-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U/ItM71/BJ2J2XvStVyxyi4aVcjNrZGKaZnoTSF8lTHOlUEJXT1oBjdefBadBoHR GD23F1M6T+nUQ/uPEbQXfw== 0000929624-99-001182.txt : 19990630 0000929624-99-001182.hdr.sgml : 19990630 ACCESSION NUMBER: 0000929624-99-001182 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANFORD TELECOMMUNICATIONS INC CENTRAL INDEX KEY: 0000725727 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 942207636 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11473 FILM NUMBER: 99655301 BUSINESS ADDRESS: STREET 1: 1221 CROSSMAN AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087450818 MAIL ADDRESS: STREET 1: 221 CROSSMAN AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94088-3733 10-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - ------------------------------------------------------------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1999 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 000-12734 STANFORD TELECOMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) Delaware 94-2207636 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1221 Crossman Avenue 94089 Sunnyvale, California (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (408) 745-0818 Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Common Stock Common Stock Purchase Rights (Title of Class) Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of May 28, 1999, the aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing sale price of such stock on the Nasdaq National Market, was $244,237,507. Shares of Common Stock held by each officer, director and ten percent stockholder of the registrant, except for Kopp Investment Advisors, Inc., have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of the registrant's Common Stock outstanding on June 23, 1999 was 13,157,284. Documents Incorporated by Reference Portions of the registrant's Annual Report to Stockholders for the fiscal year ended March 31, 1999 (the "Annual Report to Stockholders"), are incorporated by reference in Parts II and IV of this Form 10-K. Portions of the definitive proxy statement for the Annual Meeting of Stockholders held on June 23, 1999 (the "Proxy Statement"), are incorporated by reference in Part III of this Form 10-K. PART I ITEM 1. BUSINESS Stanford Telecommunications, Inc. ("Stanford Telecom" or the "Company") designs, manufactures, and markets advanced digital communications products and systems to establish or enhance communications via satellites, terrestrial wireless and cable. The Company's technical strengths include: system design, communication waveforms, modulation and demodulation techniques, ASIC design, Radio Frequency (RF) antennas and downconverters, software and firmware, Asynchronous Transfer Mode (ATM) design and advanced manufacturing techniques and processes. The Company was incorporated in California in 1973 and reincorporated in Delaware in 1988. The Company's fiscal year ending March 31, 1999 is comprised of one 14-week quarter (quarter ended June 30, 1998) and three 13-week quarters, each of which ends on the Thursday closest to the corresponding calendar quarter end. The Company's fiscal year 1998 consisted of four 13-week quarters. For convenience, the Company has presented its fiscal year as ending on March 31. Fiscal year 1999 ended on April 1, 1999. On June 22, 1999, Stanford Telecom entered into an Agreement and Plan of Merger (the "Merger Agreement") with Newbridge Networks Corporation, a Canadian corporation ("Newbridge"), and Saturn Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Newbridge ("Merger Sub"), which provides for the acquisition of the Company by Newbridge in a tax-free, stock-for-stock exchange. Pursuant to the Merger Agreement, Merger Sub will be merged with and into Stanford Telecom (the "Merger"), and Stanford Telecom will become a wholly owned subsidiary of Newbridge. See "--Proposed Newbridge Acquisition." BASE BUSINESS DISCUSSION During fiscal 1999 Stanford Telecom's base business resumed its growth, achieved solid operating income and recorded record high bookings. In May 1999 the Company was awarded a five year contract for providing critical services to facilitate meeting near-term and long term telecommunication requirements within the Federal Aviation Administration (FAA). The contract is expected to grow to approximately $100 million over 5 years. Stanford Telecom's base business in digital telecommunications continues to support a wide variety of customers and contracts. Stanford Telecom's ground equipment supports many of the Department of Defense high priority satellites including military communications satellites such as Defense Satellite Communications System (DSCS III) and MILSTAR, as well as Global Positioning Systems (GPS), the military/civil navigation satellite system. DSCS OPERATIONAL CONTROL SYSTEM (DOCS3) Stanford Telecom continues to provide critical on-site operations and maintenance support, software support, integrated logistic support, training and depot support services for the U.S. Army's DSCS program under a five year contract called DSCS Operations Control System Support Services (DOCS3). Stanford Telecom has been performing critical services in support of DSCS for the U.S. Government since 1981. The DOCS is a complex collection of network management and control subsystems that are used as tools for managing DSCS ground station and space communication payload assets. The DSCS must be operated and maintained at peak efficiency and maximum availability as it is often the only means of communication with deployed forces. Over the past two years the Government has issued individual task orders for system adaptation tasks. These tasks often require hardware and/or software enhancements and modifications to extend the life expectancy of the system. The addition of these tasks to the base contract makes DOCS3 the largest single contract at Stanford Telecom. -3- GLOBAL BROADCAST SERVICES (GBS) The U.S. Government counterpart to Direct Broadcast Satellite (DBS) television is the Global Broadcast Service. This military satellite system operates in the Ka- and Ku-bands using special payloads on UFO Follow-on Satellites. Stanford Telecom provides the uplink terminals termed the Primary Injection Point (PIP) and Tactical Injection Point (TIP) terminals. During the past year, Stanford Telecom integrated and delivered two Global Broadcast Service (GBS) Primary Injection Points terminals, under subcontract to Raytheon Information Systems Company. The first system, installed in Wahiawa, Hawaii, provides broadcast services to U.S. military facilities and deployed forces in the Pacific region over Ka-band transponders on-board the F8 UltraHigh Frequency (UHF) Follow-on (UFO) satellite. The second PIP, installed in Norfolk, Virginia, is also operational and supports the GBS in the Atlantic region via the F9 UFO satellite. The third PIP will be installed this summer in Sigonella, Italy. Stanford Telecom was recently awarded options to design, manufacture, and deliver the initial Transportable Injection Point for the GBS program. The TIP, comprised of a Transportable Satellite Broadcast Manager and a Transportable Theater Injection terminal, will be installed on High Mobility MultiWheeled Vehicles (HMMWV) and provide GBS uplink capability from deployed locations worldwide. Stanford Telecom anticipates additional TIP orders during fiscal 2000. DIGITAL SATELLITES TERMINALS (DST) The DST Satellite communications terminals differ from many other satellite terminals in that they operate with both military X-band satellites and commercial C- and Ku-band communications satellites. The Company continues to design, manufacture and deliver commercial earth stations that offer highly reliable communications over military and commercial satellite systems operating in C-, X-, and Ku-bands. During the past year Stanford Telecom delivered 2.4, 4.6, and 7.3 meter versions of the INTELSAT type approved earth stations in support of commercial and military operational requirements worldwide. The Company anticipates expanding our current transportable and fixed earth station product line with specialized systems that provide reception and dissemination of commercial remote sensing imaging products. REPLACEMENT SATELLITE CONFIGURATION CONTROL ELEMENT (RSCCE) During fiscal 1999, Stanford Telecom was awarded a production contract for the manufacture, test and installation of the Replacement Satellite Configuration Control Element (RSCCE), a critical component of the U.S. Army's Defense Satellite Communications System (DSCS). The RSCCE system developed by the Company completed formal acceptance and operational testing in December 1998. The Company's RSCCE provides satellite commanding and telemetry monitoring and processing capabilities to the U.S. Army at the DSCS Operations Centers located worldwide. The production contract also includes an additional development phase during which the system will be enhanced to provide operational capabilities requested by the customer. The Government also intends to award a contract to Stanford Telecom to produce an additional seven operational databases required by the system to support the current fleet of DSCS satellites. This program is scheduled to last about four years and will culminate with the installation of 18 RSCCE systems in late 2002 and 2003. Stanford Telecom has been performing critical services in support of DSCS for the U.S. Government for 18 consecutive years. Award of this production contract continues the long history of Stanford Telecom's uninterrupted support to the DSCS Program. -4- RBATSON SATELLITE COMMAND SYSTEMS The U.S. Army Communications Electronics Command (CECOM) exercised a major production option on the Replacement BATSON (RBATSON) program during fiscal 1999. The RBATSON program, originally awarded to the Company in December 1996, is a technology insertion effort, which replaces 1970's era BATSON cryptographic security equipment for DSCS ground control stations with new form, fit, and function replacement units. The RBATSON system (KI-34) consists of two components, the KIG-34 and the KIT-34, and new Maintenance Test Equipment (MTE), also known as the KT-43A. The Company is now under contract to produce and deliver 17 additional RBATSON units (KIG-34s and KIT-34s) and 2 KT-43, and their associated spares. CECOM also approved two engineering change proposals, which increase the capabilities of the MTE. GPS BLOCK IIF SATELLITE TEST SYSTEM Stanford Telecom is under contract to deliver a state-of-the-art factory test system to Boeing North American for use in factory testing of the next generation Global Positioning System (GPS) Block IIF satellites. The system consists of a combination of modern Commercial-Off-The-Shelf test equipment and Stanford Telecom designed GPS equipment. Specially developed Stanford Telecom software controls the equipment and digitally processes measurement data to provide extremely accurate determination of critical satellite parameters. The test set is fully automated to significantly reduce satellite test time and to reduce the effect of "human error" in the measurement process. ATMOSPHERIC SENSING SYSTEMS The Company has developed a new type of atmospheric turbulence monitoring instrument that measures the strength and rate of change of atmospheric turbulence. The measurements are essential for the design of systems with applications that depend on the ability to bring light to a sharp focus. In particular, the measurements are essential to those that use the technique known as adaptive optics to partially cancel the distorting effects of the atmosphere. The Company has a dedicated facility on the grounds of the George Washington University Northern Virginia Campus for the development and test of new optical and RF atmospheric sensing systems. This facility includes an astronomical observation center including a weather station and a local operations center for collection and processing of atmospheric data. MILSTAR INSTRUMENTED CALIBRATION TERMINAL (MILSTAR ICT) The Company has recently delivered three transportable MILSTAR Instrumented Calibration Terminals to Lockheed Martin to conduct on-orbit tests of the MILSTAR satellites at various locations throughout the world. This terminal is based on the Company's proprietary MILSTAR Transportable Terminal System. The terminal will be able to test both the current MILSTAR I and the soon to be launched next generation MILSTAR II satellites. MICROWAVE SIGNAL PRODUCTS The Company is developing wide bandwidth, GHz-rate microwave products for high-data rate communications and high-resolution radars. Stanford Telecom completed the first two production phases of the synthesizer for the Army's SCAMP Portable MILSTAR Satellite Terminal. The synthesizer is a key component of this satellite terminal. Since it will be used by soldiers in the field, the terminal must be lightweight and run on battery power for extended periods. Using cost effective commercial manufacturing practices, the Company was recently authorized to proceed with the third phase of the contract along with options, extending this contract though fiscal 2001. -5- DIRECT DIGITAL CHIRP SYNTHESIZER The STEL-2375 is being used to support customer requirements in diverse applications such as commercial automotive test equipment and state-of-the-art radars for missiles and aircraft. The chip is implemented in high-speed GaAs technology to run at a leading edge rate of 1 GHz clock rate. DIRECT DIGITAL SYNTHESIZER (DDS) The STEL-9944 builds on our earlier success with our STEL-2373 DDS Synthesizer that has been designed into aircraft radars such as the F-18 and the newer F-22. The STEL-9944 developed for the SM-II Missile program is now in full production having successfully passed its engineering pre-production phase. NASA TRACKING AND DATA RELAY SATELLITES (TDRSS) Stanford Telecom supports NASA in its major communications satellite program, the Tracking and Data Relay Satellite that provides communication to the Space Shuttle. The Company continues its 22 years of support to NASA's Tracking and Data Relay Satellite System including both systems engineering services and hardware and software development, which includes: Low Power Programmable Transceiver (LPT): The LPT utilizes innovative state-of-the-art technology to develop a multifunctional low power space based transceiver. One version of the LPT integrates GPS with the transceiver. Software Programmable Advanced Receiver (SPAR): The SPAR applies advanced signal processing into a software-programmable radio that provides highly flexible communication support across a broad range of signaling formats, spread-spectrum operations, and integrated tone ranging. The SPAR has successfully supported two Titan IV-B launches where it is used to receive signals from the Inertial Upper Stage (IUS). On its last mission it stayed in lock and tracked telemetry though the thermal roll maneuvering of the rocket, a period when dropout of the signal due to antenna misalignment was expected to cause the SPAR to lose signal lock. The SPAR's performance has been highly praised by NASA. Third Generation Beamforming System (TGBFS): The TGBFS, which will be operational in 1999, will provide low-cost, ground-based beamforming of TDRSS-phased array signals for emerging users of NASA's Demand Access System. The TGBFS applies state-of-the-art optical and digital processing with applicability to smart, adaptive antennas. Space Station Early Communication System: ECOMM is an S-band receiver that provides a spread-spectrum, command and telemetry data link, and a high-rate video conferencing link for International Space Station astronauts. Two ECOMM terminals are currently deployed on the Space Station. NEXT GENERATION GPS SIGNAL DESIGN The Company also supports the U.S. Government in the Global Positioning System (GPS), the U.S. satellite navigation system. The Company is working with the Air Force through Boeing Corporation to investigate candidate signals for the next generation GPS signal structure. The U.S. Administration recently announced that the next generation GPS signal would include both new civil and military signals. Stanford Telecom is helping to design these signals. -6- BROADBAND DIGITAL COMMUNICATIONS USING CABLE This past year has seen the start of volume deployments of modems for high-speed data over Hybrid-Fiber-Coax or HFC with over 1 million modems installed. The Company has experienced a significant increase in its sales of our Cable Headend Burst Demodulator family of products. We are also having success with design wins for our latest HFC product, the STEL-2176 that combines the upstream and downstream physical layer into a single ASIC. Sales of our STEL-1109 upstream modulator and STEL-2105 QPSK demodulator also increased. With the start of deployment of high-speed internet access over cable with services such as Road Runner and @Home, the cable modem business appears to be growing rapidly. Products offered by the Company are selling well into many applications including set-top boxes, cable telephony, and cable internet access. Stanford Telecom offers the STEL-9257 Hybrid-Fiber-Coax Burst Demodulator for applications at the head-end of cable modem systems. This product represents the latest of five generations of field proven Stanford Telecom products selling to customers worldwide. This year has seen significant shipments to domestic customers as well as new design wins in Europe where the DVB standard compliance and field proven performance of the STEL-9257 are important selling advantages. The STEL-2176 Cable Modem subscriber ASIC is a high performance, fully integrated Physical Layer or PHY and Forward Error Correction (FEC) solution for HFC cable applications. It is standards compliant with both U.S. and European standards. It receives 16/64/256 QAM signals and transmits QPSK/16 QAM signals. It is especially attractive to customers who want to combine it with their own Media Access Control (MAC) functions to maintain proprietary performance and cost advantages. VSAT MODEMS Sales of VSAT components were delayed during fiscal 1999 due to the financial crisis in Asia. We have taken advantage of this time to better match our new product to market requirements and have introduced the new STEL-9261 VSAT modem. Satellite communications continues to march toward higher levels of integration and lower cost. Our latest entrant in this market, the STEL-9261, adds several important features to serve the needs of satellite system integrators with a high performance, high reliability solution. With the addition of these features, our 52 MHz to 88 MHz input modem will now cover FEC rates 3/4 and 7/8 as well as the more traditional rate 1/2 coding. The M & C capability of the product was also enhanced. Our STEL-9258 L-band digital QPSK demodulator printed circuit board has been enhanced by the addition of a fixed 70 MHz version that opens up new opportunities. Our low cost design and attractive pricing structure should help enable renewed revenue growth for this product. FEDERAL AVIATION ADMINISTRATION Stanford Telecom has been supporting the FAA for the past 20 years. This past year we have provided support in the following areas: - - Communication: Supported the development of requirements for the modernization of the FAA's Operation Network. - - Automation: Supported planning and engineering for the upgrading of the Enroute Automation System. - - Surveillance: Supported planning and engineering for the upgrading of the surveillance automation processing subsystem. - - Security: Supported planning and engineering for the security of the NAS Automated System. - - Navigation: Supported the Satellite National Testbed. -7- FAA TELECOMMUNICATIONS Just after the close of our fiscal year, the FAA announced that Stanford Telecom was the winner of a major FAA Telecommunications Services Contract (FTSC) competition. This contract is expected to grow to approximately $100 million over 5 years. Under this contract, Stanford Telecom's Communication Systems Integration (CSI) Group will provide engineering support to the FAA's Telecommunications Integrated Product Team (TIPT). These engineering efforts will be focused on support to the continued effective operation of the existing networks as well as planning and supporting the implementation of network modernization to allow the FAA to meet the challenges of the 21st century. The FAA's TIPT is responsible for providing the communications infrastructure essential to the accomplishment of the FAA's mission. STANFORD WIRELESS BROADBAND SUBSIDIARY The Company is focusing significant resources on wireless broadband communications using microwave frequencies. There are two separate but closely related wireless broadband communications systems: Multichannel Multipoint Distribution System (MMDS), sometimes called wireless cable operating in the 2.5 GHz frequency band, and the wider bandwidth Local Multipoint Distribution System (LMDS) that operates in the 28-31 GHz frequency region. The FCC completed the auction of the LMDS frequencies in March 1998. WIRELESS BROADBAND PRODUCTS The Company increased its investment in the development of a product line of modems and service interface cards that will enable wireless delivery of high-speed data and telephony services to commercial and residential customers. Our product line supports a true point-to-multipoint architecture which uses large TDM downstream channels and smaller bandwidth-on-demand upstream channels to provide ATM transport of multimedia services to small-to-medium sized businesses and home offices. A complete product line has been developed which offers both data and a variety of telephony services. The simplest customer premise product suitable for the small office provides a single 10Mbps data line and two analog telephone connections. More sophisticated users can be provided with additional capability of up to two data lines and eight T1 (or E1) connections for a single user. Our family of wireless broadband products are capable of operating over a wide range of frequencies with programmable data rates. Technology demonstrations and field trials using prototype hardware and software were successfully completed during fiscal 1999. At year-end, hardware development was essentially complete, with low volume production deliveries under way for initial deployments in Canada, Europe, and the United States. Our customers forecast a rapid acceleration of production orders in fiscal 2000. Software development is essentially complete, with a period of final testing and evaluation planned for the first quarter of fiscal 2000. Strong market interest continues in both the United States and offshore. We have responded to several opportunities with our partners and expect that we will see strong market expansion in Europe, Latin and South America, and Asia. In the U.S., a significant consolidation of spectrum holders took place after the completion of the auction process, and it now appears that the major LMDS spectrum holders are dedicated to begin nationwide deployment. On the MMDS front, two national interexchange carriers have acquired spectrum that will allow them to deploy wireless data and telephony networks in many regions throughout the U.S. This acquisition is seen as a very positive development for the MMDS industry and will likely result in deployment decisions later this year. LMDS/MMDS PRODUCT LINE The Company has developed an extensive and very flexible product line for LMDS and MMDS equipment to support both telephony and high-speed Internet access. These products include headend and subscriber equipment and network management systems. -8- HEADEND EQUIPMENT STEL-11450 Air Interface Unit (AIU). The AIU comes in both LMDS and MMDS configurations and is populated with a: - - STEL-11560 Air Interface Control Card which provides the Internet access via high-speed fiber OC-3 connection. - - STEL-11500 Air Interface Modem (AIM) card which provides both upstream and downstream modulation/demodulation. Up to 12 AIM cards are supported. - - STEL-11550 Telephony Interface Card. Each of the cards provides up to 8 T1s or E1s. CUSTOMER PREMISES GATEWAY PRODUCTS - - STEL-11370 Dual Ethernet Rack Mounted Unit. The base unit provides a chassis with motherboard supporting 2 Ethernet ports. Each unit can have a variety of daughter cards added to enable various telephony services: - STEL-11310 Single T1 or STEL-11340 Single E1 - STEL-11320 Eight T1 or STEL-11350 Eight E1 - STEL-11330 Basic Rate ISDN - - STEL-11050. Small Office/Residential Unit. This is a small "Set top box" unit which has one Ethernet port and up to 2 POTS connections. NETWORK MANAGEMENT SYSTEM The STEL UNIX based software resides in a Sun Workstation for the Air Management Unit (AMU) and on an HP Workstation for the Network Manager. Software has been developed that will support element management of all of the STEL Products on an HP Openview platform. The System provisions telephone numbers, configures the system elements, and monitors fault status. COMMERCIAL ELECTRONIC CONTRACT MANUFACTURING Stanford Telecom maintains a high-volume, high-quality and low-cost contract manufacturing capability. Our manufacturing capability provides highly competitive contract manufacturing for other companies as well as our own products. The Company is distinguished as one of the few ISO 9001 certified contract manufacturers of printed circuit boards, chassis, and systems. Further evidence of our high quality standards is the fact that we have manufactured Class III medical products for the past five years. The Company has an extensive array of automated assembly equipment for surface mount and through-hole technologies and has recently added equipment for the new ball grid array (BGA) technology. This equipment is complimented by automated in-circuit and functional test equipment. In order to increase quality, manufacturing efficiencies, and provide real-time status, we have incorporated a paperless Work-In-Process (WIP) and on-line Statistical Process Control (SPC) systems that provide Internet access to our customers. -9- GENERAL Manufacturing Stanford Telecom's products are generally manufactured from standard components, its proprietary ASICs and other components or subsystems produced to the Company's specifications. Most of the Company's current products contain microprocessors for which proprietary software is designed and tested by the Company's engineers. The Company does not have a semiconductor foundry or fabrication facility. For the production of ASICs, the Company contracts with companies that have foundry capability, including American Microsystems, Inc., EBV Technologies, Lucent Technologies, Triquint Semiconductor and Zilog,Inc. In many cases only a single source is available for specific components, and thus there is a risk of delay in delivering finished systems within contractual schedules. The Company attempts to minimize this risk by securing second sources, finding alternate technologies to perform the same function and maintaining adequate inventories of single source components. To date, the Company has experienced no material adverse impact due to component unavailability, product returns or contract renegotiations. Many of the Company's products are covered by a 90-day to one-year warranty under which the Company will repair or replace defective parts. To date, warranty expense has not been significant. Marketing and Customers The Company markets its products and services to agencies of the U.S. Government, prime contractors to these agencies and an increasing number of commercial customers. The Company's marketing is conducted by its management and technical staff, and in the case of its commercial business, domestic and international sales representatives are also utilized. The Company's marketing efforts for its government business consist of responding to requests for proposals and solicitations for bids from U.S. Government agencies or prime contractors to these agencies and direct marketing of its off-the-shelf, standardized products. The Company markets its ASICs and commercial products primarily through its direct sales personnel consisting of 6 full-time employees, 26 independent sales representative locations covering the U.S. and Canada and 43 other independent sales representative offices covering other international territories. The Company also places advertisements for commercial products, particularly its Wireless Broadband (LMDS/MMDS) and ASIC products, in a number of trade magazines and participates in trade shows and industry symposiums. In some cases, the major communication system integrators who are pursuing wireless broadband opportunities market the Company's' products directly to the service providers. The Company may be requested to support these marketing activities from time to time. During fiscal years 1999, 1998 and 1997 approximately 64%, 62% and 59%, respectively, of the Company's revenues were attributable to contracts with numerous agencies of the U.S. Government. No single contract accounted for more than 10% of revenues during fiscal years 1999, 1998 or 1997. Some of the Company's U.S. Government sales are made under letter contracts in which the final contract price is agreed upon after work has begun. To date, the Company has had a small amount of revenue from international customers. Such sales are often subject to U.S. State Department approval and export license requirements. Competition Competition is intense among providers of digital telecommunications equipment, products and services. In the Company's government business, competitors include major defense contractors, telecommunications equipment and electronics firms, and systems integrators, most of which have significantly greater financial, marketing and operating resources than the Company, as well as broader product lines and technological capabilities. As a result of reduced defense spending by the U.S. and other governments, competition has become more intense in the Company's government business. Although no single competitor competes with the Company in all of its product lines, a number of competitors such as Harris Corporation, Loral-Space, Lockheed-Martin, TRW, BDM, Hughes, CSC, Broadcom Corporation, Hitachi, and Rockwell International compete with the Company in various market segments. Certain of the Company's customers have technological capabilities in the Company's product areas and could choose to develop and manufacture certain products themselves rather than purchase from suppliers such as the Company. As the -10- Company continues to transition to more commercial business, it expects to face new and increasing competition with respect to its commercially oriented products and services. The Company believes that, in its highly specialized technical environment, price, performance, reputation, reliability, on-time delivery and customer support are the primary competitive factors among companies having similar technical capabilities. Backlog and Bookings Funded backlog includes: (i) projects and orders covered by signed contracts for which the government has specifically allocated funding; and (ii) purchase orders from commercial customers. The Company's backlog is largely attributable to agencies of the U.S. Government. In the case of certain long-term contract awards, the U.S. Government typically makes the funds available over the life of the contract as opposed to the time of the contract award. In such cases the Company reports as funded bookings only the amount of the funds specifically allocated and the resultant backlog as funded backlog. The Company does not include unexercised options in backlog. The Company's funded bookings for fiscal 1999 and 1998 were $174.4 million and $163.0 million, respectively, and the Company's backlog at the end of fiscal 1999 and 1998 was $102.6 million and $93.6 million, respectively. At March 31, 1999 backlog from the Company's government and commercial businesses were approximately $75.5 million and $27.1 million, respectively. There can be no assurance that funded backlog will be completed and booked as revenue. The Company's contracts typically contain contingency provisions permitting termination by the customer at any time. Cancellation of pending contracts or termination or reductions of contracts in progress may have a material adverse effect on the Company's results of operations. Research and Development The telecommunications industry is characterized by rapid technological change, requiring a continuous effort to enhance existing products and develop new products. The Company believes that its continued success depends in large part on its ability to develop new and enhanced digital telecommunications products. The Company conducts extensive research, development and engineering activities with the objective of developing products and systems that provide for cost-effective, digital wireless telecommunications and high-quality satellite communications. Since its inception, the Company has developed a number of innovative and proprietary digital telecommunications technologies through a combination of customer and internally funded research and development. Company-funded expenditures for research and development including bid and proposal activities for fiscal years 1999, 1998, and 1997 were approximately $14.1 million, $13.6 million and $11.9 million, respectively, which represented 8.5%, 8.9%, and 7.1% of total revenues, respectively. The Company's revenues have historically been derived primarily from performing contract research and development and engaging in limited production contracts with agencies of the U.S. Government and their prime contractors. As a result, a substantial portion of the digital telecommunications research and development performed by the Company since its inception has been funded by its customers and recorded as revenues by the Company. Accordingly, the cost of performing this customer-funded research and development is included in "Costs of Revenues" in the Company's financial statements. The Company continually seeks to develop new products for commercial applications to leverage its leading digital telecommunications technologies that have been funded through many military and government research and development contracts since the early 1970's. Over the last two years, the Company has significantly increased its level of independent research and development expenditures. This increase is necessary to successfully develop competitive products for the commercial telecommunications market, particularly in the field of wireless broadband communications. During fiscal year 1999 approximately $9.8 million, or 70% of the Company's R&D was invested in these strategic commercial initiatives. The Company has applied much of its research and development expenditures to commercial products and initiatives in the areas of wireless and cable broadband communications. -11- Employees As of March 31, 1999, the Company employed 1,023 full-time and 21 part-time employees and 11 professional consultants. Of the full-time employees, 594 are in technical operations, 117 in manufacturing operations, 139 in management, 104 professional non-technical, and 69 in support positions. The majority of the Company's employees are highly skilled technical personnel. Several are nationally known leaders in the field of digital telecommunications. Over 598 employees hold advanced degrees, including approximately 34 with doctoral degrees. None of the employees are represented by a labor union and the Company has never had a work stoppage. The Company believes its employee relations to be good. Due to the nature of the Company's business, a large number of its technical employees must obtain security clearances from the U.S. Government, which limits the available pool of eligible candidates for such positions to those who can satisfy prerequisites for such clearances. Patents and Proprietary Rights The success of the Company's business depends in part upon its ability to protect trade secrets, obtain or license patents and operate without infringing on the rights of others. Although the Company has obtained patents covering certain of its technologies, it believes that the ownership of patents has not generally been a significant factor in its government business and that its success depends primarily on innovative skills, technical competence, and the marketing and managerial abilities of its personnel. The Company relies on a combination of trade secrets, copyrights, patents, nondisclosure agreements and technical measures to protect its proprietary rights in its products and technology. Such protection may not preclude competitors from developing products with features similar to the Company's products. The Company believes that patents will play an increasingly important role in its commercial business. The Company has received or filed for approximately 80 patents with the U.S. Patent and Trademark Office. The Company expects it will continue to aggressively pursue additional patents to protect its intellectual property. The Company requires its employees to execute proprietary rights and nondisclosure agreements and to maintain the confidentiality of the Company's proprietary information. Government Regulation The Company's operations are subject to compliance with regulatory requirements of federal, state and local authorities, including regulations concerning employment obligations and affirmative action, workplace safety and protection of the environment. In addition, many of the Company's products and proposed products are or will be subject to various regulations including regulations promulgated by the Federal Communications Commission, the FAA and the DoD. While compliance with applicable regulations has not adversely affected the Company's operations in the past, there can be no assurance that the Company will continue to be in compliance in the future or that these regulations will not change. In addition, the Company must comply with detailed government procurement and contracting regulations and with U.S. Government security regulations, including those necessary to maintain required facility clearances. Certain of these regulations carry substantial penalty provisions for nonperformance or misrepresentation in the course of negotiations. Failure of the Company to comply with its government procurement, contracting or security obligations could result in penalties or suspension of the Company from government contracting, which would have a material adverse effect on the Company's results of operations. The Company is required to maintain a U.S. Government facility clearance at most of its locations. This clearance could be suspended or revoked if the Company is found not to be in compliance with applicable security regulations. Any such revocation or suspension would delay the Company's delivery of its products to customers. Although the Company has adopted policies designed to assure its compliance with applicable regulations and there have been no suspensions or revocations of any of its facilities, there can be no assurance that the approved status of the Company's facilities will continue without interruption. -12- PROPOSED NEWBRIDGE ACQUISITION On June 22, 1999 Stanford Telecom entered into the Merger Agreement with Newbridge and Merger Sub, which provides for the acquisition of the Company by Newbridge in a tax-free, stock-for-stock exchange. Pursuant to the Merger Agreement, Merger Sub will be merged with and into Stanford Telecom, and Stanford Telecom will become a wholly owned subsidiary of Newbridge. Consummation of the Merger is subject to certain conditions, including the following: - approval by Stanford Telecom's stockholders at a special meeting of stockholders, to be called for the purpose of voting on the Merger (the "Special Meeting"); - Stanford Telecom having entered into a definitive agreement or agreements to sell certain business units (the "Non-Core Assets") to one or more third party buyers for an aggregate purchase price which will result in after-tax net cash proceeds to Stanford Telecom of not less than $102 million; - regulatory approvals; and - other customer conditions. The Non-Core Assets to be sold to one or more third party buyers consist of the Company's operations in Satcom Ground Systems, Communications Systems Integration, Applied Technology Operation, Advanced Communications Systems and Manufacturing & Quality Assurance. In the Merger, for each share of Stanford Telecom common stock, the Stanford Telecom stockholders will receive Newbridge common shares with a value equal to (a) $30, subject to potential adjustment if the market price of the Newbridge common shares is less than $24, and (b) an amount based upon a formula which includes the proceeds from the sale of the Non-Core Assets (the "Contingent Value"). The value of the Newbridge shares to be received by the STel stockholders will be based on the average price of the Newbridge common shares during the 10 trading day period ending on the fifth trading day preceding the Special Meeting. The Contingent Value may be as high as $5; however, it is possible that the after-tax net cash proceeds from the sale of the Non-Core Assets may result in the Contingent Value being minimal. In no event will the Contingent Value be less than $0. If the Non-Core Assets have not been sold by the closing of the Merger, then the Contingent Value will become payable following completion of the sale of the Non-Core Assets. In such event, at the time of the Merger, Newbridge and a rights agent will enter into a Contingent Value Rights Agreement and the Stanford Telecom stockholders will receive a certificate to evidence their right to the Contingent Value, which right will not be transferable. Pursuant to the Merger Agreement, Stanford Telecom has granted Newbridge an option to acquire a non-exclusive license to the Company's wireless broadband technology (the "Technology Option Agreement"), which option would be exercisable at $69 million if a third party acquired control of Stanford Telecom. Also pursuant to the Merger Agreement, Stanford Telecom has granted Newbridge an option to purchase unissued shares of Stanford Telecom common stock equal to 19.9% of the issued and outstanding Stanford Telecom common stocks (the "Stock Option Agreement"), at $35 per share, upon the occurrence of certain events which could give rise to a termination of the Merger Agreement. Certain officers and directors of the Company have entered into voting agreements with Newbridge providing that they will vote, in their capacity as stockholders, in favor of the adoption of the Merger Agreement and approval of the Merger. The foregoing summaries of certain principal terms of the Merger Agreement, Technology Option Agreement, Stock Option Agreement and voting agreements are not complete and are qualified in their entirety by reference to the agreements. Copies of the Merger Agreement, Technology Option Agreement and Stock Option Agreement and the form of the voting agreements are filed as Exhibits to the Company's Current Report on Form 8-K dated June 22, -13- 1999, and are incorporated herein by this reference. The form of the Contingent Value Rights Agreement that may be entered into between Newbridge and a rights agent, under the circumstances described above, also is filed as an Exhibit to the Form 8-K. FORWARD LOOKING AND CAUTIONARY STATEMENTS In the interest of providing the Company's shareholders and potential investors with certain Company information, including management's assessment of the Company's future potential, certain statements set forth herein (a) contain or are based on projections of revenue, income, earnings per share and other financial items or (b) relate to management's future plans, expectations, objectives or to the Company's future economic performance. Such statements are "forward-looking statements" within the meaning of Section 27A(i) of the Securities Act of 1933, as amended, and in Section 21E(i) of the Securities Exchange Act of 1934, as amended. Although any forward-looking statements contained herein or otherwise expressed by or on behalf of the Company are to the knowledge and in the judgment of the officers and directors of the Company, expected to prove true and to come to pass, management is not able to predict the future with absolute certainty. Accordingly, shareholders and potential investors are hereby cautioned that certain events or circumstances could cause actual results to differ materially from those projected or predicted. In addition, forward-looking statements are based on management's knowledge and judgment as of the date such statements are made, and the Company does not intend to update any forward-looking statements to reflect events occurring or circumstances existing thereafter. In particular, the Company believes that the following factors could impact forward-looking statements made herein or in other written or oral releases and by hindsight, prove such statements to be overly optimistic and unachievable: 1. Future revenues on government contracts, including contracts in progress, are subject to reduction or cancellation without prior notice at the convenience of the U.S. Government. Budgetary constraints and changes in spending priorities in government agencies such as the Department of Defense, NASA, and the FAA in the past have resulted in sudden program changes, reductions or cancellations and such conditions are expected to continue. 2. The Company has in the past accepted fixed price development commitments for both government and commercial contracts. Although the Company attempts to bid fixed price development contracts at an amount above the expected costs of development and production, the Company has from time to time experienced significant cost overruns which cannot be recovered from the customer. The Company may in the future experience material cost overruns which could adversely affect operating results over the life of the program. 3. The Company's basic strategy is to employ its technology in wireless telecommunications and digital signal processing in the commercial environment, generally as components or subsystems in the product or service offerings for large telecommunications companies. The transition from a government contracts focus to commercial development will expose the Company to certain business risks not previously encountered. Of greatest significance will be the success of the Company's customers in marketing the products or services for which the Company provides key technology components, or subsystems. A successful product development effort will not produce meaningful long-term revenues or profits for the Company unless its customer obtains market acceptance of its end product or service. Factors such as system price, competitive pressures, consumer demand and the like will impact the customer's and the Company's level of commercial success. In addition, even if a product or service achieves commercial success, the Company will experience the continued risk that the customer will develop or obtain lower cost alternatives to the Company's products or technical solutions. 4. Most of the Company's material contracts are awarded to the Company with options to extend the contracts. A contracting party's decision regarding the options particularly in the case of government contracts, can be based on numerous factors, events and circumstances which may be outside the control of the contracting party and which are difficult to predict. For example a change in government priorities, budgets and or technologies. The Company has little or no control over whether these options are exercised. -14- 5. The Company's Commercial Manufacturing Division enjoyed significant growth in revenues between 1993 and 1997. In 1998 and 1999 revenues were approximately $25.5 million and $27.0 million respectively. There can be no assurance that revenues will be maintained at the 1998 or 1999 levels. The Division provides manufacturing services to producers of electronics and medical products on either an inventory consignment or turnkey basis. The contract manufacturing business is subject to wide swings in demand, is price sensitive and extremely competitive. In addition, to the extent inventory is purchased in anticipation of future contracts, the failure to obtain such contracts can lead to a reduction in the value of such inventory. The Company's Commercial Manufacturing Division does not generally operate with long-term contracts and is often required to bid each new job even for its existing customers. 6. Many of the components incorporated in the Company's commercial products, including all semiconductor components, are purchased from third party vendors. Certain key components are sole sourced. From time to time, the Company may experience significant delays in component availability, including delays created by the Y2K problem, which could adversely impact the Company's ability to make timely deliveries to its customers. Such events could cause expected revenues to be delayed and the possible loss of future orders. ITEM 2. PROPERTIES The Company's headquarters and principal engineering and manufacturing facilities are currently located in four adjacent buildings in Sunnyvale, California where it leases approximately 172,000 square feet. The Company's Sunnyvale facility leases will expire in December 2000. The leases contain options for renewal under terms and conditions to be negotiated at the time of expiration. The Company also leases the following premises, primarily for the performance of study, system engineering and hardware contracts: Location Appx. Sq. Ft. Expiration of lease -------- ------------- ------------------- Reston, Virginia 84,000 2008 Colorado Springs, Colorado 46,400 2002 Ashburn, Virginia 39,900 2008 Annapolis Junction, Maryland 30,900 2003 Lowell, Massachusetts 15,300 2001 Seabrook, Maryland 11,300 2001 Tinton Falls, New Jersey 8,000 2002 On August 17, 1998, the Company entered into an Agreement to Lease relating to approximately 100,800 square feet of a building that is currently under construction in Colorado Springs, Colorado. The premises are expected to be available for occupancy during the second quarter of fiscal year 2000. In connection with the Agreement to Lease, the Company signed a Lease for the premises which will become effective on the Rent Commencement Date (as defined in the Agreement to Lease). The Agreement to Lease and the Lease are filed as Exhibits to this Form 10-K. The Company believes its current facilities, together with the new Colorado Springs facility, are suitable and adequate for the Company's operations over the next fiscal year. ITEM 3. LEGAL PROCEEDINGS The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect on its financial position or results of operations. -15- In December 1996, the Company filed an action against Broadcom Corporation alleging that certain Broadcom products infringe a digital modulator patent owned by the Company. The Company and Broadcom have entered into a settlement agreement, under which Broadcom has made a substantial one-time payment to the Company, in the form of a license fee, and Broadcom has been granted a non-exclusive license to the Company's current patents and patent applications relating to transmitter or receiver technology and designs and inventions capable of use over a coaxial cable transmission medium. Each of the parties has agreed to dismiss all claims and counterclaims that were filed against the other. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Inapplicable. CORPORATE OFFICERS OF THE COMPANY Set forth below are the names and ages of the executive officers of the Company, their principal occupations at present and for the past five years, certain directorships held by each, and the term of office with the Company. Dr. James J. Spilker, Jr. (age 65), a co-founder of the Company, has been Chairman of the Board since 1983. He served as President and Chief Executive Officer of the Company from August 1981 to June 1995. Since June 1995, Dr. Spilker also has been serving as Principal Scientist for the Company. Dr. Val P. Peline (age 68) was elected as a Director of the Company in October 1985. Dr. Peline joined the Company as its President and Chief Executive Officer effective June 5, 1995. Dr. Peline served as President of the Electronic Systems Group, a division of Lockheed Corp., from 1987 until he retired from such position in March 1995. Dr. Peline had been President of the Lockheed Space Division from 1984 to March 1987. Mr. Leonard Schuchman (age 62) was elected as a Director of the Company in April 1985. Mr. Schuchman joined the Company in January 1976 and became Vice President in February 1977. He is responsible for directing the Company's Communications Systems Integration group. Mr. Ernest L. Dickens, Jr. (age 52) joined the Company in October 1981. From April 1990 to October 1995 he directed the Company's Government Systems Services operation. Mr. Dickens was elected Vice President in November 1995 and currently directs the Company's Satcom Ground Systems operation. Mr. Bronic C. Knarr (age 53) joined the Company in November 1988. From November 1988 to April 1992 Mr. Knarr held various management positions at the Company in support of key programs. From April 1992 to September 1995 Mr. Knarr directed the Company's Satellite Communications operations. In September 1995 Mr. Knarr was appointed director of the Company's Manufacturing and Quality Assurance operation and was elected Vice President in November 1995. Dr. John E. Ohlson (age 59) joined the Company in March 1981 as Director of Telecommunications Programs Operations and became Vice President in January 1982. In February 1991 he was named Director of Military Ground Terminals. Dr. Ohlson directed the Satellite Communications Group from June 1992 to November 1994. Dr. Ohlson was named as the Company's Chief Technical Officer in November 1994 and currently directs the Company's Satellite Personal Communications operation. Mr. Gary S. Wolf (age 48) joined the Company in May 1978 and was elected Vice President, Chief Financial Officer, Secretary and Treasurer in December 1984. In January 1997 he was promoted to Executive Vice President. -16- Mr. Jerome F. Klajbor (age 43) joined the Company in February 1989. Mr. Klajbor served as a Contracts Manager for the Company from 1989 to 1991. From 1991 to 1996, Mr. Klajbor served as Director and subsequently Vice President of Administration and Finance for the Company's Communication Navigation Systems Operation. He was appointed Vice President and Chief Financial Officer of the Company in January 1997. -17- PART II ITEM 5. - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Incorporated by reference from page 35 of the Company's 1999 Annual Report to Stockholders. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Incorporated by reference from page 34 of the Company's 1999 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from pages 17 through 22 of the Annual Report to Stockholders. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements of Stanford Telecommunications, Inc. as of March 31, 1999 and March 31, 1998 and for each of the three years in the period ended March 31, 1999 and the report of independent public accountants thereon are incorporated by reference from pages 23 through 33 of the Annual Report to Stockholders. See Part IV, Item 14(a). ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. -18- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the caption "Election of Directors-Information with Respect to Nominees and Directors" beginning on page 2 of the Company's Proxy Statement relating to the 1999 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference and made a part hereof in response to the information required by this item. In addition, certain information pertaining to executive officers of the Company is set forth on pages 16-17 hereof. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation" beginning on page 5 of the Proxy Statement is incorporated herein by reference and made a part hereof in response to the information required by this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Stock Ownership" beginning on page 12 of the Company's Proxy Statement is incorporated herein by reference and made a part hereof in response to the information required by this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Inapplicable. -19- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following report, financial statements and other information are incorporated by reference from the Annual Report to stockholders and form a part of this report: Reference Page -------------- 1999 Annual Report Form 10-K ------ --------- 1. Financial Statements. Report of Independent Public Accountants 23 Consolidated statements of income for each of the three years in the period ended March 31, 1999 23 Consolidated balance sheets at March 31, 1999 and March 31, 1998 24 Consolidated statements of shareholders' equity for each of the three years in the period ended March 31, 1999 25 Consolidated statements of cash flow for each of the three years in the period ended March 31, 1999 26 Notes to consolidated financial statements 27 2. Financial Statement Schedules Report of Independent Public Accountants on Schedules 25 Schedule II - Valuation and Qualifying Accounts 26 All other schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements or notes thereto. With the exception of such information in the 1999 Annual Report to Stockholders specifically incorporated herein by reference, the 1999 Annual Report to Stockholders is not deemed "filed" as part of this report. -20- 3. Exhibits. Exhibit Number Description - -------------- ----------- 2.1(10) Agreement and Plan of Merger, dated as of June 22, 1999, by and between the Company, Newbridge Networks Corporation and Saturn Acquisition Corp. 3.1(2) Certificate of Incorporation, as amended. 3.2 Bylaws, as amended. 4.1(6) Rights Agreement dated as of May 9, 1995 between the Company and The First National Bank of Boston. 4.2 Amendment No. 1 to Rights Agreement dated June 18, 1999 between the Company and BankBoston, N.A. (successor to the First National Bank of Boston). 4.3 Agreement re. Rights of Holders of Long-Term Debt. 10.1(5) Consolidated, Amended and Restated Deed of Lease for the premises located at 1761 Business Center Drive, Reston, Virginia dated October 1, 1993 between the Company and the Variable Annuity Life Insurance Company. 10.2*(1) 1982 Stock Option Plan, as amended, and form of Agreements. 10.3* 1992 Employee Stock Purchase Plan, as amended. 10.4(4) Lease dated November 19, 1992 for 480 Java Drive, Sunnyvale, California, 440 Moffett Park Drive, Sunnyvale, California, and 1221 Crossman Avenue, Sunnyvale, California. 10.5(5) Office Lease Agreement for 141 National Business Parkway, Annapolis Junction, Maryland dated March 1, 1993 between the Company and Constellation Real Estate, Inc. 10.6*(8) 1991 Stock Option Plan and form of Agreements. 10.7*(8) Management Incentive Plan. 10.8(8) Credit Agreement dated December 5, 1996 between the Company and Bank of America National Trust and Savings Association (the "Credit Agreement"). 10.9(9) Second Amendment to the Credit Agreement dated December 12,1997. 10.10(9) Office lease Agreement for 45145 Research Place, Ashburn, Virginia dated June 17, 1997 between the Company and Opus East, LLC a Delaware limited liability company. 10.11(9) Rider No. three (3) to consolidated, amended and restated deed of lease agreement dated May 15, 1998, between the Company and A&A Fairfax Four L.L.C. 10.12 Third Amendment to the Credit Agreement dated August 24, 1998. 10.13 Fourth Amendment to the Credit Agreement dated December 18, 1998. -21- 10.14 Agreement to Lease Office and Manufacturing Facility dated August 17, 1998 between the Company and Cherokee Equities, LLC a Colorado limited liability company, as amended by First Addendum Agreement to Lease. 10.15 Lease dated August 17, 1998, between the Company and Cherokee Equities, LLC a Colorado limited liability company 13.1(7) Excerpts from the Annual Report to Stockholders for the fiscal year ended March 31, 1999. 21.1 Subsidiaries 23.1 Consent of Arthur Andersen LLP, independent public accountants. 24.1 Power of Attorney (included on the signature pages hereof). 27.1 Financial Data Schedule - --------------------------- *Compensatory Plan (1) Incorporated by reference from the Company's Annual Report on Form l0-K for the fiscal year ended March 31, 1987. (2) Incorporated by reference from the Company's Annual Report on Form l0-K for the fiscal year ended March 31, 1989. (3) Incorporated by reference from the Company's Annual Report on Form l0-K for the fiscal year ended March 31, 1992. (4) Incorporated by reference from the Company's Annual Report on Form l0-K for the fiscal year ended March 31, 1993. (5) Incorporated by reference from the Company's Registration Statement on Form S-1, No. 33-72720. (6) Incorporated by reference from the Company's Registration Statement on Form 8-A, dated May 24, 1995. (7) Only those portions of the Annual Report to Stockholders that are specifically incorporated by reference in this form 10-K are included in this exhibit. (8) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996. (9) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998. (10) Incorporated by reference from the Company's Current Report on Form 8-K dated June 22, 1999, filed on June 25, 1999. Reports of Form 8-K No Current Reports on Form 8-K were filed by the Company with the Securities and Exchange Commission during the last quarter of the period covered by this Form 10-K. -22- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STANFORD TELECOMMUNICATIONS, INC. Dated: June 24, 1999 /s/ James J. Spilker, Jr. -------------------------------- James J. Spilker, Jr. Chairman of the Board POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James J. Spilker, Jr. and Jerome F. Klajbor and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ James J. Spilker, Jr. Chairman of the Board June 24, 1999 - ----------------------------- James J. Spilker, Jr. /s/ Val P. Peline - ----------------------------- President (Principal Executive June 28, 1999 Val P. Peline Officer) and Director /s/ Jerome F. Klajbor - ----------------------------- Chief Financial Officer June 28, 1999 Jerome F. Klajbor (Principal Financial and Accounting Officer) /s/ Michael Berberian - ----------------------------- Director June 28, 1999 Michael Berberian
-23- /s/ John W. Brownie - ----------------------------- Director June 28, 1999 John W. Brownie /s/ Leonard Schuchman Vice President and Director June 28, 1999 - ----------------------------- Leonard Schuchman /s/ C. J. Waylan - ----------------------------- Director June 28, 1999 C. J. Waylan /s/ Robert Calafell - ----------------------------- Director June 28, 1999 Robert Calafell
-24- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES To Stanford Telecommunications, Inc.: We have audited in accordance with generally accepted auditing standards, the financial statements included in Stanford Telecommunications, Inc.'s annual report to stockholders incorporated by reference in this Form l0-K, and have issued our report thereon dated May 1, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed at Item 14(a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Jose, California May 1, 1999 -25- SCHEDULE II STANFORD TELECOMMUNICATIONS, INC. Valuation and Qualifying Accounts Three years ended March 31, 1999 (In Thousands) Allowance for doubtful accounts Bal. at Beg. Charged (Credited Bad Debts Bal. at End Year of Period back) to Expense Written Off of Period - ---- --------- ---------------- ----------- --------- 1997 $ 920 $ 135 $ (32) $1,023 1998 $1,023 $ (290) $ (22) $ 711 1999 $ 711 $ (157) $ (21) $ 533 -26- EX-3.2 2 BY-LAWS EXHIBIT NUMBER 3.2 BY-LAWS OF STANFORD TELECOMMUNICATIONS, INC. (as amended and restated as of June 16, 1999) ARTICLE 1 MEETINGS OF STOCKHOLDERS 1.1 Place of Meeting. All meetings of the stockholders for the election of directors shall be held at the principal office of the Corporation in the City of Santa Clara, State of California, at such place as may be fixed from time to time by the Board of Directors (the "Board") or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board and stated in the notice of the meeting. Meetings of stockholders for any purpose may be held at such time and place within or without the State of Delaware as the Board may fix from time to time and as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. 1.2 Annual Meeting. Annual meetings of stockholders shall be held each year at such date and time as shall be designated from time to time by the Board and stated in the notice of the meeting. At such annual meetings, the stockholders shall elect a Board and transact such other business as may properly be brought before the meetings. 1.3 Special Meetings. Special meetings of the stockholders may be called for any purpose or purposes, unless otherwise prescribed by the statute or by the Certificate of Incorporation, by the Chairman of the Board, the President' a majority of the total number of authorized directors on the Board or by the stockholders owning at least ten percent (10%) of the outstanding voting stock of the Corporation. Such request shall state the purpose or purposes of the proposed meeting. 1.4 Notice of Meetings. Written notice of stockholders' meetings, stating the place, date, and time of the meeting and the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days prior to the meeting. When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the 1 adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. 1.5 Business Matter of a Special Meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. 1.6 Action Without Meeting. Any action which may be taken at a meeting of the stockholders, except approval of an agreement for merger or consolidation of the Corporation with other corporations, may be taken without a meeting if authorized by a writing signed by a majority of the persons who would be entitled to vote upon such action at a meeting and filed with the Secretary of the Corporation. 1.7 List of Stockholders. The officer in charge of the stock ledger of the Corporation or the transfer agent shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, at a place within the city where the meeting is to be held, which place, if other than the place of the meeting, shall be specified in the notice of the meeting. The list shall also be produced and kept at the place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present in person thereat. 1.8 Organization and Conduct of Business. The Chairman of the Board or, in his or her absence, the President of the Corporation or, in their absence, such person as the Board may have designated or, in the absence of such a person, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as Chairman of the meeting. In the absence of the Secretary of the Corporation, the Secretary of the meeting shall be such person as the Chairman appoints. The Chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him or her in order. 1.9 Quorum and Adjournments. Except where otherwise provided by law or the Certificate of Incorporation or these Bylaws, the holders of a majority of the stock issued and outstanding and entitled to vote, present in person or represented in proxy, shall constitute a quorum at all meetings of the stockholders. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to have less than a quorum if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. At such adjourned meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If, however, a quorum shall not be present or represented at any meeting of the stockholders, the 2 stockholders entitled to vote thereat who are present in person or represented by proxy shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. 1.10 Voting Rights. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder. 1.11 Majority Vote. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation or of these Bylaws, a different vote is required in which case such express provision shall govern and control the decision of such question. 1.12 Record Date for Stockholder Notice, Voting, and Giving Consents. For purposes of determining the stockholders entitled to notice of any meeting or to vote or entitled to express consent to corporate action without a meeting, or entitled to receive payment of any dividend or other distribution, or entitled to exercise any right in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any other action. If the Board does not so fix a record date: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (b) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, (i) when no prior action by the Board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action of the Board has been taken, shall be at the close of business on the day on which the Board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. 1.13 Proxies. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the Corporation. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, or otherwise) by the stockholder or the stockholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to 3 that proxy, by a writing delivered to the Corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the Corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven months from the date of the proxy, unless otherwise provided in the proxy. 1.14 Inspectors of Election. Before any meeting of stockholders the Board may appoint any person other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the Chairman of the meeting may, and on the request of any stockholder or a stockholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more stockholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the Chairman of the meeting may, and upon the request of any stockholder or a stockholder's proxy shall, appoint a person to fill that vacancy. ARTICLE 2 DIRECTORS 2.1 Number. As set forth in the Certificate of Incorporation, the authorized number of directors of the Corporation shall not be less than five (5) nor more than nine (9) until changed by amendment to the Certificate of Incorporation. The Board may, within the limits specified by this Section, increase or decrease the exact number of directors from time to time by resolution adopted by the affirmative vote of a majority of the entire Board. The exact number of directors shall be six (6) until changed pursuant to this Section. No decrease in the number of directors shall shorten the term of any incumbent director. 2.2 Election, Qualifications and Term of Office. Except as provided in Section 3.3, the directors shall be elected by the stockholders at the Annual Meeting in each year and shall severally hold office until their successors shall be duly elected and qualified, or until their death, resignation or removal. Directors need not be stockholders. 2.3 Resignation and Vacancies. A vacancy or vacancies in the Board shall be deemed to exist in the case of the death, resignation or removal of any director, or if the authorized number of directors be increased. Vacancies may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, unless otherwise provided in the Articles of Incorporation. The stockholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. If the Board accepts the resignation of a director tendered to take effect at a future time, the Board shall have power to elect a successor to take office when the resignation is to become effective. If there are no directors in office, then an election of directors may be held in the manner provided by statute. 4 2.4 Removal of Directors. Unless otherwise restricted by statute, the Certificate of Incorporation or these Bylaws, any director or the entire Board may be removed, with or without cause, by the holders of at least a majority of the shares entitled to vote at an election of directors. 2.5 Powers. The business of the Corporation shall be managed by or under the direction of the Board which may exercise all such powers of the Corporation and do all such lawful acts and things which are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. Without prejudice to these general powers, and subject to the same limitations, the directors shall have the power to: (a) Select and remove all officers, agents, and employees of the Corporation; prescribe any powers and duties for them that are consistent with law, with the Certificate of Incorporation, and with these Bylaws; fix their compensation; and require from them security for faithful service. (b) Confer upon any office the power to appoint, remove and suspend subordinate officers, employees and agents; (c) Change the principal executive office or the principal business office in the State of California from one location to another; cause the Corporation to be qualified to do business in any other state, territory, dependency, or country and conduct business within or without the State of California; and designate any place within or without the State of California for the holding of any stockholders meeting, or meetings, including annual meetings. (d) Adopt, make, and use a corporate seal; prescribe the forms of certificates of stock; and alter the form of the seal and certificates. (e) Authorize the issuance of shares of stock of the Corporation on any lawful terms, in consideration of money paid, labor done, services actually rendered, debts or securities canceled, tangible or intangible property actually received. (f) Borrow money and incur indebtedness on behalf of the Corporation, and cause to be executed and delivered for the Corporation's purposes, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, and other evidences of debt and securities. (g) Declare dividends from time to time in accordance with law. 5 (h) Adopt from time to time such stock option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine. (i) Adopt from time to time regulations not inconsistent with these Bylaws for the management of the Corporation's business and affairs. 2.6 Place of Meetings. The Board may hold meetings, both regular and special, either within or without the State of Delaware. 2.7 Annual Meetings. The annual meetings of the Board shall be held immediately following the annual meeting of stockholders, and no notice of such meeting shall be necessary to the Board, provided a quorum shall be present. The annual meetings shall be for the purposes of organization, and an election of officers and the transaction of other business. 2.8 Regular Meetings. Regular meetings of the Board may be held without notice at such time and place as may be determined from time to time by the Board. 2.9 Special Meetings. Special meetings of the Board may be called by the Chairman of the Board, the President, a Vice President or a majority of the Board upon one (1) days notice to each director. 2.10 Quorum and Adjournments. At all meetings of the Board, a majority of the directors then in office shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board, except as may otherwise be specifically provided by law or the Certificate of Incorporation. If a quorum is not present at any meeting of the Board, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting at which the adjournment is taken, until a quorum shall be present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved of by at least a majority of the required quorum for that meeting. 2.11 Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 2.12 Telephone Meetings. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any member of the Board or any committee may part pate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 6 2.13 Waiver of Notice. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. 2.14 Fees and Compensation of Directors. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board and may be paid a fixed sum for attendance at each meeting of the Board or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 2.15 Rights of Inspection. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the Corporation and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and obtain extracts. ARTICLE 3 COMMITTEES OF DIRECTORS 3.1 Selection. The Board may, by resolution passed by a majority of the entire Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. 3.2 Power. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange 7 of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation) adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of dissolution, removing or indemnifying directors, or amending the Bylaws of the Corporation; and, unless the resolution or the Certificate of Incorporation expressly so provide no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock or to adopt a certificate of ownership and merger. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board. 3.3 Committee Minutes. Each committee shall keep regular minutes of its meetings and report the same to the Board when required. ARTICLE 4 OFFICERS 4.1 Officers Designated. The officers of the Corporation shall be chosen by the Board and shall be a President, a Secretary and a Treasurer. The Board may also choose a Chairman of the Board, one or more Vice Presidents, and one or more assistant Secretaries and assistant Treasurers. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide. 4.2 Appointment of Officers. The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of 4.3 or 4.5 of this Article 4, shall be appointed by the Board, and each shall serve at the pleasure of the Board, subject to the rights, if any, of an officer under any contract of employment. 4.3 Subordinate Officers. The Board may appoint, and may empower the President to appoint, such other officers and agents as the business of the Corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in the Bylaws or as the Board may from time to time determine. 4.4 Removal and Resignation of Officers. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board, at any regular or special meeting of the Board, or, except in case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board. Any officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. 8 4.5 Vacancies in Offices. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointment to that office. 4.6 Compensation. The salaries of all officers of the Corporation shall be fixed from time to time by the Board and no officer shall be prevented from receiving a salary because he is also a director of the Corporation. 4.7 The Chairman of the Board. The Chairman of the Board, if such an officer be elected, shall, if present, perform such other powers and duties as may be assigned to him from time to time by the Board. If there is no president, the Chairman of the Board shall also be the Chief Executive Officer of the Corporation and shall have the powers and duties prescribed in Section 4.8 of this Article 4. 4.8 The President. Subject to such supervisory powers, if any, as may be given by the Board to the Chairman of the Board, if there be such an officer, the President shall be the Chief Executive Officer of the Corporation, shall preside at all meetings of the stockholders and in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board, shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board are carried into effect. He or she shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board to some other officer or agent of the Corporation. 4.9 The Vice President. The Vice President (or in the event there be more than one, the Vice Presidents in the order designated by the directors, or in the absence of any designation, in the order of their election), shall, in the absence of the President or in the event of his disability or refusal to act, perform the duties of the President, and when so acting, shall have the powers of and subject to all the restrictions upon the President. The Vice President(s) shall perform such other duties and have such other powers as may from time to time be prescribed for them by the Board, the President, the Chairman of the Board or these Bylaws. 4.10 The Secretary. The Secretary shall attend all meetings of the Board and the stockholders and record all votes and the proceedings of the meetings in a book to be kept for that purpose and shall perform like duties for the standing committees, when required. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and special meetings of the Board, and shall perform such other duties as may from time to time be prescribed by the Board, the Chairman of the Board, or the President, under whose supervision he or she shall act. The Secretary shall have custody of the seal of the Corporation of the seal and the Secretary, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it, and, when so affixed, the seal may be attested by his or her signature or by the signature of such Assistant Secretary. The Board may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing thereof by his or her signature. The 9 Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. 4.11 The Assistant Secretary. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order designated by the Board (or in the absence of any designation, in the order of their election) shall, in the absence of the Secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board. 4.12 The Treasurer. The Treasurer shall have the custody of the Corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the President and the Board, at its regular meetings, or when the Board so requires, an account of all his or her transactions as Treasurer and of the financial condition of the Corporation. 4.13 The Assistant Treasurer. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order designated by the Board (or in the absence of any designation, in the order of their election) shall, in the absence of the Treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board. ARTICLE 5 STOCK CERTIFICATES 5.1 Certificates for Shares. The shares of the Corporation shall be represented by certificates or shall be uncertificated. Certificates shall be signed by, or in the name of the Corporation by, the Chairman of the Board, or the President or a Vice President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation. Within a reasonable time after the issuance or transfer of uncertified stock, the Corporation shall send to the registered owner thereof a written notice containing the information required by the General Corporation Law of the State of Delaware or a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class 10 of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 5.2 Signatures on Certificates. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 5.3 Transfer of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate of shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Upon receipt of proper transfer instructions from the registered owner of uncertificated share, such uncertificated shares shall be cancelled and issuance of new equivalent uncertificated shares or certificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the Corporation. 5.4 Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a percent registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 5.5 Record Date. In order that the Corporation may determine the stockholders of record who are entitled to receive notice of, or to vote at, any meeting of stockholders or any adjournment thereof or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any lawful action, the Board may fix, in advance, a record date which shall not be more than sixty (60) nor less than ten (10) days prior to the date of such meeting, nor more than sixty (60) days prior to the date of any other action. A determination of stockholders of record entitled to notice or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. 5.6 Lost, Stolen, Destroyed Certificates. The Board may direct that a new certificate or certificates be issued to replace any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing the issue of a new certificate or certificates, the Board may, in its discretion and as a condition precedent to the issuance thereof, require the owner of the lost, stolen, or destroyed certificate or certificates, or his or her legal representative, to advertise the same in such manner as it shall require, and/or to give the Corporation a bond in such sum as it may direct as indemnity 11 against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. ARTICLE 6 NOTICES 6.1 Notice. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, notice is required to be given to any director or stockholder it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram or telephone. 6.2 Waiver. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE 7 GENERAL PROVISIONS 7.1 Dividends. Dividends upon the capital stock of the Corporation, subject to any restrictions contained in the General Corporation Laws of Delaware or the provisions of the Certificate of Incorporation, if any, may be declared by the Board at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. 7.2 Dividend Reserve. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. 7.3 Annual Statement. The Board shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the Corporation. 12 7.4 Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board may from time to time designate. 7.5 Corporate Seal. The Board may provide a suitable seal, containing the name of the Corporation, which seal shall be in charge of the Secretary. If and when so directed by the Board or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or Assistant Treasurer. 7.6 Execution of Corporate Contracts and Instruments. The Board, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. ARTICLE 8 AMENDMENTS These Bylaws may be altered, amended or repealed or new Bylaws may be adopted as provided for in the Certificate of Incorporation. ARTICLE 9 INDEMNIFICATION 9.1. Right to Indemnification. The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (an "Indemnitee") who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he, or a person for whom he is the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such Indemnitee. Notwithstanding the preceding sentence, except as otherwise provided in Section 9.3 hereof, the Corporation shall be required to indemnify an Indemnitee in connection with a proceeding (or part thereof) commenced by such Indemnitee only if the commencement of such proceeding (or part thereof) by the Indemnitee was authorized by the Board of Directors of the Corporation. 13 9.2. Prepayment of Expenses. The Corporation shall pay the expenses (including attorneys' fees) incurred by an Indemnitee in defending any proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Indemnitee to repay all amounts advanced if it should be ultimately determined that the Indemnitee is not entitled to be indemnified under this Article 9 or otherwise. 9.3. Claims. If a claim for indemnification or payment of expenses under this Article 9 is not paid in full within sixty days after a written claim therefor by the Indemnitee has been received by the Corporation, the Indemnitee may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action, the Corporation shall have the burden of proving that the Indemnitee is not entitled to the requested indemnification or payment of expenses under applicable law. 9.4. Nonexclusivity of Rights. The rights conferred on any Indemnitee by this Article 9 shall not be exclusive of any other rights which such Indemnitee may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, these Bylaws, agreement, vote of stockholders or disinterested directors or otherwise. 9.5. Other Sources. The Corporation's obligation, if any, to indemnify or to advance expenses to any Indemnitee who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or nonprofit entity shall be reduced by any amount such Indemnitee may collect as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust, enterprise or nonprofit enterprise. 9.6. Amendment or Repeal. Any repeal or modification of the foregoing provisions of this Article 9 shall not adversely affect any right or protection hereunder of any Indemnitee in respect of any act or omission occurring prior to the time of such repeal or modification. 9.7. Other Indemnification and Prepayment of Expenses. This Article 9 shall not limit the right of the Corporation, to the extent and in the manner permitted by law, to indemnify and to advance expenses to persons other than Indemnitees when and as authorized by appropriate corporate action. 14 EX-4.2 3 AMENDMENT NO. 1 TO RIGHTS AGREEMENT EXHIBIT NUMBER 4.2 AMENDMENT NO. 1 TO RIGHTS AGREEMENT THIS AMENDMENT NO. 1 TO RIGHTS AGREEMENT (this "Amendment"), dated as of June 18, 1999, is between Stanford Telecommunications Inc., a Delaware corporation (the "Company"), and BankBoston, N.A. (f/k/a The First National Bank of Boston) (the "Rights Agent"). WHEREAS, the Company and the Rights Agent are parties to a Rights Agreement dated as of May 9, 1995 (the "Rights Agreement"); and WHEREAS, pursuant to Section 27 of the Rights Agreement, the Company and the Rights Agent desire to amend the Rights Agreement as set forth below. NOW, THEREFORE, the Rights Agreement is hereby amended as follows: 1. Amendment of Section 1. Section 1 of the Rights Agreement is amended by adding thereto two new definitions immediately after the definition of "Trading Day", which new definitions shall read as follows: "(ee) `Merger Agreement' shall mean the Agreement and Plan of Merger, dated as of June 22, 1999, by and among the Company, Newbridge Networks Corporation, and Saturn Acquisition Corp. as the same may be amended from time to time. (ff) 'Transaction Documents' shall mean the Merger Agreement, the Stock Option Agreement (as defined in the Merger Agreement), the Technology Option Agreement (as defined in the Merger Agreement), and the Voting Agreements (as defined in the Merger Agreement), as said Transaction Documents or any thereof may be amended from time to time." 2. Amendment of Section 2. Section 2 of the Rights Agreement is amended by adding the following language after the word "desirable" in the second sentence: ", upon ten (10) days' prior written notice to the Rights Agent. The Rights Agent shall have no duty to supervise, and shall in no event be liable for, the acts or omissions of any such co-Rights Agent." 3. Amendment of Section 7. Section 7(a) of the Rights Agreement is amended by amending the definition of "Expiration Date" by deleting the word "or" immediately preceding clause (iii) thereof and by adding the following new phrase immediately following clause (iii) thereof: "or (iv) immediately prior to the Effective Time (as defined in the Merger Agreement)." 4. Amendment of Section 18. Section 18(a) of the Rights Agreement is amended by adding the word "gross" immediately after the word "without" and immediately before the word "negligence" in the second sentence. 5. Amendment of Section 20. Section 20(c) of the Rights Agreement is amended by adding the word "gross" immediately after the word "own" and immediately before the word "negligence." 6. Amendment of Section 26. Section 26 of the Rights Agreement is amended by deleting the address for The First National Bank of Boston as set forth therein and substituting in lieu thereof the following: "BankBoston, N.A. c/o EquiServe Limited Partnership 150 Royall Street Canton, MA 02021 Attn: Client Administration" 7. Addition of New Section 35. The Rights Agreement is amended by adding a Section 35 thereof which shall read as follows: "Section 35. Exception For Merger Agreement. Notwithstanding any provision of this Agreement to the contrary, neither a Distribution Date, Flip-In Event, Flip-Over Event nor a Stock Acquisition Date shall be deemed to have occurred, neither Newbridge Networks Corporation, or Merger Sub (as defined in the Merger Agreement) nor any of their affiliates shall be deemed to have become an Acquiring Person, and no holder of any Rights shall be entitled to exercise such Rights under, or be entitled to any rights pursuant to, any of Sections 3(a), 7(a), 11(a) or 13 of this Agreement, in any such case solely by reason of (a) the approval, execution or delivery of the Transaction Documents or any amendments thereof, or (b) the performance or consummation of any the transactions contemplated by the Transaction Documents in accordance with the provisions of the Transaction Documents, including the Merger (as defined in the Merger Agreement)." 2 8. Effectiveness. This Amendment shall be deemed effective as of, and immediately prior to, the earlier of (i) execution and delivery of the Merger Agreement, (ii) the execution and delivery of the Stock Option Agreement (as defined in the Merger Agreement), the (iii) the execution and delivery of the Technology Option Agreement (as defined in the Merger Agreement), and the (iv) the execution and delivery of the Voting Agreements (as defined in the Merger Agreement), and all references to the Rights Agreement shall, from and after such time, be deemed to be references to the Rights Agreement as hereby amended. Except as amended hereby, the Rights Agreement shall remain in full force and effect and shall be otherwise unaffected hereby. 9. Miscellaneous. This Amendment shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such state applicable to contracts to be made and performed entirely within such state. This Amendment may be executed in any number of counterparts, each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. If any term, provision, covenant or restriction of this Amendment is held by a court of competent jurisdiction or other authority to be invalid, illegal, or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Amendment shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date set forth above. STANFORD TELECOMMUNICATIONS INC. By: ------------------------------------------------ Name: Jerome F. Klajbor Title: Vice President, Chief Financial Officer BANKBOSTON, N.A. By: ------------------------------------------------ Name: Geoffrey Anderson Title: Director 4 EX-4.3 4 AGREEMENT RE. RIGHTS OF HOLDERS OF LONG TERM DEBT EXHIBIT NUMBER 4.3 AGREEMENT RE. RIGHTS OF HOLDERS OF LONG-TERM DEBT The Company hereby agrees to furnish to the Securities and Exchange Commission, upon request, a copy of the instruments which define the rights of holders of long-term debt of the Company. None of such instruments not included as exhibits herein represents long-term debt in excess of 10% of the total assets of the Company. EX-10.3 5 EMPLOYEE STOCK PURCHASE PLAN DATED 04-15-1998 EXHIBIT NUMBER 10.3 EMPLOYEE STOCK PURCHASE PLAN As Amended and Restated as of April 15, 1998 Section 1. Establishment of the Plan The Stanford Telecommunications, Inc. Employee Stock Purchase Plan (the "Plan") is established to provide Eligible Employees with an opportunity to purchase common stock of STANFORD TELECOMMUNICATIONS, INC. (the "Company") so that they may increase their proprietary interests in the success of the Company. The Plan, which provides for the purchase of stock through regular payroll withholding, is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended. Section 2. Definitions (a) "Board of Directors" means the Board of Directors of Stanford Telecommunications, Inc., a Delaware corporation. "Directors" means members of the Board of Directors. (b) "Committee" means any committee appointed to administer the Plan, as provided in Section 3. (c) "Compensation" means the total compensation received by a Participant from the Company during a Participation Period, including bonuses and commissions, but excluding special payments (such as moving expenses) and income with respect to stock options or other stock purchases. (d) "Date of Grant" means the first day of a Participation Period. (e) "Eligible Employee" means any regular employee of a Participating Company whose date of hire was at least three (3) months prior to the commencement of a Participation Period and who is customarily employed for more than twenty (20) hours per week and who is an active employee at the commencement of a Participation Period. (f) "Executive Officer" shall mean any person who is an "officer" of the Company within the meaning of Rule 16a-1(f) as promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (g) "Fair Market Value" of a share of Stock means (i) if the Stock is traded on NASDAQ, the average of the NASDAQ closing bid and asked prices on the applicable date, (ii) if the Stock is traded on the NASDAQ National Market, the last price on the applicable date, or (iii) if the Stock is traded on a national exchange, the closing price on the applicable date. In the event the Stock is not traded on the date as of which the Fair Market Value is to be determined, Fair Market Value shall be determined as of the next preceding date on which the Stock is traded. "Open Fair Market Value" means the Fair Market Value on the next preceding date on which Stock is traded. (h) "Participant" means an Eligible Employee who elects to participate in the Plan, as provided in Section 5 hereof. (i) "Participating Company" means the Company and such present or future Subsidiaries of the Company as the Board of Directors shall from time to time designate. (j) "Participation Period" means a period during which contributions may be made toward the purchase of Stock under the Plan, as determined pursuant to Section 5(b). (k) "Plan Account" means the account established for each Participant pursuant to Section 5(d). (l) "Purchase Price" means the price at which Participants may purchase stock under Section 5 of the Plan, as determined pursuant to Section 5(c). (m) "Stock" means the common stock of the Company, $.01 par value. (n) "Subsidiary" means a subsidiary corporation as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended. Section 3. Administration The Plan shall be administered by the Board of Directors. The interpretation and construction by the Board of Directors of any provisions of the Plan or of any right to purchase Stock granted under it shall be conclusive and binding on all persons. No Director shall be liable for any action, omission or determination taken, omitted or made under or in connection with the Plan in good faith. The Board of Directors may delegate administration of the Plan to a Committee consisting of not less than three (3) members of the Board of Directors. The Board of Directors may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, howsoever caused, shall be filled by the Board of Directors. The Committee shall select one of its members as chairman, and shall hold meetings at such times and places as it may determine. Section 4. Number of Shares To Be Offered and To Be Purchased The maximum aggregate number of shares which shall be offered under the Plan shall be seven hundred thousand (700,000) shares of Stock, subject to adjustment as provided in Section 8 hereof. In the event that the aggregate number of shares which all Participants elect to purchase during a Participation Period shall exceed the number of shares remaining available for issuance under the Plan, then the number of shares to which each Participant shall become entitled shall be determined by multiplying the number of shares available for issuance by a fraction the numerator of which is the sum of the number of shares the Participant has elected to purchase pursuant to Section 5 and denominator of which is the sum of the number of shares which all employees have elected to purchase pursuant to Section 5. Section 5. Eligibility and Participation Purchase of Shares (a) Eligibility and Participation. Any person who qualifies as an Eligible Employee on the Date of Grant with respect to a Participation Period may elect to participate in the Plan for such Participation Period. An Eligible employee may elect to participate by executing the enrollment form prescribed for such purpose by the Committee. The enrollment form shall be filed with the Committee no later than the first day of the Participation Period. The Eligible Employee shall designate on the enrollment form the percentage of his or her Compensation which he or she elects to have withheld for the purchase of Stock, which may be any whole percentage from one percent (1%) to ten percent (10%) of the Participant's Compensation. 2 By enrolling in the Plan, a Participant shall be deemed to have elected to purchase the maximum number of whole shares of Stock which can be purchased with the amount of the Participant's Compensation which is withheld during the Participation Period; provided, however, that with respect to any Participation Period, no Participant may purchase more than two hundred fifty (250) shares of Stock or shares of Stock in excess of the amounts set forth in Section 9. Once enrolled, a Participant will continue to participate in the Plan for each succeeding Participation Period until he or she terminates participation or ceases to qualify as an Eligible Employee. If a Participant desires to change the rate of payroll withholding, he or she may do so effective for the next Participation Period by filing a new enrollment form with the Committee at any time prior to the first day of the Participation Period for which such change is to be effective. (b) Participation Periods. The Plan shall be implemented by one or more Participation Periods of three months duration. The Board of Directors may determine the commencement dates of each Participation Period, provided that no Participation Period shall have a commencement date after March 1, 2002. (c) Purchase Price. The Purchase Price for each share of Stock is to be purchased pursuant to this Section 5 shall be the lesser of (i) eighty-five percent (85%) of the Opening Fair Market Value of such share on the Date of Grant in the Participation Period, or (ii) eighty-five percent (85%) of the Fair Market Value of such share on the last trading day during the Participation Period. (d) Contributions. The Purchase Price for each share of Stock to be purchased pursuant to this Section 5 will be payable by each Participant by means of payroll deduction. Payroll deductions for the amount of Compensation designated by the Participant to Section 5(a) shall commence with the first paycheck issued during the Participation Period and shall be deducted from each subsequent paycheck throughout the Participation Period. The amount deducted from each paycheck shall be the amount determined pursuant to Section 5(a) as of the beginning of the Participation Period and no adjustments will be made for any changes in salary or status during the Participation Period. (e) Purchase of Shares. The Company will maintain a Plan Account on its books in the name of each Participant. At the close of each pay period, the amount deducted from the Participant's Compensation will be credited to the Participant's Plan Account. As of the last day of each Participation Period, the amount then in the Participant's Plan Account will be divided by the Purchase Price and the amount in the Participant's Plan account shall be used to purchase the number of whole shares which result. Share certificates representing the number of shares of Stock so purchased shall be issued and delivered to the Participant as soon as reasonably practicable after the close of the Participation Period. Any surplus in a Participant's Plan Account attributable to fractional share interests will be carried over to the next Participation Period. Any amount remaining in the Participant's Plan Account caused by anything other than a surplus due to fractional shares shall be refunded to the Participant in cash. (f) Resales by Persons Subject to Section 16 of Exchange Act. All shares of Stock purchased under the Plan by persons subject to Section 16 of the Exchange Act (including Executive Officers and Directors) must be held, and may not be sold, given away or otherwise transferred, for a period of at least six (6) months following the date on which the purchase price for such shares is determined pursuant to Section (5) hereof. (g) Compliance with Section 16 of Exchange Act. With respect to persons subject to Section 16 of the Exchange Act (including Executive Officers and Directors), transactions under this Plan are 3 intended to comply with all applicable conditions of Rule 16b-3 (or its successors) as promulgated under the Exchange Act. To the extent any provision of the Plan or action by the Board of Directors or Committee pursuant to the Plan fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Board of Directors. Notwithstanding the foregoing, each person subject to Section 16 of the Exchange Act shall be responsible for his or her compliance with Section 16, including compliance with Rule 16b-3, and the Company shall have no obligation or liability for failure to so comply. (h) Withdrawal. A Participant may elect to withdraw from participation under the Plan at any time up to the last day of a Participation Period by filing the prescribed form with the Committee. At the time of withdrawal, the amount credited to the Participant's Plan Account will be refunded in cash, without interest. Any Executive Officer or Director who is a Participant but who withdraws from participation shall not be eligible to become a Participant again for a period of six (6) months following such withdrawal. Section 6. Effect of Termination of Employment Termination of employment for any reason including without limitation, death, disability or retirement, shall be treated as an automatic withdrawal pursuant to Section 5(h). A transfer from the Company to a Subsidiary, from one Subsidiary to another, or from a Subsidiary to the Company shall not be treated as a termination of employment. Section 7. Rights Not Transferable The rights or interest of any Participant in the Plan, in any right granted under the Plan, or in any Stock or moneys to which he or she may be entitled under the Plan, shall not be transferable by voluntary or involuntary assignment or by operation of law, or by any other manner otherwise than by will or the applicable laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant. If the Participant shall in any manner attempt to transfer, assign or otherwise encumber his or her rights or interest under the Plan, other than by will, such act shall be treated as an automatic withdrawal under Section 5(h). Section 8. Recapitalization, Etc. The aggregate number of shares of Stock offered under the Plan and the number and price of shares which any Participant has elected to purchase pursuant to Section 5 shall be proportionately adjusted for any increase or decrease in the number of issued shares of Stock resulting from a subdivision or consolidation of shares or any other capital adjustment, the payment of a stock dividend, or other increase or decrease in such shares effected without receipt of consideration by the Company. In the event of a dissolution or liquidation of the Company, or a merger or consolidation to which the Company is a constituent corporation, this plan shall terminate, unless the plan of merger, consolidation or reorganization provides otherwise, and all amounts then remaining in each Participant's Plan Account shall be refunded, without interest. Section 9. Limitation on Stock Ownership. Notwithstanding any provision herein to the contrary no Participant shall be permitted to elect to participate in the Plan with respect to a Participation Plan (i) if such Participant, as of the Date of Grant for such Participation Period, would own stock possessing five percent (5%) or more of the total combined 4 voting power or value classes of Stock of the Company or any parent or Subsidiary of the Company, or (ii) if under the terms of the Plan the rights of the employee to purchase Stock under this and all other qualified employee stock purchase plans of the Company or its Subsidiaries would accrue at a rate that exceeds $25,000 of Fair Market Value of such Stock (determined at the time such right or option is granted) for each calendar year for which such right or option is outstanding at any time. For purposes of this Section 9, ownership of Stock shall be determined by the attribution rules of Section 424 (d) of the Internal Revenue Code of 1986, as amended, and Participants shall be considered to own any Stock which they have a right or option to purchase under this or any other plan. Section 10. Rights as an Employee Nothing in the Plan shall be construed to give any person the right to remain in the employ of the Company or a Subsidiary or to effect the right of the Company and its Subsidiaries to terminate the employment of any person at any time with or without cause. Except as otherwise specifically provided herein, all Eligible Employees shall have the same rights and privileges pursuant to the Plan. Section 11. Rights as a Stockholder A Participant shall have no rights as a stockholder with respect to any shares he or she may have a right to purchase under the Plan until the date of issuance of a stock certificate to such Participant for shares issued pursuant to the Plan. Section 12. Withholding Taxes Any taxes required by law to be withheld on account of this Plan shall be deducted and withheld accordingly. A Participant may become liable for taxes when he or she disposes of shares of Stock acquired under this Plan, and the Company shall not in any way be responsible for any tax liability incurred by any participant as a result of this Plan. Section 13. Amendment or Termination of the Plan The Board of Directors shall have the right to amend, modify or terminate the Plan at any time without notice, provided that no Participant's existing rights are adversely affected thereby, and provided further that, except as provided in Section 8 hereof, no increase in the aggregate number of shares to be issued under the Plan shall be effective until such increase is approved by a vote of the stockholders of the Company in the manner provided in Section 14 hereof. Notwithstanding the foregoing, the provisions of the Plan, as they apply to Executive Officers and Directors, which state the amount and price of Stock that may be purchased or specify the timing of permitted purchases or set forth a formula that determines such amount, price and timing shall not be amended more frequently than once every six months, other than to comport with changes in the Internal Revenue Code of 1986, as amended, the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations thereunder. The Plan shall terminate on June 30, 2002, if it has not been earlier terminated pursuant to this Section 13. Section 14. Ratification of the Plan The Plan shall become effective as of July 1, 1992 provided that it is approved and ratified by the vote of the holders of at least a majority of the outstanding shares of Stock of the Company within twelve (12) months after the date upon which the Plan is approved by the Board of Directors. If no such shareholder approval and ratification is obtained within such period, this Plan shall be void and of no further force and effect. 5 EX-10.12 6 THIRD AMENDMENT TO THE CREDIT AGREEMENT EXHIBIT NUMBER 10.12 THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (MULTICURRENCY) THIS THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (MULTICURRENCY) (the "Amendment"), dated as of August 24, 1998, is entered into by and between STANFORD TELECOMMUNICATIONS, INC. (the "Borrower") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank"). RECITALS A. The Borrower and the Bank are parties to an Amended and Restated Credit Agreement (Multicurrency) dated as of December 20, 1995, as amended by a First Amendment thereto dated as of December 5, 1996 and a Second Amendment thereto dated as of December 12, 1997 (as so amended, the "Credit Agreement") pursuant to which the Bank has extended certain credit facilities to the Borrower. B. The Borrower has requested that the Bank agree to certain amendments of the Credit Agreement. C. The Bank is willing to amend the Credit Agreement, subject to the terms and conditions of this Amendment. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings, if any, assigned to them in the Credit Agreement. 2. Amendments to Credit Agreement. (a) Section 7.05 of the Credit Agreement shall be amended and restated in its entirety so as to read as follows: 7.05 Dividends. Neither the Borrower nor any of its Subsidiaries that is not wholly-owned by the Borrower shall declare or pay any dividends or distributions on any of its shares now or hereafter existing, or purchase, redeem or otherwise acquire for value any of its shares, or create any sinking fund in relation thereto, except (i) dividends payable solely in its capital stock and (ii) repurchases of its common stock in an aggregate cumulative amount settled from and after August 24, 1998 not to exceed $15,000,000; provided that no such common stock repurchases shall be made at any time when an Event of Default has occurred which has not been cured or waived. (b) Section 7.13 of the Credit Agreement shall be amended and restated in its entirety so as to read as follows: 7.13 Tangible Net Worth. The Borrower shall not permit its Tangible Net Worth on a consolidated basis at any time to be less than $70,000,000 plus (i) 75% of the Borrower's consolidated net income (but not less any net losses for any period) earned in each fiscal quarter commencing after September 30, 1996 plus (ii) the value of all Net Issuance Proceeds (whether in cash, other property or in kind) of equity securities issued by the Borrower from and after September 30, 1996, less (iii) the lesser of (a) the aggregate cumulative amount of its common stock repurchased and settled from and after August 24, 1998 and (b) $15,000,000. For purposes of this Section and Section 7.14, "Tangible Net Worth" means, as of any date of determination, (i) total assets (exclusive of goodwill, patents, trademarks, trade names, organization expense, treasury shares, unamortized debt discount and premium, deferred charges and other like intangibles) less (ii) all reserves applicable thereto and all liabilities (including accrued and deferred income taxes and subordinated liabilities). For purposes of this Section, "Net Issuance Proceeds" means, in respect of any issuance of common or preferred equity, proceeds (whether in cash, other property, or in kind) received in connection therewith, net of out-of-pocket costs and expenses paid or incurred in connection therewith in favor of any person not an affiliate of the Borrower and not to exceed 5% of the gross proceeds thereof. (c) Schedule 2 to Exhibit A of the Credit Agreement shall be amended and restated in its entirety so as to read as set forth in Schedule 2 attached hereto. 3. Representations and Warranties. The Borrower hereby represents and warrants to the Bank as follows: (a) No Default or Event of Default has occurred and is continuing. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate and other action and do not and will not require any registration with, consent or approval of, notice to or action by, any person (including any governmental authority) in order to be effective and enforceable. The Credit Agreement as amended by this Amendment constitutes the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with its respective terms, without defense, counterclaim or offset. (c) All representations and warranties of the Borrower contained in the Credit Agreement are true and correct. (d) The Borrower is entering into this Amendment on the basis of its own investigation and for its own reasons, without reliance upon the Bank or any other person. 4. Reservation of Rights. The Borrower acknowledges and agrees that the execution and delivery by the Bank of this Amendment shall not be deemed to create a course of dealing or otherwise obligate the Bank to enter into similar amendments under the same, similar or any other circumstances in the future. 5. Miscellaneous. (a) Except as herein expressly amended, all terms, covenants and provisions of the Credit Agreement are and shall remain in full force and effect and all references therein to such Credit Agreement shall henceforth refer to the Credit Agreement as amended by this Amendment. This Amendment shall be deemed incorporated into, and a part of, the Credit Agreement. This Amendment is a Credit Document. (b) This Amendment shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective successors and assigns. No third party beneficiaries are intended in connection with this Amendment. (c) This Amendment shall be governed by and construed in accordance with the law of the State of California. (d) This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Each of the parties hereto understands and agrees that this document (and any other document required herein) may be delivered by any party thereto either in the form of an executed original or an executed original sent by facsimile transmission to be followed promptly by mailing of a hard copy original, and that receipt by the Bank of a facsimile transmitted document purportedly bearing the signature of the Borrower shall bind the Borrower with the same force and effect as the delivery of a hard copy original. Any failure by the Bank to receive the hard copy executed original of such document shall not diminish the binding effect of receipt of the facsimile transmitted executed original of such document which hard copy page was not received by the Bank. (e) This Amendment, together with the Credit Agreement, contains the entire and exclusive agreement of the parties hereto with reference to the matters discussed herein and therein. This Amendment supersedes all prior drafts and communications with respect thereto. This Amendment may not be amended or modified except in writing executed by both of the parties hereto. (f) If any term or provision of this Amendment shall be deemed prohibited by or invalid under any applicable law, such provision shall be invalidated without affecting the remaining provisions of this Amendment or the Credit Agreement, respectively. (g) Borrower covenants to pay to or reimburse the Bank, upon demand, for all costs and expenses (including allocated costs of in-house counsel) incurred in connection with the development, preparation, negotiation, execution and delivery of this Amendment. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first above written. STANFORD TELECOMMUNICATIONS, INC. By: ------------------------------ Name: ---------------------------- Title: --------------------------- By: ------------------------------ Name: ---------------------------- Title: --------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: ------------------------------ Name: ---------------------------- Title: Vice President EX-10.13 7 FOURTH AMENDMENT TO THE CREDIT AGREEMENT EXHIBIT NUMBER 10.13 FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (MULTICURRENCY) THIS FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (MULTICURRENCY) (the "Amendment"), dated as of December 18, 1998, is entered into by and between STANFORD TELECOMMUNICATIONS, INC. (the "Borrower") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank"). RECITALS A. The Borrower and the Bank are parties to an Amended and Restated Credit Agreement (Multicurrency) dated as of December 20, 1995, as amended by a First Amendment thereto dated as of December 5, 1996, a Second Amendment thereto dated as of December 12, 1997, and a Third Amendment thereto dated as of August 24, 1998 (as so amended, the "Credit Agreement") pursuant to which the Bank has extended certain credit facilities to the Borrower. B. The Borrower has requested that the Bank agree to certain amendments of the Credit Agreement. C. The Bank is willing to amend the Credit Agreement, subject to the terms and conditions of this Amendment. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings, if any, assigned to them in the Credit Agreement. 2. Amendments to Credit Agreement. (a) Section 1.01 of the Credit Agreement shall be amended at the defined term "Availability Period" by amending and restating such defined term as follows: "'Availability Period': the period commencing on the date of this Agreement and ending on the date that is the earlier to occur of (a) December 17, 1999, and (b) the date on which the Bank's commitment to extend credit hereunder terminates." (b) Section 1.01 of the Credit Agreement shall be amended at the defined term "Final Maturity Date" by amending and restating such defined term as follows: "'Final Maturity Date': (a) in respect of any Advances, December 17, 1999; (b) in respect of any commercial letters of credit, June 17, 2000; (c) in respect of any standby letters of credit, December 17, 2000; (d) in respect of any Bank Guaranties, December 17, 2000; and (e) in respect of any acceptances, June 17, 2000." (c) Article II of the Credit Agreement shall be amended by inserting the following new Section 2.12 immediately following Section 2.11: (a) Definitions. In this Section and in each other provision of this Agreement to which reference is made in this Section expressly or implicitly, the following terms have the following meanings: "commencement of the third stage of EMU" means the date of commencement of the third stage of EMU (at the date of this Agreement expected to be January 1, 1999) or the date on which circumstances arise which (in the opinion of the Bank) have substantially the same effect and result in substantially the same consequences as commencement of the third stage of EMU as contemplated by the Treaty on European Union. "EMU" means economic and monetary union as contemplated in the Treaty on European Union. "EMU legislation" means legislative measures of the European Council for the introduction of, changeover to, or operation of a single or unified European currency (whether known as the euro or otherwise), being in part the implementation of the third stage of EMU. "euro" means the single currency of participating member states of the European Union. "euro unit" means the currency unit of the euro. "national currency unit" means the unit of currency (other than a euro unit) of a participating member state. "participating member state" means each state so described in any EMU legislation. "Treaty on European Union" means the Treaty of Rome of March 25, 1957, as amended by the Single European Act 1986 and the Maastricht Treaty (which was signed at Maastricht on February 7, 1992, and came into force on November 1, 1993), as amended from time to time. (b) Effectiveness of Provisions. The provisions of subsections (c) through (i) of this Section shall be effective at and from the commencement of the third stage of EMU; provided, that if and to the extent that any such provision relates to any state (or the currency of such state) that is not a participating member state on the commencement of the third stage of EMU, such provision shall become effective in relation to such state (and the currency of such state) at and from the date on which such state becomes a participating member state. (c) Redenomination and Alternative Currencies. Each obligation under this Agreement of the Bank and the Borrower which has been denominated in the national currency unit of a participating member state shall be redenominated into the euro unit in accordance with EMU legislation; provided, that if and to the extent that any EMU legislation provides that following the commencement of the third stage of EMU an amount denominated either in the euro unit or in the national currency unit of a participating member state and payable within that participating member state by crediting an account of the creditor can be paid by the debtor either in the euro unit or in that national currency unit, the Bank and the Borrower shall be entitled to pay or repay any such amount either in the euro unit or in such national currency unit. (d) Local Currency Advances. Any Local Currency Advance or other obligation denominated in Local Currency which is denominated in the currency of a participating member state shall be made in the euro unit. (e) Banking Days. With respect to any amount denominated or to be denominated in the euro unit or a national currency unit, any reference to a "Banking Day" shall be construed as a reference to a day (other than a Saturday or Sunday) on which banks are generally open for business in (i) London and New York City, and (ii) Frankfurt am Main, Germany (or such principal financial center or centers in such participating member state or states as the Bank may from time to time nominate for this purpose). (f) Payments to the Bank. Each provision of this Agreement calling for payments in a specified currency shall be construed so that, in relation to the payment of any amount of euro units or national currency units, such amount shall be made available to the Bank in immediately available, freely transferable, cleared funds to such account of the Bank's in Frankfurt am Main, Germany (or such other principal financial center in such participating member state as the Bank may from time to time nominate for this purpose) as the Bank shall from time to time nominate for this purpose. (g) Payments by the Bank Generally. With respect to the payment of any amount denominated in the euro unit or in a national currency unit, the Bank shall not be liable to the Borrower in any way whatsoever for any delay, or the consequences of any delay, in the crediting to any account of any amount required by this Agreement to be paid by the Bank if the Bank shall have taken all relevant steps to achieve, on the date required by this Agreement, the payment of such amount in immediately available, freely transferable, cleared funds (in the euro unit or, as the case may be, in a national currency unit) to the account with the bank in the principal financial center in the participating member state which the Borrower or, as the case may be, the Bank shall have specified for such purpose. In this subsection, "all relevant steps" means all such steps as may be prescribed from time to time by the regulations or operating procedures of such clearing or settlement system as the Bank may from time to time determine for the purpose of clearing or settling payments of the euro. (h) Basis of Accrual. If the basis of accrual of interest or fees expressed in this Agreement with respect to the currency of any state that becomes a participating member state shall be inconsistent with any convention or practice in the London interbank market or, as the case may be, another applicable interbank market for the basis of accrual of interest or fees in respect of the euro, such convention or practice shall replace such expressed basis effective as of and from the date on which such state becomes a participating member state; provided, that if any Local Currency Advance in the currency of such state is outstanding immediately prior to such date, such replacement shall take effect, with respect to such Advance, at the end of the then current interest period or other applicable period. (i) Rounding and Other Consequential Changes. Without prejudice and in addition to any method of conversion or rounding prescribed by any EMU legislation and without prejudice to the respective liabilities of the Borrower to the Bank or the Bank to the Borrower under or pursuant to this Agreement: (i) each reference in this Agreement to a minimum amount (or an integral multiple thereof) in a national currency unit to be paid to or by the Bank shall be replaced by a reference to such reasonably comparable and convenient amount (or an integral multiple thereof) in the euro unit as the Bank may from time to time specify; and (ii) except as expressly provided in this Section, each provision of this Agreement shall be subject to such reasonable changes of construction as the Bank may from time to time specify to be necessary or appropriate to reflect the introduction of or changeover to the euro in participating member states. (j) Increased Costs. The Borrower shall, from time to time at the request of the Bank, pay to the Bank the amount of any cost or increased cost incurred by, or of any reduction in any amount payable to or in the effective return on its capital to, or of interest or other return foregone by, the Bank or any holding company of the Bank as a result of the introduction of, changeover to or operation of the euro in any participating member state, other than any such cost or reduction or amount foregone reflected in any interest rate hereunder. (c) Article V of the Credit Agreement shall be amended by inserting the following new Section 5.15 immediately following Section 5.14: 5.15 Year 2000. On the basis of a comprehensive review and assessment of the Borrower's and its Subsidiaries' systems and equipment and inquiry made of the Borrower's and its Subsidiaries' material suppliers and vendors, the Borrower reasonably believes that the "Year 2000 problem" (that is, the inability of computers, as well as embedded microchips in non-computing devices, to perform properly date-sensitive functions with respect to certain dates prior to and after December 31, 1999), including costs of remediation, will not result in a Material Adverse Effect. 3. Representations and Warranties. The Borrower hereby represents and warrants to the Bank as follows: (a) No Default or Event of Default has occurred and is continuing. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate and other action and do not and will not require any registration with, consent or approval of, notice to or action by, any person (including any governmental authority) in order to be effective and enforceable. The Credit Agreement as amended by this Amendment constitutes the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with its respective terms, without defense, counterclaim or offset. (c) All representations and warranties of the Borrower contained in the Credit Agreement are true and correct. (d) The Borrower is entering into this Amendment on the basis of its own investigation and for its own reasons, without reliance upon the Bank or any other person. 4. Effective Date. This Fourth Amendment will become effective as of the date first above written (the "Effective Date"), provided that each of the following conditions is satisfied: (a) The Bank has received from the Borrower a duly executed original (or, if elected by the Bank, an executed facsimile copy) of this Amendment; and (b) The Bank has received from the Borrower a copy of a resolution passed by the board of directors of such corporation, certified by the Secretary or an Assistant Secretary of such corporation as being in full force and effect on the date hereof, authorizing the execution, delivery and performance of this Amendment. 5. Reservation of Rights. The Borrower acknowledges and agrees that the execution and delivery by the Bank of this Amendment shall not be deemed to create a course of dealing or otherwise obligate the Bank to enter into amendments under the same, similar or any other circumstances in the future. 6. Miscellaneous. (a) Except as herein expressly amended, all terms, covenants and provisions of the Credit Agreement are and shall remain in full force and effect and all references therein and in any other Credit Documents to such Credit Agreement shall henceforth refer to the Credit Agreement as amended by this Amendment. This Amendment shall be deemed incorporated into, and a part of, the Credit Agreement. This Amendment is a Credit Document. (b) This Amendment shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective successors and assigns. No third party beneficiaries are intended in connection with this Amendment. (c) This Amendment shall be governed by and construed in accordance with the law of the State of California. (d) This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Each of the parties hereto understands and agrees that this document (and any other document required herein) may be delivered by any party thereto either in the form of an executed original or an executed original sent by facsimile transmission to be followed promptly by mailing of a hard copy original, and that receipt by the Bank of a facsimile transmitted document purportedly bearing the signature of the Borrower shall bind the Borrower with the same force and effect as the delivery of a hard copy original. Any failure by the Bank to receive the hard copy executed original of such document shall not diminish the binding effect of receipt of the facsimile transmitted executed original of such document which hard copy page was not received by the Bank, and the Bank is hereby authorized to make sufficient photocopies thereof to assemble complete counterparty documents. (e) This Amendment, together with the Credit Agreement, contains the entire and exclusive agreement of the parties hereto with reference to the matters discussed herein and therein. This Amendment supersedes all prior drafts and communications with respect thereto. This Amendment may not be amended or modified except in writing executed by both of the parties hereto. (f) If any term or provision of this Amendment shall be deemed prohibited by or invalid under any applicable law, such provision shall be invalidated without affecting the remaining provisions of this Amendment or the Credit Agreement, respectively. (g) The Borrower covenants to pay to or reimburse the Bank, upon demand, for all costs and expenses (including allocated costs of in-house counsel) incurred in connection with the development, preparation, negotiation, execution and delivery of this Amendment. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first above written. STANFORD TELECOMMUNICATIONS, INC. By: ------------------------------ Name: ---------------------------- Title: --------------------------- By: ------------------------------ Name: ---------------------------- Title: --------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: ------------------------------ Name: Michael J. McCutchin Title: Managing Director EX-10.14 8 AGREEMENT TO LEASE OFFICE AND MANUFACTURING FACILITY EXHIBIT NUMBER 10.14 AGREEMENT TO LEASE THIS AGREEMENT TO LEASE ("Agreement"), made this 17 day of August, 1998 by and between CHEROKEE EQUITES, LLC, a Colorado limited liability company (hereinafter referred to as "Cherokee Equities"), and Stanford Telecom Corporation, a Delaware Corporation (hereinafter referred to as "Stanford Telecom"), 1221 Crossman Avenue Sunnyvale, CA 94089-1117. WITNESSETH, THAT: WHEREAS, Stanford Telecom desires to lease from Cherokee Equities and Cherokee Equities desires to construct and lease to Stanford Telecom the premises consisting of an office facility containing approximately 100,000 square feet (the "Improvements"), as described on Exhibit B, to be constructed on a site on 1500 Garden of the Gods Road in the City of Colorado Springs, County of El Paso, State of Colorado described on Exhibit A attached hereto (the "Land") (the Land and Improvements together referred to as the "Premises"). WHEREAS, Cherokee Equities, as Landlord and Stanford Telecom, as Tenant have entered into a Lease (the "Lease") of even date hereof for the Premises; and WHEREAS, Cherokee Equities has agreed with Stanford Telecom to develop and construct the Improvements on the Land for use by Stanford Telecom; and WHEREAS, Cherokee Equities and Stanford Telecom desire to supplement the Lease with respect to certain other terms and conditions relating thereto; and WHEREAS, it is intended by Cherokee Equities and Stanford Telecom that the terms and provisions of this Agreement are a supplement to the Lease and are to survive, where appropriate, the completion of the Improvements and the commencement of the term of the Lease. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein and in consideration of Ten Dollars ($10.00) in hand paid by Cherokee Equities to Stanford Telecom, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by both Stanford Telecom and Cherokee Equities, it is hereby agreed as follows: 1. The preambles hereto are incorporated into and made a part of this Agreement 2. Any capitalized terms utilized in this Agreement but not defined herein shall have the meaning provided in the Lease. 3. This Agreement and the effectiveness of the Lease shall be subject to and conditioned upon: (a) Cherokee Equities closing on and obtaining by October 23, 1998 a general warranty deed to the Land and a survey of the Land and title insured in a manner satisfactory to Cherokee Equities in its sole discretion and with condition of title and survey acceptable to Stanford Telecom pursuant to paragraph 4(b) hereof. (b) Cherokee Equities obtaining a phase 1, Environmental Site Assessment of the Land satisfactory to Cherokee Equities and Stanford Telecom each in its sole discretion pursuant to paragraph 5 hereof. (c) Satisfactory evidence to Cherokee Equities and Stanford Telecom that the Premises are properly zoned and that no governmental laws, rules or regulations are in effect which would affect Stanford Telecom's free and unencumbered right to conduct the business contemplated. (d) Cherokee Equities receiving assurances that all permits, licenses and approvals can be obtained from public authorities (excluding building permits) which are necessary or deemed necessary by Stanford Telecom to operate the proposed business on the Premises. Approval of the details pursuant to paragraph 6 hereof. Each condition, except Cherokee Equities obtaining a deed for the Premises, shall be satisfied in the sole and independent discretion of Cherokee Equities and Stanford Telecom five (5) days prior to the date on which Cherokee Equities will acquire the Land and if not raised as a written objection to the other by that time it shall thereafter be waived. Cherokee Equities shall notify Stanford Telecom by August 31, 1998 of the status of the above conditions as to Cherokee Equities and the proposed date of acquisition of the land. Cherokee Equities shall not close upon and acquire the Land prior to such closing date without the consent of Stanford Telecom. In the event a condition set out herein is not satisfied or waived, then this Agreement and the Lease shall terminate and be of no further force and effect, and the parties hereto shall have no further rights or obligation hereunder. 4. (a) Cherokee Equities represents and warrants that it shall own fee simple title in the Premises upon the date that Stanford Telecom is put into possession of the Premises pursuant to the Lease between Cherokee Equities and Stanford Telecom; that the Premises as of the Rent Commencement Date as defined in Article 9 hereof, shall not be subject to the lien of any deed of trust, mortgage, purchase option, right of first refusal or other similar encumbering instrument having the potential of extinguishing Stanford Telecom's leasehold interest, and that Cherokee Equities will put Stanford Telecom into complete and exclusive possession of the Premises as of the Rent Commencement Date. (b) Cherokee Equities shall provide Stanford Telecom with a copy of the survey, as well as a copy of Cherokee Equities Title Commitment and any amendments thereto not less than twenty (20) days prior to closing on the acquisition of the Land, together with the documents referred to therein as exceptions to title ofthe Land. Stanford Telecom shall have ten (10) days after receipt of title and survey or five (5) days prior to the closing, whichever is earlier, to review said title and survey and make written objections to Cherokee Equities of any matter contained therein. Irrespective of the representations, warranties and obligations of Cherokee Equities contained herein relating to the survey and title, Stanford Telecom may not object to matters affecting title to the Premises disclosed on said title commitment or survey and not raised by Stanford Telecom as written objections to title as permitted herein. 5. (a) Cherokee Equities will conduct or cause to be conducted a due diligence phase I Environmental Site Assessment (ESA) of the Premises and provide a report of findings for review by Stanford Telecom. The primary purpose of the ESA will be to evaluate the potential presence of contamination on the Premises from current or historical uses within the land or contamination impacts to properties in the vicinity of the Land that could potentially impact the Land. At the minimum, the assessment report will address ownership of the Land, describe and characterize the Land, provide history and description of surrounding land uses, sensitive receptors within a 1,000 foot radius of the Land, regulatory issues and references consulted, including interviews with personnel. (b) Following a review of the Phase I ESA findings by Stanford Telecom, additional environmental investigation(s) may be necessary to satisfy Stanford Telecom of the actual environmental conditions. Stanford Telecom will provide Cherokee Equities with written notice of its objections to the Phase I ESA and its concerns (if any) within ten (10) days after receipt of the Phase I ESA or five (5) days prior to the closing, whichever is earlier, and direct, before proceeding to purchase and improve the Land, that a due diligence Phase II ESA be accomplished. Approval of the Phase II ESA shall be in the same manner. Stanford Telecom shall approve the environmental condition of the Land as a condition precedent to the obligation of Cherokee Equities to purchase the Land and proceed with the construction of the improvements described herein. If Stanford Telecom has not objected to the environmental condition of the Land, or requested additional environmental testing in writing prior to the date specified above, it shall be deemed to have approved the environmental condition of the Land. The approval of the environmental condition of the Land by Stanford Telecom or by Cherokee Equities shall not constitute any agreement on behalf of Stanford Telecom or Cherokee Equities to the other with respect to the remediation of any contamination within, on or under the Land present on or before the acquisition of the Land by Cherokee Equities. (c) Cherokee Equities warrants and represents that any use, storage or transportation of any Regulated Substance that occurs in or on the Premises during the time period commencing at the acquisition of the Land by Cherokee Equities and ending at the commencement of the term of the Lease (except by Stanford Telecom, its agents, employees and fixturing contractors) shall be in compliance with all applicable Environmental Laws. Cherokee Equities additionally agrees that it shall take all reasonable measures to avoid any such release, leak, discharge, spill, disposal or emission of any Regulated Substance in, on or from the Premises during said period (collectively referred to herein as "Discharge") and shall promptly, diligently and expeditiously perform any containment removal or remediation ("cure") of any Discharge in compliance with the requirements of environmental laws. If a material Discharge does occur that is not cured, Stanford Telecom shall have the right to terminate the Lease. (d) If Stanford Telecom objects to Environmental Condition of Land the Lease shall be terminated and the parties hereto shall have no further rights hereunder. 6. (a) Preliminary plans, elevations and a description of the work to complete the improvements are attached as Exhibit C hereto and are approved by Cherokee Equities, its contractor FCC Construction, Inc. and Stanford Telecom. Cherokee Equities agrees that within (10) days after the date of this Agreement to Lease, subject to force majeure, Cherokee Equities shall submit to Stanford Telecom, for Stanford Telecom's approval, final detailed plans and detailed specifications ("the Details"). The Details shall be consistent with Exhibit C and shall include working drawings and design analysis. If, within ten (10) days after Stanford Telecom receives the Details, Stanford Telecom has not given written notice of any comments thereon to Cherokee Equities, then such complete set of the Details shall be deemed approved by Stanford Telecom. If, within ten (10) days after Stanford Telecom shall have received such Details, Stanford Telecom shall give Cherokee Equities notice of comments thereon, Cherokee Equities shall revise the Details in accordance with said comments and resubmit the Details, as so revised, to Stanford Telecom for approval within twenty (20) days after receipt of Stanford Telecom's notice of comments. If, within five (5) days, after Stanford Telecom shall have received such revisions, Stanford Telecom has not given written objection to such revisions, such shall be deemed approved by Stanford Telecom. Approval or deemed approval of the Details by Stanford Telecom shall indicate approval of the facility and its features by Stanford Telecom but shall not constitute a waiver or acceptance by Stanford Telecom of any defect therein or in the structural or engineering design set forth in the Details, the approval of errors therein, or the compliance of said Details with applicable laws or regulations, nor shall it be deemed the representation or acknowledgment by Stanford Telecom of any warranty of workmanship or materials. (b) Any time after the date hereof and after the Details shall be approved by Stanford Telecom, and prior to completion of construction, Stanford Telecom may give written notice to Cherokee Equities of changes it desires in Exhibit C or in the Details. Changes which do not affect the structure, add to the cost of construction, do not delay the completion of construction work or achieving Substantial Completion shall not require the approval of Cherokee Equities; changes which do affect the structure, cost or which delay the completion of construction work or achieving Substantial Completion shall require the approval of Cherokee Equities, which approval Cherokee Equities agrees it will not unreasonably delay or withhold. Upon receipt of such notice from Stanford Telecom of any changes that affect the structure, cost or delay the completion of construction work or achieving Substantial Completion, Cherokee Equities shall notify Stanford Telecom of the estimate of cost and/or delay of said change in writing. Stanford Telecom shall notify Cherokee Equities of its approval or disapproval of the proposed change and/or delay in writing within three (3) business days of receipt of notice of the Estimated Cost and/or Delay. The additional cost of any change shall be bome by Stanford Telecom at the actual cost of the change plus ten percent (10%) overhead and five percent (5%) profit. Unless approved in writing by Stanford Telecom within said three (3) business-day period, the change will not be implemented. The work necessary to construct the Improvements in accordance with the Details, as the same may be revised and changed as aforesaid, shall be known as "Cherokee Equities Work" or the "Work". (c) If Stanford Telecom shall give notice to Cherokee Equities that extensive changes to the details have been involved, Cherokee Equities will furnish "as built" drawings. Upon completion of construction Cherokee Equities shall furnish photographs and operating instructions and all third party warranties. (d) Prior to the commencement of Cherokee Equities Work, Cherokee Equities shall submit to Stanford Telecom for its approval a construction schedule, and on or before the tenth (10th) day of each month during Cherokee Equities Work, Cherokee Equities shall submit to Stanford Telecom a revised construction schedule. Receipt of such schedule(s) by Stanford Telecom shall not excuse any delay(s) indicated or reflected therein or waive any rights of Cherokee Equities or Stanford Telecom with respect thereto. (e) No employee or agent of Stanford Telecom other than Ernie Dickens or Kathv Zehringer or a representative designated in writing by one of them for this purpose, has any authority to approve any plans or specifications or approve any changes in plans or specifications, and any approval by any other person shall not be binding upon Stanford Telecom unless such approval shall be in writing. (f) Cherokee Equities has proposed and Stanford Telecom has agreed to a fixed Base Rent under the Lease based upon the preliminary plans, elevations and description of the Work as set out in Exhibit C to this Agreement to Lease and the allowances established on Exhibit D hereto for certain elements of the Work. The project costs include allowances for the items listed on Exhibit D. In the event the actual items of the cost of the Work shall vary upward or downward from the anticipated cost of the Work on account of changes made by Stanford Telecom to the preliminary plans, elevations and description of the Work (Exhibit C), or in the approval of the Details, or the actual cost of allowance items is more or less than the allowance amounts shown in Exhibit D, then Cherokee Equities and Stanford Telecom agree to modify upward or downward as appropriate the Base Rent figures established in the Lease in a manner consistent with Section 6.(b) above, and to amend the Lease to provide for the revised and adjusted rent as established herein. (g) Cherokee Equities has agreed that the area of Stanford Telecom's building, measured from exterior walls shall be not less than 100,000 square feet. In the event the area of the building is less than 100,000 square feet, the initial Base Rent as provided in the Lease, shall be reduced at the rate of seven dollars and seventeen cents ($7.17) for each square foot less than 100,000 square foot of area with the similar adjustment in reduction being made to the rental rate increases in the Lease. (h) Promptly upon execution hereof, Cherokee Equities shall enter into a written construction contract or design/build agreement with FCC Construction, Inc. (the "Contractor") (the "Construction Contract") for the construction of the Improvements. Such contract shall provide for a warranty from the Contractor (i) covering any defects due to faulty materials or workmanship which appear within a period of one (1) year from the date of substantial completion of construction of the Improvements, (ii) covering latent structural defects due to faulty materials or workmanship which appear within a period of ten (10) years from the date of substantial completion of construction of the Improvements; and (iii) shall also provide that Stanford Telecom is the third-party baneficiary of any and all warranties received from materials and equipment suppliers furnishing materials and equipment for the construction. Cherokee Equities shall cause Contractor to obtain and provide warranties from materials and equipment suppliers that are no less favorable to Stanford Telecom than the most favorable warranties of substantially similar equipment or materials obtained by Contractor from such suppliers at the relevant time or times, provided Contractor shall have no obligation to purchase such warranties or extended warranties except as provided in the Details. Cherokee Equities shall provide Stanford Telecom with a list, and copies, of all warranties for the building and systems at the commencement of the term of the Lease. Such warranties shall be normal and customary warranties. Repairs made by or for Cherokee Equities pursuant to the warranties from the Contractor shall be performed and paid for such that no liens or encumbrances shall result therefrom. Cherokee Equities shall indemnify Stanford Telecom from and against injury to persons including death and damage to property of others (specifically excluding from this indemnity the property and employees of Stanford Telecom and entities affiliated with Stanford Telecom) to the extent resulting from or arising out of structural defects due to faulty materials or workmanship for which warranty is provided herein. In the event of a default or failure by Cherokee Equities' Contractor to perform the one (1) year warranty for faulty materials or workmanship or the five (5) year warranty for mechanical defects due to faulty materials or workmanship, Cherokee Equities shall be obligated to remedy such defect. 7. Construction of Cherokee Equities Work shall be done by or on behalf of Cherokee Equities in a good and workmanlike manner prosecuted to completion with due diligence and performed in accordance with all applicable laws, ordinances, rules, regulations and requirements of all governmental authorities having jurisdiction over the Premises including, but not limited to, the Americans with Disabilities Act. Before commencing any work, Cherokee Equities shall obtain, or cause to be obtained, workers' compensation insurance covering all persons employed in connection with Cherokee Equities Work and with respect to whom death or bodily injury claims could be asserted against Cherokee Equities and/or Stanford Telecom, and general liability insurance insuring Cherokee Equities and Stanford Telecom against any liability that may be incurred as a result of any of Cherokee Equities Work in, to or upon the Premises. A certificate of insurance shall be delivered to Stanford Telecom upon written request. Cherokee Equities shall discharge all liens filed against the Premises arising out of Cherokee Equities Work, and shall indemnify Stanford Telecom against any loss, cost or expense arising on account of or in connection with the actual performance of Cherokee Equities Work or mechanic's liens. Cherokee Equities shall procure and pay for all permits, licenses and authorizations required in connection with the construction of the Improvements. Upon completion of the Improvements, Cherokee Equities shall furnish Stanford Telecom with evidence that the Improvements are free from all mechanics' and materialman's liens, which shall be in the form of lien waivers from all contractors, subcontractors, suppliers and materialman performing such construction work, or the furnishing of a bond as provided by law if such liens are filed. 8. (a) "Substantial Completion" shall mean the date of completion of construction of the work in such fashion, excluding issuance of a permanent certificate of occupancy, as to enable Stanford Telecom, upon performance of any work to be done by Stanford Telecom and the installation of its equipment, fixtures and inventory, to open its office for business in a normal manner, but not necessarily including completion or correction of all normal "punch list" items as certified by Cherokee Equities architect or other qualified representative. Cherokee Equities shall keep Stanford Telecom informed from time to time in writing of the anticipated date of Substantial Completion of the Improvements. Stanford Telecom may, at its expense, retain an independent architect who shall from time to time visit the Improvements and become familiar with the Details. Such architect shall have the right to inspect the site on the date Cherokee Equities architect or other qualified representative intends to certify such Substantial Completion. Upon Substantial Completion, Cherokee Equities, as Landlord, and Stanford Telecom, as Tenant, shall execute and deliver an amendment to the Lease for the Premises to make any changes to the Base Rent under paragraph 6 hereof to reflect Stanford Telecom requested changes, any adjustment on account of allowance items or the rent reduction applicable if the final size of Tenant's Building is less than 100,000 square feet. (b) Within thirty (30) days after Substantial Completion, Stanford Telecom shall issue to Cherokee Equities Stanford Telecom's written "punch list" of particulars in which the Improvements are not in accordance with the Details (the "Punch List"), and Cherokee Equities shall diligently and expeditiously materially satisfy each item on the Punch List. Cherokee Equities shall complete the Punch List to Stanford Telecom's reasonable satisfaction within thirty (30) days after its issuance or such additional time as reasonably is necessary to complete such Punch List items provided that Cherokee Equities is proceeding with due diligence. Except for completion of the Punch List items, and except for the warranties contained herein, Stanford Telecom accepts the Premises in its as-is condition. (c) Stanford Telecom's architect and Cherokee Equities architect or other qualified representative shall concur in the determination of Substantial Completion and if unable to do so a third architect shall be retained to make the determination and if Substantial Completion has not been achieved the requirements therefor. This independent architect shall be either agreeable to the parties or if the parties do not agree, selected by the president of the local association of architects. The charges for the third architect shall be paid by the party whose determination of Substantial Completion differs from the determination of the independent architect. 9. The Term of the Lease shall commence on the "Rent Commencement Date," which shall occur on the earlier of the following events: (a) The date on which Stanford Telecom shall have received a certificate of occupancy for the Premises, if required, executed by appropriate public authority, together with all permits and authorizations permitting lawful occupancy of the Premises from the City of Colorado Springs; provided, however, that all of the work has reached Substantial Completion as agreed and consented to by Stanford Telecom's architect, if any, and if no certificate of occupancy is required, upon Substantial Completion; or (b) The date Stanford Telecom shall have commenced using the Premises but no earlier than Substantial Completion; or (c) 10 days after Substantial Completion, if any delay in attaining the Certificate of Occupancy is a result of Stanford Telecom's actions, inactions, or work. 10. At its own risk and expense, Stanford Telecom shall have the right, prior to and during progress of construction, from time to time, to enter upon the Premises in order to install its furniture, fixtures, appliances and equipment and for purposes incidental thereto including, but not limited to, installation of telephone, computer and other communication lines, without obligation to pay any sum of money as rent or for use and occupation prior to the date set out therefor herein; provided. however, that Stanford Telecom shall have given Cherokee Equities at least two (2) days prior written notice of such entry and such entry shall not unreasonably interfere with nor damage the construction of the Improvements on the Premises by Cherokee Equities; and provided, further, that, prior to such entry, Stanford Telecom shall cause Cherokee Equities and its contractor to be named as additional insureds on liability insurance to be maintained by Stanford Telecom at its own expense with such coverages, limits of liability, term, and carriers as Cherokee Equities shall reasonably require. Stanford Telecom shall provide evidence of such coverage to Cherokee Equities and will also provide evidence workers' compensation insurance in statutory limits and employer's liability with limits of liability of $500,000.00. 11. (a) Cherokee Equities shall, as soon as practicable, but not later than ten (10) business days following acquisition of the land by Cherokee Equities (unless such date is extended pursuant to force majeure as deemed herein), commence (either by actual construction or by engineering design work preparatory thereto) and thereafter diligently prosecute to completion construction of the Improvements, in a good and workmanlike manner and in accordance with the Details. (b) Cherokee Equities shall obtain Substantial Completion on or before May 15, 1999, subject to force majeure. If Substantial Completion does not occur on or before May 15, 1999, subject to force majeure, Cherokee Equities shall be liable to Stanford Telecom for liquidated damages in the amount of five hundred dollars ($500.00) per calendar day as Stanford Telecom 's sole and exclusive remedy on account of such failure to obtain Substantial Completion. In addition, if Substantial Completion does not occur on or before June 15, 1999, subject to force maieure, Cherokee Equities shall be liable to Stanford Telecom for liquidated damages in the amount of one thousand dollars ($1,000.00) per calendar day after June 15, 1999, as Stanford Telecom 's sole and exclusive remedy on account of such failure to obtain Substantial Completion. In addition, if Substantial Completion does not occur on or before August 15, 1999, subject to force majeure, at Stanford Telecom's sole option, by notice in writing to Cherokee Equities within ten (10) days, Stanford Telecom shall have the option to cancel the lease in which event the parties shall be relieved from all further obligations under the lease and premises. 12. (a) The time for performance as provided herein shall be extended for the number of days equal to such delays caused by an event of "force majeure," as hereinafter defined. (b) "Force majeure" shall mean events beyond the control of Cherokee Equities, including, without limitation, fire, flood, tornado, or earthquake, war, riot, insurrection, strike, lockout, boycott or embargo, changes ordered by Stanford Telecom to the Improvements which result in delays, acts of God, unavoidable casualties, labor disputes, and unusual delays in transportation, unavailability of materials, adverse weather conditions not reasonably anticipatable, delays caused by concealed conditions, delays caused by Stanford Telecom, its employees, agents, or separate contractors, any delay in execution of this Agreement to Lease beyond August 18, 1998, delay beyond October 30, 1998, in securing final unappealable zoning and platting for the land necessary for the proposed Improvements, delay not caused by Cherokee Equities beyond October 30, 1998, in Closing Cherokee Equities purchase of the Land, delay beyond November 6, 1998, in the issuance of a final and complete building permit, provided that Cherokee Equities or its agents or representatives diligently and in good faith attempt to make filings for such preliminary and final building permits as promptly as practicable after approval of the details and that any submittal therefor required to be made by Cherokee Equities has been made in proper form, delays in the issuance of any other permits, authorizations, certificates, or approvals required to commence construction of Cherokee Equities Work, provided that any submittal therefor required to be made by Cherokee Equities has been made as promptly as practicable and in proper form, or any other cause beyond Cherokee Equities' reasonable control, which is similar to the foregoing. (c) Except for events of force majeure occurring as the result of delay in the execution of this Agreement to Lease, rezoning the land, in Closing on the purchase of the Land, and issuance of permits beyond the dates established therefor in subparagraph (b) above for which notice shall not be required, any party who asserts the occurrence of force majeure shall give Stanford Telecom written notice within ten (10) working days after the commencement of a delay caused by an event of force majeure, and any party making claim therefor shall give a supplemental notice of the period of time such delay caused by an event of force majeure is expected to last, otherwise any right of claim therefor shall be deemed waived. The parties hereto shall take all reasonable actions to assure resumption of normal performance under this Agreement to Lease as soon as possible after the end of the force majeure event. 13. It is expressly recognized that Cherokee Equities may or may not cause to be prepared following completion of construction an "as built" survey of the Premises, and that if such a survey were to be prepared, minor variations in measurements might be evidenced from the dimensions shown on Exhibit B due to topographic or construction variables. Stanford Telecom 's failure to request that such an "as built" survey be prepared, or to reasonably object to minor dimension deviations between the Premises as built and Exhibit B shall in no way invalidate Exhibit B or constitute a waiver by Stanford Telecom of its rights under this Paragraph 13, but rather Exhibit B shall ipso facto be amended to incorporate such minor dimension deviations therein. 14. Cherokee Equities agrees that on the Rent Commencement Date the Premises shall be connected to the electric and gas lines serving the municipality wherein the Premises are located and to the water and sewer systems of such municipality. Cherokee Equities agrees that on the Rent Commencement Date (i) all such water, electricity and gas shall be in such amounts per unit of time as shall be required by the Details (including, without limitation, sufficient water for air conditioning) and (ii) all such sewerage disposal facilities shall be of such capacity as shall be required by the Details. If for any reason the Premises cannot be connected to such municipality's water and/or sewer systems on the Rent Commencement Date, Cherokee Equities shall then provide water and/or sewer systems which (i) shall be of such capacity as shall be required by the Details, (ii) shall be subject to the prior written approval of Stanford Telecom which shall not be unreasonably withheld, delayed, or conditioned and (iii) shall meet the requirements of all public authorities having jurisdiction with respect thereto. Cherokee Equities shall not take, or permit any person claiming under Cherokee Equities to take, any action which shall unreasonably interrupt, or interfere with, any electric, gas, water, sewerage or telephone service to the Premises. Stanford Telecom agrees to save Cherokee Equities harmless from, and indemnify Cherokee Equities against, all charges for utilities services consumed in the Premises from the Rent Commencement Date until expiration of the term or any holding over thereafter. 15. The provisions of this Agreement are a supplement to the Lease and shall survive Stanford Telecom's entering into possession upon the commencement of the Lease Term for the periods of time herein contemplated by the separate covenants and agreements. The Lease and this Agreement are expressly made contingent each on the other and shall constitute the reciprocal obligations of the parties. In the event of any inconsistency between the provisions of this Agreement and the provisions of said Lease, the provisions of this Agreement shall control and be intended to be the understanding of the parties hereto. 16. Any notice or demand which either party hereto either is required to or may desire to serve upon the other, must be in writing, and shall be sufficiently served if (i) personally delivered, (ii) sent by registered or certified mail, postage prepaid, or (iii) sent by recognized commercial overnight carrier, and addressed, in the instance of Cherokee Equities, to: Cherokee Equities, LLC Attn: David Allen Phillips 5260 Mark Dabling Blvd. Colorado Springs, CO 80918 with a copy to: Sparks Dis, P.C. Attn: Mr. Chris Brandt 128 S. Tejon, Suite 304 Colorado Springs, CO 80903 in the instance of Stanford Telecom, to: Stanford Telecom Corporation 5009 Centennial Blvd. Colorado Springs, CO 80919 Attention: Kathryn A. Zehringer with a copy to: Stanford Telecom Corporation Attn: Mr. David Morrison, Vice President of Administration 1221 Crossman Avenue Sunnyvale, CA 94089-1117 or any other address which Stanford Telecom may be notified of in writing by Cherokee Equities, and or such other address which Cherokee Equities may be notified in writing by Stanford Telecom. Such notice shall be deemed to have been served on the day of the time of the mailing thereof or upon receipt in the event of personal service or on the day of delivery to the overnight courier; provided, however, that should such notice pertain to the change of address to either of the parties hereto, such notice shall be deemed to have been served upon receipt thereof by the party to whom such notice is given. 17. If any term or provision of this Agreement shall to any extent be held invalid or unenforceable, the remaining terms and provisions of this Agreement shall not be affected thereby, but each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law. This Agreement shall be construed and enforced in accordance with the laws of the State in which the Premises is located. 18. Each party shall pay the other party's reasonable legal costs and attorney's fees incurred if such party prevails in litigation or arbitration enforcing any covenants, terms or conditions of this Ayeement. l 9. Cherokee Equities and Stanford Telecom, and the persons signing for them, each represent that the execution and delivery of this Agreement, the Lease and the performance of all of the covenants and agreements contained herein and therein, have been duly authorized, ratified and confirmed by all necessary corporate action on the part of each of said parties, and that said parties are validly existing and in good standing. 20. This Agreement and the Lease between the parties hereto with respect to the Premises represent the entire agreement between the parties hereto and no modification of this Agreement or the Lease, and no waiver of the terms of either of said instruments, shall be effective unless made in writing and duly executed by the parties hereto. 21. The covenants and agreements herein contained shall bind and inure to the benefit of Cherokee Equities, its successors and assigns, and Stanford Telecom, its permitted successors and assigns. 22. In the event of a conflict between the terms of this Agreement to Lease and the Lease, this Agreement to Lease will prevail. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed as of the day and year first above written. WITNESS: CHEROKEE EQUITIES, LLC By: Name: Its: WITNESS: STANFORD TELECOM CORPORATION By: EX-10.15 9 LEASE DATED 08/17/1998 EXHIBIT NUMBER 10.15 LEASE THIS LEASE (hereinafter sometimes referred to as this "Lease" or this "Agreement"), is made this day of August 17, 1998, by and between CHEROKEE EQUITIES, LLC, a Colorado limited liability company having its principal place of business at 5260 Mark Dabling, Colorado Springs CO. 80918 (hereinafter referred to as "Landlord"), and STANFORD TELECOM CORPORATION, a Delaware corporation maintaining its principal place of business at 1221 Crossman Avenue, Sunnyvale, CA 94089-1117 (hereinafter referred to as "Tenant"); WITNESSETH THAT: WHEREAS, Tenant desires to lease from Landlord upon the terms and conditions set out herein, the real property described in Exhibit A and illustrated in Exhibit B (the "Site Plan"), and improvements thereon, located in the City of Colorado Springs, County of El Paso, State of Colorado; and WHEREAS, Landlord is willing to purchase and improve said real property and to lease said real property and improvements to Tenant upon the terms and conditions set out herein; NOW, THEREFORE, for and in consideration of the foregoing preambles, of the mutual promises and covenants contained herein, of Ten Dollars ($10.00) in hand paid by Tenant to Landlord, and of other good and valuable consideration, the receipt and sufficiency of all of which is hereby acknowledged by both Landlord and Tenant, Landlord and Tenant hereby agree as follows ARTICLE I Incorporation of Preambles - Certain Definitions 1.01 Incorporation of Preambles. The foregoing preambles are hereby incorporated into this Lease as a part hereof by this reference thereto. 1.02 Certain Definitions. Reference is made in this Article 1.02 to certain defined terms used herein, which are defined in the Articles referred to opposite each such term, as follows: Term Article Where Defined - ---- --------------------- "Additional Rent" Article 4.04 "Agreement" Preambles, Article 1.01 "Base Rent" Article 4.01 "Default Rate" Article 18.03(c) "Environmental Laws" Article 26.01(a) "Force Majeure" Article 14.05(a) "Improvements" Article II "Initial Term" Article 3.01 "Landlord" Preambles, Article 1.01 "Laws" Article XIII "Lease" Preambles, Article 1.01 "Lease Year" Article 3.02 "Premises" Article II "Regulated Substance" Article 26.01(b) "Rent" Article 4.05 "Rent Adjustment Date" Article 4.01 "Rent Commencement Date" Article 3.04 "Site" Preambles, Article 1.01 "Site Plan" Preambles, Article II "Tenant" Preambles, Article 1.01 "Tenant's Building" Article II "Tenant's Property" Article X "Term" Article 3.03 ARTICLE II Lease of Premises Landlord, for and in consideration of the rent to be paid and of the covenants and agreements herein contained to be kept and performed by Tenant, does hereby exclusively lease and demise to Tenant, and Tenant does hereby exclusively hire from Landlord, on an absolute net basis, the real property being located in the City of Colorado Springs, County of and State of Colorado described in Exhibit A and illustrated on Exhibit B, including all improvements thereon, consisting of an office building containing approximately 100,000 square feet ("Tenant's Building") and all fixtures and accessory improvements thereon, including all roadway, parking areas and landscaped areas located thereon (collectively such Tenant's Building, fixtures and improvements are hereinafter referred to as the "Improvements") together with all easements, rights, privileges and amenities otherwise appurtenant to such real property (herein all collectively called the "Premises"). The improvements are indicated upon the site plan attached hereto as Exhibit B (the "Site Plan"). ARTICLE III Term and Extensions 3.01 Initial Term. The initial term ("Initial Term") of this Lease shall commence on the Rent Commencement Date. The Initial Term shall end ten (10) complete Lease Years following the Rent Commencement Date. 3.02 Lease Year. The first Lease Year during the Term shall be the approximately twelve (12) calendar month period commencing on the Rent Commencement Date and terminating on either (a) the day before the first anniversary of the Rent Commencement Date if the Rent Commencement Date is the first day of month, or (b) the last day of the twelfth (12th) full calendar month following the Rent Commencement Date if the Rent Commencement Date is not the first day of the month. Each subsequent Lease Year during the Term shall commence on the day immediately following the last day of the preceding Lease Year and shall continue for a period of twelve (12) full calendar months. 3.03 Extensions. Provided that Tenant is not in default of this Lease, at the time of expiration of the then-existing Term of this Lease and provided that the term has not ended, Landlord hereby grants to Tenant the option to extend the Term for two (2) additional periods of five (5) years each upon the terms and conditions contained herein, each exercisable by Tenant's written notice to Landlord of such exercise given not less than twelve (12) months prior to the expiration of the Initial Term hereof, or of the then existing option period, as the case may be, on the same terms and conditions as applied during the Initial Term except the base rent shall be $11.50 per square foot, with 3% escalations every year. The initial option to extend after the initial lease term subject to increased lease rate of $11.50 per square foot with 3% annual escalations every year. Any extension after the initial option period shall be at the then prevailing market rate. The extension periods shall be each exercisable by Tenant's written notice to the Landlord of such exercise given not less than twelve (12) months prior to the expiration of the initial term or of the existing option period as the case may be on the same conditions as applied during the Initial Term. An allowance in the amount of $6.00 per square foot for the office space and $3.00 per square foot for the production area is included in the initial extension period lease rate and shall be paid to reimburse Tenant for alterations made by Tenant in compliance with the requirements of Article IX of this Lease. Should Tenant fail to exercise any prior extension option offered hereunder, all subsequent extension options shall be deemed waived as well. Tenant shall have no other renewal rights hereunder. The Initial Term of this Lease, plus all options to extend validly exercised by Tenant as provided in this Article III, are herein collectively referred to as the "Term". 3.04 Rent Commencement Date. As used herein the term "Rent Commencement Date" shall have the meaning ascribed to such term in the Agreement to Lease entered into between Landlord and Tenant as of the date hereof. 3.05 Rent Commencement Date Agreement. When the Rent Commencement Date has been determined, Landlord and Tenant shall execute a memorandum which shall expressly confirm or revise the Base Rent, Rent Commencement Date, Lease Year, the expiration date of the Initial Term, that construction of the Premises has been completed and possession accepted by Tenant and which shall ratify and affirm all of the terms and provisions of this Lease. ARTICLE IV Rent 4.01 Base Rent. Tenant shall pay to Landlord as Base Rent on the Premises, on the first day of each month in advance, during the Term of this Lease and any extensions hereof, as follows: (a) Commencing on the Rent Commencement Date of this Lease and terminating on the last day of the second (2nd) Lease Year hereunder, an annual Base Rent of Seven Hundred Seventeen Thousand and 00/100 Dollars ($717,000.00) payable in equal monthly installments of Fifty-nine thousand Seven Hundred fifty and 00/100 Dollars ($59,750.00); (b) Commencing on the first day of the third (3rd) Lease Year and terminating on the last day of the fourth (4th) Lease Year hereunder, an annual Base Rent of Seven Hundred Forty-four Thousand and 00/100 Dollars ($744,000.00) payable in equal monthly installments of Sixty-two Thousand and 00/100 Dollars ($62,000.00); (c) Commencing on the first day of the fifth (5th) Lease Year and terminating on the last day of the sixth (6 th) Lease Year hereunder, an annual Base Rent of Seven Hundred Seventy thousand and 00/100 Dollars ($770,000.00) payable in equal monthly installments Sixty-four Thousand One Hundred Sixty-six and 67/100 Dollars ($64,166.67); (d) Commencing on the first day of the seventh (7 th) Lease Year and terminating on the last day of the eighth (8 th) Lease Year hereunder, an annual Base Rent of Seven Hundred Ninety-five Thousand and 00/100 Dollars ($795,000.00) payable in equal monthly installments of Sixty-six Thousand Two Hundred Fifty and 00/100 Dollars ($66,250.00); (e) Commencing on the first day of the ninth (9 th) Lease Year and terminating on the last day of the tenth (10 th) Lease Year hereunder, an annual Base Rent of Eight Hundred Twenty-four Thousand and 00/100 Dollars ($824,000.00) payable in equal monthly installments of Sixty-eight Thousand Six Hundred Sixty-six and 67/100 Dollars ($68,666.67). This Section 4.01 shall be amended in the manner provided in the Agreement to Lease to reflect any change in the Base Rent in the event the actual cost of the project varies upward or downward from the anticipated cost of the project. 4.02 Partial Month Rent. If the Rent Commencement Date or the date upon which the Term expires shall be other than the first or last day of a calendar month, as the case may be, Base Rent shall be pro-rated for the period by taking the amount of monthly Base Rent divided by 30 and multiplying that amount times the number of days of such partial month. 4.03 Terms of Payment. All Rent and other payments to be made by Tenant to Landlord hereunder shall be made payable to Landlord in current legal tender of the United States of America and sent to Landlord at the place to which notice to Landlord is required to be sent hereunder unless Landlord shall direct otherwise by notice to Tenant. Extensions, indulgences, or changes by Landlord upon any occasion in the mode or time of payment of rent or any other payment to be made by Tenant to Landlord hereunder shall not be construed as any continuing waiver or change, or as requiring or allowing in the future any similar change or indulgence. All rent shall be payable as stated without notice, demand, setoff, or abatement. 4.04 Additional Rent. All amounts other than Base Rent which Tenant is required to pay or discharge pursuant to this Lease including, but not limited to, charges for taxes, insurance. utilities, and any penalties for late payment of Base Rent shall constitute Additional Rent. 4.05 Rent. The term "Rent" shall mean all amounts due as Base Rent and all other sums payable by Tenant to Landlord hereunder. ARTICLE V Absolute Net Lease It is the purpose and intent of Landlord and Tenant that the rent herein above provided to be paid to Landlord by Tenant be absolutely net to Landlord so that this Lease shall yield net to Landlord without abatement, set-off or deduction therefrom the rent as herein above provided, to be paid during the Term of this Lease or any extensions hereof, and, that all costs, expenses, and impositions of every kind or nature whatsoever relating to the Premises, the use thereof, the maintenance thereof, the operation thereof, the management thereof, or otherwise which may arise or become due during the Term of this Lease or any extensions hereof be paid by Tenant, and Landlord be indemnified and saved harmless by Tenant from and against the same. Tenant hereby assumes and agrees to perform all duties and obligations with relation to the Premises, as well as the use, operation, management, and maintenance thereof even though such duties and obligations would otherwise be construed to be those of the Landlord. Nothing herein contained, however, shall be deemed to require Tenant to pay or discharge any liens or mortgages of any character, whatever which may be placed upon the Premises by the affirmative act of Landlord. Except as expressly set forth in this Lease, this Lease shall not terminate, nor shall Tenant have any right to terminate this Lease for any cause whatsoever, any present or future law to the contrary notwithstanding. Tenant agrees that it will remain obligated under this Lease in accordance with its terms notwithstanding any action, which may be taken with respect to this Lease by any trustee or receiver of Landlord in any bankruptcy or similar proceeding. ARTICLE VI Use The Premises shall be occupied and used by Tenant for the purpose of conducting therein the business of office and light manufacturing. Tenant shall use and occupy the Premises in accordance with all governmental laws, statutes, orders, ordinances, rules and regulations of any governmental authority with jurisdiction affecting the Premises from time to time, including, without limitation, applicable zoning ordinances. Tenant agrees to comply with all deed restrictions, declarations, conditions and covenants applicable to the Premises as of the date of this Lease, if any, and to which the Premises or Lease is later made subject with Tenant's written consent and to assume and perform any duties or obligations thereunder applicable to the Premises or to the owner of the Premises. Tenant shall not use, or allow the Premises to be used, for any purpose other than as specified herein and shall not use or permit the Premises to be used for any unlawful, disreputable or immoral purpose or in any way that will injure the reputation of the Premises, detract from its value, or in violation of any certificate of occupancy applicable to the Premises, or endanger the Premises or unnecessarily increase the applicable insurance premiums payable with respect thereto, or create a nuisance, or permit the Premises to be occupied in whole or in part by any other person, except as otherwise provided herein. Landlord shall not allow any buildings to be constructed on Landlord's property adjacent to Tenant's Premises which obstruct the free and clear view of Tenant's south facing antennas. Tenant requires look angles for antennas which are due south 30 degrees with an elevation of not less than 30 degrees. Any views above 30 degrees shall not be obstructed by building or objects Landlord places adjacent to the Premises. Landlord shall submit any plans of any building to be constructed on Landlord's property adjacent to Tenant's Premises for Tenant's review to assess how it affects Tenant's antennas. If Tenant determines in Tenant's reasonable discretion under the above criteria that Tenant's antennas are obstructed and so notifies Landlord in writing within ten (10) days of Landlord's notice to Tenant, then Landlord shall modify the location or characteristics of the proposed building until Tenant's antennas are not affected. If Tenant's antennas are obstructed in any way during the term of this Lease, in violation of this section, then it will be the sole cost and responsibility of Landlord to relocate Tenant's antenna pad site to a site reasonably agreeable to Tenant. If Landlord does not do so within ten (10) days of written notice from Tenant, then Tenant may terminate the Lease upon 120 days written notification given within ten (10) days of Landlord's failure to do so. This entire Article shall be made a part of the covenants for all of the adjacent land that is being purchased by Cherokee Equities from ITT, generally known as 1500 Garden of the Gods Road. Should Cherokee Equities sell any of such adjacent land and at any time after the execution of this Lease, then the provisions under this Article shall be binding upon the purchasers and the successors and assigns of Cherokee Equities thereafter, for so long as the Stanford Telecommunications' Lease is in effect. Cherokee Equities shall provide legal access to either Garden of the Gods Road or Centennial Boulevard. ARTICLE VII Subletting and Assignment 7.01 Subletting and Assignment. Tenant shall not assign this Lease or sublet all or any part of the Premises without the prior written consent of Landlord which consent shall not be unreasonably withheld. In the event of any assignment or subletting, Tenant shall nevertheless at all times remain fully responsible and liable for the payment of Rent and for compliance with all of its other obligations under the terms, provisions and covenants of this Lease unless relieved therefrom in writing by Landlord, and Tenant's Assignee and/or Subleasee shall assume in writing and agree to keep and perform all of the terms of this Lease on the part of Tenant to be kept and performed and shall be and become jointly and severally liable with Tenant for the keeping and performing thereof In addition, Tenant shall have the right, by prior written notice to Landlord, to transfer and assign this Lease without Landlord's consent to any parent, subsidiary or affiliated company of Tenant, with Tenant remaining liable for the performance of the terms of this Lease and a copy of any such assignment or sublease and an executed assumption agreement shall be delivered to Landlord at the time of any assignment or sublet. For purposes of this Article, a leasehold mortgage shall be deemed an assignment. 7.02 Limits on Assignees. Notwithstanding anything to the contrary contained in this Lease, Tenant shall not, without the prior written consent of Landlord (which Landlord shall not reasonably withhold and which consent, in each instance to be effective, must expressly state Landlord is aware that the subject assignee or subtenant, as the case may be, is a tax-exempt entity) assign all or any part of its interest in this Lease or sublet all or any part of the Premises, or in any other manner grant any right to use, occupy or otherwise "lease" (within the meaning of Internal Revenue Code of 1986, Section 168(h), as amended ("Section 168(h)")) all or any part of the Premises, to any "tax-exempt entity," as defined in Section 168(h), to the extent that the aggregate portion of the Premises sublet, assigned, used, occupied or "leased" by all such tax-exempt entities shall not be more than 35% of the Premises. Tenant agrees that any assignment of lease or subletting made in violation of the foregoing sentence will be deemed initially void, and acknowledges that, notwithstanding such voiding, Landlord may incur damages as a result of such violations, and Tenant agrees to indemnify Landlord from any such damages. 7.03 Assignment by Landlord. Landlord shall have the right to transfer all or any part of Landlord's interest in the Lease and the Premises without the consent or approval of Tenant and without notice to Tenant, which transfer shall work an absolute release of Landlord's liabilities and obligations hereunder arising after the date of such assignment, providing all obligations of Landlord hereunder arising after the date of such assignment are assumed by the assignee. ARTICLE VIII Quiet Enjoyment - Landlord's Warrant Landlord covenants and agrees with Tenant that so long as Tenant keeps and performs all of the covenants and conditions to be kept and performed by Tenant hereunder, Tenant shall have quiet, undisturbed and continued possession of the Premises free from any claims by any persons claiming under, by or through Landlord and its assigns. ARTICLE IX Alterations 9.01 Tenant's Alterations. Tenant shall have the right, at its sole cost and expense, at the commencement of and during the term of this Lease or any extension thereof to make such alterations in and/or additions to the Premises, including without limiting the generality of the foregoing, alterations in the water, gas and electrical wiring systems as may be necessary to fit the same for Tenant's business, upon first delivering to Landlord written plans and specifications for all such work and obtaining the written approval of Landlord as to said plans and specifications and the contractor(s) to perform such work, such approval not to be unreasonably withheld or delayed, financial assurances, the materials to be used and the manner of making such alterations and/or additions. Tenant shall be able to make any additions and/or alterations necessary for his business without prior written consent of Landlord if the total sum of those alterations and/or additions amounts to less than $25,000.00. Upon the termination of this Lease, Tenant shall not be required to remove any of the original Improvements still in existence or any such approved subsequent alterations or improvements (unless otherwise required in Landlord's written approval), or to restore (unless otherwise required in Landlord's written approval) the Premises to its original condition. All such Improvements and alterations (excluding Tenant's Property as defined in Article X) now or hereafter located on the Premises are the Property of Landlord. 9.02 Method of Alterations. All alterations, additions and improvements made by Tenant shall be done in a good and workmanlike manner without impairing the structural soundness of the Premises, penetrating the roof, and without lessening the value thereof. All such work shall be performed in accordance with all applicable laws, ordinances, rules, and regulations and requirements of all governmental authorities having jurisdiction over the Premises. Before commencing any work, Tenant shall obtain or cause to be obtained, workers' compensation and employer's liability insurance covering all persons employed in connection with the work and with respect to whom death or bodily injury claims could be asserted against Landlord and/or Tenant, and general liability insurance insuring Landlord and Tenant against any liability that may be incurred as a result of any work done by Tenant in, to or upon the Premises. A certificate of insurance or copy of said policy shall be delivered to Landlord upon written request. Tenant shall procure and pay for all permits, licenses and authorizations required in connection with any such alteration, addition or improvement, and Landlord agrees to cooperate with Tenant, at Tenant's expense, in procuring such permits, licenses and authorizations. ARTICLE X Tenant's Property 10.01 Installation. Removal. Tenant may, at its sole cost and expense, install any trade fixtures, equipment, and other personal property of a temporary or permanent nature used in connection with its business on the Premises ("Tenant's Property"), and Tenant shall have the right at any time during the Term of this Lease or any extensions hereof or prior to expiration or earlier termination of the Lease or any extensions hereof, provided Tenant is not in default of any of the terms of this Lease, to remove any and all such trade fixtures, equipment, and other personal property that it may have stored or installed upon the Premises; provided, however, that Tenant shall have no right to remove any item which is necessary for the operation or maintenance of the Premises as such, without regard to the nature of the business conducted therein; and provided, further, that in the event of such removal, Tenant shall repair any damage caused by the removal of such trade fixtures, equipment, and other personal property and restore the Premises substantially to the same condition, ordinary wear and tear excepted, in which they were at the time Tenant took possession. 10.02 Required Removal. In case Tenant shall decide not to remove any part of its Tenant's Property prior to expiration or earlier termination of this Lease, Tenant shall notify Landlord in writing not fewer than ninety (90) days prior to the expiration of the Term of this Lease or any extensions hereof, specifying those items of Tenant's Property that Tenant has decided not to remove. If, within thirty (30) days after service of such notice, Landlord shall request Tenant to remove any of said Tenant's Property, Tenant shall, at its own expense, before the expiration of the Term of this Lease or any extension hereof, remove said Tenant's Property and, in case of damage by reason of such removal, restore the Premises to good order and condition. Tenant will pay all costs and expenses incurred by Landlord in removing, sorting, or disposing of Tenant's Property and repairing all damage to the Premises caused by removal of Tenant's Property which Tenant has failed to remove despite the requirements of this section (10.02). Any of Tenant's Property not removed by Tenant upon the expiration or earlier termination of this Lease or any extensions hereof shall be considered abandoned by Tenant and may be appropriated, sold, destroyed, or otherwise disposed of by Landlord without liability or obligation on Landlord's part, to and without any obligation to care for or account for same. 10.03 Title at Termination. As to the Tenant's Property that Tenant has not elected to remove pursuant to Section 10.01 or that Tenant is not required to remove pursuant to Section 10.02, at the expiration or earlier termination of this Lease or any extensions hereof, all remaining Tenant's Property shall, at Landlord's sole election, become and remain the property of Landlord, free and clear of any claim or interest of Tenant or anyone claiming thereunder. At the request of Landlord, Tenant will, at such time, execute, acknowledge, and deliver to Landlord a bill of sale or other appropriate conveyance document evidencing the transfer to Landlord of all right, title and interest of Tenant in and to all or any part of the remaining Tenant's Property. ARTICLE XI Lien or Encumbrance 11.01 No Liens. Tenant will pay or cause to be paid all charges for all work done, including without limitation all labor and materials for all repairs, alterations, and additions, to or upon the Premises during the Term of this Lease or any extensions hereof and will not suffer or permit any mechanic's, materialman's, or similar liens for labor or materials furnished to the Premises prior to or during the Term of this Lease or any extensions hereof to be filed against the Premises prior to or and if any such lien shall be filed, Tenant will either pay the same or procure the discharge thereof by giving security or in such other manner as may be required or permitted by law within thirty (30) days after such filing or within such shorter time period as may be required by law. Tenant shall have the right, however, at its sole cost and expense, in its name or in the name of Landlord or in the name of both, to contest any such lien, provided the existence of such lien pending such contest shall not jeopardize Landlord's interest in the Premises. Tenant shall indemnify Landlord against, and save Landlord harmless from, any and all loss, damage, claims, liabilities, judgments, interest, costs, expenses, and attorney's fees arising out of the filing of any such lien. 11.02 No Consent to Work, Lien or Encumbrance. Nothing contained herein shall constitute any consent or request by Landlord, express or implied, to or for the performance of any labor or services or the furnishing of any materials or other property in respect of the Premises nor as giving Tenant any right, power, or authority to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would permit the making of any claim against Landlord or the Premises in respect thereto. Nothing in this Lease shall be construed as empowering Tenant to encumber or cause to be encumbered the title or interest of Landlord in the Premises in any manner whatsoever. Landlord shall be permitted to post the Premises with Landlord's notice of non-liability. ARTICLE XII Repairs and Maintenance 12.01 Duty to Repair. During the Term of the Lease Tenant shall, at its sole cost and expense, keep the Premises and the adjoining sidewalks, curbs, and passageways, if required by governmental authority, free from unlawful obstructions, and will keep the Premises in as good condition and repair as they were upon commencement of the Term of this Lease, normal wear and tear excepted, and will perform all maintenance and make all necessary repairs thereto, interior and exterior, structural and non-structural, ordinary and extraordinary, and foreseen and unforeseen, including but not limited to maintenance and repair of the plumbing, electrical wiring, air conditioning and heating equipment, walls, foundations, services, roof, doors, floors, maintenance and repair of the parking area, painting of the walls of the Improvements, and repair of all glass and casualty damage. For all such work with a cost in excess of $10,000, Tenant shall, prior to making any repair, deliver to Landlord written plans and specifications for all such work and obtain the written approval of Landlord as to the contractor(s) to perform such work, financial assurances, materials to be used and the manner of making such repairs. Landlord shall not unreasonably withhold or delay its approval of said repairs proposed to be made by Tenant. 12.02 Definition and Standard of Repair. The term "repairs" shall include all necessary replacements, renewals, alterations, additions, and betterments. The necessity for and adequacy of repairs to the Improvements shall be measured by the standard which is appropriate for buildings of similar construction and class, provided that Tenant shall in any event make all repairs necessary to avoid any structural damage or injury to any of the Improvements. All repairs made by Tenant shall be equal or better in quality and class to the original work shall meet the same requirements as are set out in Article 9.02 of this Lease to the extent necessary and shall be made in a good and workmanlike manner and in compliance with all applicable permits and authorizations and building and zoning laws and with all other laws, rules, regulations, and ordinances governing such work. Tenant will not commit any waste of the Premises. 12.03 No Obligation to Repair. Landlord shall not under any circumstances be required to furnish any services or facilities or to make any maintenance repairs, replacements or alterations of any nature or description in or to the Premises whether ordinary or extraordinary, structural or non- structural, foreseen or unforeseen, or to make any expenditure whatsoever in connection with this Lease or to maintain the Premises in any way. Tenant hereby waives the right to make repairs at the expense of Landlord pursuant to any law in effect at the time of the execution of this Lease or thereafter enacted, and assumes the full and sole responsibility for the condition, operation, repair, replacement, maintenance, and management of the Premises. Landlord covenants to cooperate with Tenant in processing claims with respect to matters covered by available insurance. ARTICLE XIII Requirements of Law Tenant shall, at its expense, comply with, or cause to be complied with, all insurance requirements, and all current and future laws, statutes, ordinances and regulations of federal, state, county and, municipal authorities including, but not limited to, the Americans With Disabilities Act (collectively, "Laws") and any restrictions, declarations, conditions, agreements, covenants or requirements, if any, applicable to the Premises as of the date of this Lease or to which the Premises or this Lease is later made subject with Tenant's consent, which shall impose any duty or obligation with respect to the Premises or the Landlord including, but not limited to, a duty to construct additional improvements or modify the Improvements or with respect to the conduct of Tenant's business therein. Tenant shall have the right at Tenant's own expense, to object to and appeal from any administrative or judicial decision requiring compliance and Landlord shall cooperate at Tenant's expense with any such appeal and/or objection by Tenant. In the event compliance shall require improvements or alterations to the Premises, then Tenant shall, at Tenant's sole expense, construct such improvements or alterations in accordance with the provisions for Tenant's alterations contained in Article IX of this Lease. ARTICLE XIV Damage or Destruction 14.01 Tenant's Obligation to Rebuild. Except in the event oftermination as permitted hereinafter in this Article XIV, Tenant shall repair and rebuild the Premises in the event of damage to or destruction of the Improvements during the Term of this Lease by fire, the elements, or other casualty. The proceeds of the insurance carried pursuant to Article 15 of this Lease entitled "Insurance" and any additional Tenant funds reasonably required by Landlord shall be paid into an escrow account with Landlord's first mortgage lender or a bank selected by Landlord and reasonably agreed to by Tenant. The insurance proceeds and other funds of Tenant shall be used by Tenant for the prompt reconstruction or repair, as the case may be, of the Improvements. Tenant shall rebuild or repair the same in such manner that the Improvements as so rebuilt or repaired shall be of the same or better quality and value as they were prior to such damage or destruction, and shall have same rebuilt or repaired and ready for occupancy within twelve (12) months from the time and loss or destruction occurred, subject to Force Majeure. If the insurance proceeds exceed the cost of repair or restoration, Tenant shall receive said excess upon completion of such repair or restoration. 14.02 Approval of Plans and Specifications. In the event of a loss hereunder, Tenant shall submit to Landlord the plans and specification for reconstruction or repair for Landlord's approval. Landlord shall have a fifteen (15) day period within which to review and approve or disapprove the plans and specifications, the contractor(s) to perform such work, materials to be used and the manner of making such repairs. 14.03 Payment from Escrow. Amounts shall be paid out from said escrow account established pursuant to Section 14.01 from time to time upon the certification of Tenant's architect that said amount is being applied to the payment of the reconstruction or repair at a reasonable cost therefor and that the disbursement then requested, plus all previous disbursements and the amount of any applicable "deductible" do not exceed the cost of the repair or restoration already completed and paid for, and that the balance in said escrow account is sufficient to pay for the estimated cost of completing the repair or restoration. If the insurance proceeds shall be less than the cost of repair or restoration, Tenant shall pay the excess cost. 14.04 Failure to Reconstruct; Termination. In case of Tenant's failure to enter into the reconstruction or repair of the Improvements within six (6) months from the date of payment of such insurance proceeds, or to prosecute said reconstruction or repair with such dispatch as may be necessary to complete the same within twelve (12) months after the occurrence of such damage or destruction or to complete same within said twelve (12) months, then the amount so collected, or the balance thereof remaining in the escrow account may be requested by Landlord, in its sole discretion, and then shall be paid to Landlord and Landlord shall after receipt of such balance terminate the Lease and retain such amounts as liquidated damages resulting from Tenant's failure hereunder. Tenant shall have the right to terminate the Term if less than two (2) years remain in the Term at the time of any such casualty, and in such event Tenant shall have no obligation to rebuild the Improvements, Landlord shall have the sole and exclusive right to adjust the loss with the insurance carriers and all insurance proceeds shall be paid to and retained by Landlord. 14.05 Force Majeure. "Force Majeure" shall mean events beyond the control of the parties, including, without limitation, fire, flood, tornado, or earthquake, war, riot, insurrection, strike, lockout, boycott or embargo, acts of God, unavoidable casualties, labor disputes, and unusual delays in transportation, unavailability of materials, adverse weather conditions not reasonably anticipatable. Any party who asserts the occurrence of force majeure shall give written notice within five (5) working days after the commencement of a delay caused by an event of force majeure, and any party making claim therefor shall give a supplemental notice of the period of time such delay caused by an event of force majeure is expected to last; otherwise, any right of claim therefor shall be deemed waived. 14.06 No Abatement of Rent. Notwithstanding any contrary law, rent shall not be suspended or abated as a result of such damage or destruction, and restoration or rebuilding. 14.07 Default in Payment of Rent. If, at any time after such insurance proceeds come into possession of Tenant or are placed in escrow pursuant to this Article after destruction or damage by casualty, Tenant is in default of any rent or other charges payable under this Lease, then Landlord shall be entitled to so much of said proceeds as may be necessary to pay and discharge any such Rent or other charges of which Tenant is in default, whenever and as often as any such default shall occur. Tenant shall forthwith reimburse such escrow account by depositing therein any amount so paid out on account of Tenant's default. Nothing herein contained, however, shall be construed as permitting Tenant to default in the payment of Rent or other charges herein stipulated to be paid or in the performance of any other covenants of this Lease, and Landlord may, at its option proceed against Tenant for the collection of such Rent or other charges in default and recover and take possession of the Premises in accordance with the provisions of this Lease without prejudice to Landlord's right to the benefit of such insurance money as security for Tenant's performance under the terms of this Lease. 14.08 Landlord's Mortgage. All provisions herein contained relative to the disposition of payments from insurance companies are subject to the requirement that, if any mortgagee who holds a mortgage on the Premises elects, in accordance with the terms of such mortgage, to require such insurance proceeds be paid to the mortgagee on account of the mortgage, then such payment shall be made, but in such event landlord shall provide such amount as is necessary to provide replacement funds in the manner set forth in this Article to assure and complete the payment for the work of reconstruction or repair. 14.09 Untenantability. Except as otherwise expressly provided in this Lease, the untenantability or unusability of the Premises shall not relieve, abate, or reduce Tenant's obligations under this Lease. ARTICLE XV Insurance 15.01 Landlord's Property Insurance. Landlord shall, throughout the Term of this Lease, at Tenant's sole cost and expense, provide and keep in force for the benefit of Landlord and Tenant, insurance against loss or destruction of or damage or injury to any Improvements now or hereafter erected on the Premises resulting from fire or from any hazard included in the so-called extended coverage endorsement (including plate glass insurance, increased cost of construction endorsement, sprinkler leakage, collapse and vandalism and malicious mischief, also known as "All Risks of Physical Loss" coverage). In addition to the foregoing, Landlord shall, at Tenant's sole cost and expense, provide and keep in force for the benefit of Landlord and Tenant, throughout the Term of this Lease, flood insurance, provided the Premises are located within the "Federal Flood Plain Area" of the United States, as well as insurance against loss or damage or injury or destruction of any Improvements now or hereafter erected on the Premises resulting from water or earthquake damage. Landlord shall provide and keep in full force all such insurance in an amount sufficient to prevent Landlord or Tenant from becoming a co-insurer under the terms of the applicable policy, but in no event less than the full replacement cost of the Improvements. Such replacement cost shall be determined annually by a method required by the insurer(s). The deductible under each of said policies shall be an amount not greater than Ten Thousand Dollars ($10,000.00). Such insurance policies to be provided for and kept in force by Landlord shall provide that the loss, if any, be payable to Landlord and Tenant, as their respective interests may appear, except as herein provided, and such insurance policies may exclude foundations, excavation and the usual items customarily excluded in such insurance policies, and that the proceeds thereof shall be used to repair or replace the damage sustained by the casualty. Landlord may provide that the interest of any mortgagee under a fee mortgage covering the Premises, be protected by proper endorsements to any such policies of insurance, and that duplicate originals of such policies of insurance be delivered to such mortgagee. Tenant shall pay to Landlord, upon invoice from Landlord, the premium for such insurance, and shall pay to Landlord monthly, with Base Rent, one-twelfth of the premium for such insurance, plus such additional sum as is necessary to assure sufficient escrow to pay the premiums thereon as they become due. Such funds may be commingled by Landlord, shall not bear interest, and shall be used by Landlord to timely pay such premiums. Landlord shall, upon written request of Tenant, provide Tenant with evidence of such insurance on the Premises. 15.02 Boiler Insurance. Tenant shall provide and maintain insurance, at Tenant's cost and expense throughout the Term of this Lease, for loss or damage by explosion of steam boilers, pressure vessels, air conditioning systems or similar apparatus to be now or hereafter installed on the Premises, to the extent applicable. Said insurance shall be on a Boiler and Machinery Broad Form Policy on a repair and replacement basis, with Use and Occupancy coverage for at least one hundred twenty (120) days. Such policy shall name Landlord, and/or any successor Landlord and Landlord's mortgagee as additional insureds, as their interests may appear. 15.03 Public Liability Insurance. During the Term, at Tenant's sole cost and expense, Tenant shall maintain in full force and effect broad form commercial or comprehensive general liability insurance, including blanket contractual liability coverage specifically endorsed to provide coverage for the obligations assumed by Tenant pursuant to the Lease against claims and liability for personal injury, bodily injury, death or property damage occurring on, in or about the Premises, with limits of liability of not less than Five Million Dollars ($5,000,000.00) arising out of any one occurrence or annual aggregate. Tenant shall cause such insurance policy or policies to name Landlord, and/or any successor Landlord and Landlord's mortgagee as additional insureds, as their interests may appear. 15.04 Workers' Compensation, Employer's Liability Insurance. Tenant shall also provide and maintain, at Tenant's sole cost and expense throughout the Term of this Lease, workers' compensation insurance with statutory limits of liability and employer's liability insurance with limits of liability of not less than Five Hundred Thousand Dollars ($500,000.00) in respect of any work or other operations done or performed on or about the Premises. 15.05 Business Interruption. Tenant shall, during the Term of this Lease, at its sole cost and expense, procure and maintain business interruption (or use and occupancy) insurance including, at a minimum, coverage for rent and other charges for which Tenant is obligated hereunder for a period of twelve (12) months. 15.06 Insurance on Tenant's Property. It is understood and agreed that Tenant may self-insure with respect to any damage to or destruction of Tenant's Property. 15.07 No Separate Insurance. Tenant shall not take out separate insurance concurrent in form or contributing in the event of loss with that required herein to be furnished by Tenant unless Landlord is included therein as additional insured, and as loss payee with loss payable as set out herein. Tenant shall immediately notify Landlord in writing whenever any such separate insurance is taken out and shall deliver the policy or policies or duplicates thereof, or certificates evidencing the same, as provided herein. 15.08 Conduct of Business. Cooperation. Tenant shall comply with all requirements of said insurance policies and shall not conduct or allow to be conducted business or other activities or fail to maintain or take other actions with regard to the Premises in such a manner as will result in an increase in said premiums, or a decrease in the recovery thereunder, or cancellation thereof Any insurance proceeds payable by reason of any insured loss pursuant to or this Article XV shall, subject to the rights of the holders of any Landlord's mortgage upon the Premises be used exclusively for the purpose of restoring and rebuilding the Premises. Subject to the foregoing and provided Tenant is not in default of this Lease, Tenant shall have the sole right to adjust with the insurance carriers (other than Landlord's Property Insurance) the amount of the loss upon any such policies (but with prior notice to Landlord). Landlord and Tenant shall, at Tenant's cost and expense, cooperate fully in order to obtain the largest possible insurance recovery and shall execute any and all consents and other instruments and take all other actions necessary or desirable in order to effectuate the same and to cause such proceeds to be paid. In the event of a default by Tenant or of a termination pursuant to the provisions of this Lease, Landlord shall have the right to adjust the amount of the loss with the insurance carriers. Landlord shall give notice to Tenant if Landlord elects to adjust the loss as provided in this Article. If Landlord requests, Tenant shall adjust any and all such claims and Landlord and its mortgage lender, if any, shall have the right to join with Tenant therein. 15.09 Requirements of Policies. (a) All policies required to be carried pursuant to this Article XV: (i) shall be written and signed by solvent and responsible insurance companies authorized to do business in the jurisdiction wherein the Premises are located having a rating of not less than Best A+, Class XV; (ii) shall contain an agreement by the insurer that such policy or policies shall not be canceled or non-renewed without at least thirty (30) days prior written notice to Landlord, Landlord's Mortgage, and Tenant; (iii) may be carried under so-called blanket policies, provided that the protection afforded thereunder as to the Premises shall be not less than that which would have been afforded under separate policy or policies relating only to the Premises and provided, however, any such policy of blanket insurance shall specify therein, or Tenant shall furnish Landlord a written statement from the insurer under such policy so specifying, the amount of the total insurance allocated to the Premises, which amount shall be not less than the amount required herein and any such policy shall comply in all respects with the requirements set out in this Article; (iv) may be carried under a combination of primary insurance and umbrella coverage; and (v) shall be primary insurance by the party obligated under Article XV, which will not call upon any other insurance effected or procured by the other party for defense, contribution or payment. (b) Tenant retains full responsibility for payment of all deductibles under each policy provided for hereunder. (c) Annually, Tenant will promptly furnish certificates evidencing that the insurance required pursuant to this Article XV is in full force and effect. If the certificates of insurance do not provide for thirty (30) days prior written notice of cancellation or non-renewal to Landlord and Landlord's mortgagee, Tenant shall no later than twenty (20) days prior to termination by cancellation or non-renewal provide to Landlord and its mortgagee paid receipts evidencing continuation or renewal of insurance. (d) If Tenant shall fail or refuse to effect or maintain any of said insurance, Landlord may, but shall have no obligation to do so, effect or maintain said insurance and the amount of money so paid, with interest at the Prime Rate, shall be payable by Tenant to Landlord as Additional Rent immediately due and payable hereunder upon notice from Landlord. 15.10 Release Waiver of Subrogation. To the extent of available insurance, and to the extent of insurance coverage that is required to be, but was not, obtained under the provisions of this Lease, the parties hereby release each other and their respective officers, directors, employees and agents from liability or responsibility for any loss or damage in, about or to the Premises (including, without limitation, loss or damage to personal property, and loss arising from any act or neglect of covenants or other occupants of the Premises) and this release shall apply notwithstanding the fault or negligence of either party or anyone for whom a party may be responsible. The aforesaid policy shall contain an endorsement recognizing this release and waiving all rights of subrogation by the respective property and liability insurance carriers, if such is reasonably available. ARTICLE XVI Indemnification of Landlord Tenant will defend, indemnify, and hold harmless Landlord from and against any and all liabilities, claims, losses, damages, actions, judgments, costs, and expenses (including without limitation attorney's fees and expenses) of every kind imposed upon or asserted against Landlord or Landlord's title in the Premises arising by reason of or in connection with (a) Tenant's possession, use, occupancy, or control of the Premises; (b) any accident, injury to or death of persons, or loss of or damage to property occurring on or about the Premises or adjoining public passageways, (c) the possession, operation, use, misuse, management, maintenance, or repair of the Premises; (d) any damage to the environment and any property and persons injured thereby; (e) the environmental or other condition of the Premises or (f) any failure on the part of Tenant to perform or comply with any of the terms of this Lease. If it becomes necessary for Landlord to defend any action seeking to impose any such liability, Tenant will pay Landlord all costs, expenses, and attorney's fees incurred by Landlord in effecting such defense, in addition to any other sums which Landlord may be called upon to pay by reason of the entry of a judgment against Landlord in the litigation in which such claim is asserted. Landlord shall not be responsible for the loss of or damage to property or injury to or death of persons occurring in or about the Premises by reason of any existing or future condition, defect, matter, or thing in the Premises, or the property of which the Premises are a part, or for the acts, omissions, or negligence of other persons or tenants in and about the Premises; and Tenant agrees to defend, indemnify, and hold Landlord harmless from and against all claims and liability for same. This indemnity shall not apply to any matters caused by or arising from the negligent or willful acts or failures to act of Landlord, or Landlord's breach of this Lease. ARTICLE XVII Condemnation 17.01 Authority. If eminent domain proceedings are instituted by any entity having powers of eminent domain, Landlord shall have the exclusive right and authority to act in said proceedings, although Tenant may participate in such proceedings at its expense as herein after so set forth if it so desires. 17.02 Taking. Subject to the rights of Tenant hereinafter set forth, Tenant hereby irrevocably assigns to Landlord any award or payment to which Tenant may become entitled by reason of any taking of the Premises, or any part thereof, in or by condemnation or other eminent domain proceedings pursuant to any law or by reason of the temporary requisition of the use or occupancy of the Premises or any part thereof by any governmental authority, whether same shall be paid or payable in respect of Tenant's leasehold interest hereunder or otherwise, but nothing in this Lease shall impair Tenant's right to any separate award or payment on account of Tenant's trade fixtures, equipment, and other tangible property, moving expenses, loss of business, and the like, if available, to the extent Tenant shall have a right to a separate claim therefor against the appropriate governmental authority, provided such separate claim or award is not based in whole or in part upon the value of Tenant's leasehold interest and will not diminish the award or payment to Landlord. To the extent of such right, Tenant shall not be deemed to have assigned the same to Landlord, and Tenant shall be entitled to participate in any such proceedings described in this section at Tenant's sole expense. 17.03 Termination. If all or substantially all of the Premises shall be taken in or by such proceedings, or if Landlord shall convey all or substantially all of the Premises under the threat of the exercise of the power of eminent domain, and if Tenant determines in good faith and exercising reasonable judgment that the remaining portion of Premises is no longer suitable to operate thereon the business then being operated, Tenant shall, within sixty (60) days after receipt of notice of any such taking, give written notice to Landlord of its intention to terminate this Lease as of the day preceding the date of the vesting of title to the Premises or portion thereof in the condemning authority, and all rent and other amounts payable by Tenant hereunder shall be apportioned as of the date of such vesting. 17.04 Restoration. If less than all or less than substantially all of the Premises shall be taken by condemnation or other eminent domain proceedings, or if the use or occupancy of the Premises or any part thereof shall be temporarily requisitioned by any governmental authority, civil or military, then this Lease shall continue in full force and effect without abatement or reduction of rent or other amounts payable by Tenant hereunder, notwithstanding such taking or requisition. In the event of any such lesser taking, Landlord shall promptly make available to Tenant out of the award, payment, or compensation received by Landlord, and Tenant shall use said funds, in the same manner as insurance proceeds are used to repair casualty damage hereunder, to promptly repair any damage caused by any such taking or requisition such that, after completion of such repair, the Premises shall be as nearly as possible in a condition as good as the condition thereof immediately prior to such taking or requisition, ordinary wear and tear excepted, provided that Tenant shall not be obligated to expend an amount therefor in excess of the proceeds received by Tenant from Landlord. Any proceeds remaining hereunder shall be retained by Landlord. ARTICLE XVIII Default 18.01 Events of Default. Each of the following shall be deemed default by Tenant: (a) Tenant's failure to pay Rent when such becomes due as herein provided and/or any other charges or payments herein reserved, included or agreed to be treated or collected as Rent and/or any other charge, expense or cost herein agreed to be paid by Tenant, provided that Landlord shall have first given Tenant ten (10) days' written notice and opportunity to cure the same, with no cure having been made within such ten (10) day period notwithstanding the foregoing Landlord shall not be required to give notice of monetary default more than two (2) times in any twelve (12) month period; or (b) Tenant's failure to perform, within ten (10) days after written notice from Landlord (or within a reasonable time thereafter if the default is of such a nature that it cannot be cured within such ten (10) day period, and Tenant does not thereafter complete the same in good faith and with reasonable diligence), any other terms, conditions, or covenants of this Lease to be observed by Tenant; or (c) The adjudication of Tenant as a bankrupt or insolvent; or the making by Tenant of a general assignment for the benefit of creditors; or the appointment of a receiver in equity for the property of Tenant, provided such appointment is not released, bonded according to law or otherwise provided for by indemnity within thirty (30) days after written notice thereof first given to Tenant, within a reasonable time after the occurrence thereof; or the appointment of a trustee, custodian or receiver for Tenant's Property in a reorganization, arrangement or other bankruptcy proceeding; or Tenant's filing of a voluntary or involuntary petition in bankruptcy or for a bankruptcy organization, liquidation or arrangement; or Tenant's filing of an answer admitting bankruptcy or agreeing to a bankruptcy reorganization liquidation or arrangement. 18.02 Landlord's Rights Upon Tenant's Default. In the event of any default set forth in Article 18.01, Landlord, in addition to any other rights or remedies it may have at law or in equity, may do any one or more of the following: (a) elect to terminate this Lease and Tenant's right to possession; or (b) perform, on behalf and at the expense of Tenant (entering upon the Premises for such purpose, if necessary), any obligation of Tenant under this Lease which Tenant has failed to perform, the cost of which performance or liability by Landlord shall be deemed Additional Rent and incurred for the account of Tenant, and Tenant shall reimburse Landlord therefor or save Landlord harmless therefrom upon demand provided, however, that Landlord may cure any such default described in this subparagraph prior to the expiration of the cure period established in Section 18.01, but after such notice to Tenant, if the curing of such default prior to the expiration of said cure period. is reasonably necessary to protect the Premises or Landlord's interest in the Premises, or to prevent injury or damage to persons or property. Notwithstanding anything to the contrary contained herein, in the case of emergency, notice required pursuant to this Article 18 may be given verbally or in any other reasonably due and sufficient manner having regard to the emergency and the attending circumstances. If any such notice shall not be given in the manner described in Article XXIII of this Lease entitled "Notice", then as soon thereafter as practicable, such notice shall be followed up by notice given in the manner prescribed in said Article. No entry by Landlord, in accordance with the provisions of this Article, shall be deemed to be an eviction of Tenant. Landlord's performance of any such covenant shall neither subject Landlord to liability for any loss, inconvenience or damage to Tenant nor be construed as a waiver of Tenant's default or of any other right or remedy of Landlord in respect of such default, or as a waiver of any covenant, term or condition of this Lease; or (c) Using such force as may be reasonably necessary, re-enter upon the Premises, remove all persons and property therefrom, and dispose of store such property in a public warehouse or elsewhere at the sole cost and for the account of Tenant, all without service of notice or resort to legal process, without being deemed guilty of trespass or becoming liable for any loss or damage which may be occasioned thereby (except for any loss or damage resulting from or caused by the gross negligence or criminal act of Landlord or its employees, agents or contractors), and without such re- entry being deemed to terminate this Lease. 18.03 Re-letting. In the event Landlord re-enters upon the Premises as provided in clause (c) of the foregoing Section 18.02, or takes possession of the Premises pursuant to legal proceedings or pursuant to any notice provided for by law, Landlord may in addition to all other rights and remedies provided or this Lease or at law or in equity: (a) Landlord may terminate this Lease and forthwith repossess the Premises and remove all persons or property therefrom and be entitled to recover from Tenant, as damages, the sum of money equal to the total of (i) the reasonable cost of recovering the Premises, (ii) the accrued and unpaid rentals owed at the time of termination plus interest thereon from such due date at the lesser of the Default Rate, as hereinafter defined, or the maximum rate permitted by law, (iii) the discounted net present value of the balance of the fixed annual minimum rent for the remainder of the term, and (iv) any other sum of money and damages owed by Tenant to Landlord; or (b) Landlord may terminate Tenant's right of possession (but not this Lease) and may repossess the Premises without demand or notice of any kind to Tenant and without terminating this Lease in which event Landlord may, but shall be under no obligation to do so, relet the same for the account of Tenant for such rent and upon such terms as shall be satisfactory to Landlord. For the purpose of such reletting, Landlord is authorized to make repairs, changes, alterations or additions to the Premises to make same relettable, and (i) if Landlord shall be unable to relet the Premises, or (ii) if the same are relet and sufficient sums shall not be realized from such reletting (after paying: (a) the unpaid rentals due under the Lease earned, but unpaid at the time of reletting plus interest thereon at the lesser of the Default Rate or the maximum rate permitted by applicable law, (b) the cost of recovering possession, including Landlord's attorney's fees (c) all of the costs and expenses of reletting including broken commissions, advertising, decorations, repairs, changes, alterations and additions by Landlord, and (d) the expense of the collection of the Rent accruing therefrom) to satisfy the rent and all other charges provided for in this case to be paid by Tenant then Tenant shall pay to Landlord, as damages, the sum equal to the amount of the Rent and other expenses payable by Tenant for such period or periods, or if the Premises have been relet, Tenant shall satisfy and pay any such deficiency upon demand therefor from time to time and Tenant agrees that Landlord may file suit to recover any sums falling due under the terms of this Article from time to time upon one or more occasions without Landlord being obligated to wait until expiration of the term of this Lease. Such reletting shall not be construed as an election on the part of Landlord to terminate this Lease unless a written notice of such intention be given to Tenant by Landlord. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach. Failure of Landlord to declare any default immediately upon occurrence thereof or delay in taking any action in connection therewith shall not waive such default but Landlord shall have the right to declare any such default at any time thereafter. (c) As used herein "Default Rate" shall mean the base rate on corporate loans at large U.S. money centers or commercial banks as published from time to time by the Wall Street Journal plus two hundred basis points (two percent (2%)) adjusted with each change in each published rate. 18.04 Damages Upon Termination. In the event that Landlord at any time terminates this Lease for any default by Tenant, in addition to any other remedies Landlord may have, Landlord may recover from Tenant (i) all damages Landlord may incur by reason of such default, including, without limitation, all repossession costs, brokerage commissions, court costs, attorneys' fees, alteration and repair costs, (ii) the accrued and unpaid rentals owed at the time of termination plus interest thereon from such due date at the lesser of the Default Rate or the maximum rate permitted by law, (iii) the discounted net present value of the balance of the Rent for the remainder of the Term, and (iv) any other sum of money and damages owed by Tenant to Landlord. All such amounts shall be immediately due and payable from Tenant to Landlord. ARTICLE XIX Signs Tenant shall have the right to erect, at its expense and in accordance with all applicable laws, ordinances, rules and regulations, in or on the Premises such sign or signs as it may desire. ARTICLE XX Taxes and Other Liens 20.01 Impositions. Tenant shall pay before any fine, penalty, interest, or cost may be added thereto for the nonpayment thereof, all taxes (including, without limitation, real and personal property, franchise, sales and rent taxes), assessments and levies, ad valorem taxes, charges for water, sewer, utility and communications services, vault charges, license and permit fees, dues or assessments, general or special, of any association to which the Premises is subject and other governmental levies and charges, general and special, ordinary, and extraordinary, unforeseen as well as foreseen, of any kind and nature (collectively "Impositions") which may be charged, assessed, levied or imposed during the Term of this Lease upon (i) Tenant, (ii) the Premises or any part thereof or (iii) Landlord, as a result of or arising in respect of the acquisition, ownership, occupancy, leasing, use, possession or sale to Tenant of the Premises, any activity conducted on the Premises, or the Rent; provided, however, that if, by law, any Imposition is payable or at the option of the taxpayer may be paid in installments (whether or not interest shall accrue on the unpaid balance thereof), Tenant may pay the same (and any accrued interest on the unpaid balance) in installments and shall be required to pay only such installments as may become due during the Term of this Lease as the same respectively become due and before any fine, penalty, interest, or cost may be added thereto for nonpayment thereof; and provided further, that any Imposition relating to a fiscal period of a taxing authority, a part of which period is included within the Term of this Lease and a part of which is included in a period of time before the commencement of the Term or after the termination of this Lease, other than a termination of this Lease pursuant to Article 18, shall (whether or not such Imposition shall be assessed, levied, confirmed, imposed, or become a lien upon the Premises or shall become payable, during the term of this Lease) be appropriately pro rated between Landlord and Tenant. 20.02 Real Estate Taxes and Assessments. Notwithstanding anything herein to the contrary, Tenant shall pay to Landlord monthly, with Base Rent, one twelfth of the real estate taxes, assessments, and levies, and ad valorem taxes on the Premises or any part thereof, plus such additional sum as is necessary to assure sufficient escrow to pay same as they become due. Such funds may be commingled by Landlord, shall not bear interest, and shall be used by Landlord to timely pay such taxes, assessments, and levies. 20.03 Tax on Tenant Additions. Tenant shall pay all additional taxes levied, assessed or becoming payable on Tenant's Property or by reason of the improvements, alterations or additions to the Premises installed by Tenant at any time during the Term of this Lease. 20.04 Exceptions. Nothing in this Lease shall require Tenant to pay any corporate, estate, inheritance, succession, capital levy, stamp, transfer or similar tax of Landlord, or any income, excess profits, franchise, revenue or similar tax or any other tax or assessment determined on the basis of Landlord's net income or net worth nor shall any tax, assessment, charge, or levy of the character described in this Section 20.04 be deemed to be included within the term "imposition"; provided, however, that if at any time under the laws of the State or any political subdivision thereof in which the Premises is located a future change in the method of taxation or in the taxing authority, or for any other reason, a franchise, income, transfer, profit or other tax or governmental imposition, however designated, shall be levied against Landlord in substitution in whole or in part for any Imposition, or in lieu of additions to or increases of said Impositions then said franchise, income, transfer, profit or other tax or governmental imposition shall be deemed to be included within the term "Imposition," and Tenant shall pay and discharge such Imposition in accordance with Section 20.01 in respect of the payment of Impositions, to the extent it would be payable if the Premises were the only property of Landlord subject to such Imposition. 20.05 Proof of Payment. Tenant agrees to submit to Landlord official receipts evidencing payment of said Impositions at the place at which rental payments are required to be made at least ten (10) days before said impositions or other charges would otherwise become delinquent. 20.06 Refunds. If Landlord shall receive a refund of any Imposition theretofore paid by Tenant pursuant to the provisions hereof, such refund, net of Landlord's costs of recovery, shall be promptly paid to Tenant. 20.07 Protest. If Tenant shall, in good faith, desire to contest the validity or amount of such Impositions, Tenant shall have the right to do so without being in default hereunder provided that Tenant shall give Landlord prompt written notice of Tenant's intention to institute such legal proceedings as are appropriate, which proceedings shall be promptly instituted and conducted in good faith and with due diligence; such proceedings shall suspend the collection of the particular Impositions being protested, so long as the Premises shall not be in danger of being sold, forfeited, or lost; and Tenant shall furnish Landlord or the appropriate governmental agency with a bond made by a surety company qualified to do business in the State in which the Premises is located or shall pay cash to a recognized escrow agent in the County within which the Premises is located in one and one-half (1-1/2) times the amount of such Impositions, conditioned to pay such Impositions when the validity thereof shall have been finally determined, which said written notice and security shall be given by Tenant to Landlord or the appropriate governmental agency not fewer than ten (10) days before such Impositions proposed to be contested would otherwise become delinquent. Upon the conclusion of such contest, Landlord shall return to Tenant the security herein above required to be deposited by Tenant, provided that Tenant shall first evidence payment of such Impositions. Landlord may also contest the validity or amount of any Impositions. 20.08 Requirements of Mortgage. In the event the financing institution where Landlord has financing on the Premises shall require Landlord to prepay the Impositions in monthly installments of one-twelfth (1/12th) of the annual amount thereof, then Tenant shall make to Landlord, in addition to the Rent reserved hereunder, monthly payments of one-twelfth (1/12th) of such Impositions. ARTICLE XXI Utilities 21.01 Payment of Charges. Tenant shall, during the Term of this Lease, pay and discharge punctually as and when the same shall become due and payable without penalty all water and sewer rents, rates, and charges, charges for removal of waste materials, and charges for water, steam, heat, gas, electricity, light, phone, telecommunications, and power, and all other service or services furnished to the Premises or the occupants thereof during the Term of this Lease or any extensions hereof, and shall indemnify Landlord against any and all liability on such account. 21.02 Provision of Services. Landlord shall not be required to furnish any services or facilities to the Premises and shall not be liable for any failure of water supply or electric current or of any service by any utility, nor for injury or damage to person (including death) or property caused by or resulting from steam, gas, electricity, water, heat, or by rain or snow that may flow or leak from any part of the Premises or from any pipes, appliances, or plumbing works of the same or from the street or subsurface or from any other place, nor for interference with light or other incorporeal hereditaments or easements, however caused, unless due to the affirmative acts of Landlord. Tenant hereby assumes the full and sole responsibility for the services to and the condition, operation, repair, replacement, maintenance, and management of the Premises. ARTICLE XXII Expansion and Hold Over (a) So long as at least three (3) years remain on the term (including any exercised extensions), Tenant, at Tenant's option, shall have the ability to expand up to an additional 50,000 sq. feet in an additional building or structure. Landlord shall reserve and control additional land for the term of this Lease for Tenant expansion purposes. Tenant shall give Landlord written notification of at least 180 days of Tenant's intent to expand the Premises. Landlord and Tenant shall mutually and diligently work together to reasonably design and build the expansion premises to meet Tenant's expansion needs. The design, plans and specifications, the contractor(s) to perform such work the materials to be used and the manner of making such expansion premises shall all be subject to Landlord's reasonable control and approval. Unless otherwise agreed to in writing, Tenant and Landlord shall mutually select a general contractor to oversee construction of the expansion premises. The general contractor shall bid the costs of the expansion premises to no less than 3 subcontractors and Landlord and Tenant shall mutually agree and select the subcontractors to perform the work. If Landlord and Tenant cannot agree on selection of the general contractor or subcontractors, the lowest cost reasonable general contractor and subcontractors shall be selected, but with all risk of construction then assumed by Tenant. The initial Base Rent for the expansion premises shall be based on all the hard and typical and reasonable soft costs of designing and constructing the expansion premises, amortized over the term of the Lease (which shall either be coterminous or may be reasonably extended beyond Tenant's existing Lease at Tenant's written option) at the cost of money (as determined by Prime as published in Wall Street Journal) plus a rate of return of 10%, and with periodic upward adjustments similar to those provided in Article IV of this Lease. (b) If Tenant or anyone claiming under Tenant remains in possession of the Premises at the expiration of the Term, without entering into a written agreement with Landlord, or without having duly exercised its right, if any, to extend or further extend the Term, such continuing possession shall create a month-to-month tenancy on the terms herein specified, with Rent in the amount of one hundred and fifty percent (150%) of the immediately preceding monthly installment of Rent. Such tenancy may be terminated at the end of any month thereafter by either party by giving at least fifteen (15) days' notice thereof to the other party. (c) Landlord shall grant Tenant a Right of First Opportunity to expand into any space which either comes available during the term of this Lease or Landlord constructs and is under Landlord's control in each case if such is within the industrial park currently known as Component Centre Campus, 1500 Garden of the Gods Road, Colorado Springs, Colorado. As soon as Landlord knows that any such space is coming available Landlord shall submit to Tenant written notification of the space which will be available and the terms on which Landlord reasonably intends to lease the space. Tenant shall have ten (10) business days to respond in writing of Tenant's election to lease the space. If Tenant so elects to lease the space, then the terms and conditions shall be as negotiated between the Landlord and Tenant but in any event not less favorable than the terms contained in Landlord's notice, and with the rental no less favorable than the greater of that contained in Landlord's notice or the rental rate determined under Pages 3 and 4 of this Lease, article V, Rent. ARTICLE XXIII Notice 23.01 Notice Address. Any notice or demand which either party hereto either is required to or may desire to serve upon the other, must be in writing, and shall be sufficiently served if (i) personally delivered, (ii) sent by recognized registered or certified mail, postage prepaid, or (iii) sent by commercial overnight carrier, and addressed, in the instance of Landlord, to: Cherokee Equities, LLC 5260 Mark Dabling Blvd. Colorado Springs, CO. 80918 Attention: David Allen Phillips with a copy to: Sparks Dix, P.C. 128 S. Tejon Suite 304 Colorado Springs, CO. 80903 Attention: Chris Brandt Or any other address which Tenant may be notified of in writing by Landlord, and in the instance of Tenant, to:
Tenant Stanford Telecom 5009 Centennial Boulevard Colorado Springs, CO 80919 Attention: Kathy Zehringer with a copy to: Stanford Telecom Stanford Telecom 5009 Centennial Boulevard Attn: Mr. David Morrison, Colorado Springs, CO 80919 Vice President of Administration 1221 Crossman Avenue Attention: Ernie Dickens Sunnyvale, CA 94089-1117
or such other addresses which Landlord may be notified in writing by Tenant. 23.02 Service of Notice. Such notice shall be deemed to have been served on the day of the mailing thereof or upon receipt in the event of personal service or on the day of delivery of the overnight courier; provided, however, that should such notice pertain to the change of address to either of the parties hereto, such notice shall be deemed to have been served upon receipt thereof by the party to whom such notice is given. ARTICLE XXIV Subordination 24.01 Lease Subordinate. This Lease and all of Tenant's right, title, and interest in and under this Lease shall be subject, subordinated, and inferior to the lien of any and all ground leases, underlying leases, mortgages, and deeds of trust and to any and all terms, conditions, provisions, extensions, renewals or modification of any such leases, mortgages, or deeds of trust which Landlord or any grantee or assignee of Landlord has placed or may place upon the Premises in the same manner and to the same extent as of this Lease had been executed subsequent to the execution, delivery, and recording of such Lease, mortgage, or deed of trust. 24.02 Subordination, Self-Operative, Subordination Agreement, Nondisturbance. The subordination of this Lease to any mortgage or deed of trust now or hereafter placed upon the Premises shall be automatic and self-operative and no further instrument or evidence of subordination shall be necessary. Without limiting such automatic and self-operative subordination, however, Tenant shall, on demand, within ten (10) days of such demand, execute, acknowledge, and deliver to Landlord or any grantee or assignee of Landlord any and all instruments that may be necessary or proper to evidence the subordination of this Lease and all rights hereunder to the lien of such mortgage or deed of trust. In any and all events, so long as Tenant is not in default under this Lease, Tenant's right of possession shall not be disturbed. 24.03 Attornment. Tenant covenants and agrees that, upon any mortgage foreclosure or foreclosure under a deed of trust, or deed in lieu thereof, it will attorn to any mortgagee, trustee, assignee, or any purchaser at any foreclosure sale as its Landlord, and this Lease shall continue in full force and effect as a direct Lease between Tenant herein and such party upon all terms, conditions, and agreements set forth in this Lease. 24.04 Attornment to Successor. In the event Landlord or any successor owner of the Premises shall transfer the Premises, which transfer may be freely effected by Landlord without the consent or approval of Tenant, Landlord or such successor owner, as the case may be, shall thereupon be released from all future liabilities and obligations of Landlord under this Lease and all such future liabilities and obligations shall thereupon automatically be binding upon the new owner, and Tenant will attorn to any new owner as its Landlord, and this Lease shall continue in full force and effect as a direct Lease between Tenant herein and such party upon all terms, conditions, and agreements set forth in this Lease. 24.05 Tenant's Right to Quiet Enjoyment. Notwithstanding such subordination, as to hereafter occurring matters, Tenant's right to quiet enjoyment of the premises shall not be disturbed if Tenant is not in default and so long as Tenant shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. ARTICLE XXV Landlord's Access to the Premises Landlord, or its agents or authorized representatives, shall have access to the Premises at any time during normal business hours for the purposes of examining or inspecting the condition of same. In the event of any emergency such as, but not limited to, a fire, flood, or severe windstorm, Landlord shall have free access to the Premises for the purpose of examining or inspecting damage done to them. Unless Tenant shall have given notice of its exercising its option to extend the Term of this Lease pursuant to Article III of this Lease entitled "Term and Extensions", Landlord shall have the right, for the twelve (12) months prior to expiration of this Lease or any extensions hereof, to show the Premises to prospective tenants, at reasonable times during normal business hours, or at other times upon reasonable notice to Tenant. Landlord further reserves the right to show the Premises to prospective purchasers or lenders any time during the Term of the Lease, during normal business hours, or at other times upon reasonable notice to Tenant. ARTICLE XXVI Environmental Compliance 26.01 Definitions. For purposes of this Lease: (a) the term "Environmental Laws" shall mean and include the Resource Conversation and Recovery Act, as amended by the Hazardous and Solid Waste Amendments of 1984, the Comprehensive Environmental Response, Compensation and Liability Act, the Hazardous Materials Transportation Act, the Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act and any and all other applicable federal, state and local environmental laws, ordinances, rules, requirements, regulations and publications, as any of the foregoing may have been or may be from time to time amended, supplemented or supplanted and any and all other federal, state or local laws, ordinances, rules, requirements, regulations and publications, now or hereafter existing, relating to the preservation of the environment or the regulation or control of toxic or hazardous substances or materials; and (b) the term "Regulated Substance" shall mean and include any, each and all substances or materials now or hereafter regulated pursuant to any Environmental Laws, including, but not limited to, any such substance or material now or hereafter defined as or deemed to be a "regulated substance, " "pesticide," "hazardous substance" or "hazardous waste", "asbestos," "polychlorobiphenyls", "petroleum" or included in any similar or like classification or categorization thereunder. 26.02 Compliance. Tenant shall: (a) not cause or permit any Regulated Substance to be placed, held, located, released, transported or disposed on, under, at or from the Premises or to otherwise adversely affect the Premises in violation of any Environmental Laws; (b) at its own cost and expense contain at and remove from the Premises, and perform any other necessary or desirable remedial action regarding, any Regulated Substance in any way affecting the Premises if, as and when such containment, removal or other remedial action is required under any Environmental Laws and, whether or not so required, shall perform any containment, removal or remediation of any kind involving any Regulated Substance in any way affecting the Premises in compliance with the requirements of all Environmental Laws; (c) provide Landlord with written notice (and a copy as may be applicable) of any of the following within ten (10) days thereof: (i) Tenant's obtaining knowledge or notice of any kind of the presence, or any actual or threatened release, of any Regulated Substance in any way affecting the Premises; (ii) Tenant's receipt or submission, or Tenant's obtaining knowledge or notice of any kind, of any report, citation, notice or other communication from or to any federal, state or local governmental or quasi-governmental authority regarding any Regulated Substance in any way affecting the Premises; or (iii) Tenant's obtaining knowledge or notice of any kind of the incurrence of any cost or expense by any federal, state or local governmental or quasi-governmental authority or any private party in connection with the assessment, monitoring, containment, removal or remediation of any kind of any Regulated Substance in any way affecting the Premises, or of the filing or recording of any lien on the Premises or any portion thereof in connection with any such action or Regulated Substance in any way affecting the Premises; and (d) defend all actions against the Landlord and its Mortgagee and pay, protect, indemnify and save harmless Landlord and its Mortgagee from and against any and all liabilities, losses, damages, costs, expenses (including, without limitation, attorneys' and consultant's fees, response and clean-up costs, court costs, and litigation expenses), causes of action, suits, claims demands or judgments of any nature relating to (i) the presence, disposal, release or threatened release of any Regulated Substance; (ii) any personal injury (including wrongful death) or property damage (real or personal) arising out of or relating to any Regulated Substance; or (iii) any Environmental Laws, Regulated Substance or other environmental matters. If at or after the expiration or other termination of this Lease any response or clean up of a condition involving Regulated Substances existing at the expiration or other termination of this Lease is required by any federal, state or local governmental authority, Tenant shall remain solely responsible for such requirement and this Lease shall remain in full force and effect pursuant to the terms of Article XXII until such response or clean up is completed to the satisfaction of the respective governmental authority. The indemnity contained in this Section XXVI shall survive the expiration or earlier termination of this Lease. 26.03 Environmental Testing. "Upon prior written notice from Landlord, (i) in the event of the reasonable suspicion of Landlord that a Regulated Substance is or may be found within the Premises in violation of Environmental Laws or (ii) in connection with a bona fide sale or mortgage transaction, Tenant shall permit such persons as Landlord may designate ("Site Reviewers") to visit the Premises and perform environmental site investigations and assessments ("Site Assessments") on the Premises for the purpose of determining whether there exists on the Premises any violation of Environmental Laws or any condition with respect to the environment that could result in liability to Landlord. Such Site Assessments may include both above and below the ground testing and such other tests as may be necessary, in the reasonable opinion of the Site Reviewers, to conduct the Site Assessments and shall, to the extent reasonable, be scheduled and conducted in a manner to minimize interference with Tenant's use of the Premises. Tenant shall supply to the Site Reviewers such historical and operational information regarding the Premises as may be reasonably requested by the Site Reviewers to facilitate the Site Assessments, and shall make available for meetings with the Site Reviewers appropriate personnel having knowledge of such matters. ARTICLE XXVII Late Rent Tenant hereby acknowledges that late payment by Tenant to Landlord of Rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any mortgage or trust deed encumbering the Premises. Accordingly, if any installment of Rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee within seven (7) days after the date on which such sum is due, Tenant shall pay to Landlord a late charge equal to the greater of 4% of such overdue amount or the late charge, penalty or interest imposed on Landlord by its Mortgagee as a result of any resulting late payment made to such Mortgagee. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge, partial payments, or other matters by Landlord shall in no event constitute a waiver of Tenant's default or Landlord's rights with respect to such overdue amount or other default(s), nor prevent Landlord from exercising any of the other rights and remedies allowed hereunder. All remedies hereunder and at law shall be cumulative. ARTICLE XXVIII Estoppel Certificates Tenant will within ten (10) days, promptly execute, acknowledge, and deliver to Landlord, upon request, a certificate of Tenant certifying that this Lease is unmodified and is in full force and effect (or, if modified, that this Lease is in full force and effect, as modified, and stating the date of each instrument so modifying this Lease); the dates, if any, to which Rent and other charges payable hereunder have been paid; whether, in the opinion of Tenant, any default exists hereunder and, if so, the nature and period of existence thereof and what action Landlord is taking or proposes to take with respect thereto and whether notice thereof has been given to Landlord; and such other and further matters as may reasonably be requested by Landlord and any mortgagee or purchaser of Landlord. If such certificate is required to be delivered by a corporation, the same shall be signed by the President or a Vice President and the Secretary or an Assistant Secretary thereof, and if such certificate is required to be delivered by a partnership, the same shall be signed by a general partner thereof. Any certificate required under this Article may be relied upon by a prospective purchaser, mortgagee, or other transferee of Landlord's interest under this Lease. ARTICLE XXIX Reports Tenant agrees to furnish to Landlord, with reasonable promptness: (l) copies of financial statements of Tenant (including, but not limited to, annual balance sheets, income statements and surplus statements) prepared in accordance with generally accepted accounting principals and certified by independent certified public accountants; and (2) other financial statements, reports and documents which the Tenant (i) files with or otherwise sends to the Securities and Exchange Commission, whether pursuant to the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934 including, without limitation, Annual Report on Form l0-K, Quarterly Report on Form l0-Q, Current Report on Form 8-K and Proxy Statements and other Soliciting materials; (ii) files with any other governmental commission, department or agency or any securities exchange; or (iii) sends to or makes available to its shareholders. In addition to the foregoing, Tenant shall obtain and deliver to Landlord, with reasonable promptness, such other information respecting the operation of the Premises or the financial condition and affairs of Tenant, as Landlord may from time to time reasonably request. ARTICLE XXX Provisions of General Application (a) The language in all parts of this Lease shall in all cases be construed as a whole and according to its fair meaning, and not strictly for or against either Landlord or Tenant, and the construction of this Lease and any of its various provisions shall be unaffected by any argument or claim, whether or not justified, that it has been prepared, wholly or in substantial part, by or on behalf of Landlord or Tenant. (b) The Article headings in this Lease are for convenience only and are not a part of this Lease, and do not in any was limit or simplify the terms and provisions of this Lease, nor should they be used to determine the intent of the parties. (c) If any term, covenant, condition or provision of this Lease, or the application thereof to any person or circumstances, shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby; and it is the intention of the parties hereto that if any provision of this Lease is capable of two constructions, one of which would render the provision invalid, and the other which would render the provision valid, then the provision shall have the meaning which renders it valid; and each term, covenant, condition and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. (d) It is mutually covenanted and agreed by and between the parties that no waiver of a breach of any of the covenants or conditions of this Lease shall be construed to be a waiver of any succeeding breach of the same covenant or condition. It is further agreed by and between the parties that no modification, release, discharge or waiver of any provision of this Lease shall be of any force, effect or value unless in writing and signed by the Landlord and Tenant or their duly authorized agents. (e) This Lease shall be governed and construed in accordance with the laws of the state wherein the Premises are located (f) The words "Landlord" and "Tenant" and the pronouns referring thereto, as used in this Lease, shall mean, where the context requires or permits, the persons named herein as Landlord and as Tenant, respectively, and their respective heirs, legal representatives, successors, and assigns, irrespective of whether singular or plural, or masculine, feminine, or neuter. The agreements and conditions in this Lease contained on the part of Landlord to be performed and observed shall be binding upon Landlord and its heirs, legal representatives, successors, and assigns, and shall endure to the benefit of Tenant and its heirs, legal representatives, successors, and assigns; and the agreements and conditions on the part of Tenant to be performed and observed hereunder shall be binding upon Tenant and its heirs, legal representatives, successors, and assigns, and shall endure to the benefit of Landlord and its heirs, legal representatives, successors, and assigns. (g) Landlord and Tenant represent to each other that no broker or person is entitled to any commission by reason of the negotiation and execution of this Lease. Landlord and Tenant agree to hold the other harmless against any and all claims by any person for brokerage commissions arising out of any conversation, negotiations or other dealings held by it with any broker regarding this Lease. (h) The parties will, at any time at the written request of either one, promptly execute duplicate originals of an instrument, in recordable form, which will constitute a short form of lease, setting forth a description of the Premises, the Term and any other portions hereof, except the rental provisions (unless required by statute), as either party may request. All costs incurred in connection with recording the short form of lease shall be paid by Tenant. If a party fails or refuses to execute and acknowledge a reasonable short form of lease within fifteen (15) days after notice of said request, the requesting party is authorized to, and is hereby appointed attorney-in-fact with full power and authority to execute and acknowledge said short form of lease on behalf of and in the name of the other Party. (i) If, as a result of any breach or default in the performance of any of the provisions of this Lease, Landlord or Tenant uses the services of an attorney in order to secure compliance with such provisions or recover damages therefor from the breaching party, and if the non-breaching party is the prevailing party in any litigation resulting therefrom or settlement associated therewith, then the non-breaching party shall be entitled to recover from the breaching party any and all reasonable attorneys fees and expenses incurred by the non-breaching party in connection with such litigation or settlement. (j) This instrument and the Agreement to Lease contain the entire and only agreement between the parties relating to the subject matter hereof, and no oral statements or representations or written matter not contained in these instruments shall have any force or effect. This Lease shall not be amended or modified in any way except by writing executed by both parties. (k) The relationship between the parties hereto is solely that of Landlord and Tenant, and nothing in this Lease shall be construed as creating a partnership or joint venture between the parties hereto, it being the express intent of Landlord and Tenant that the business of Tenant on the Premises and elsewhere, and the good will thereof, shall be and remain the sole property of Tenant. (l) Throughout this Lease, wherever the context so requires, the singular shall include the plural, and the masculine gender shall include the feminine and neuter genders. (m) There shall be no merger of this Lease or the leasehold estate created by this Lease with any other estate or interest in the Premises by reason of the fact of the same person, firm, corporation, or other entity acquiring or owning or holding, directly or indirectly, this Lease or the leasehold interest created by this Lease or any interest in this Lease, and any such other estate or interest in the Premises or any part thereof, and no such merger shall occur unless and until all corporations, firms, and other entities having an interest (including a security interest) in this Lease or the leasehold interest created by this Lease and any such other estate or interest in the Demised premises or any part thereof, shall join in a written instrument effecting such merger and shall duly record the same. (n) In the event of a conflict between the terms of the Agreement to Lease and this Lease, the Agreement to Lease shall prevail. IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be duly executed and delivered in their respective names as of the date first above written, and Tenant has provided Landlord with a certified copy of its corporate resolution evidencing the authority of the person subscribing below to execute leases such as this Lease on its behalf. IN WITNESS WHEREOF, each of the parties hereto has caused this Addendum to be duly executed as of the day and year first above written. Landlord: CHEROKEE EQUITIES, LLC By: -------------------------------- Name: David Allen Phillips Title: Its Manager Tenant: STANFORD TELECOM CORPORATION, A DELAWARE CORPORATION By: -------------------------------- Name: Ernest L. Dickens, Jr. Title: Vice President and Division General Manager ACKNOWLEDGEMENT STATE OF COLORADO ) ) SS. COUNTY OF EL PASO ) Before me, a Notary Public in and for said county and state personally appeared of_____________, as_____ CHEROKEE EQUITIES, LLC, a Colorado Limited Liability Company, who acknowledged that he did sign the foregoing instrument on behalf of said limited liability company and acknowledged the same to be its free act and deed and the free act and deed of him personally as such officer. My Commission expires:________ ________________________Notary Public Seal STATE OF COLORADO ) ) SS. COUNTY OF EL PASO ) Before me, a Notary Public in and for said county and state personally appeared Ernest I. Dickens, Jr., as Vice President and Division General Manager of Stanford Telecom Corporation, a Delaware corporation, who acknowledged that he did sign the foregoing instrument on behalf of said corporation and acknowledged the same to be its free act and deed and the free act and deed of him personally as such officer. My Commission expires:________ ________________________Notary Public Seal EX-13.1 10 EXCERPTS FROM THE ANNUAL REPORT TO STOCKHOLDERS EXHIBIT NUMBER 13.1 EXCERPTS FROM THE ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED MARCH 31, 1999 MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operation COMPANY OVERVIEW Since the Company's inception in 1973, revenues have been generated primarily from sales to agencies of the U.S. Government, including the DoD, the U.S. Air Force, Army and Navy, NASA and the FAA, or their prime contractors. Such revenues are generated from many contracts including programs requiring multi-year hardware and software development and limited production of products and systems. The Company's contracts often require the design, production, operation and maintenance of sophisticated equipment and systems and provision of system integration services in the digital telecommunications and satellite communications fields. A substantial portion of the digital telecommunications and satellite communications research and development performed by the Company since its inception has been funded by its customers and recorded as revenues by the Company. Accordingly, the cost of performing this customer-funded research and development is included in "Cost of Revenues" in the Company's financial statements. The Company's government contracts are generally cost-reimbursement plus profit or fixed-price contracts. The Company generally recognizes revenues from its long-term government contracts on a percentage-of-completion basis. Commencing in the late 1980's, the Company began to pursue commercial opportunities utilizing its digital telecommunications technology developed and enhanced by the Company since its inception. Commercial revenues have risen from less than 6% of total revenues in fiscal year 1989 to approximately 36% of total revenues in fiscal year 1999. During fiscal year 1999, commercial revenues which amounted to approximately $59.9 million included: (i) contract manufacturing revenues from the Company's Contract Manufacturing segment ($27.0 million); (ii) sales of ASICs, circuit boards and subsystems to the telecommunications industry ($11.4 million); (iii) Wireless Broadband Products ($3.5 million) and (iv) other commercial systems and product business ($18.0 million). The Company expects to generate increased commercial revenues during fiscal year 2000 associated with its wireless broadband products which commenced initial production and deliveries in the latter part of fiscal year 1999. The Company includes in commercial revenues sales of standardized or off-the-shelf products to any customers, including government customers. The Company's operating results have from time to time been adversely affected by non-recoverable cost overruns on certain fixed-price contracts, primarily fixed-price development contracts which have included significant software and hardware development. The Company has instituted additional management controls to more closely monitor its bidding process and costs incurred on fixed-price development contracts, however, no assurance can be given that the Company will not incur losses on future fixed-price contracts or additional losses on existing contracts. The Company believes that development contracts are an important element in maintaining its technological leadership position in digital telecommunications. As a result, the Company may incur losses on certain fixed-price contracts. Such losses will be charged against results of operations in the period when they first become known, typically near the initiation of the contract and may have a material adverse effect on the Company's results of operations. CAUTIONARY STATEMENTS In the interest of providing the Company's shareholders and potential investors with certain Company information, including management's assessment of the Company's future potential, certain statements set forth herein (a) contain or are based on projections of revenue, income, earnings per share and other financial items or (b) relate to management's future plans and objectives or to the Company's future economic performance. Such statements are "forward-looking statements" within the meaning of Section 27A(i) of the Securities Act of 1933, as amended, and in Section 21E(i) of the Securities Exchange Act of 1934, as amended. Although any forward-looking statements contained herein or otherwise expressed by or on behalf of the Company are to the knowledge and in the judgment of the officers and directors of the Company, expected to prove true and to come to pass, management is not able to predict the future with absolute certainty. Accordingly, shareholders and potential investors are hereby cautioned that certain events or circumstances could cause actual results to differ materially from those projected or predicted herein. In addition, the forward-looking statements herein are based on management's knowledge and judgment as of the date hereof, and the Company does not intend to update any forward-looking statements to reflect events occurring or circumstances existing hereafter. For further information on the foregoing, reference is made to the Company's Securities and Exchange Commission reports including its recent reports on Forms 10-Q and 10-K. Page 17 PARENT-SUBSIDIARY OVERVIEW The Company has invested heavily in the development of a family of products to deliver telephone and data services over wireless broadband links. The high level of R&D expenses associated with the development of the wireless broadband family impacted the earnings results for the Company over the past four years. In order to provide further detail as to the level of revenues, cost of revenues, and operating expenses incurred by the base business and the corresponding financial performance of the broadband wireless business, the Company established a wholly owned subsidiary, Stanford Wireless Broadband, Inc. in June 1998, which comprises two of the three reportable segments of the Company; Wireless Broadband and Contract Manufacturing. In addition to providing financial visibility, the establishment of the subsidiary allows the Company's wireless broadband customers the benefit of working with a unique and separate entity dedicated to the development, manufacturing, sales and support of its broadband family of products. The table shown below provides a summary of the financial performance of the Base Business segment and Stanford Wireless Broadband, Inc. for the year ended March 31, 1999.
Base Stanford Wireless (in thousands) Business Broadband, Inc. --------------------------------------------------------------------------------------- Revenues from unaffiliated customers $134,940 $ 30,465 Cost of revenues 101,868 29,443 -------- -------- Gross profit 33,072 1,022 -------- -------- Expenses Research and development 4,323 9,782 Marketing and administrative 13,150 6,776 -------- -------- Total expenses 17,473 16,558 -------- -------- Operating income (loss) $ 15,599 $(15,536) ======== ========
For fiscal year 1999, revenues for the Base Business segment consisted of $105.5 million and $29.4 million of government and commercial revenues, respectively. For fiscal year 1999, revenues for Stanford Wireless Broadband, Inc. consisted of $27.0 million and $3.5 million from the Company's Contract Manufacturing segment and Wireless Broadband segment, respectively. The Company's Wireless Broadband subsidiary's operating loss for the twelve months of fiscal year 1999, was attributable to a continued high level of research and development in the wireless broadband family of products, high level of costs associated with activities necessary to support worldwide LMDS and MMDS field trials, and an operating loss associated with the Company's Contract Manufacturing segment. Operating income from the Base Business segment of $15.6 million was essentially equal to the operating loss incurred by the Company's Wireless Broadband subsidiary. BUSINESS SEGMENTS OVERVIEW The Company classifies its business into three reportable segments: Base Business, Wireless Broadband and Contract Manufacturing. The Base Business segment primarily includes multi-year hardware and software engineering services for data and voice communications. The primary customer for the Base Business segment is the U.S. Government, however, 22% of the revenues were derived from the sale of commercial products and services. The Wireless Broadband segment develops and produces hardware for broadband wireless applications for the two-way, high-speed transmission of voice and data. Finally, the Contract Manufacturing segment is in the business of providing manufacturing services both for the Company's products as well as products for other companies.
Revenue Operating Income (loss) (1) --------------------------------------- ---------------------------------------- (in thousands) 1999 1998 1997 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Base Business $ 138,777 $ 127,596 $ 133,997 $ 15,599 $ 16,212 $ 14,980 Wireless Broadband 3,543 2,571 2,047 (12,203) (7,371) (4,315) Contract Manufacturing 31,236 30,625 40,556 (3,333) (3,178) 229 Less: Intra-Company Revenues (8,151) (7,532) (9,598) -- -- -- --------- --------- --------- --------- --------- --------- Stanford Telecommunications, Inc. $ 165,405 $ 153,260 $ 167,002 $ 63 $ 5,663 $ 10,894 --------- --------- --------- --------- --------- ---------
(1) Operating income of $63 thousand, $5.7 million and $10.9 million in fiscal years 1999, 1998 and 1997 includes intra-company eliminations of profit of approximately $.3 million, $.5 million and $.4 million, respectively, related to the Contract Manufacturing segment. Page 18 Segment Revenues. The decrease in Base Business segment revenues from $134.0 million in fiscal year 1997 to $127.6 million in fiscal year 1998 was the result of a $3.0 million decrease in commercial catalog product sales and a $3.4 million decrease in other Base Business segment product and service revenues. The increase in the Base Business segment revenues from $127.6 million in fiscal year 1998 to $138.8 million in fiscal year 1999 was primarily attributable to a $16.5 million increase in other Base Business segment product and service revenues offset by a $5.0 million decrease in revenues from the sale of commercial cable and VSAT catalog products, and satellite personnel communications system design support. The increases in the Wireless Broadband segment revenues from fiscal year 1997 to fiscal year 1998 and from fiscal year 1998 to fiscal year 1999 resulted from increased sales associated with LMDS/MMDS field trials and deliveries of initial production hardware during the fourth quarter of fiscal year 1999. The decrease in the Contract Manufacturing segment revenues from $40.6 million in fiscal year 1997 to $30.6 million in fiscal year 1998 was primarily the result of an $8.6 million decrease in sales associated with the contract manufacturing of products for other companies. Sales to external customers increased by $1.5 million from fiscal year 1998 to fiscal year 1999, however, this was offset by a $.9 million decrease in internal manufacturing sales. The Company anticipates that internal manufacturing sales will increase during fiscal year 2000 as a result of increasing demand for its wireless broadband products with external manufacturing sales expected to be approximately equal to fiscal year 1999 levels. Segment Operating Income (Loss). The increase in operating income of the Base Business segment from $15.0 million in fiscal year 1997 to $16.2 million in fiscal year 1998 was primarily the result of higher gross margins realized on its government and commercial revenues. Operating income decreased from $16.2 million in fiscal year 1998 to $15.6 million in fiscal year 1999 primarily due to decreasing gross margins realized on government and commercial revenues. The decrease in operating income for fiscal year 1999 was also affected by an increase in administration and marketing expenses related to the pursuit of new opportunities in the government market and legal fees related to patent infringement litigation. The increase in operating loss of the Wireless Broadband segment from $4.3 million in fiscal year 1997 to $7.4 million in fiscal year 1998 was primarily the result of increased research and development costs and increased marketing and administrative costs. The increase in operating loss for the segment from $7.4 million in fiscal year 1998 to $12.2 million in fiscal year 1999 was mainly the result of increased research and development costs and lower gross margins realized due to the increased costs associated with activities to support worldwide LMDS and MMDS field trials. The Contract Manufacturing segment operating loss of $3.2 million in fiscal year 1998 compared to a fiscal year 1997 operating profit of $.2 million was primarily attributable to the decrease in revenue of $9.9 million. The operating loss for fiscal year 1999 was approximately the same as experienced in fiscal year 1998. RESULTS OF OPERATIONS - STANFORD TELECOMMUNICATIONS, INC. The following table sets forth, for the periods indicated, certain items from the Company's Consolidated Statements of Income expressed as a percentage of the Company's total revenues:
Year Ended March 31 1999 1998 1997 - ------------------------------------------------------------------------------ Revenues 100.0% 100.0% 100.0% Cost of revenues 79.4 76.1 76.3 ----- ----- ----- Gross profit 20.6 23.9 23.7 ----- ----- ----- Expenses Research and development 8.5 8.9 7.1 Marketing and administrative 12.1 11.3 10.1 ----- ----- ----- Total expenses 20.6 20.2 17.2 ----- ----- ----- Operating income 0.0 3.7 6.5 Interest income, net 1.2 1.2 0.8 ----- ----- ----- Income before provision for income taxes 1.2 4.9 7.3 Provision for income taxes 0.4 1.5 2.5 ----- ----- ----- Net income 0.8% 3.4% 4.8% ----- ----- -----
Page 19 COMPARISON OF FISCAL YEARS 1997, 1998 AND 1999 Revenues. Revenues for the Company were $167.0 million, $153.3 million, and $165.4 million in fiscal year 1997, 1998, and 1999, respectively, representing a year-to-year decrease of 8% in fiscal year 1998 and a year-to-year increase in fiscal year 1999 of 8%. The decrease in revenues from fiscal year 1997 to fiscal year 1998 was primarily the result of a decrease in revenues from the Company's Contract Manufacturing segment amounting to $8.6 million and a decrease of $5.7 million in revenues from the Company's Base Business segment. The increase in revenues from fiscal year 1998 to fiscal year 1999 was primarily attributed to a $9.8 million increase in revenues from the Company's Base Business segment. The Company expects that commercial sales in its Wireless Broadband segment will increase during fiscal year 2000. In addition, as a result of strong bookings in the Base Business segment in fiscal year 1999, the Company anticipates growth in this segment primarily associated with sales to the Government. Cost of Revenues. Cost of revenues were $127.4 million, $116.6 million and $131.3 million in fiscal year 1997, 1998 and 1999, respectively. The cost of revenues as a percentage of revenues was approximately 76% for fiscal years 1997 and 1998. The increase in cost of revenues as a percentage of revenues in fiscal year 1999 was attributable to lower gross margins experienced by the Company's Wireless Broadband segment due to increased costs associated with worldwide LMDS and MMDS field trials, a decrease in gross margins for the Base Business segment, and increased operating costs within the Company's Contract Manufacturing segment. Gross Profit. Gross profit was $39.6 million, $36.6 million and $34.1 million in fiscal year 1997, 1998 and 1998, respectively. The decrease in gross profit during fiscal year 1998 relative to fiscal year 1997 was primarily due to a lower revenue base. The decrease in gross profit during fiscal year 1999 relative to fiscal year 1998 was primarily due to decreases in gross profits of the Company's Base Business segment and the Company's Wireless Broadband segment in fiscal year 1999. Research and Development. Research and development expenses, including bid and proposal expenses were $11.9 million, $13.6 million and $14.1 million in fiscal year 1997, 1998 and 1999, respectively. The Company has applied much of its research and development expenditures to commercial products and initiatives in the areas of wireless and cable broadband communications. The Company expects research and development expenses in fiscal year 2000 to decrease as a percentage of revenues compared to that experienced in fiscal year 1999, especially in the Wireless Broadband segment as the LMDS/MMDS products transition from development to full scale production. The Company's research and development expenses include bid and proposal expenses associated with Government contracts and certain large commercial programs. Bid and proposal expenses comprised between 16% to 20% of the total research and development expenses during the past three fiscal years. Bid and proposal expenditures are largely the initial advanced technology development efforts directed toward a specific product or technical task for which the Company must show technical viability. The Company expects an increase in bid proposal expenses during the fiscal year 2000 resulting from increased business opportunities in the Base Business segment. Marketing and Administrative. Marketing and administrative expenses were $16.8 million, $17.3 million and $19.9 million in fiscal year 1997, 1998, and 1999, respectively. The increase in costs from fiscal year 1997 to fiscal year 1998 was the result of increased legal expenses primarily associated with a patent infringement case brought by the Company against Broadcom Corporation in December 1996 and increased marketing expenses in pursuit of commercial opportunities. The increased costs from fiscal year 1998 to fiscal year 1999 was the result of additional legal expenses associated with the patent infringement litigation which is scheduled for trial in May 1999. The Company expects these legal fees associated with the patent litigation to decrease after the completion of the trial. In addition, the Company experienced increased marketing expenses primarily associated with pursuit of opportunities in the Base Business segment. Operating Income. Operating income was $10.9 million, $5.7 million, and $.1 million for fiscal year 1997, 1998 and 1999. The decrease in operating income from fiscal year 1997 to fiscal year 1998 was primarily the result of a decrease in revenues, an increase in research and development and an increase in marketing and administrative expenses. The decrease in operating income from fiscal year 1998 to fiscal year 1999 was the result of lower overall gross margins, an increase in marketing and administrative expenses, and an increase in research and development expenses. Interest Income. Interest income was $1.3 million, $1.9 million and $1.9 million in fiscal years 1997, 1998 and 1999 respectively. In fiscal years 1998 and 1999, the Company increased its interest income over previous periods as a result of maintaining a higher overall average balance in U.S. Treasury instruments and money market accounts. Provision for Income Taxes. Provision for income taxes was $4.2 million, $2.3 million and $.6 million in fiscal years 1997, 1998 and 1999, respectively. This represents an effective tax rate of 34.5% for fiscal year 1997, 31% for fiscal year 1998 and 31% for fiscal year 1999. The decrease in the effective tax rate during fiscal year 1998 and 1999 compared to fiscal year 1997 results primarily from increased Page 20 Research and Development (R&D) tax credits and other state income tax credits. The Company anticipates that its effective tax rate in fiscal year 2000 will be approximately the same as experienced in fiscal year 1999 assuming continued extension of the federal R&D tax credit. Bookings and Backlog. Funded bookings were $168.5 million, $163.0 million and $174.4 million in fiscal year 1997, 1998 and 1999, respectively. Government contract bookings were $103.5 million, $102.8 million and $120.1 million during fiscal years 1997, 1998 and 1999, respectively. Commercial contract bookings were $65.0 million, $60.2 million and $54.3 million during fiscal years 1997, 1998 and 1999, respectively. The Company's backlog increased from $83.9 million at the end of fiscal year 1997 to $93.6 million at the end of fiscal year 1998 and further increased to $102.6 million at the end of fiscal year 1999. Certain Trends and Uncertainties. The Company's revenues and results of operations are subject to fluctuation from period to period. Factors that could cause the Company's revenues and operating results to vary from period to period include: timing, bidding activity and delivery of significant commercial and government contracts and orders; mix of products and systems sold, and services provided; disruptions in delivery of components or subsystems; underestimating costs on fixed-price contracts particularly for software and hardware development; termination of contracts; regulatory developments; and general economic conditions. Research and development expenses include both research and development costs as well as bid and proposal expenses. Bid and proposal expenses vary significantly from quarter to quarter based on the number of proposals being prepared at any time. These requests for proposals are not received evenly during the year or in any predictable pattern. LIQUIDITY AND CAPITAL RESOURCES Working capital increased from $66.4 million to $73.1 million at March 31, 1997 and March 31, 1998, respectively, and increased to $76.3 million at March 31, 1999. The increase in working capital at March 31, 1998 was attributable to cash generated from net income and proceeds from transactions under stock plans. The increase in working capital at March 31, 1999 was primarily attributable to an increase in receivables resulting from increased revenues. Net cash provided by operating activities for the years ended March 31, 1997, 1998 and 1999 was $18.6 million, $4.4 million and $.3 million respectively. The decrease from fiscal year 1997 to fiscal year 1998 is the result of lower net income and an increase in inventories to support future delivery of commercial products. The decrease from fiscal year 1998 to fiscal year1999 is the result of lower net income and an increase in receivables. Accounts receivable as of March 31, 1999 includes a $3.9 million secured note receivable for one of the Company's customers. In January 1999, due to the customer's liquidity condition, the Company agreed to exchange its trade receivables for a note receivable secured by an interest in certain of the customer's equipment with an historical cost of $13.4 million. The note bears interest at 10% per annum and matured on May 1, 1999. The Company's customer has paid $500,000 on May 1, 1999 and asked for an extension on the balance of this note. The Company is considering the requested extension. The Company expects to recover the full value of the note receivable. The Company used its cash for the purchase of property and equipment totaling $5.5 million, $5.9 million and $5.0 million in fiscal years 1997, 1998 and 1999, respectively. Capital expenditures in recent years are primarily attributable to increased investments in electronic test equipment to support both commercial and Government activities. During fiscal years 1997, 1998 and 1999 $1.6 million, $1.6 million and $.6 million, respectively, of net cash was provided by financing activities. These amounts represent primarily the proceeds from transactions under the stock plans. The Company has a bank credit commitment of $15.0 million, which it has used to augment cash flow needs and to secure term loans or standby letters of credit. Available borrowings under this line at March 31, 1999, were $15.0 million. Under this credit line, the Company must maintain certain financial covenants. The Company was in compliance with all covenants throughout fiscal year 1999. At March 31, 1999, the Company's long-term obligations (including current maturities) and capital lease obligations totaled approximately $.1 million. At March 31, 1999 cash and cash equivalents of $19.4 million were held significantly in money market accounts. In addition, short-term investments of $9.9 million were held in U.S. Government Treasury instruments. The Company believes that its current cash position funds generated from operations and funds available from its existing bank credit agreement, will be adequate to meet the Company's requirements for working capital, capital expenditure and debt service for the next fiscal year. Page 21 YEAR 2000 ISSUE The "Year 2000 Issue", also known as "Y2K", exists because many computer programs store and process dates using only the last two digits of the year in the date field. If not corrected, many computer applications could create miscalculations or erroneous results causing disruptions of operations. The Company has made this issue a significant priority and has formed an Interdisciplinary Steering Committee, which has been meeting regularly since January 1998, dedicated to the evaluation and mitigation of any Y2K issues. The Committee is responsible for overseeing and providing guidelines to four task force committees whose function is to focus on specific areas of the Y2K issue, namely products, software, customers and suppliers. The Y2K Plan for the Company has been presented to and approved by the Board of Directors. In March 1998, the Corporate Steering Committee implemented a remediation plan to address mission-critical software (mission-critical is defined as software or systems that can seriously impair the Company's ability to conduct its business) and products impacted by the Y2K issue. This plan included Information Technology "IT" systems, and non-IT systems such as building security systems. Our Information Technology "IT" system is compliant and currently operating without any significant problems for the Company's fiscal year 2000 which commenced on April 2, 1999. Other mission-critical software has been tested or is in the process of being tested, updated, or replaced. This was the first two phases of our plan. At this time the costs associated with these phases have been less than $100,000, and software that has been replaced has been done so in conjunction with planned changes not in connection with the Y2K issue. The third phase of our plan involved our assessment of our products that might be impacted by the Y2K. At this time 96% of our products over the last 10 years have been reviewed, and in our assessment there is not an issue. The remaining 4% are being reviewed as well as our current products. We estimate that we will complete this review by the end of our first quarter of fiscal year 2000. The final phase of our plan is to draft and put into effect any contingency plan necessary to mitigate any Y2K issues. This phase is also to be completed by June 1999. The Company does not anticipate costs associated with the continued implementation of this plan or its findings on any phase of the plan to have a material impact on the Company's financial position, capital resources, or results of operation. The above statements describing the Company's plans and objectives for handling the Y2K Issue and the expected impact, involve risks and uncertainties that could cause actual results discussed above, therefore having an adverse effect on future results of operations. Uncertainties that might cause such a difference include, but are not limited to, delays in executing the plan or unforeseen costs associated with the implementation of the plan. Further, even if the Company successfully implements the plan, there is no assurance that the company will not be adversely affected by the failure of others to become Year 2000 compliant. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK The Company's interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of the Company's investments are in short-term instruments. Due to the nature of short-term investments, the Company has concluded that there is no material interest rate risk exposure. Therefore no quantitative tabular disclosures are required. Page 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Stanford Telecommunications, Inc.: We have audited the accompanying consolidated balance sheets of Stanford Telecommunications, Inc. (a Delaware Corporation) and subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stanford Telecommunications, Inc. and subsidiaries as of March 31, 1999 and 1998 and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended March 31, 1999 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP San Jose, California May 1, 1999
Consolidated Statements of Income Year Ended March 31, (In thousands, except for per share amounts) 1999 1998 1997 - ----------------------------------------------------------------------------------------------- Revenues $165,405 $153,260 $167,002 Cost of revenues 131,311 116,629 127,432 -------- -------- -------- Gross profit 34,094 36,631 39,570 -------- -------- -------- Expenses: Research and development 14,105 13,647 11,868 Marketing and administrative 19,926 17,321 16,808 -------- -------- -------- Total expenses 34,031 30,968 28,676 -------- -------- -------- Operating income 63 5,663 10,894 Interest income 1,880 1,896 1,336 -------- -------- -------- Income before provision for income taxes 1,943 7,559 12,230 Provision for income taxes 602 2,343 4,219 -------- -------- -------- Net income $ 1,341 $ 5,216 $ 8,011 ======== ======== ======== Earnings per share- basic and diluted $ 0.10 $ 0.40 $ 0.61 ======== ======== ======== Shares used in computing basic earnings per share 12,992 12,902 12,775 ======== ======== ======== Shares used in computing diluted earnings per share 13,145 13,179 13,070 ======== ======== ========
The accompanying notes are an integral part of these financial statements Page 23
Consolidated Balance Sheets March 31, (in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------ Assets Current assets: Cash and cash equivalents $ 19,400 $ 13,914 Short-term investments 9,934 19,493 Accounts receivable 30,086 26,958 Unbilled receivables 23,955 20,911 Inventories 13,973 14,276 Prepaid taxes and other 3,963 1,919 --------- --------- Total current assets 101,311 97,471 --------- --------- Property and equipment at cost: Electronic test equipment 50,557 46,768 Furniture and fixtures 4,021 3,887 Leasehold improvements 4,472 3,996 --------- --------- 59,050 54,651 Less: Accumulated depreciation and amortization (46,385) (40,516) --------- --------- Net property and equipment 12,665 14,135 --------- --------- Other assets 1,087 535 --------- --------- $ 115,063 $ 112,141 Liabilities and Stockholders' Equity Current liabilities: Current maturities of long-term obligations $ 40 $ 44 Accounts payable 10,426 10,739 Advance payments from customers 2,738 1,909 Accrued liabilities 7,801 8,218 Accrued income taxes 3,961 3,462 --------- --------- Total current liabilities 24,966 24,372 --------- --------- Long-term obligations, less current maturities 73 41 --------- --------- Other long-term liabilities 595 855 --------- --------- Commitments and contingencies (Notes 3 and 7) Stockholders' equity: Common stock - par value $.01; 25,000 shares authorized; 13,067 and 12,975 shares issued and outstanding in 1999 and 1998, respectively 131 130 Paid-in capital 43,573 42,359 Retained earnings 45,725 44,384 --------- --------- Total stockholders' equity 89,429 86,873 --------- --------- $ 115,063 $ 112,141
The accompanying notes are an integral part of these financial statements Page 24
Consolidated Statements of Stockholders' Equity Total Common Stock Paid-In Retained Stockholders' (in thousands) Shares Amount Capital Earnings Equity - --------------------------------------------------------------------------------------------------------- Balance, March 31, 1996 12,656 $ 127 $ 38,305 $ 31,157 $ 69,589 Sale of common stock under Employee Stock Purchase Plan 67 -- 959 -- 959 Sale of common stock under Employee Stock Option Plan 105 1 729 -- 730 Issuance of common stock as awards to employees 5 -- 102 -- 102 Tax benefits from employee stock transactions -- -- 315 -- 315 Net income -- -- -- 8,011 8,011 -------- -------- -------- -------- -------- Balance, March 31, 1997 12,833 128 40,410 39,168 79,706 Sale of common stock under Employee Stock Purchase Plan 91 1 1,198 -- 1,199 Sale of common stock under Employee Stock Option Plan 49 1 417 -- 418 Issuance of common stock as awards to employees 2 -- 50 -- 50 Tax benefits from employee stock transactions -- -- 284 -- 284 Net income -- -- -- 5,216 5,216 -------- -------- -------- -------- -------- Balance, March 31, 1998 12,975 130 42,359 44,384 86,873 - --------------------------------------------------------------------------------------------------------- Sale of common stock under Employee Stock Purchase Plan 141 1 1,299 -- 1,300 Sale of common stock under Employee Stock Option Plan 36 1 290 -- 291 Issuance of common stock as awards to employees 2 -- 29 -- 29 Tax benefits from employee stock transactions -- -- 484 -- 484 Repurchases of common stock (87) (1) (888) -- (889) Net income -- -- -- 1,341 1,341 -------- -------- -------- -------- -------- Balance, March 31, 1999 13,067 $ 131 $ 43,573 $ 45,725 $ 89,429 ======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements Page 25
Consolidated Statements of Cash Flows Year Ended March 31, (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Operating activities: Net income $ 1,341 $ 5,216 $ 8,011 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,417 5,807 5,558 Issuances of stock to employees under award plans 29 50 102 Change in provision for losses on receivables, contracts and inventories (1,020) (2,041) 1,388 Loss on disposition of property and equipment 56 20 305 (Increase) decrease in assets: Receivables billed and unbilled (5,594) (1,549) (11,803) Inventories 745 (6,934) 11,446 Prepaid taxes and other assets (2,112) 2,021 724 Increase (decrease) in liabilities: Accounts payable, advance payments and accrued liabilities 184 2,782 1,489 Other long-term liabilities (260) (55) (76) Accrued income taxes 499 (954) 1,463 -------- -------- -------- Net cash provided by operating activities 285 4,363 18,607 -------- -------- -------- Investing activities: Proceeds from maturities of short-term investments 43,117 33,793 33,746 Purchases of short-term investments (33,558) (28,212) (44,693) Purchases of property and equipment (5,003) (5,852) (5,501) Proceeds from sale of property and equipment -- 3 25 -------- -------- -------- Net cash provided by (used in) investing activities 4,556 (268) (16,423) -------- -------- -------- Financing activities: Payments on capital lease obligations (57) (33) (47) Repurchases of common stock (889) -- -- Proceeds from transactions under stock plans 1,591 1,617 1,689 -------- -------- -------- Net cash provided by financing activities 645 1,584 1,642 -------- -------- -------- Net increase in cash and cash equivalents 5,486 5,679 3,826 Cash and cash equivalents at beginning of year 13,914 8,235 4,409 -------- -------- -------- Cash and cash equivalents at end of year $ 19,400 $ 13,914 $ 8,235 ======== ======== ======== Supplemental Cash Flow Information: Cash paid for: Interest $ 7 $ 19 $ 7 Income taxes $ 1,878 $ 942 $ 1,736
The accompanying notes are an integral part of these financial statements Page 26 Notes to Consolidated Financial Statements NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company. Stanford Telecommunications, Inc. (the Company), incorporated in Delaware, designs, manufactures and markets advanced digital telecommunication products and systems to establish or enhance communications via satellites, terrestrial wireless and cable. The Company's technical strengths include: system design, communication waveforms, modulation and demodulation techniques, ASIC design Radio Frequency (RF) antennas and downconverters, software and firmware, Asynchronous Transfer Mode (ATM) design and advanced manufacturing techniques and processes. The Company's government revenues are generated from U.S. government contracts where the Company may be either the prime contractor or a subcontractor. The Company's commercial revenues include contract manufacturing revenues, sales of integrated circuits, circuit boards and subsystems, wireless broadband products, and development programs. In addition to the U.S. Government, the principle markets for the Company's products include telecommunications and electronics markets primarily located in the U.S. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Fiscal Year. The Company's fiscal year ending March 31, 1999 is comprised of one 14-week quarter (quarter ended June 30, 1998) and three 13-week quarters, each of which ends on the Thursday closest to the corresponding calendar quarter end. The Company's fiscal year 1998 consisted of four 13-week quarters. For convenience, the Company has presented its fiscal year as ending on March 31. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The Company prepares and evaluates on-going cost to complete estimates in order to monitor its project costs. These estimates form the basis for calculating revenues and gross margins for each project under the percentage-of-completion method of accounting. Due to uncertainties inherent in the estimation process, estimated total costs are subject to revision on an on-going basis as additional information becomes available. The estimates are subject to change and actual results could be materially different from these estimates. Cash Equivalents. The Company considers cash equivalents to be cash in the bank and money market accounts. Short-term Investments. The Company's short-term investments consist of US Treasury securities that mature at various dates within one year. The Company classifies these securities as held-to-maturity and carries them at amortized cost. At March 31, 1999, the fair value of the Company's investments approximated amortized costs and, as such, unrealized holding gains were insignificant. At March 31, 1998 unrealized holding gains totaled $270,000. Receivables. Accounts receivable as of March 31, 199, included a $3.9 million secured note receivable from one of the Company's customers. In January 1999, due to the customer's liquidity condition, the Company agreed to exchange it's trade receivables for a note receivable secured by an interest in certain of the customer's equipment with a historical cost of $13.4 million. The note bears interest at 10% per annum and matured on May 1, 1999. The Company's customer has paid $500,000 on May 1, 1999 and asked for an extension on the balance of this note. The Company is considering the requested extension. The Company provides a reserve for doubtful accounts where circumstances indicate that one is necessary. As of March 31, 1999 and 1998 the Company's reserve for doubtful accounts was $533,000 and $711,000, respectively. Unbilled Receivables. Unbilled receivables represent differences between billings and revenues recognized. At March 31, 1999, approximately 62% of the unbilled receivables represent revenues recognized on fixed price contracts under the percentage-of-completion method of accounting which exceed the amounts that are billable according to contract terms and are expected to be significantly collected within one year. In general, the Company is authorized to bill between 75% to 100% of the costs expended on a contract. The remaining portion of unbilled receivables at March 31, 1999 represents timing differences for billings and revenues recognized on cost type contracts and differences between actual indirect rates and government approved billing rates. The indirect rates are not billable until approval of final indirect rates by the respective governmental agencies. The Company has received final indirect rate approval for charges through fiscal 1995. Page 27 Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market. Cost includes materials, labor and related indirect expenses. General and administrative costs are only included in inventory for government contracts, as such costs are reimbursed by the government. Work-in-process mainly represents costs incurred on short-term contracts. The components of inventory are as follows: March 31, (in thousands) 1999 1998 ---------------------------------------------------------------------- Work-in-process $ 11,250 $ 11,176 Finished goods 2,696 3,066 Allocated general and administrative costs 83 136 Less: Progress billings (56) (102) -------- -------- $ 13,973 $ 14,276 ======== ======== The Company purchases certain inventories that have long purchase lead times and may be single sourced. Although there are a limited number of manufacturers of these particular inventory items, management believes that other suppliers could provide similar inventory on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which may affect operating results adversely. Depreciation and Amortization. Depreciation and amortization are provided over the estimated useful lives of the assets (3 to 7 years or the term of the lease if shorter), using the straight-line method. Accrued Liabilities . Accrued liabilities consist of the following: March 31, (in thousands) 1999 1998 --------------------------------------------------------------------- Compensation and employee benefits $6,500 $6,543 Accrued contract cost 573 956 Other 728 719 ------ ------ $7,801 $8,218 ====== ====== Revenue Recognition. The Company principally uses the percentage-of-completion method of accounting for contract revenues. The percentage-of-completion method is based on total costs incurred to date compared with estimated total costs upon completion of contracts. Certain contracts provide for milestone billings which are recorded as revenues when the defined milestones are met. The Company recognizes revenues for standard, off-the-shelf products and certain commercial products upon shipment to the customer. The Company charges all losses on contracts to cost of sales in the period when the loss is known. The principal government agencies to which the Company sells are the Department of Defense (DoD), NASA and the FAA. The DoD accounted for 34%, 33%, and 33% of total revenues in 1999, 1998 and 1997, respectively. The Company has a contract with another company whose Chief Executive Officer is a Board member of the Company. In fiscal year 1999, the Company has recognized $580,000 in revenues and $467,000 in cost of revenues related to this contract Earnings Per Share. Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding. Diluted EPS is computed by dividing net income by the diluted weighted average number of common shares outstanding. Diluted EPS reflects the potential dilution that could occur upon exercise of outstanding stock options. The following is a summary of the calculation of the number of shares used in calculating basic and diluted EPS: (in thousands) 1999 1998 1997 --------------------------------------------------------------------- Shares used to compute basic EPS 12,992 12,902 12,775 Add effect of dilutive securities: Stock options 153 277 295 ------ ------ ------ Shares used to compute diluted EPS 13,145 13,179 13,070 ====== ====== ====== Options to purchase 679,000, 86,000 and 75,000 weighted shares outstanding during fiscal years 1999, 1998 and 1997 respectively were excluded from the computation of diluted EPS because the options' exercise prices were greater than the average market price of the Company's common stock during those years. Page 28 Comprehensive Income. Effective April 1, 1998 the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income", which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. For fiscal years 1999, 1998 and 1997, the Company's net income was equal to comprehensive income as defined in SFAS 130. Concentration of Credit Risk. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, short-term investments, and trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to a balanced mix of receivables due from the U.S. government and other customers which are dispersed across different industries and geographic regions. Classification. Consistent with industry practice, assets and liabilities relating to government long-term contracts are classified as current although a portion of these amounts is not expected to be realized within one year. NOTE 2. LINE OF CREDIT On December 18, 1998, the Company amended its bank line agreement extending the expiration date until December 17, 1999. The Company has $15,000,000 in credit under this line, all of which is available at March 31, 1999. Under this line of credit the Company must maintain certain financial covenants. As of March 31, 1999, the Company was in compliance with all such covenants. NOTE 3. COMMITMENTS The Company leases its buildings and other equipment under noncancelable operating lease agreements that expire at various dates through 2009. The Company also leases certain office equipment under capital leases which expire during 2004. The terms of several of the Company's leases provide for deferral of cash rental payments over various periods. Rental expense under these agreements is recognized on a straight-line basis. As of March 31, 1999 the Company has accrued approximately $518,000 in related expense which is included in other long-term liabilities in the accompanying consolidated balance sheets. Approximate future minimum lease payments under these leases are as follows (in thousands): Year Ending March 31, Operating Leases Capital Leases -------------------------------------------------------------------- 2000 $5,098 $39 2001 4,976 26 2002 3,501 25 2003 3,553 24 2004 3,045 4 Thereafter 9,631 -- ------- ----- Total minimum lease payments $29,804 118 ======= Less: interest (5) ----- 113 Less:current portion (40) $ 73 Lease payments and other rental expenses charged to operations totaled approximately $5,675,000, $4,676,000, and $4,279,000 for the years ended March 31, 1999, 1998 and 1997, respectively. During 1999, 1998, and 1997 the Company acquired equipment under capital leases in the amounts of $85,000, $41,000, and $30,000, respectively. Page 29 NOTE 4. RETIREMENT PLAN The Company maintains a defined contribution plan covering substantially all employees. Amounts contributed are based on a percentage of eligible employees annual compensation. Percentages contributed equaled 3% in 1999, 3% in 1998 and 4% in 1997. The Company's contributions totaled approximately $1,645,000 in 1999, $1,403,000 in 1998, and $1,566,000 in 1997. The Plan also permits eligible employees to make voluntary before-tax salary deferral contributions. 5. Income Taxes The provision for income taxes charged to operations was comprised of the following:
Year Ended March 31, (in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------- Provision for (benefit from) income taxes: Current Federal $ 1,140 $1 ,570 $ 3,602 State 111 176 555 Deferred, net Federal (772) 647 96 State 123 (50) (34) ------- ------- ------- Net tax provision $ 602 $ 2,343 $ 4,219 ======= ======= =======
The provision for income taxes for the three years ended March 31, 1999 differs from the U.S. statutory rate principally as follows:
Year Ended March 31, 1999 1998 1997 - ------------------------------------------------------------------------ % % % Statutory Federal income tax rate 34.0 34.0 35.0 State income taxes, net of Federal benefit 1.5 1.5 2.8 Research and development credits (3.8) (7.3) (3.6) Other (0.7) 2.8 0.3 ---- ---- ---- Effective income tax rate 31.0 31.0 34.5 ==== ==== ====
The major components of deferred tax assets and liabilities consisted of the following:
Year Ended March 31, (in thousands) 1999 1998 - ---------------------------------------------------------------------------------------- Reserves and accruals not currently deductible for tax purposes $ 3,134 $ 3,235 Tax credits 520 373 Accelerated depreciation 729 223 ------- ------- Total deferred tax asset 4,383 3,831 Percentage of completion contract accounting (513) (610) ------- ------- Net deferred tax asset $ 3,870 $ 3,221 ======= =======
The $3,870,000 net deferred tax asset as of March 31, 1999 was allocated on the accompanying consolidated balance sheets with $729,000 included in other assets, and $3,141,000 included in prepaid taxes and other. Page 30 NOTE 6. COMMON STOCK In August 1998, the Board of Directors authorized a plan to repurchase the Company's common stock in open-market transactions. The plan authorizes the purchase of up to 1,000,000 shares of STII Common Stock. Since the authorization of this plan, the Company repurchased 86,500 shares in open market transactions at an average price of $10.27 per share. On January 29, 1997, the Company's Board of Directors declared a two-for-one split of the Company's common stock effected in the form of a 100% stock dividend distributed on February 28, 1997 to stockholders' of record as of February 10, 1997. Approximately 6.4 million shares of common stock were issued in connection with the split. The stated par value of each share was not changed from $.01. A total of $64,000 was reclassified from the Company's paid-in capital account to the Company's common stock account. All share and per share amounts included in these financial statements have been restated to retroactively reflect the stock split. On May 9, 1995, the Board of Directors adopted a Stockholder's Rights Plan and declared a dividend of one Common Share Purchase Right (the "Right") for each share of the Company's common stock outstanding on May 25, 1995. Each Right entitles the holder thereof to purchase one share of the Company's common stock for $30. The Rights will be exercisable if a person or group acquires 15% or more of the Company's common stock. Upon such acquisition, each Right (other than those held by the acquiring person or group) will be exercisable for the number of shares of the Company's common stock having a market value at that time of twice the exercise price of the Right. If the Company subsequently enters into certain business combinations, each Right (other than those held by the acquiring person or group) will be exercisable for that number of shares of common stock of the other party to the business combination having a market value of two times the exercise price of the Right. The Rights are subject to redemption at the option of the Board of Directors at a price of $.01 per Right. The Rights expire on May 9, 2005. The Company's Stock Option Plan provides for the issuance of either incentive or non-qualified options to employees and certain non-employee directors. Incentive options can be granted at an exercise price not less than fair market value of the stock on the date of grant. Non-qualified options can be granted at an exercise price not less than 85% of the fair market value of the stock on the date of the grant. Options granted under the Plan generally vest 25% one year after the date of grant and ratably thereafter over three years and options generally expire ten years from the date of grant. The Plan will expire in the year 2001. Information with respect to this plan is as follows:
Stock Option Plan --------------------------------------------- Available Average for Grant Outstanding Option Prices - ------------------------------------------------------------------------------- Balance at March 31, 1996 1,143,830 697,366 $ 7.49 Granted (375,300) 375,300 $16.54 Exercised -- (64,534) $ 7.65 Terminated 45,711 (45,711) $10.39 ---------- ---------- ------ Balance at March 31, 1997 814,241 962,421 $10.92 Granted (167,900) 167,900 $16.57 Exercised -- (49,409) $ 8.51 Terminated 45,222 (45,222) $13.08 ---------- ---------- ------ Balance at March 31, 1998 691,563 1,035,690 $11.85 Granted (558,350) 558,350 $14.91 Exercised -- (35,812) $ 8.11 Terminated 35,400 (35,400) $15.67 ---------- ---------- ------ Balance at March 31, 1999 168,613 1,522,828 $12.97 ========== ========== ======
Page 31 Under the Stock Option Plan the options outstanding on March 31, 1999 were as follows:
Options Outstanding Options Exercisable ------------------- ------------------- Range of Exercise Number Weighted Average Weighted Average Number Weighted Average Prices Outstanding remaining Exercise Exercisable Exercise Contractual Life Price Price In Years - ----------------------------------------------------------------------------------------------------------------- $2.50 - $ 7.38 322,870 4.52 $ 6.85 309,199 $ 6.82 $7.88 - $13.63 235,008 3.18 $ 9.65 198,508 $ 9.14 $14.25 - $14.25 342,100 9.99 $ 14.25 -- -- $14.38 - $16.00 382,250 8.13 $ 15.46 102,350 $ 14.84 $16.75 - $31.50 240,600 7.65 $ 18.66 160,300 $ 19.37 ---------- ---- --------- ------- ----------- Total 1,522,828 6.94 $ 12.97 770,357 $ 11.10
Pro Forma Information. The Company applies APB No.25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for the stock compensatory plans (the Plans) described above. Accordingly, no compensation cost has been recognized for the Plans. If compensation cost for the Plans had been determined consistent with SFAS No.123 "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below):
(in thousands except per share data) 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Net income as reported $ 1,341 $ 5,216 $ 8,011 Pro forma (loss) net income $ (32) $ 4,037 $ 6,755 Basic and diluted earnings per share as reported $ 0.10 $ 0.40 $ 0.61 Pro forma basic and diluted (loss) earnings per share $ (0.00) $ 0.31 $ 0.52
Because the method of accounting prescribed by SFAS No.123 has not been applied to options granted prior to April 1, 1995, and because the Black-Scholes option valuation model was developed for traded options and requires the input of subjective assumptions, the resulting pro forma compensation cost may not be representative of that to be expected in future years The fair value of each option grant is estimated based on the date of grant using the Black-Scholes option pricing model with the following assumptions used for fiscal years 1999, 1998 and 1997: risk-free interest rates of approximately 5.3% for 1999, 6.6% for 1998 and 6.0% for 1997, dividend yields of 0%, volatility factor of the expected market price of the Company's common stock of 74%, and a weighted average expected life of an option of approximately three years. The weighted average fair values of options granted in fiscal years 1999, 1998 and 1997 respectively were $8.03, $8.33 and $7.34. Under an Employee Stock Purchase Plan, the Company makes offerings of its common stock to its employees at such time and of such duration as its Board determines. A total of 700,000 shares of common stock has been reserved for issuance. In fiscal years 1999, 1998 and 1997, the Company has sold 140,883 shares, 90,631 shares and 66,512 shares. The weighted average fair value of such shares for fiscal years 1999, 1998 and 1997 were $3.88, $4.88 and $5.27 respectively. As of March 31,1999, 234,318 shares remained available for purchase. NOTE 7. LITIGATION AND CONTINGENCIES The Company is contingently liable with respect to lawsuits and other matters which arise in the normal course of business. The Company must comply with detailed government procurement and contracting regulations. The Company has prepared and presented documentation and support to a customer addressing its post-award audit recommendations. Management believes that the outcome of such contingencies will not have a material adverse effect on the Company's financial position or results of operations. Page 32 NOTE 8. SEGMENT REPORTING On March 31, 1999 Stanford Telecommunications, Inc. adopted statement of Financial Accounting Standard (SFAS) Number 131 "Disclosures about segments of an Enterprise and Related Information." SFAS 131 establishes standards for public companies relating to the reporting of financial and descriptive information about their operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker when deciding how to allocate resources and when assessing performance. The Company's chief operating decision making group is the Executive Staff, which is comprised of the Chief Executive Officer and Executive Vice Presidents. The adoption of SFAS 131 did not have a material effect on the company's primary financial statements, but has expanded the disclosure of segment information contained elsewhere herein. The Company classifies its business into three operating segments: Base Business, Wireless Broadband and Contract Manufacturing. Base Business consists of multiyear hardware and software engineering services for data and voice communications systems. Wireless Broadband consists of the development and production of products for two-way transmission of high-speed digital data and voice. Contract Manufacturing provides manufacturing services for both the Company's products as well as products for other companies. Stanford Wireless Broadband Inc., consists of Contract Manufacturing and Wireless Broadband segments. Information as to the operation of the company in different business segments is set forth below based on the nature of the products and services offered. The company evaluates performances based on several functions of which the primary financial measure is business segment operating income. The accounting polices of the segments are the same as those described in the summary of significant accounting policies within the notes within the consolidated financial statements. Intersegment sales are generally accounted for at cost. The following summarize selected financial information by segment:
Non Segment Base Wireless Contract Property, Plant Business Broadband Manufacturing & Equipment Total - ---------------------------------------------------------------------------------------------------------------------------- Operating Segments 1999 Revenues before elimination $138,777 $ 3,543 $ 31,236 $173,556 Revenues-Other segments (3,837) (58) (4,256) (8,151) Revenues-Unaffiliated customers 134,940 3,485 26,980 165,405 Operating Income (loss) (1) 15,599 (12,203) (3,333) 63 Property Plant and Equipment 7,153 2,423 2,301 $788 12,665 Capital Expenditures 3,183 1,297 130 393 5,003 - ---------------------------------------------------------------------------------------------------------------------------- 1998 Revenues before elimination 127,596 2,571 30,625 160,792 Revenues-Other segments (2,423) -- (5,109) (7,532) Revenues-Unaffiliated customers 125,173 2,571 25,516 153,260 Operating Income (loss) (1) 16,210 (7,371) (3,176) 5,663 Property Plant and Equipment 7,747 2,079 3,464 845 14,135 Capital Expenditures 2,834 1,209 1,457 352 5,852 - ---------------------------------------------------------------------------------------------------------------------------- 1997 Revenues before elimination 133,997 2,047 40,556 176,600 Revenues-Other segments (3,136) -- (6,462) (9,598) Revenues-Unaffiliated customers 130,861 2,047 34,094 167,002 Operating Income (loss) (1) 14,980 (4,315) 229 10,894 Property Plant and Equipment 8,331 1,452 3,370 960 14,113 Capital Expenditures $ 3,086 $ 636 $ 1,126 $653 $ 5,501
The Company's assets are located in the United States. Through March 31, 1999, the Company has derived its revenues primarily from customers located in the United States. (1) Operating Income of $63,000, $5.7 million and $10.9 million in fiscal years 1999, 1998 and 1997 include intracompany eliminations of profit of approximately $0.3 million, $0.5 million and $0.4 million respectively, related to the Contract Manufacturing segment. Page 33 Selected Consolidated Financial Data
(in thousands, except for per share data) 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- SUMMARY OF CONSOLIDATED OPERATIONS Revenues $165,405 $153,260 $167,002 $145,100 $114,384 Operating income 63 5,663 10,894 8,444 1,620 Net income 1,341 5,216 8,011 6,173 131 Earnings per share - basic and diluted 0.10 0.40 0.61 0.49 0.01 Shares used in computing basic earnings per share 12,992 12,902 12,775 12,556 12,408 Shares used in computing diluted earnings per share 13,145 13,179 13,070 12,702 12,484 CONSOLIDATED FINANCIAL POSITION Current assets $101,311 $ 97,471 $ 89,131 $ 76,152 $ 71,994 Current liabilities 24,966 24,372 22,721 19,657 24,035 Working capital 76,345 73,099 66,410 56,495 47,959 Current ratio 4.1 4.0 3.9 3.9 3.0 Property and equipment, net 12,665 14,135 14,113 14,500 15,608 Total assets $115,063 $112,141 $103,518 $ 90,948 $ 88,005 Long-term debt 73 41 30 85 161 Stockholders' equity 89,429 86,873 79,706 69,589 62,097 Common stock outstanding 13,067 12,975 12,833 12,656 12,468 Book value per share $ 6.84 $ 6.70 $ 6.21 $ 5.50 $ 4.98
CONSOLIDATED QUARTERLY RESULTS Statements of Operations Data. The following table presents the Company's consolidated financial results by quarter for fiscal years 1999, 1998 and 1997. These consolidated quarterly financial results are unaudited. In the opinion of management, however, they have been prepared on the same basis as the audited financial information and include all adjustments necessary for a fair presentation of the information set forth therein. The consolidated operating results for any quarter are not necessarily indicative of the results that may be expected for any future period.
(in thousands except per share data) 1999 - ------------------------------------------------------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - ------------------------------------------------------------------------------------------------- Revenues $ 44,362 $ 40,705 $ 37,132 $ 43,206 Gross profit 9,443 7,981 7,276 9,394 Net income (loss) 1,039 342 (479) 439 Earnings (loss) per share-basic and diluted $ 0.08 $ 0.03 $ (0.04) $ 0.03 1998: - ------------------------------------------------------------------------------------------------- Revenues $ 35,331 $ 36,838 $ 40,713 $ 40,378 Gross profit 8,901 9,373 9,935 8,422 Net income 1,382 928 1,577 1,329 Earnings per share-basic and diluted $ 0.11 $ 0.07 $ 0.12 $ 0.10 1997: - ------------------------------------------------------------------------------------------------- Revenues $ 40,843 $ 41,058 $ 42,028 $ 43,073 Gross profit 8,850 10,169 9,723 10,828 Net income ,888 1,911 1,960 2,252 Earnings per share-basic and diluted $ 0.14 $ 0.15 $ 0.15 $ 0.17
page 34 SELECTED COMMON STOCK DATA Stanford Telecommunications, Inc. Common Stock was offered to the public on October 6, 1983, and since that date has been traded on the NASDAQ stock market under the symbol STII. During January 1994, the Company completed a secondary offering of its common stock. On February 28, 1997 the Company distributed a two-for-one split of the Company's common stock to stockholders' of record as of February 10, 1997. The price per share reflected in the table represents the closing prices in the NASDAQ National Market System. The quotations represent inter-dealer quotations, without retail markups, markdowns or commissions, and may not necessarily represent actual transactions. The Company has not paid cash dividends on its Common Stock since its incorporation and anticipates that for the foreseeable future it will continue to retain its earnings for use in its business. A covenant under the current Line of Credit would require prior approval of any cash dividend by the Bank. On March 31, 1999, there were approximately 1,793 holders of record of the Company's Common Stock.
1999 1998 ---- ---- Fiscal year High Low High Low - ---------------------------------------------------------------------------- First Quarter 19 11 13/16 20 1/4 14 1/8 Second Quarter 15 1/2 8 1/2 28 15 Third Quarter 14 11/16 6 7/8 26 15 Fourth Quarter 18 1/4 11 25/32 20 1/2 14
NASDAQ TRADING VOLUME Fiscal 1999 -16,945,029 shares / Fiscal 1998 -20,213,599 shares NASDAQ MARKET MAKERS Oppenheimer & Co Inc. . Mayer & Schweitzer Inc. Weeden & Co. Inc. John G. Kinnard & Co., Inc. Knight Securities L.P. Dain Rauscher Inc. Sherwood Securities Troster Singer Corp. Herzog, Heine, Geduld, Inc. Sutro & Co. Inc. Page 35 EX-21.1 11 SUBSIDIARIES EXHIBIT NUMBER 21.1 SUBSIDIARIES Stanford Wireless Broadband, Inc., a Delaware corporation Stanford Telecommunications International, Inc., a U.S. Virgin Islands corporation (foreign sales corporation) EX-23.1 12 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT NUMBER 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (file nos. 33-45090, 33-68534, 33-63771 and 333-61623). /s/ Arthur Andersen LLP San Jose, California June 25, 1999 EX-27 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS MAR-31-1999 APR-01-1998 MAR-31-1999 19,400 9,934 54,041 0 13,973 101,311 59,050 46,385 115,063 24,966 0 0 0 131 89,298 115,063 165,405 165,405 131,311 165,342 0 0 0 1,943 602 1,341 0 0 0 1,341 .10 .10
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