlord. Any such waiver shall not be construed as a
waiver of any matter except as specified therein. Neither Tenant's payment of an
amount less than a sum due nor Tenant's endorsement or statement on any check or
letter accompanying such payment shall be deemed an accord and satisfaction.
Notwithstanding any request or designation by Tenant, Landlord may apply any
payment received from Tenant to any payment then due. Landlord's acceptance of
any payment (including any payment pursuant to Section 12.1) shall be deemed not
to constitute a waiver of any breach or prejudice Landlord's rights and
remedies. Re-entry and acceptance of keys shall not be considered an acceptance
of a surrender of this Lease.
19.4 If more than one natural person and/or entity shall constitute
Tenant, then the liability of each such person or entity shall be joint and
several. If Tenant is a general partnership or other entity the partners or
members of which are subject to personal liability, then the liability of each
such partner or member shall be joint and several.
19.5 If Tenant fails to make any payment to any third party or to do any
act required hereby to be made or done by Tenant, and if such failure is not
cured within the cure period specified in Section 19.1(b), then Landlord may,
but shall not be required to, make such payment or do such act. Landlord's
taking such action shall not be considered a cure of such failure by Tenant or
prevent Landlord from pursuing any remedy it is otherwise entitled to in
connection with such failure. If Landlord elects to take such action, then
Tenant shall pay all expenses incurred (including a ten percent (10%) fee to
cover Landlord's administrative expenses).
19.6 If Tenant fails to pay the Base Rent, additional rent or any other
payment due Landlord by the date such payment is due (without regard to any
grace period specified in this Lease), then (without limiting Landlord's rights
and remedies) Tenant shall pay a late fee of five percent (5%) of the amount of
such payment. Such payment shall bear interest at the Default Rate from the date
such payment was due to the date of payment. The Default Rate shall equal the
rate per annum which is two (2) whole percentage points above the prime rate
published from time to time in the Money Rates section of the Wall Street
Journal (or substitute prime rate reasonably designated by Landlord). The
foregoing notwithstanding, no late fee shall be payable with respect to the
first late payment in any calendar year provided such payment is made within ten
(10) days after written notice.
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ARTICLE XX
BANKRUPTCY
20.1 An Event of Bankruptcy is the occurrence with respect to Tenant of
any of the following: (a) such person'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 (the "Insolvency Laws"); (b) appointment of a
receiver or custodian for any property of such person, or the institution of a
foreclosure or attachment action upon any property of any such person; (c)
filing by such person of a voluntary petition under the provisions of the
Bankruptcy Code or Insolvency Laws; (d) filing of an involuntary petition
against such person as the subject debtor under the Bankruptcy Code or
Insolvency Laws, which either (1) is not dismissed within thirty (30) days after
filing, or (2) results in the issuance of an order for relief against the
debtor; or (e) such person's making or consenting to an assignment for the
benefit of creditors or a composition of creditors.
20.2 After the commencement of a case (the "Case") in which Tenant is
the subject debtor under the Bankruptcy Code, (a) Tenant or its trustee in
bankruptcy (collectively "Trustee") shall perform all of Tenant's post-petition
obligations under this Lease, and (b) if Landlord is entitled to damages
(including without limitation unpaid rent), then all such damages shall be
entitled to administrative expense priority pursuant to Section 507(a)(1) of the
Bankruptcy Code. If the Lease is assigned pursuant to the Bankruptcy Code, then
the assignee shall be deemed without further act to have assumed all of Tenant's
obligations under this Lease arising from and after such assignment and at
Landlord's request shall execute an instrument confirming such assumption.
Trustee shall not have the right to assume or assume and assign this Lease
unless Trustee promptly (a) cures all defaults under this Lease, (b) compensates
Landlord for damages incurred as a result of such defaults, (c) provides
adequate assurance of future performance on the part of Trustee as debtor in
possession or Trustee's assignee, and (d) complies with all other requirements
of the Bankruptcy Code. If Trustee fails to assume or assign this Lease in
accordance with the requirements of the Bankruptcy Code within sixty (60) days
after the initiation of the Case (or, if shorter, the shortest period of time in
which Trustee may be required to so act), then Trustee shall be deemed to have
rejected this Lease. If this Lease is rejected or deemed rejected, then Landlord
may exercise all rights and remedies available pursuant to Article XIX. Adequate
assurance of future performance shall require (among other things) that the
following minimum criteria be met: (1) Tenant's gross receipts in the ordinary
course of business during the thirty (30) days preceding the Case must be
greater than ten (10) times the next monthly installment of the Base Rent and
additional rent; (2) Both the average and median of Tenant's monthly gross
receipts in the ordinary course of business during the seven (7) months
preceding the Case must be greater than ten (10) times the next monthly
installment of the Base Rent and additional rent; (3) Trustee must pay its
estimated pro rata share of the cost of all services performed or provided by
Landlord (whether directly or through agents or contractors and whether or not
previously included as part of the Base Rent) in advance of the performance or
provision of such services; (4) Trustee must agree that Tenant's business shall
be conducted in a first-class manner, and that no liquidating sale, auction or
other non-first-class business operation shall be conducted in the Premises; (5)
Trustee must agree that the use of the Premises as stated in this Lease shall
remain unchanged and that no prohibited use shall be permitted; (6) Trustee must
agree that the assumption or assumption or assignment of this Lease shall not
violate or affect the rights of other tenants in the Building; (7) Trustee must
pay at the time the next monthly installment of the Base Rent is due, in
addition to such installment, an amount equal to the monthly installments of the
Base Rent and additional rent due for the next six (6) months thereafter, such
amount to be held as a security deposit; (8) Trustee must agree to pay
immediately after Landlord draws on such security deposit the amount drawn; (9)
Trustee must comply with all of Tenant's obligations under this Lease; and (10)
All assurances of future performance specified in the Bankruptcy Code must be
provided.
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ARTICLE XXI
SUBORDINATION
21.1 This Lease is subject and subordinate to the lien, provisions,
operation and effect of all mortgages, deeds of trust, ground leases or other
security instruments which may now or hereafter encumber the Building or the
Land (collectively "Mortgages"), to all funds and indebtedness intended to be
secured thereby, and to all renewals, extensions, modifications, recastings or
refinancings thereof. The holder of a Mortgage to which this Lease is
subordinate shall have the right (subject to any required approval of the holder
of any other Mortgage) at any time to declare this Lease to be superior to the
lien, provisions, operation and effect of such Mortgage. The foregoing
notwithstanding, subordination of this Lease to any Mortgage is conditioned on
the holder of such Mortgage's agreeing to execute a subordination,
nondisturbance and attornment agreement (on such holder's customary form).
21.2 At Landlord's request Tenant shall execute promptly any requisite
or appropriate document confirming such subordination. Tenant waives the
provisions of any statute or rule of law now or hereafter in effect which may
give Tenant any right to terminate or otherwise adversely affect this Lease or
Tenant's obligations in the event any such foreclosure proceeding is prosecuted
or completed or in the event the Land, the Building or Landlord's interest
therein is transferred by foreclosure sale or by deed in lieu of foreclosure. If
this Lease is not extinguished upon such transfer or by the transferee following
such transfer, then, at the request of such transferee, Tenant shall attorn to
such transferee and shall recognize such transferee as landlord. Upon such
attornment such transferee shall not be (a) bound by any payment of the Base
Rent or additional rent more than one (1) month in advance, (b) bound by any
amendment of this Lease made without the consent of the holder of each Mortgage
existing as of the date of such amendment, (c) liable for any breach, act or
omission of any prior landlord, (d) subject to any offsets or defenses which
Tenant might have against any prior landlord, or (e) liable for return of the
Security Deposit unless such transferee actually receives the Security Deposit.
Within five (5) days after receipt, Tenant shall execute, acknowledge and
deliver any requisite or appropriate document submitted to Tenant confirming
such attornment.
21.3 If a (prospective or current) holder of a Mortgage requires that
modifications to this Lease be obtained, and provided that such modifications
(a) are reasonable, (b) do not adversely affect Tenant's use of the Premises as
herein permitted, and (c) do not increase the rent and other sums to be paid by
Tenant, then Landlord may submit to Tenant an amendment to this Lease
incorporating such modifications. Tenant shall execute, acknowledge and return
such amendment within five (5) days after receipt if Tenant reasonably approves
such amendment.
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ARTICLE XXII
QUIET ENJOYMENT
22.1 If Tenant shall perform timely all of its obligations, then,
subject to the provisions of this Lease, Tenant shall during the Lease Term
peaceably and quietly occupy and enjoy possession of the Premises without
hindrance by Landlord or anyone claiming through Landlord. The foregoing
notwithstanding, this Lease is contingent upon Landlord's purchasing the
Building. If Landlord does not purchase the Building by May 1, 1998, then this
Lease shall terminate.
22.2 Landlord reserves the right to: (a) change the street address and
name of the Building; (b) (if Tenant is not the sole tenant of the Building)
change the arrangement and location of entrances, passageways, doors, doorways,
corridors, elevators, stairs, restrooms or other public parts of the Building;
(c) erect, use and maintain pipes, conduits and other equipment in and through
the Premises; (d) (if Tenant is not the sole tenant of the Building) grant to
anyone the exclusive right to conduct any particular business in the Building
not inconsistent with the permitted use of the Premises; (e) use or lease
exclusively the roof, sidewalks and other exterior areas; (f) resubdivide the
Land or to combine the Land with other lands; (g) (if Tenant is not the sole
tenant of the Building) construct improvements on the Land and in the public and
common areas of the Building; (h) relocate any parking area designated for
Tenant's use; (i) during the last 12 months of the Lease Term, display signs,
advertisements and notices on any part of the exterior or interior of the
Building; and (j) make alterations to the Premises after Tenant vacates the
Premises or portion thereof and without relieving Tenant of its obligation to
pay rent through the expiration of the Lease Term. Exercise of any such right
shall not be considered a constructive eviction or a disturbance of Tenant's
business or occupancy. Landlord shall use reasonable effort to minimize any
disruption.
ARTICLE XXIII
GENERAL PROVISIONS
23.1 Tenant acknowledges that neither Landlord nor any broker, agent or
employee of Landlord has made any representation or promise with respect to the
Premises or the Building except as expressly set forth herein, and no right is
being acquired by Tenant except as expressly set forth herein. This Lease
contains the entire agreement of the parties and supersedes all prior
agreements, negotiations, letters of intent, proposals, representations,
warranties and discussions between the parties. This Lease may be changed in any
manner only by an instrument signed by both parties.
23.2 Nothing contained herein shall be construed as creating a
relationship between the parties other than that of landlord and tenant.
23.3 Each party warrants that in connection with this Lease it has not
employed or dealt with any broker, agent or finder other than the Broker(s).
Landlord shall pay each Broker pursuant to a separate agreement with such
Broker.
23.4 From time to time upon ten (10) days' prior written notice, Tenant
and each subtenant and assignee of Tenant shall execute, acknowledge and deliver
to Landlord and its designees a written statement certifying: (a) that this
Lease is unmodified and in full force and effect (or that this Lease is in full
force and effect as modified and stating the modifications); (b) the dates to
which rent and any other charges have been paid; (c) that Landlord is not in
default in the performance of any obligation (or specifying the nature of any
default); (d) the address to which notices are to be sent; (e) that this Lease
is subordinate to all Mortgages; (f) that Tenant has accepted the Premises and
all work therefor has been completed (or specifying the incomplete
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work); and (g) such other matters as Landlord may reasonably request. Any such
statement may be relied upon by any owner of the Building or the Land, any
prospective purchaser of the Building or the Land, any holder or prospective
holder of a Mortgage or any other person or entity. Time is of the essence to
the delivery of such statements.
23.5 LANDLORD AND TENANT WAIVE TRIAL BY JURY IN ANY ACTION, CLAIM OR
COUNTERCLAIM BROUGHT IN CONNECTION WITH ANY MATTER ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS LEASE, THE LANDLORD-TENANT RELATIONSHIP, TENANT'S USE OR
OCCUPANCY OF THE PREMISES OR ANY CLAIM OF INJURY OR DAMAGE. Tenant consents to
service of process relating to any such action at the Premises; provided,
however, that nothing herein shall be construed as requiring such service at the
Premises. Landlord and Tenant waive any objection to the venue of any action
filed in any court situated in the jurisdiction in which the Building is located
and waive any right under the doctrine of forum non conveniens or otherwise to
transfer any such action to any other court.
23.6 Any notice or other required communication shall be in writing and
deemed duly given when delivered in person (with receipt therefor) or sent
(postage prepaid, return receipt requested) by Federal Express, other overnight
courier, or certified or registered mail, to the following addresses: (a) if to
Landlord, 8227 Old Courthouse Road, Suite 100, Vienna, Virginia 22182; or (b) if
to Tenant, at the Tenant Address for Notices. A party may change its address for
the receiving of notices by notice given in accordance with this Section. If
Landlord or the holder of any Mortgage notifies Tenant that a copy of each
notice to Landlord shall be sent to such holder at a specified address, then
Tenant shall give (in the manner specified in this Section and at the same time
such notice is given to Landlord) a copy of each such notice to such holder, and
no such notice shall be considered duly given unless such copy is so given to
such holder. If Tenant claims that Landlord has breached any obligation, then
Tenant shall give such holder notice specifying the breach and permit such
holder a reasonable opportunity (not less than sixty (60) days) to cure the
breach. Such holder's curing of Landlord's default shall be deemed performance
by Landlord.
23.7 Each provision shall be valid and enforceable to the fullest extent
permitted by law. If any provision or its application to any person or
circumstance shall be invalid or unenforceable to any extent (e.g., an interest
rate is usurious), then such provision shall be deemed to be replaced by the
valid and enforceable provision most substantively similar thereto (e.g., the
highest non-usurious interest rate) and the remainder of this Lease and the
application of such provision to other persons or circumstances shall not be
affected.
23.8 Headings are used for convenience and shall not be considered in
construing this Lease. Gender appropriate pronouns and plural or singular forms
shall be substituted as the context may require. This Lease may be executed in
multiple counterparts, each of which is deemed an original and all of which
constitute one and the same document.
23.9 This Lease shall be binding upon and inure to the benefit of each
party and its successors and assigns, subject to the provisions restricting
assignment or subletting.
23.10 Upon reasonable prior notice, Tenant shall permit Landlord and its
designees to enter the Premises, without rent abatement, to inspect and exhibit
the Premises (but exhibition to prospective tenants shall be limited to the last
18 months of the Lease Term) and make such alterations and repairs as Landlord
deems necessary.
23.11 This Lease shall be governed by the laws of the State of Maryland.
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23.12 The submission to Tenant of correspondence or an unsigned copy of
this document shall not constitute an offer or option to lease. This Lease shall
become effective only upon execution and delivery by both parties.
23.13 Time is of the essence with respect to each obligation of Tenant
and Landlord.
23.14 Landlord reserves the right to make changes to the Building's
plans and specifications, provided such changes do not alter Tenant's use and
enjoyment of the Premises or increase the cost for taxes, services and utilities
for which Tenant is responsible.
23.15 All amounts payable by Tenant shall be paid to Landlord by check
(subject to collection) drawn upon a local clearinghouse bank and delivered to
the address to which notices to Landlord are to be given or to such other party
or such other address as Landlord may designate in writing. Except as otherwise
specified, any amount owed by Tenant to Landlord, and any cost, expense, damage
or liability incurred by Landlord for which Tenant is liable, shall be
considered additional rent payable pursuant to this Lease and paid by Tenant
within ten (10) days after the date Landlord notifies Tenant of the amount
thereof.
23.16 Tenant's liabilities existing as of the expiration or earlier
termination of the Lease Term shall survive such expiration or termination.
23.17 If either party is delayed or prevented from performing any
obligation due to fire, act of God, governmental act or failure to act, labor
dispute, inability to procure materials or any cause beyond such party's
reasonable control (whether similar or dissimilar to the foregoing), then the
time for performance shall be excused for the period of such delay or prevention
and extended for a period equal to the period of such delay or prevention. The
foregoing notwithstanding, this Section shall not excuse any late payment or
extend the Lease Term.
23.18 Landlord's review, approval and consent powers (including the
right to review plans and specifications) are for its benefit only. Such review,
approval or consent (or conditions imposed in connection therewith) shall be
deemed not to constitute a representation concerning legality, safety or any
other matter. Tenant waives any right to damages based upon Landlord's actually
or allegedly wrongfully withholding or delaying any approval or consent.
Tenant's sole remedy therefor shall be a proceeding for specific performance,
injunction or declaratory judgment.
23.19 From time to (but not more than twice per year) time upon fifteen
(15) days' prior written notice, Tenant shall submit such information regarding
the financial condition of Tenant as Landlord may reasonably request. Tenant
warrants that all such information heretofore or hereafter submitted is and
shall be correct and complete.
23.20 Deletion of any printed, typed or other portion of this Lease or
prior draft hereof shall not evidence an intention to contradict such deleted
portion. Such deleted portion shall be deemed not to have been inserted in this
Lease. Interpretation of this Lease shall not be affected by any claim that this
Lease has been prepared by either party.
23.21 The person executing on Tenant's behalf warrants due authorization
to so act.
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IN WITNESS WHEREOF, the parties have executed this Lease as of the date
first above written.
WITNESS: LANDLORD:
RED BRANCH ROAD, L.L.C.
BY: Atlantic Realty Companies, Inc., Manager
/s/ Stan Barg By: /s/ Charles Nulsen
- ------------------------ -----------------------------
Title: Executive Vice President
--------------------------
WITNESS: TENANT:
GSE SYSTEMS, INC.
/s/ Thomas K. Milhollan By: /s/ Robert W. Stroup
- ------------------------ ------------------------------
Title: Executive Vice President
---------------------------
22
EXHIBIT 10.26
March 6, 1998
GSE POWER SYSTEMS, INC.
f/k/a Simulation, Systems and
Services Technologies Company, Inc.
MSHI, Inc.
8930 Stanford Boulevard
Columbia, Maryland 21045
Re: Letter of Credit, Loan and Security Agreement dated as of January 30,
1996 (the "Loan Agreement") by and among GSE Power Systems, Inc.
("GSE"), MSHI, Inc. ("MSHI") and CoreStates Bank, N.A. ("CoreStates").
------------------------------------------------------------------------
Dear Sirs:
GSE, MSHI and CoreStates are parties to the Loan Agreement, as the same
has been amended from time to time. GSE Systems, Inc. is a guarantor of the
obligations under the Loan Agreement.
Pursuant to its terms, the Loan Agreement expired December 31, 1997.
CoreStates agreed on December 29, 1997, to extend the Expiration Date (as such
term is defined in the Loan Agreement) to March 31, 1998. Please be advised that
CoreStates hereby agrees to extend the Expiration Date until June 30, 1998
provided, however, that for such extension to be effective, the Export-Import
Bank of the United States must agree to a corresponding extension of its Working
Capital Guarantee No. AP066390XB.
Please signify your acceptance of this extension by executing this
letter agreement in the space provided below.
Very truly yours,
/s/ Derrick R. Davis
--------------------
Derrick R. Davis,
Vice President
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The foregoing extension is accepted and acknowledged this 6th day of March 1998.
GSE POWER SYSTEMS, INC.
By: /s/ Robert W. Stroup
---------------------------
Its: Executive Vice President,
Secretary & Treasurer
CONSENT OF GUARANTORS
GSE Systems, Inc., as guarantor of the obligations of GSE Power Systems,
Inc. and MSHI, Inc. pursuant to their certain Guaranty and Suretyship Agreement
dated January 30, 1996 hereby consents to the extension of the Expiration Date
as set forth above this 6th day of March 1998.
GSE SYSTEMS, INC.
By: /s/ Robert W. Stroup
---------------------------
Its: Executive Vice President,
Secretary & Treasurer
2
EXHIBIT 10.27
March 6, 1998
GSE PROCESS SOLUTIONS, INC.
8930 Stanford Boulevard
Columbia, Maryland 21045
Re: Amended and Restated Letter of Credit, Loan and Security Agreement dated
October 13, 1995 (the "Loan Agreement") by and between GSE Process
Solutions, Inc. ("GSE") and CoreStates Bank, N.A. ("CoreStates").
---------------------------------------------------------------------------
Dear Sirs:
GSE and CoreStates are parties to the Loan Agreement, as the same has
been amended from time to time. Pursuant to its original terms, the Loan
Agreement expired December 31, 1997. By letter dated December 29, 1997,
CoreStates agreed to extend the Termination Date, as such term is defined in the
Loan Agreement, until March 31, 1998. GSE Systems, Inc. and GSE Erudite
Software, Inc. guarantee the obligations under the Loan Agreement. GSE Systems,
Inc. has advised CoreStates that it is considering the sale of GSE Erudite
Software, Inc. Capitalized terms used in this letter shall have the same
meanings as given to such terms in the Loan Agreement, unless the context
requires otherwise.
GSE has requested that CoreStates (a) permit Advances in excess of the
current Collateral Value by increasing the amount of the Collateral Value from
the date hereof until the earlier to occur of the sale of GSE Erudite Software,
Inc. or May 15, 1998 by the amount of $1,500,000 (the "Overadvance Limit") and
(b) extend the Termination Date until June 30, 1998. CoreStates is agreeable to
such increase and extension provided the following terms and conditions are met:
1. Delivery of each of the following:
(a) Guaranty agreements (each a "Guaranty") of G P Strategies
Corporation ("Strategies") and ManTech International Corporation ("ManTech")
assuring payment of the obligations of GSE to CoreStates due under the Loan
Agreement each in the amount of $1,500,000 and in the aggregate amount of
$3,000,000, in the form attached hereto as Exhibit A. (ManTech and Strategies
are hereafter sometimes called "Guarantors".)
(b) A copy, certified in writing by the Secretary or an
Assistant Secretary of each of ManTech and Strategies, of (i) resolutions of the
Board of Directors of each "Guarantor" evidencing approval of the Guarantees and
each matter contemplated thereby and (ii) each document evidencing other
corporate action and governmental approvals, if any, with respect to the
Guarantees and (iii) a statement as to the names and signatures of the officers
of each Guarantor authorized to sign the Guarantees and the other documents or
certificates to be executed or delivered pursuant thereto; and
(c) A favorable opinion of counsel to each Guarantor in form and
substance as attached hereto as Exhibit B.
2. Retroactive to February 1, 1998, (a) each Prime Rate Loan shall bear
interest as provided in the Loan Agreement, except that the rate shall be
applied at Prime Rate plus 1.00% and (b) each Eurodollar Loan shall bear
interest as provided in the Loan Agreement, except that the rate shall be
applied at the LIBO Rate plus 3.00%.
1
<PAGE>
3. (a) No Loan shall continue as a Eurodollar Loan after the expiration
of the current Interest Period, no new Eurodollar Loans shall be made and no
Prime Rate Loan shall be converted into a Eurodollar Loan.
(b) No Letters of Credit shall be issued under the Loan Agreement.
(c) GSE shall pay no cash fees to either Guarantor for the issuance
of its Guaranty.
4. (a) GSE will pay on demand all costs and expenses (including the
reasonable fees and out-of-pocket expenses of the Bank's counsel and the Bank's
auditors and consultants) incurred by the Bank in connection with (i) audits and
Collateral review, (ii) the preparation and negotiation of this letter agreement
and the Guarantees, and (iii) the enforcement and protection of the rights of
the Bank in connection with this letter agreement or either of the Guarantees.
(b) In consideration for the establishment of the Overadvance Limit
and the extension of the Termination Date until June 30, 1998, GSE will pay to
the Bank a restructuring and waiver fee in the total amount of $70,000.
5. Beginning with Monday, March 9, 1998, and on each Wednesday
thereafter, GSE shall deliver a Borrowing Certificate with information completed
as of the previous Friday to CoreStates in the same form as Exhibit B to the
Loan Agreement.
6. In the event of a sale of GSE Erudite Software, Inc., the Commitment
shall immediately be reduced to $3,000,000 and GSE shall thereupon make such
payments on the Loans as are required to reduce the total of the outstanding
balances of the Loans and the Letter of Credit Obligations to not more than the
lesser of (a) the Collateral Value or (b) the Commitment. For the purpose of
this paragraph such sale shall be deemed to have occurred at such time as the
legal or equitable title to all or substantially all of the assets or stock of
GSE Erudite Software, Inc. shall have been transferred to the purchaser thereof.
7. GSE has informed CoreStates that the financial statements that will
be issued as of December 31, 1997 and March 31, 1998 will almost certainly
report results that will fail to meet the Cash Flow Coverage Ratio and the
Tangible Net Worth provisions found in Sections 10.1 and 10.3 of the Loan
Agreement, respectively. CoreStates hereby waives any Default or Event of
Default caused by the failure to meet the Cash Flow Coverage Ratio for the
periods ending December 31, 1997 and March 31, 1998 only and waives any Default
or Event of Default caused by the failure to meet the Tangible Net Worth
provision for the periods ending December 31, 1997 and March 31, 1998, provided,
however, that the Tangible Net Worth shall be at least $5.5 million for the
period ending December 31, 1997 and $3 million for the period ending March 31,
1998.
Except as the Loan Agreement is specifically amended or modified or any
provision thereof is waived, all provisions of the Loan Agreement and the other
Financing Documents shall remain in full force and effect and CoreStates
reserves all of its rights thereunder.
2
<PAGE>
Please signify your acceptance of this extension by executing this
letter agreement in the space provided below.
Very truly yours,
/s/ Derrick R. Davis
--------------------------
Derrick R. Davis,
Vice President
The foregoing agreement is accepted and acknowledged this 6th day of March 1998.
GSE PROCESS SOLUTIONS, INC.
By: /s/ Robert W. Stroup
------------------------
Its: Executive Vice President,
Secretary & Treasurer
CONSENT OF GUARANTORS
GSE Systems, Inc. and GSE Erudite Software, Inc., each as guarantor of
the obligations of GSE Process Solutions, Inc. pursuant to their respective
guarantees of February 23, 1996 and November 11, 1997 hereby consent to the
terms and conditions set forth above this 6th day of March 1998.
GSE SYSTEMS, INC.
By: /s/ Robert W. Stroup
------------------------
Its: Executive Vice President,
Secretary & Treasurer
GSE ERUDITE SOFTWARE, INC.
By: /s/ Robert W. Stroup
------------------------
Its: Executive Vice President,
Secretary & Treasurer
3
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
Year Ended December 31,
-----------------------------
1997 1996 1995
---- ---- ----
Net (loss) income before preferred dividend.... $(8,703) $ 4,143 $ 3,676
Preferred dividend ............................ -- -- --
------- ------- -------
Net (loss) income available to common shares... $(8,703) $ 4,143 $ 3,676
Weighted averaged common shares
outstanding................................ 5,066 5,066 4,049
Dilutive effect of common stock equivalents
- stock options............................ 0 7 10
------- ------- -------
Total shares used for earnings per share..... 5,066 5,073 4,059
======= ======= =======
Loss (earnings) per share (Basic and
diluted)................................... $ (1.72) $ .82 $ .91
======= ======= =======
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
The companies listed below are directly or indirectly owned 100% by GSE
Systems, Inc. and are included in its consolidated financial statements. GS
Information Systems FSC Ltd, GSE Systems International Ltd, MSHI, Inc., GSE
Power Systems AB and GSE Process Solutions, Inc. are wholly owned subsidiaries
of GSE Systems, Inc. GP International Engineering & Simulation, Inc. and GSE
Services Company L.L.C. are wholly owned subsidiaries of GSE Power Systems, Inc.
which is a wholly owned subsidiary of MSHI, Inc. GSE Process Solutions B.V. is a
wholly owned subsidiary of GSE Process Solutions, Inc. GSE Process Solutions
Belgium N.V. and GSE Process Solutions Singapore (Pte) Limited are wholly owned
subsidiaries of GSE Process Solutions B.V. J. L. Ryan, Inc., acquired by GSE
Power Systems, Inc. in December 1997, has been merged with and into GSE Power
Systems, Inc. as of February 1998, with GSE Power Systems, Inc. being the
surviving corporation.
Name Jurisdiction of Organization
- ---- ----------------------------
GS Information Systems FSC Ltd. Barbados
GSE Systems International Ltd. State of Delaware
MSHI, Inc. State of Virginia
GSE Power Systems, Inc. State of Delaware
GP International Engineering & Simulation, Inc. State of Delaware
GSE Services Company L.L.C. State of Delaware
GSE Power Systems AB Sweden
GSE Process Solutions, Inc. State of Delaware
GSE Process Solutions B.V. Netherlands
GSE Process Solutions Belgium N.V. Belgium
GSE Process Solutions Singapore (Pte) Limited Singapore
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of GSE Systems, Inc. on Form S-8 (File No.333-08805) of our report
dated March 31, 1998, on our audits of the consolidated financial statements of
GSE Systems, Inc. as of December 31, 1997 and 1996, and for the years ended
December 31, 1997, 1996 and 1995, which report is included in this Annual Report
on Form 10-K.
Coopers & Lybrand LLP
McLean, Virginia
March 31, 1998
GSE SYSTEMS, INC.
8930 Stanford Blvd.
Columbia, Maryland 21045
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Officers and
Directors of GSE Systems, Inc., a Delaware corporation, hereby constitute and
appoint Robert W. Stroup and Thomas K. Milhollan, and each of them, the true and
lawful agents and attorneys-in-fact of the undersigned with full power and
authority in said agents and attorneys-in-fact, and in any one or both of them,
to sign, for the undersigned and in their respective names as Officers and
Directors of the Corporation the Annual Report on Form 10-K of the Corporation
to be filed with the Securities and Exchange Commission, Washington, D.C., under
the Securities Exchange Act of 1934, as amended, and any amendment or amendments
to such Annual Report; hereby ratifying and confirming all acts taken by such
agents and attorneys-in-fact, or any one or more of them, as herein authorized.
Dated: March 25, 1998
Name Title
---- -----
/s/ JEROME I. FELDMAN Chairman of the Board
- -----------------------------
Jerome I. Feldman
/s/ CHRISTOPHER M. CARNAVOS Director and President
- ------------------------------ (Principal Executive Officer)
Christopher M. Carnavos
/s/ ROBERT W. STROUP Executive Vice President, Secretary & Treasurer
- ------------------------------ (Principal Financial and Accounting Officer)
Robert W. Stroup
/s/ EUGENE D. LOVERIDGE Director and Senior Vice President
- ------------------------------
Eugene D. Loveridge
/s/ HANS I. EBENFELT Director
- ------------------------------
Hans I. Ebenfelt
/s/ SHELDON L. GLASHOW Director
- ------------------------------
Sheldon L. Glashow
/s/ JOHN A. MOORE, JR. Director
- ------------------------------
John A. Moore, Jr.
/s/ GEORGE J. PEDERSEN Director
- ------------------------------
George J. Pedersen
/s/ MARTIN M. POLLAK Director
- ------------------------------
Martin M. Pollak
/s/ SYLVAN SCHEFLER Director
- ------------------------------
Sylvan Schefler
2
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