-----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, RR7jYJIlcxIbdUGpMvY5wgyw/86WfHCtzIl0DkMpwTJiHHlqK9dQd5O9zx6VFAbM 4cNaUPqW961pP0Ece7ZCUg== 0000950123-97-002699.txt : 19970329 0000950123-97-002699.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950123-97-002699 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COHERENT COMMUNICATIONS SYSTEMS CORP CENTRAL INDEX KEY: 0000921147 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 112162982 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-24308 FILM NUMBER: 97567154 BUSINESS ADDRESS: STREET 1: 44084 RIVERSIDE PRKWY STREET 2: LANDSDOWNE BUSINESS CENTER CITY: LEESBURG STATE: VA ZIP: 22075 BUSINESS PHONE: 7037296400 MAIL ADDRESS: STREET 1: 60 COMMERCE DRIVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K405 1 COHERENT COMMUNICATIONS SYSTEMS CORP. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 Commission File No. 0-24303 COHERENT COMMUNICATIONS SYSTEMS CORPORATION (Exact name of registrant as specified in its charter) Delaware 11-2162982 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 44084 Riverside Parkway Lansdowne Business Center Leesburg, Virginia 22075 (703) 729-6400 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) Securities registered pursuant to section 12(b) of the Act: Title of each class Name of each exchange on which registered None Not applicable Securities registered pursuant to section 12(g) of the Act: Common Stock, Par Value $.01 Per Share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 495 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [X] The aggregate market value of voting stock held by nonaffiliates of the registrant as of March 13, 1997, was approximately $153,044,650 based on the sale price of the Common Stock on March 13, 1997, of $16.75 as reported by the NASDAQ National Market System. As of March 13, 1997, the registrant had outstanding 15,146,522 shares of its Common Stock, par value $.01 per share. Documents incorporated by reference Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 15, 1997 are incorporated herein by reference in Part III, Items 10, 11, 12 and 13. 2 Coherent Communications Systems Corporation COHERENT COMMUNICATIONS SYSTEMS CORPORATION INDEX TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 Item Page No. No. - ---- ---- Part I 1 Business............................................................... 3 2 Properties............................................................. 14 3 Legal Proceedings...................................................... 14 4 Submission of Matters to a Vote of Security Holders.................... 14 Part II 5 Market for Registrant's Common Equity and Related Stockholder Matters.. 15 6 Selected Consolidated Financial Data................................... 15 7 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 16 8 Financial Statements and Supplementary Data............................ 19 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................. 34 Part III 10 Directors and Executive Officers of the Registrant..................... 34 11 Executive Compensation................................................. 34 12 Security Ownership of Certain Beneficial Owners and Management......... 34 13 Certain Relationships and Related Transactions......................... 34 Part IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 35 2 3 Coherent Communications Systems Corporation COHERENT COMMUNICATIONS SYSTEMS CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 ITEM 1. BUSINESS Coherent Communications Systems Corporation, a Delaware corporation ("Coherent" or "the Company"), develops, manufactures and markets voice quality enhancement products for wireless (including digital cellular and Personal Communication Systems ("PCS")), satellite-based, Cable Communication Systems, and wireline telecommunications systems throughout the world. Coherent's principal product lines are transmission products and teleconference products. The Company's transmission and teleconference products utilize proprietary high speed reduced instruction set computer ("RISC") microchip along with proprietary software to enhance the quality of voice communications during a telephone call. The Company's products are compatible with domestic and foreign telecommunications systems. The Company's transmission products include standalone echo cancellers, integrated echo cancellers, and echo canceller platforms that enhance voice quality in several ways, including eliminating electrical and acoustic echoes inherent in modern telecommunications systems. The technological advances incorporated into telecommunications systems, such as wireless and digital transmission technology, speech compression, fiber optic transmission lines and satellite links, make echo canceller products an essential component of most digital telecommunications networks. The Company's transmission products are designed to support a variety of speech enhancement functions in addition to echo cancellation. Sculptured Sound(R), Netreach(R) and Enhanced Audio Plus(TM) are three released examples of this strategy. Sculptured Sound was introduced in early 1995 and is designed to automatically optimize speech levels in a variety of local, long distance and cellular networks. Enhanced Audio Plus, Outreach and other software products which have been developed by the Company may be incorporated into new transmission products or marketed to existing transmission product customers of the Company that desire enhanced audio quality and functionality. The Company sells its transmission products to network operators and other end-users through its direct sales force and third-party distributors, and also to telecommunications equipment manufacturers through its direct sales force. Users of the Company's transmission products include telecommunications network operators throughout the world, such as British Telecommunications PLC ("British Telecom"), Deutsche Bundespost, AT&T Wireless, Motorola, Kokusai Denshin Denwa Co., Ltd., Telefonos de Mexico, SA, Teleglobe Canada Inc., PTT Telecom Logistics (Netherlands) and Telia Mobitel (Sweden). The Company has directed selling efforts for its transmission products extensively in international markets. During 1996, however, the Company increased its selling effort in the United States with a larger direct sales force. Competition is price sensitive. However, this issue has changed somewhat recently due to the release of improved standards and the demands for improved quality for digital wireless communications. The Company believes that the cost effective performance of the transmission products that have resulted from its focus on technological advancements will enable it to participate in the expansion of, and in the changes in, worldwide telecommunications systems, particularly in the areas of digital cellular, PCS and other wireless communications. During 1994 and early 1995, the Company introduced a second generation version of its EC-6000 digital echo canceller, which provides customers with two major new features. First, installation has been made simple and easy, reducing the traditional costs of installation. Second, the usefulness of the Company's echo cancellers has been expanded by the introduction of a series of software products including Enhanced Audio Plus, Sculptured Sound and Netreach. Another software product, Netwise(TM), enables the telephone company to mix voice, fax and video and data services on Integrated Services Digital Network "ISDN" circuits, thus improving the operators' use of their facilities. The Company's teleconference products include equipment and related software used in teleconferencing and in videoconferencing applications, such as distance learning and business television. These products include the Call Port(R), ConferenceMaster(R) and Voicecrafter(TM) lines of audio systems. Call Port provides a natural high quality, full-duplex, hands free audio connection to personal computers and workstations. ConferenceMaster provides group teleconferencing facilities for meeting rooms, and Voicecrafter provides full-duplex, high quality audio for videoconference systems. In October 1995, the Company purchased the technology, and related assets for the Consortium(TM) conference bridge teleconferencing product line. The Consortium is a modestly priced, user friendly 3 4 Coherent Communications Systems Corporation teleconferencing bridge targeted to the corporate customer and other organizations that require multi-party teleconferencing for 24 - 96 participants. During 1996, as the product was introduced, the Company had modest sales. The Company utilizes an indirect distribution strategy in marketing teleconference products to end users through a network of more than 100 independent dealers and distributors throughout the world. The Company also directly markets teleconference products to equipment manufacturers and systems integrators, such as Intel, AT&T, British Telecom, CBCI Telecom and others. Strategy The Company's objective is to be a leading provider of software configurable products that improve the voice quality and efficiency of telecommunications systems throughout the world. The Company's strategy for achieving this goal includes the following elements: o Expand Alliances with Telecommunications Network Operators and Equipment Manufacturers. In the course of developing and marketing its echo canceller and teleconference products, the Company has established strategic relationships with major telecommunications network operators, large manufacturers of telecommunications equipment, and telecommunications equipment distributors. The Company intends to continue to develop these relationships to keep abreast of the trends in telecommunications technology, to support customer needs as they arise, to expand the Company's distribution channels, and to identify additional product and market opportunities using the Company's proprietary technology. The Company believes that the numerous strategic alliances that the Company enjoys with much larger equipment manufacturers and network operators will further support the growth of the Company's business in all of its marketplaces and provide a basis for expansion into new markets. For example, the development of the Company's relationships with equipment manufacturers has led to several arrangements to include the Company's products and technology in large telecommunication systems project bids that the Company might not have been able to bid upon independently. Certain equipment manufacturers have entered into supply agreements with the Company for customized products designed and produced for the equipment manufacturers' specific application. o Support Wireless Telecommunication Systems. Speech compression performed in digital wireless networks delays speech to the degree that echo cancellation equipment is required on all calls, both local and long distance. As wireless telecommunications systems expand and convert to digital wireless systems and as PCS and low earth orbit satellite systems are implemented, the Company intends to continue to introduce software products aimed at supporting these new technologies. An example of the Company's efforts in this area is the 1995 introduction of Enhanced Audio Plus software, designed specifically for speech enhancement by controlling noise, gain and echo in digital wireless telephone systems. Additional products targeted for the wireless industry were under development in 1996. o Expand sales presence in worldwide markets. The Company has begun to open sales offices to serve growing markets in China, India, Eastern Europe, Japan and has been adding sales personnel in the USA. Late in 1996, offices were opened in Singapore, Tokyo and Beijing. Transmission Products Background. Telecommunications networks are subject to many transmission system impairments that degrade the quality of local and long distance telephone service. One of the most serious of these impairments is "echo." Echo is a reflected signal that may be bounced back to a speaker at various points during the transmission to the listener. The degree of perception by the speaker of the echo is a function of the strength of the echo and the duration of the delay between the original transmission and the return of the echo. The longer the delay, the more significant the degradation in the clarity of the transmission. A 30 millisecond ("ms") delay in the return of the reflected signal will result in a perception that the voice clarity is hollow, or that the speaker is talking in a tunnel. A 500 ms delay would result in the speaker hearing complete words as an echo. The impairment in transmission quality caused by echo is capable of rendering conversation virtually impossible if active measures to control its effects are not employed. Speech signals travel throughout the inter-exchange telephone network on 4-wire trunks, consisting of two separate paths where each path is dedicated to a particular direction of travel. When these signals arrive at a local telephone company central office they must be converted so they can be transmitted over the 2-wire local loop 4 5 Coherent Communications Systems Corporation between central office and the remote subscriber. This conversion is performed by a device called a 2- to 4-wire converter. The local loop between the central office and the subscriber is not ideal and its characteristics can change with time, temperature and humidity. For this reason, the conversion is never perfect and some of the speech going to the telephone is reflected back and appears in the speech path coming from the telephone. This is called echo. This echo is perceived at the other end of the call where the person speaking into the telephone handset hears his own voice returning back to him. The strength or amplitude of the echoed signal is dependent on the impedance mismatch at the 2-wire to 4-wire converter. The time delay in receipt of the reflected signal is dependent on the round trip delay in the speech path. In the case of copper-wire analog telecommunications networks, this delay is principally a function of the length of the speech path. Local telephone calls on an exclusive copper-wire system will generally involve no discernible echo while long distance calls increase the likelihood of significant echo. Time delay in modern telecommunications networks, which may incorporate copper wire, fiber optic lines, analog and digital transmission and conversion, international gateway switching, and satellite transmission, are also a function of the delays caused by signal processing at various points along the transmission route. In the case of telecommunications systems using satellite links, which have round trip delays of greater than 500 ms, the impairment is very severe, resulting in a strong, distinct, and very objectionable echo during speech. Digital transmission methods introduce additional signal delays due to the additive effects of switching and processing inside each piece of digital network equipment. This processing increases the round trip delay and can result in objectionable echo even on short distance links. The use of fiber optic links further increases the requirement for echo cancellation. The time it takes to transmit a signal through fiber optic cable is considerably more than through copper cable or microwave. As a result, echo problems may occur on even relatively short fiber links compared to copper cable or microwave links. As existing long-distance routes are converted to fiber-optic transmission media, echo cancellers are needed to preserve high-quality service. During the 1970s, telecommunications companies attempted to deal with the system problems caused by echo, principally in satellite circuits, through the technique of echo suppression. An echo suppression system is essentially a voice-activated switch that attempts to permit the speaker to transmit but then turns off the circuit to the speaker in an attempt to block an echo signal. The use of echo suppressers to reduce echoes caused other transmission problems, including chopped first syllables, artificial volume adjustments and the inability of two persons to talk at the same time. These problems reduced the ability to provide a natural conversation environment on echo suppresser-equipped telecommunications systems. Echo cancellation technology was deployed during the 1980s to address the problems caused by echo in telecommunications transmission systems without the drawbacks of the echo suppression methodology. Echo cancellers make use of high speed digital signal processing techniques to develop a model of the returning echo. This echo model is subtracted from the echo return path and in a well-designed echo canceller can provide more than 30 decibels ("dB") of echo return loss enhancement to the voice circuit. Since some small residual echo will still remain in the return path, the echo canceller also includes an additional circuit called a non-linear processor that will remove this residual echo from the path during single talker speech. Total echo cancellation in a high quality echo canceller is in the order of 65-70 dB. The Company expects that its transmission product sales will increase in five main markets: digital wireless telephony, co-axial cable communications, long distance telephony, speech enhancement and network management. The Company is not aware of any independent market surveys that project potential demand for transmission products in any of these markets, and it is difficult to forecast such demand for the speech enhancement and network management markets because these markets are new and no historical information is available. However, independent forecasts call for an increase in the total number of digital wireless subscribers from one million, in 1993, to 100 million, in the year 2000. Even in the face of declining transmission product prices due to technological advancements, the Company believes it could experience significant sales growth if the size of the digital cellular telephony market alone grows as projected. The Company estimates that a majority of digital wireless networks, including networks utilizing present technology and the developing PCS and low earth orbit systems technologies, will need to employ echo cancellers due to their use of digital speech compression, which causes delay and resultant echo. Potential customers requiring echo cancellers in these four markets include all telephone operating companies and are not limited to the cellular or long distance operators to whom the Company currently sells its transmission products. 5 6 Coherent Communications Systems Corporation Products. The Company offers a broad range of echo canceller products to satisfy the needs of public and private telecommunications networks, satellite networks, digital cellular networks, international gateway switches and terrestrial networks. Its principal echo canceller products are its EC-6000 in both T-1 and E-1 formats, its EC-7000 in E-1 format, and its related software products. The EC-6000 is designed to provide echo canceller capabilities in a variety of digital formats. The EC-6000 T-1 is designed for use in telecommunications systems using the United States T-1 carrier line standard while the EC-6000 E-1 is designed for use in telecommunications systems using the international CEPT carrier line standard prevalent outside the United States. The EC-6000 Dual Di-Group Digital Echo Canceller is a compact and low cost echo canceller designed to support one or two T-1 or CEPT lines for remote and private earth station applications. The EC-7000, introduced in July 1993, is specifically designed for echo cancellation in digital transmissions using the international CEPT standard, including modifications to the CEPT standard proposed by the European Telecommunications Standard Institute, and is sized for a particular European cabinet configuration. An EC-6000 unit in a 23 inch shelf, when fully loaded with 16 circuit boards, can provide echo cancellation for 384 telephone circuits under the T-1 standard and 480 telephone circuits under the CEPT standard. Depending upon the options included in the unit, such as software, redundant power supply boards, and varying levels of Company training and support included in the sale, the Company's echo canceller product prices generally range from $55 to $210 for each telephone circuit supported. The EC-6000 and EC-7000 utilize the Company's proprietary echo cancellation software and proprietary high speed RISC microchips. These products contain substantial speech processing power, of up to 132 million instructions per second ("MIPs") per line, compared to the less than 20 MIPs processing power of competitors' echo cancellers that do not use RISC technology. As a result of this processing power and speed, management believes that the Company's echo canceller products are able to react more quickly and comprehensively to network system echo problems than competitors' echo canceller products, and are more suited as a platform for additional software speech enhancement products. The Company introduced Audio Plus (1993), and Enhanced Audio Plus (1995), for the digital wireless telephone network. These software products, which run on the Company's echo canceller hardware platform, are designed to improve digital cellular speech quality by addressing several sources of interference that degrade digital cellular telephone calls. The Company believes that Enhanced Audio Plus is the only available product that truly cancels acoustic echo in the wireless network. In early 1995, the Company introduced Sculptured Sound, a speech level optimization product that resides on its echo canceller platform. Sculptured Sound is designed to automatically adjust the speech level on all circuits of a T1 (24 channel) telephone link so that they are within the operating parameters of the telephone operating company. Speech levels in the international telephone network vary considerably and extreme variations can cause degradation in call quality. Distribution and Marketing. As of February 28, 1997, 27 employees on the Company's sales staff marketed the Company's transmission products directly to telecommunications network operators, telecommunications equipment manufacturers and distributors. The Company also indirectly markets echo canceller products to network operators and other end-users through distributors, which receive marketing and technical support from the Company's direct sales staff. The Company's distributors are generally responsible for sales to telephone companies in specific countries. For example, Wandel & Goltermann Inc. distributes echo cancellers in Canada, P.T. Metaplas distributes echo cancellers in Indonesia, and Telecommunications Systems Professionales distributes echo cancellers in Mexico. The Company does not usually grant distributors the exclusive right to distribute selected echo canceller products in their respective territories. The Company has entered into product development and sales agreements with Nokia Telecommunications Oy, of Finland ("Nokia"), and StrataCom, Inc., of the United States ("StrataCom"), pursuant to which the Company has custom designed echo canceller products for sale to such manufacturers, which incorporate the Company's products into their telecommunications switches. In 1994, the Company entered into a five-year renewable supply and license agreement with NEC Australia, and in 1992 entered into a ten-year supply and licensing agreement with TRT Telecommunications Radioelectriques Et Telephoniques ("TRT"), a French Affiliate of Philips N.V., pursuant to which NEC Australia and TRT each license an echo canceller design of the Company and purchase key components from the Company to enable NEC Australia and TRT to manufacture their own echo canceller products and market such products worldwide. NEC Australia has an exclusive right to market such products in Australia. TRT has an exclusive right to market such products in France, Switzerland, Scandinavia and French speaking Africa. Nokia and the Company have a written agreement establishing estimated purchases of the Company's products through 1999. StrataCom and TRT submitted advance notice of purchase requirements to the Company, StrataCom, NEC Australia and TRT have agreed to certain established purchase price terms that are 6 7 Coherent Communications Systems Corporation dependent upon the quantity of products purchased. These four arrangements generated, in the aggregate, 22 % of the Company's total net sales for 1996. Pursuant to these arrangements, the Company's echo canceller products have been used as an adjunct to these four manufacturers in their bidding upon major telecommunications network expansion and upgrade construction projects. In November of 1995, TRT was acquired by Lucent which has continued performance under the contract. Product Development. During the last three fiscal years, the Company's total annual product development expenditures amounted to $4.0 million in 1994, $4.6 million in 1995 and $6.2 million in 1996, reflecting the Company's commitment to new product development and, in particular, the Company's focus on the development of new software products running on the echo canceller platforms and new teleconference products. Echo canceller product development has resulted, in the introduction of Enhanced Audio Plus, which truly cancels the acoustic echo in a wireless network, and the introduction of Netreach, which is capable of canceling far-end hybrid echo and Sculptured Sound level optimization. The Company currently is developing additional software products intended to take advantage of the echo canceller as a hardware platform that is strategically located in the telecommunications network infrastructure. Speech Enhancement. The Company's transmission products currently make use of several enhancement techniques designed to improve the intelligibility of speech and lower background noise during a telephone call. The Company intends to employ these and other technologies, such as advanced echo cancellation algorithms and noise cancellation, to develop dedicated speech enhancement products that will provide noticeable improvements in speech quality in both local and long distance telephone networks and the wireless environment. This improvement is possible without requiring major upgrades to switches, telephone instruments, or transmission lines by use of the Company's existing echo canceller equipment as a platform. This provides the Company with an immediate installed base of upgradeable products. Competition. The echo canceller industry is intensely competitive and is characterized by rapid rates of technological change and product obsolescence, price competition and competition in product specifications and capabilities. The Company experiences competition from a number of domestic and foreign companies, some of whom have substantially greater financial, manufacturing and marketing resources than the Company and offer a more complete product line of telecommunications equipment than that offered by the Company. The Company believes, however, that its focus on developing products with superior echo cancellation and advanced noise cancellation technology and related software products, and its alliances with other participants in the telecommunications industry, will enable it to compete effectively in its markets. Telecommunication Standards. Echo cancellers are critical components in a telecom carrier's high-revenue long distance circuits, and the quality of their performance is critical to customer satisfaction. International standards have been developed to ensure that these products provide a certified level of performance and that they do not interact in an adverse manner with other network equipment. The International Telecommunications Union, a division of the United Nations based in Geneva, Switzerland, is responsible for developing these global standards. In late 1994 Coherent joined the ITU, and is now an active member of this organization. In 1996, with the Company's encouragement and participation, the ITU released a new echo canceller standard which raises the quality level demands for canceller equipment. Coherent's membership in the ITU will help ensure not only that its products are fully compliant with evolving standards, but also that new standards will recognize the rapid achievement in telecommunications technology being developed by the Company. 7 8 Coherent Communications Systems Corporation Teleconference Products Background. Teleconferencing is a communications technology through which individuals in two or more locations can exchange information by telephone or other communications medium as if they were face-to-face. In the last several years, the use of and applications for teleconference products have increased due to changing business practices that increasingly require compressed "time to market" demands for products and services. Decision making in today's competitive business environment demands accurate and timely exchange of information by individuals and groups often separated by significant distances. Telephones and facsimile machines have become essential business tools that facilitate communication in convenient and inexpensive formats. In many situations, however, information cannot be transferred effectively by standard telephones or in writing, and more natural communication is necessary, through teleconferencing or videoconferencing, which often serve as an effective substitute for time consuming and expensive business travel. The Company's products are used to provide the audio portion of a videoconferencing system. The key components of the Company's teleconference products consist of acoustic echo cancellation and noise cancellation equipment, microphones, loudspeakers, an amplifier and dialing/signaling equipment. The Company's teleconference products accept a voice signal through the microphone for transmission and deliver a received voice signal through a loudspeaker. Acoustic echo is present in every office environment. In a teleconference telephone, speech from the speaking party's end is amplified and sent to the listening party's loudspeaker. Some of this speech goes directly from the listening party's loudspeaker to the listening party's microphone, and some is reflected off the walls of the conference room and, after a time delay dependent on the size of the room, is also received by the listening party's microphone. To the microphone, the direct and reflected speech appear to be originating in the room and would normally be sent to the speaking party's end, where such speech would be heard as unwanted echo. The delayed speech is particularly objectionable and makes it very difficult to carry on a conversation. In order to eliminate this unwanted echo, traditional teleconference systems and speakerphones employ a "half-duplex" operation that simply turns off the microphone if speech is being received. This shut-off mechanism effectively blocks the echo from returning to the person that initiated the speech, but it produces negative side-effects: it blocks speech that is intended to be transmitted to the other party and allows the loudest person to capture the microphone. The result is a clipping of speech syllables at the beginning and end of sentences, which results in the remote party missing some of the conversation. Furthermore, this "half-duplex" operation can only be used for point-to-point, not multipoint, links and precludes multiple parties from speaking at the same time. To counter the problems and inconvenience associated with half-duplex conference phones, the Company's teleconference products eliminate echo electronically and allow the teleconference system to be live in both directions. This permits people to engage in natural conversation and enhances productivity by allowing more meaningful and timely communication. The market for teleconference products and services has grown significantly in the past three years. Reductions in basic technology development costs have enabled companies to reduce teleconference product prices and offer advanced technological features, which in turn have produced increased consumer demand for these products. In 1996 U.S. Robotics introduced a line of low cost teleconference products along with a major advertising campaign. Not only did this expand the sales of "speakerphones" significantly but it also shifted the distribution model from telecommunications product resellers to personal computer distributors and discount retailers. The Company believes the market for desktop video conferencing systems continued to grow at a rapid pace. There is continued pressure to lower costs in order to achieve even wider use of business use of personal videoconferencing systems that has been predicted by more than one industry observer. Products. The Company introduced its first teleconference product in 1989 and subsequently introduced products with advanced technology, such as one of the industry's first full duplex audio systems that worked with video codecs, which was introduced in 1990 and sold primarily to the videoconference marketplace, and the first full duplex conference telephone to include echo cancellation technology and an integrated dial pad, which was introduced in 1992. The Company was the first supplier of teleconference products to use a proprietary high speed RISC in its products, rather than a generic signal processor, and currently is the only company utilizing RISC technology in its teleconference products. As a result, the Company's products provide significantly more processing power and acoustic performance than competing products. For example, the ConferenceMaster conference telephone couples a network of proprietary RISC audioprocessing microchips with a DSP, and provides a processing resource of approximately 160 MIPs. The speech processing power contained in the Voicecrafter is approximately 750 MIPs. When compared to the typical DSPs used in other manufacturers' products, which have 8 9 Coherent Communications Systems Corporation from 20 to 40 MIPs available, this additional processing power provides higher quality audio and very robust performance in adverse audio environments. Echo cancellation technology in the Company's full duplex teleconference products permits all microphones and loudspeakers in a point-to-point or multipoint link to be kept open at all times, allowing teleconference participants to talk freely and contemporaneously without any loss of quality. The echo cancellers operate under software control to compute speech models as speech occurs, and filter copies of the speech model (or echo) to ensure that echo is not transmitted to or heard at the distant end. The Company's teleconference products are designed to be used by small, medium and large users, in both narrow band (i.e., telephone quality) and wide band (i.e., higher fidelity, higher frequency audio quality) applications. All of the Company's teleconference products incorporate its proprietary Sculptured Sound voice quality enhancement technology, which allows clear, natural and undistorted conversation that is spontaneous and simultaneous, as in face-to-face communication. Sculptured Sound utilizes substantial speech microprocessing power to reproduce and deliver robust, high fidelity audio quality by reducing background noise and enhancing speech at high and low frequencies (i.e., treble and bass) that typically are eliminated in ordinary telephone transmission. The Company's teleconference products consist principally of the Call Port, ConferenceMaster, Voicecrafter, and the Consortium. Call Port is the first self contained, full-duplex, hands-free subsystem designed specifically to operate with a personal computer or workstation. It is designed to eliminate the need for an audio headset or handset when using audio-enabled applications, such as desktop videoconferencing, document collaboration, or speech recognition/response applications. It allows the user the free use of his hands while using an audio application and is designed to operate unobtrusively in open office environments. This product competes in a very price sensitive market segment and may be subject to volume or price declines. The ConferenceMaster line of conference telephones, which was introduced in January 1992, serves the meeting room marketplace and consists of full duplex audioconferencing systems that can service up to 40 participants in conference rooms and executive suites with areas of up to 800 square feet. The ConferenceMaster products are ergonomically designed, are equipped with two omnidirectional microphones, one loudspeaker, a dial pad and ringer, and can be connected to a standard telephone outlet. ConferenceMaster has been recognized for its outstanding industrial design by the Smithsonian Institution, which has acquired a sample for its permanent collection in the National Design Museum at the Cooper-Hewitt Museum in New York. While the product continues to be sold as a premium teleconferencing system capable of accommodating larger rooms and more participants than competing products, it is under pressure from lower priced competition. The Voicecrafter line of products is designed to supply highly interactive audio for group videoconferencing through a direct connection to a video codec, such as a videoconference room unit or desktop video system. The Voicecrafter product line has the longest echo cancellation span available in its class, allowing it to operative effectively in the widest range of acoustic environments. While the Voicecrafter 3000 was originally aimed at the growing, lower cost, roll-about videoconferencing market it has found increasing success in the rapidly growing "distance learning" market and such new markets as "telearraignment." Distance learning involves one or two way video in an educational environment with two way audio whereby remote classrooms can communicate with the instructor. Telearraignment is a term coined to describe the use of videoconferencing in a courtroom to minimize the transportation of prisoners. The Consortium Conference Bridge, acquired in a technology/asset acquisition in October 1995, incorporates the latest in DSP technology, in a user friendly conferencing bridge. Consortium allows multiple participants at several sites to communicate simultaneously in a "virtual conference room". The bridge provides a cost effective, turnkey solution for a company's audioconferencing needs. Simplified installation and training require less than half a day, and does not require a dedicated human operator to coordinate conferences. The product allows for up to 96 participants, in a managed environment which includes security code password protection, true duplex "all talker" audio, and exclusive echo cancellation for each port. Special features of the Consortium include an intuitive graphical user interface. It is expected that during 1997 a series of enhancements will be introduced. Due to the rapidly growing demand for hands free communication, Coherent's strategy to grow the teleconferencing part of their business will be to partner with OEMs who want to add hands free audio capability to their products rather than try to compete directly in each market. 9 10 Coherent Communications Systems Corporation Product Development. In developing teleconference products, the Company makes extensive use of the experience acquired in developing and marketing telephony echo cancellers. Teleconference telephone equipment requires not only acoustic echo cancellation but also line echo cancellation, which can be accomplished by employing technology that is very similar to the technology incorporated in the Company's echo canceller products. By promoting an active sharing of technology within the organization, the Company believes it has created a unique technical position in the industry, in that no other supplier of audio teleconference terminal equipment maintains any significant market or technical position in both telephony and acoustic echo cancellation. The Company's technology sharing and design and manufacturing capabilities are critical to the Company's future success because the teleconference products market is characterized by short product life cycles. In-house development and manufacturing capabilities typically shorten the Company's product development cycle, as compared to competitors that do not have such capabilities and must rely upon outsourcing to achieve component design or manufacture for subsequent product integration or sale. During the last three fiscal years, the Company's total annual product development expenditures increased from $4.0 million in 1994, to $4.6 million in 1995 and $6.2 million in 1996. Teleconference product development has resulted in the introduction of the Call Port, as well as new generations within the Company's Voicecrafter, Consortium and ConferenceMaster product lines. Distribution and Marketing. The Company has established a global sales and distribution network for teleconference products based upon projected worldwide growth in demand for teleconference products. Key employees of the Company are assigned to or located in these regions and are familiar with the requirements for transacting business in the various local markets. In addition, key alliances have been formed around the world with other companies and individuals that have broad technological expertise and significant distribution capabilities. The Company currently sells its teleconference products through distributors in North America, as well as through international distributors in Australia, Japan, Canada, France, Germany, the United Kingdom and other countries. In addition to selling its products through dealers and distributors to end users, the Company also sells teleconference products directly to equipment manufacturers and systems integrators, which integrate standard or custom teleconference products into their audio or video teleconference systems for later resale. Competition. Competition in the teleconference product market is intense and is primarily characterized by short product lives and rapidly declining prices. The Company has also encountered, and may in the future encounter, a form of indirect competition from telecommunications equipment manufacturers that integrate internally developed audio products in place of components previously sold to them by the Company. Given the competitive nature of the teleconference product market and constant new product introductions, no assurance can be given that the Company will be able to maintain a competitive price advantage over its competitors for any given product for any certain period of time. Intense competition within the teleconference product market has given rise to rapid rates of technological change, short product life cycles and product obsolescence, and price competition, and such competition is expected to intensify as product prices decline further. The Company believes that in order for it to be competitive in the teleconference product market, it must integrate its technology in OEM products. In order to achieve success in this market, the Company has structured its marketing and sales organization according to projected growth in teleconference product sales worldwide. In addition, the Company spends a substantial percentage of teleconference product net sales on product development. Manufacturing Capability The Company purchases microchips and other hardware components of its products from a number of suppliers and is not materially dependent on any single supplier. Company designed proprietary RISC microchips are manufactured on behalf of the Company by two sources, one of which maintains a 90-day supply of such microchips in inventory for the Company. The Company incorporates its software into the RISC microchips and DSPs, and assembles and tests its products at the Company's manufacturing facility in Hauppauge, New York, before shipment to its customers. During 1996 the Company invested in several capital improvements to its manufacturing product testing process. The Company's in-house manufacturing capability allows the Company to adjust production to meet customer delivery schedules, to make production design changes quickly to respond to market needs and to closely monitor production quality. This capability is particularly advantageous since the Company competes in product markets defined by short product life cycles. 10 11 Coherent Communications Systems Corporation The Company is ISO-9001 certified. In order to obtain ISO-9001 certification, an international standard of manufacturing quality, a manufacturer must meet standards for control of procedures and pass an independent operational audit. This standard of manufacturing quality is important because many international companies require their vendors to satisfy this standard as a condition to commencing and maintaining a business relationship. ISO-9001 certification involves satisfaction of quality standards company-wide, not solely in manufacturing. Backlog and Cancellation Policy The Company typically fills orders for its products within 7 to 60 days of the receipt of the purchase order. Customers usually purchase products on an as-needed basis, and, accordingly, the Company generally has less than two-months net sales in backlog. Backlog consists of purchase orders received by the Company with a schedule of deliveries within twelve months of the purchase order date. Written commitments without delivery schedules are not considered in calculating backlog. The Company's total backlog of product orders as of December 31, 1996 was approximately $ 5.7 million. The Company expects that all of this backlog will be filled during the current year. The Company has a policy to charge a 20% restocking fee for a purchase order cancellation, except in cases in which the cancellation request was received more than 30 days prior to the scheduled delivery date and no prior cancellation request had been previously delivered by the prospective customer. Patents and Trademarks The Company relies upon its know-how and trade secrets as well as upon its patents to develop and maintain its competitive position. Although the Company believes its patents are valuable, it also believes its future success depends primarily on its technical and engineering competence and the creative skills of its employees. The Company attempts to protect its proprietary information through the use of confidentiality agreements with employees and through other security measures, although there can be no assurance that these measures will be adequate to protect the Company's interests. The Company owns or holds rights under a total of seven patents granted by the United States Patent Office, three of which relate to echo canceller product technology, and four of which relate to other aspects of the Company's product lines. In mid-1995 the Company entered into a non-exclusive license agreement to acquire the rights to 50 patents in basic noise cancellation technology. The Company has filed foreign patent applications which are currently pending. The Company has obtained a design patent on its ConferenceMaster product in both the United Kingdom and Canada. There can be no assurance that the Company's current patents will be upheld as valid. Numerous patents on various communications technologies are held by others, including competitors of the Company. Such patents could inhibit or restrict the Company's ability to develop new products. If there is a conflict between products of the Company and its competitors' patents or between its competitors' products and the Company's patents, it could be very costly for the Company to enforce its rights in an infringement action or defend itself in an infringement action brought by another party against the Company. No assurance can be given that in the future the Company will not be subject to actions by competitors or others claiming that the Company's products infringe upon their patents. The Company strives to protect tradenames and marks through registration. The Company owns United States registered trademarks, including "ConferenceMaster," "Linemate," "Sculptured Sound" and "Enhancing the Way the World Communicates" and claims rights to other trademarks, including "Audio Plus," "Consortium, " "Voicecrafter," "Enhanced Audio Plus," and "Virtual Presence." Employees As of March 14, 1997 the Company had 202 full-time employees, 43 of whom were engaged in product development, 54 of whom were engaged in sales and marketing, 19 of whom were engaged in finance and administration, 71 of whom were engaged in operations and 15 of whom served in multiple disciplines of the Company's operations. The Company's employees are not represented by any collective bargaining agreements, and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. 11 12 Coherent Communications Systems Corporation Warranty Policy The Company's transmission products are backed by a warranty, which generally provides that the Company will repair or replace any defective product prior to the passage of the earlier of 18 months from the mailing date of the product invoice or 12 months from the date of product installation. Teleconference products provide for repair or replacement of defective parts for up to 3 years from date of purchase. The Company does not have any significant warranty claims outstanding. Customers One customer accounted for 12%, 18% and 11% of net sales for 1996, 1995 and 1994, respectively. A different customer accounted for approximately 12% of 1995 net sales. Export Sales Marketing in foreign countries is accomplished through independent sales representatives paid on a commission basis and through a sales office in England, Japan and Singapore. Export sales accounted for 69%, 75% and 71% of the Company's net sales in 1996, 1995 and 1994, respectively. Sales are principally denominated in U.S. dollars. During 1996, 1995 and 1994, net sales into Europe, Africa and the Middle East contributed 42%, 51% and 50%; net sales into Asia/Pacific contributed 18%, 20% and 10%; and net sales into other foreign countries accounted for 9%, 4% and 11%, respectively. 12 13 Coherent Communications Systems Corporation EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the executive officers is set forth below. The executive officers of the Company are elected annually by the Board of Directors and hold office until their successors are elected and qualified. Name Age Position Daniel L. McGinnis........... 58 Chief Executive Officer and Director David L. Powell ............ 45 President and Chief Operating Officer Michael P. Gendron........... 49 Vice President and Chief Financial Officer Miles R. Pratt.............. 54 Vice President Daniel L. McGinnis was elected Chief Executive Officer of Coherent in September 1994. From 1988 until September 1994, Mr. McGinnis served as President and Chief Operating Officer. He has also been a director of Coherent since March 1988. Prior to joining Coherent from Safeguard Scientifics, Inc., where he held a financial management position, Mr. McGinnis held a variety of management and executive positions in the fields of sales, operations and finance with Air Products & Chemicals Inc., Bausch & Lomb, Inc., C. & J. Clark, Inc. and Hercules, Inc. David L. Powell was appointed President and Chief Operating Officer in September 1994. From December 1993 until September 1994, Mr. Powell served as the Company's Vice President. Mr. Powell has also served as the Managing Director from June 1990 through the present date of Coherent Communications Systems, Limited, a wholly owned subsidiary of the Company. Prior to joining the Company, Mr. Powell was General Sales Manager of Tech Nel Data Products Ltd., in England. Michael P. Gendron was appointed Vice President and Chief Financial Officer in June 1995. Prior to joining Coherent, Mr. Gendron was Vice President - - Finance of the U.S. Pharmaceutical Group - Alpharma, Inc. , from 1992 to 1995 and prior to that he held a variety of management and executive positions at Bausch & Lomb, Inc. Mr. Gendron is a Certified Public Accountant. Miles R. Pratt has served as Vice President of the Company since January 1989. From January 1987 to December 1988, Mr. Pratt served as Director of International Sales for the Company. Prior to joining Coherent Mr. Pratt held management and executive positions with the NCR Corporation, Ascom Switzerland and Olivetti International. 13 14 Coherent Communications Systems Corporation ITEM 2. PROPERTIES The Company's world headquarters, located in Leesburg, Virginia, consists of approximately 20,000 square feet of office space, is used for sales, administrative and product development functions and is leased pursuant to an agreement which has been canceled effective September 1997. The Company has agreed to lease a new facility for its worldwide headquarters. Construction of the 75,000 square foot facility commenced in September 1996 and is expected to be completed in September 1997. The Company's lease will be for a term of 15 years, beginning upon the completion of the facility. The Company's approximately 30,000 square feet of space in Hauppauge, New York houses its manufacturing facility and a sales office and is leased pursuant to a lease expiring in 2000. The Company also maintains sales offices in Abingdon, England, Scottsdale, Arizona, Beijing, China, Tokyo, Japan and Singapore. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal actions incidental to the normal conduct of its business. Management does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 15 Coherent Communications Systems Corporation Part II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock has been listed on the NASDAQ National Market System since June 16, 1994 under the symbol "CCSC". The table below sets forth for the periods indicated the high and low sales prices for the Common Stock as compiled from published sources. 1996 1995 ---- ---- High Low High Low ---- --- ---- --- First Quarter 25 3/4 17 1/4 12 3/8 6 5/8 Second Quarter 28 1/4 18 21 8 3/4 Third Quarter 22 13 1/8 28 1/2 16 3/4 Fourth Quarter 24 18 27 3/4 12 1/2 As of March 18, 1997, there were approximately 4,800 beneficial holders of the Company's Common Stock. Dividend Policy To date, the Company has not paid any dividends on its Common Stock. The Company currently intends to retain future earnings for use in its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Future dividends, if any, will depend, among other things, on the Company's results of operations, capital requirements and financial condition and on such other factors as the Company's Board of Directors may, in its discretion, consider relevant. ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial information relating to the financial condition and results of operations of the Company and should be read in conjunction with the consolidated financial statements and notes included elsewhere. Summary Consolidated Financial Information (In thousands, except per share data)
Years Ended December 31, ------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------- ------------ ------------ ------------ ------------ Net Sales $54,431 $43,829 $30,516 $22,944 $18,002 Gross profit 34,238 26,804 17,883 12,902 9,444 Net income 9,748 7,590 3,801 423 539 Net income per common share .63 .49 .26 .01 Cash and short term investments 16,769 10,477 2,473 423* 474 Working capital 25,652 15,993 9,694 4,044 2,847 Total assets 37,558 28,616 17,278 9,306 8,399 Long-term debt including current - 2,949 3,000 461 - portion Total stockholders' equity 31,799 20,448 10,391 2,467 2,825 * After a non-recurring Goodwill write-off of $1,087.
15 16 Coherent Communications Systems Corporation ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Company's positioning in the worldwide, digital telecommunications marketplace has led to a very successful year in 1996. Sales increased 24% in 1996 to $54.4 million while net income increased 28% to $9.7 million, primarily the result of higher sales and modestly higher margins. The following table sets forth for the periods indicated selected data as a percentage of net sales:
Years Ended December 31, ----------------------------------------- 1996 1995 1994 ------------ ----------- ------------ Net sales Transmission products 86 % 86 % 82% Teleconference products 14 14 18 ------------ ----------- ------------ Total net sales 100 100 100 Gross profit 63 61 59 Operating expenses Selling 16 16 17 Product development and engineering 11 10 13 General and administrative 8 8 8 ------------ ----------- ------------ Total expenses 35 34 38 Operating income 28% 27% 21%
Net sales increases of 24% and 44% in 1996 and 1995, respectively, are primarily attributable to higher unit sales of transmission products for which net sales increased by 24% and 55% in 1996 and 1995, respectively. The sales growth of transmission products was the result of strong demand from equipment manufacturers in the United States, sales to end customers in the digital wireless market in Europe, Mexico and the United States and sales to distributors in Australia. It is anticipated that the Company will continue to benefit from the growth occurring in the wireless market and from the Company's product positioning in the growing worldwide digital telecommunications market. Teleconference products sales increased by $1.5 million compared to 1995 primarily as a result of increased sales of the Call Port and sales of the Consortium(TM) product, which was acquired at the end of 1995. This increase was partially offset by the decrease in sales of the Company's ConferenceMaster product. Voicecrafter sales were slightly increased over prior year. The Company anticipates that there will be continued pricing pressure on teleconferencing products. The Company typically fills orders for its products within 7 to 60 days of the receipt of the purchase order. Customers usually purchase products on an as-needed basis and, accordingly, the Company generally has less than 45 days net sales in backlog. Backlog currently consists of purchase orders received by the Company with a schedule of deliveries within twelve months of the purchase order date. Written commitments without delivery schedules are not considered in calculating backlog. The Company's total backlog of product orders as of December 31, 1996 was approximately $5.7 million. The Company expects that all of this backlog will be filled during the current year. Gross profit as a percentage of net sales improved to 63% in 1996 from 61% in 1995 and 59% in 1994. Gross profit margin has steadily improved primarily due to higher margins on transmission products and the effect 16 17 Coherent Communications Systems Corporation of increased sales without a significant increase in manufacturing overhead spending, resulting in reduced unit manufacturing costs. Selling expense remained at 16% of sales during 1996 and 1995 compared to 17% in 1994, but increased by $1.9 million in 1996 and $1.5 million in 1995. The Company has continued to expand its sales and marketing functions to support plans for growth of its transmission and teleconference products. During 1996 the Company expanded the strategic partnering functions and also enhanced product management. Selling staff was increased to expand sales in China, Singapore, Japan and Latin America during 1996. Expansion of the Technical Assistance Center and personnel increases in the Marketing areas contributed to the increased spending. Marketing programs in 1995 included the introduction of an improved ConferenceMaster and a new Call Port. Product development and engineering expenses increased by $1.7 million or 36% and $.6 million or 15% in 1996 and 1995, respectively. The increase in product development and engineering expenses permitted continued work on a number of customer-specific projects throughout 1996 while simultaneously extending our basic product line. In addition, a dedicated team was left in place to work on our next version of technology and hardware platform in parallel with general development efforts. Increases in 1995, resulted from additional personnel and investments in voice enhancement software products including payments for licenses. The Company will continue to invest in product development to remain competitive in the telecommunications market. General and administrative expenses increased $1 million in both 1996 and 1995, while remaining constant as a percentage of sales. The increase in general and administrative expenses in 1996 and 1995 were primarily the result of an increase in administrative activities required to support the Company's continued growth. In light of the anticipated development of new wireless service markets, the Company will increase its operating expenses to position the Company for future growth, especially in the United States, Latin America and in Asia. The expense investment in personnel and related operating expenses will be made while maintaining the current return on sales. The Company's forward looking statements of expected growth revenue are subject to various risks, such as an unanticipated general decline in infrastructure investment in developing countries or worldwide reductions in telecommunications expenditures. Income taxes reflect an effective tax rate of 36% in 1996 and 40% in 1995 and 1994. The decrease in effective tax rate was due in part to tax benefits recorded on export sales during 1996. Liquidity and Capital Resources The Company has cash and short term investments totaling $16.8 million. Short term investments are generally limited to obligations of the U.S. Government and its agencies with a maturity of less than one year. The Company continues to generate sufficient cash from operations to fund its working capital and capital expenditure requirements. The Company has available a $10 million uncommitted bank line of credit to provide a supplementary source of funds in the event of accelerated working capital requirements, however, the line has not been utilized in 1996 or 1995. During 1996, receivables and inventories increased to support the significant growth in sales, however, days outstanding in receivables decreased during 1996 compared to 1995. Inventory turns on cost of sales were approximately seven in 1996 and 1995. During 1995, the Company acquired substantially all the assets, technology, and certain liabilities of Teleconferencing Technologies, Inc. In exchange, the Company agreed to pay $1,500,000 in cash, of which $450,000 was paid at closing, $350,000 paid upon the completion of the documentation of certain technology and $700,000 plus accrued interest was paid one year from the closing date. The assumed liabilities were paid at closing. The note was paid in full as of December 31, 1996. During 1994, the Company raised $3.7 million from an initial public stock offering. In conjunction with the offering, the Company issued a note for $4 million to redeem its outstanding preferred stock. The note was due in four equal annual installments. Offering proceeds of $1 million were used to pay the initial installment. The second installment was paid in June of 1995 and the remaining two installments were paid in full by September 1996. 17 18 Coherent Communications Systems Corporation The Company's business has not been capital asset intensive, and capital asset expenditures in any year normally are not significant. Capital expenditures for 1996 and 1995 were $2.0 million and $1.4 million, respectively, and relate primarily to the purchase of manufacturing and engineering equipment, computerized development equipment for new products, and the installation of an enhanced integrated information system. It is expected that during 1997 the Company will invest approximately $3-$5 million in capital expenditures predominantly in product development and improvements related to the new facility. The Company has agreed to lease a new facility for its worldwide headquarters. Construction of the facility commenced in September 1996 and is expected to be completed in September 1997. The Company's lease will be for a term of 15 years, beginning upon the completion of the facility. The Company has terminated the lease of the existing Virginia headquarters in accordance with the lease provision and is not subject to significant cancellation costs. 18 19 Coherent Communications Systems Corporation ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report............................................ 20 Consolidated Balance Sheets as of December 31, 1996 and 1995............ 21 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994................... 22 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994................... 23 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994................... 24 Notes to Consolidated Financial Statements.............................. 25-32 Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1996, 1995 and 1994......................... 33 Schedules not listed above have been omitted because they are either not applicable or the required information has been given elsewhere in the consolidated financial statements. 19 20 Coherent Communications Systems Corporation Independent Auditors' Report The Board of Directors Coherent Communications Systems Corporation: We have audited the accompanying consolidated financial statements of Coherent Communications Systems Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements we also have audited the related financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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 financial position of Coherent Communications Systems Corporation and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule when considered in relation to the basic consolidated financial statements taken as a whole presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Jericho, New York January 31, 1997 20 21 Coherent Communications Systems Corporation Consolidated Balance Sheets December 31, 1996 and 1995 (Amounts in thousands except shares)
1996 1995 ------------- ------------- ASSETS Current assets Cash and cash equivalents $ 9,251 $ 3,352 Short term investments 7,518 --- Accounts receivable - trade, less allowances ($684 in 1996 and $449 in 1995) 10,065 8,068 Notes receivable from related parties --- 7,125 Inventories 3,301 2,769 Other current assets 562 1,295 Deferred taxes 547 375 ------------- ------------- Total current assets 31,244 22,984 Property, plant and equipment Building and leasehold improvements 314 239 Machinery and equipment 5,115 3,408 Furniture and fixtures 970 755 ------------- ------------- 6,399 4,402 Less accumulated depreciation 2,577 1,469 ------------- ------------- Net property, plant and equipment 3,822 2,933 Goodwill (net of amortization) 1,359 1,583 Other assets 1,133 1,116 ------------- ------------- Total assets $ 37,558 $ 28,616 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 733 $ 862 Accrued expenses 2,675 2,707 Note payable - related party --- 1,000 Notes payable --- 949 Income taxes payable 2,184 1,473 ------------- ------------- Total current liabilities 5,592 6,991 Note payable - related party --- 1,000 Deferred taxes 167 177 ------------- ------------- Total liabilities 5,759 8,168 ------------- ------------- Stockholders' equity Common stock, par value $.01 per share; authorized - 30,000,000 shares; issued and outstanding, 15,128,000 in 1996 and 14,733,000 in 1995 151 147 Additional paid-in capital 10,657 9,058 Retained earnings (from December 31, 1993) 20,991 11,243 ------------- ------------- Total stockholders' equity 31,799 20,448 ------------- ------------- Total liabilities and stockholders' equity $ 37,558 $ 28,616 ============= =============
See accompanying notes to consolidated financial statements. 21 22 Coherent Communications Systems Corporation Consolidated Statements of Income Years ended December 31, 1996, 1995 and 1994 (Amounts in thousands except per share amounts)
1996 1995 1994 --------------- --------------- ---------------- Net sales $ 54,431 $ 43,829 $ 30,516 Cost of sales 20,193 17,025 12,633 --------------- --------------- ---------------- Gross profit 34,238 26,804 17,883 --------------- --------------- ---------------- Operating expenses: Selling 8,764 6,823 5,323 Product development and engineering 6,226 4,563 3,970 General and administrative 4,439 3,355 2,305 --------------- --------------- ---------------- Total operating expenses 19,429 14,741 11,598 --------------- --------------- ---------------- Operating income 14,809 12,063 6,285 Interest income-net (443) (587) (104) --------------- --------------- ---------------- Income before income taxes 15,252 12,650 6,389 Income tax expense 5,504 5,060 2,588 --------------- --------------- ---------------- Net income 9,748 7,590 3,801 Preferred stock dividends -- -- (148) --------------- --------------- ---------------- Net income applicable to common stockholders $ 9,748 $ 7,590 $ 3,653 =============== =============== ================ Net income per common share $ .63 $ .49 $ .26 =============== =============== ================ Weighted average common and common equivalent shares 15,480 15,440 13,868 =============== =============== ================
See accompanying notes to consolidated financial statements. 22 23 Coherent Communications Systems Corporation Coherent Communications Systems Corporation Consolidated Statements of Stockholders' Equity Years ended December 31, 1996, 1995 and 1994 (Amounts in thousands)
Retained Total Common Stock Additional Earnings Stockholders' Shares Amount Paid in Capital (Deficit) Equity Balance - December 31, 1993 14,154 $142 $2,325 - $2,467 Net income - - - $3,801 3,801 Dividends on preferred stock - - - (148) (148) Net proceeds from public stock offering 1,600 16 3,728 - 3,744 Shares contributed by Safeguard (2,820) (28) 28 - - Exercise of employee stock options 812 8 519 - 527 -------- -------- -------- -------- -------- Balance - December 31, 1994 13,746 138 6,600 3,653 10,391 Net income - - - 7,590 7,590 Tax benefit of non-qualified options - - 1,540 - 1,540 Exercise of employee stock options 987 9 918 - 927 -------- -------- -------- -------- -------- Balance - December 31, 1995 14,733 147 9,058 11,243 20,448 Net income - - - 9,748 9,748 Tax benefit of non-qualified options - - 984 - 984 Exercise of employee stock options 395 4 615 - 619 -------- -------- -------- -------- -------- Balance - December 31, 1996 15,128 $151 $10,657 $20,991 $31,799 ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 23 24 Coherent Communications Systems Corporation Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994 (Amounts in thousands)
1996 1995 1994 ---------- ----------- ----------- Operating activities Net income $9,748 $7,590 $3,801 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 1,332 792 960 Increase in deferred income taxes (182) (92) (146) Changes in working capital items: Receivables (1,997) (3,826) (1,074) Inventories (532) (441) (1,068) Other current assets 716 -- (387) Accounts payable (129) 242 259 Accrued expenses (32) 488 446 Income taxes payable 711 472 816 ---------- ----------- ----------- Cash provided by operating activities 9,635 5,225 3,607 ---------- ----------- ----------- Investing activities Purchase of short term investments (7,518) -- -- Purchase of TTI, net of cash -- (1,400) -- Increases in notes receivable - related parties -- (6,250) (4,475) Payments received on note receivable - related parties 7,125 4,270 1,437 Increase in long-term note receivable -- (1,000) -- Expenditures for property, plant and equipment (1,997) (1,433) (761) ---------- ----------- ----------- Cash provided by (used in) investing activities (2,390) (5,813) (3,799) ---------- ----------- ----------- Financing activities Net proceeds from issuance of common stock -- -- 3,744 Exercise of stock options and related tax benefit 1,603 2,467 107 Debt repayments to related party (2,000) (1,000) (1,461) Debt repayment related to TTI purchase (949) -- -- Preferred dividends -- -- (148) ---------- ----------- ----------- Cash provided by (used in) financing activities (1,346) 1,467 2,242 ---------- ----------- ----------- Increase in cash 5,899 879 2,050 Cash and cash equivalents- beginning of year 3,352 2,473 423 ---------- ----------- ----------- Cash and cash equivalents- end of year $9,251 $3,352 $2,473 ========== =========== ===========
See accompanying notes to consolidated financial statements. 24 25 Coherent Communications Systems Corporation Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 [1] Business of the Company Coherent Communications Systems Corporation, a Delaware corporation ("Coherent" or "the Company"), develops, manufactures and markets voice enhancement products for wireless (including digital cellular), satellite-based and wireline telecommunications systems throughout the world. Coherent's principal products are transmission products and teleconference products. The Company's transmission and teleconference products utilize a proprietary high speed RISC microchip along with its proprietary echo cancellation software to enhance the quality of voice communications during a telephone call. The Company's products are compatible with domestic and foreign telecommunications systems. The Company's products are marketed worldwide and its customers consist primarily of public telephone companies and large publicly-held corporations. Two corporations accounted for 23% and 34% of the December 31, 1996 and 1995 accounts receivable balance, respectively. One customer accounted for 12%, 18% and 11% of net sales for 1996, 1995 and 1994, respectively. A different customer accounted for approximately 12% of 1995 net sales. [2] Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Coherent Communications Systems Corporation and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Fair Value of Financial Instruments The carrying value of all financial instruments approximates fair value. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts are not expected to differ materially from those estimates. Inventories Inventories are stated at the lower of standard cost, which approximates actual cost (FIFO basis), or market. The components of inventory at December 31, 1996 and 1995 are as follows: raw materials of $2,263,000 and $1,924,000, work-in process of $786,000 and $738,000 and finished goods of $252,000 and $107,000, respectively. Property, Plant and Equipment Property, plant and equipment are depreciated on a straight-line basis based on the estimated useful lives of the assets (building and leasehold improvements - 5 to 13 years, machinery and equipment - 3 to 7 years, and furniture and fixtures -8 years). 25 26 Coherent Communications Systems Corporation Notes to Consolidated Financial Statements, Continued Goodwill The goodwill associated with the purchased assets and technology of Teleconferencing Technologies, Inc. (Note 3) is being amortized over a period of seven years. During 1996, $224,000 was recorded as amortization on the purchase. The Company assesses the recoverability of such excess costs based upon the undiscounted anticipated future cash flows of the business acquired. Revenue Recognition and Warranty Expenses Sales revenue is generally recognized as products are shipped and invoiced which in certain cases requires prior customer acceptance of the product. Warranty expenses are accrued at the time of sale based upon the Company's estimated cost to repair expected returns of products. Cash, Cash Equivalents and Short-term Investments The Company considers temporary cash investments with original maturities of three months or less at the time of purchase to be cash equivalents. Short term investments consist of U.S. Government Agency bonds due within one year. The market value of these securities at year end approximate their amortized cost. The Company has classified its short term investments as held-to-maturity and adjusts the carrying amount for the amortization or accretion of premiums or discounts. A decline in the market value of any held-to-maturity security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. In 1996, 1995 and 1994, the Company paid $3,975,000, $3,136,000 and $2,062,000, respectively in income taxes and $123,000, $124,000 and $75,000 in interest, respectively. In 1995, the remaining balance of $949,000 due in connection with the purchase of assets and technology described in Note 3, was treated as a non-cash financing activity. The balance of this debt was paid during 1996. During 1994, non-cash financing activities included the redemption of the convertible preferred stock in exchange for a $4 million note payable to Safeguard Scientifics, Inc. ("Safeguard") and a loan to an officer of the Company for $420,000 for the exercise of stock options. Income Taxes Income taxes are accounted for using the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Under this method, the effect on deferred taxes of a subsequent change in tax rates is recognized in income in the period that includes the enactment date. Income tax expense is reduced by allowable tax credits using the flow-through method. 26 27 Coherent Communications Systems Corporation Notes to Consolidated Financial Statements, Continued Net Income Per Common Share Net income per share is computed by dividing net income applicable to common stockholders by the weighted average number of common and common equivalent shares outstanding. Weighted average common and common equivalent shares include common shares and stock options using the treasury stock method. For 1994, weighted average common and common equivalents shares have been reduced for the contribution of 2,820,850 shares of common stock by Safeguard to the capital of the Company. Stock Based Compensation In 1996, the Company adopted Financial Accounting Standards Board No. 123, " Accounting for Stock-Based Compensation", which gives companies the option to adopt the fair value method for expense recognition of employee stock options or to continue to account for stock options and stock based awards using the intrinsic value method as outlined under Accounting Principles Board Opinion No. 25, " Accounting for Stock Issued to Employees" ("APB25") and to make pro forma disclosures of net income and net income per share as if the fair value method had been applied. The Company has elected to continue to apply APB 25 for future stock options and stock based awards and has disclosed proforma net income and net income per share as if the fair value method had been applied. Deficit Elimination The Company's Board of Directors, with the consent of the stockholders, approved a quasi-reorganization of the Company effective December 31, 1993. As part of the quasi-reorganization, the deficit in retained earnings of $13,643,500 was reclassified to additional paid-in capital. [3] Acquisition On October 25, 1995, the Company acquired substantially all of the assets, technology and certain liabilities of Teleconferencing Technologies, Inc. and its Canadian affiliate (collectively, "TTI"). In exchange, the Company agreed to pay $1,500,000 in cash, of which $450,000 was paid at closing, $350,000 was paid upon the completion of the documentation of certain technology and $700,000 plus accrued interest was paid one year from the closing date. The assumed liabilities were paid at closing. The transaction was accounted for using the purchase method. Accordingly, the purchase price was allocated to assets acquired based on their estimated fair values resulting in approximately $1.5 million of costs in excess of net assets. The results of operations of the business acquired prior to its acquisition are not material to the Company. The Company has agreed to pay TTI royalties on the sale of audio teleconferencing bridge products for the four years after the closing as follows: first year, 10%; second year 8%; third year, 6%; and fourth year, 4%. Royalty payments of $22,000 were paid during 1996 and are paid on cash receipts related to the sales. [4] Related Party Transactions Prior to the Company's initial public offering in 1994, the Company was a 99.6% owned subsidiary of Safeguard. Safeguard has a 32% interest in the Company at December 31,1996. 27 28 Coherent Communications Systems Corporation Notes to Consolidated Financial Statements, Continued During 1993, Safeguard and the Company entered into an agreement whereby the Company would lend to Safeguard a portion of its excess cash and receive a negotiated interest rate which was higher than the rate the Company might realize by independently investing the funds, but which was less than Safeguard's cost of funds. Under this agreement, Safeguard borrowed $2.4 million and $3.1 million in 1995 and 1994, respectively, from the Company. All amounts were repaid in 1996 and it is not expected that additional borrowings will take place. The Company is party to an administrative services agreement with Safeguard, which was renewed December 1, 1993 for five years, whereby Safeguard provides the Company with day-to-day business and organizational strategy, financial and investment management, and merchant and investment banking services. The agreement provides for the payment on a monthly basis of an administrative service fee, calculated on a sliding scale ranging from 1-1/2%- 1%, of net revenues of the Company. For 1996, 1995 and 1994, the management fee incurred amounted to $717,000, $613,000, and $357,000, respectively, and is included in general and administrative expenses in the accompanying consolidated statements of income. Management believes that the method used to allocate costs to the Company and the amount of such costs are reasonable based upon the services provided. In connection with the initial public offering, 400,000 shares of the Company's Series A Redeemable Convertible Preferred Stock owned by Safeguard were redeemed by the Company, for a $4,000,000 note payable, which was due in four $1,000,000 installments. The offering proceeds of $1,000,000 was used to pay the initial installment. The second installment was paid in June of 1995 and the remaining two installments were paid in full by September 1996. During 1994, the Company invested $25,000 in an Australian based distribution company for a 25% interest which is included in other assets. The Company has granted the distributor exclusive distribution rights for teleconferencing products in Australia. Sales to the affiliate accounted for approximately $1,190,000, $572,000 and $1,181,000 of the Company's 1996, 1995 and 1994 net sales, respectively, and $62,000 and $67,000 of the Company's accounts receivable balance as of December 31, 1996 and 1995, respectively. [5] Leases The Company occupies premises under long-term operating lease arrangements expiring at various dates through January 2000. The leases provide for escalation charges based upon changes in the consumer price index or a preset cost increase factor. Also, the Company is required to pay certain executory costs including taxes and insurance. The Company has terminated the lease agreement of the existing Virginia facility and is not subject to significant cancellation charges. The Company has completed a new lease agreement for a facility for which annual rent is expected to be about $882,000 per year. Future minimum lease payments under these and other operating leases for the succeeding five years are: $956,000- 1997; $1,122,000- 1998; $1,175,000- 1999; $906,000- 2000, $882,000- 2001. Rent expense was $751,000, $676,000 and $625,000 in 1996, 1995 and 1994, respectively. The Company is guarantor of the landlord's mortgage totaling $141,500 at December 31, 1996, on the space leased in Hauppauge, New York. [6] Stockholders' Equity Initial Public Offering On June 16, 1994, the Company completed an initial public stock offering for the sale of 1,600,000 shares of its common stock at a price of $2.50 per share. The proceeds of $3,743,600 were net of underwriting fees and expenses of $256,400. In connection with the offering, the Company redeemed its outstanding convertible preferred stock discussed in Note 4 in exchange for a $4,000,000 note payable to Safeguard. In addition, Safeguard contributed 2,820,850 shares of common stock to the Company. 28 29 Coherent Communications Systems Corporation Notes to Consolidated Financial Statements, Continued Stock Options The Company has adopted the following stock option plans: the 1982 Amended and Restated Stock Option Plan ("the 1982 Plan") and the 1993 Equity Compensation Plan ("the 1993 Plan" and together with the 1982 Plan, "the Plans"). The 1982 Plan provides for the issuance of a maximum of 2,500,000 shares of Common Stock. Options to purchase approximately 224,000 shares remain outstanding under the 1982 Plan. No further awards may be made under the 1982 Plan. The 1993 Plan provides for the issuance of a maximum of 1,500,000 shares of Common Stock pursuant to the grant of ISOs, NQSOs, Stock Appreciation Rights (SARs), restricted stock awards and grants to employees, non employee directors and consultants of the Company and its subsidiary. The Plans are administered by the Compensation Committee of the Board of Directors (the "Committee"). As of December 31, 1996, the Committee has only granted to its employees and directors ISOs and NQSOs under the Plans with terms that typically provide for vesting over a four or five year period, an expiration date seven years after the date of the grant and a per share exercise price equal to the fair market value of a share of Common Stock on the date of grant. The Company applies APB 25 and related interpretations in accounting for its various stock option plans. Had compensation cost been recognized consistent with SFAS 123, the Company's consolidated net income would have been reduced to $9,538,000 and $7,516,000, respectively, in 1996 and 1995. There was no material impact on earnings per share. The per share weighted-average value of stock options issues by the Company during 1996 and 1995 was $12.27 and $12.50, respectively, on the date of grant. In 1996 and 1995, the assumptions of no dividends, expected volatility of 55%, and an average expected life of 6 years were used by the Company in determining the fair value of the stock options granted using the Black Scholes option-pricing model. In addition, the calculations assumed a risk-free interest rate of 5.9% to 6.6% in 1996 and 5.5% to 6.1% in 1995. A summary of the stock options activity is as follows:
1996 1995 1994 -------------------------- -------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------- ------------ ------------- ------------ ------------ ------------ (000's omitted except per share amounts) Outstanding at beginning of year 950 $ 3.27 1,940 $ 1.36 2,530 $ 0.96 Options granted 232 20.84 76 21.38 331 2.68 Options exercised (389) 1.57 (977) 0.94 (802) 0.65 Options canceled (36) 19.37 (89) 2.57 (119) 1.83 -------- -------- -------- -------- -------- -------- Outstanding at end of year 757 $ 8.79 950 $ 3.27 1,940 $ 1.36 -------- -------- -------- -------- Options exercisable at year-end 148 274 969 Shares available for future grant 718 915 957
Approximately 485,000 of the options outstanding range in exercise price from $.60 to $4.00 with a weighted average remaining contractual life of 3.5 years and a weighted average exercise price of $1.97. Options for 136,000 shares are currently exercisable with a weighted average exercise price of $1.44. The remaining 272,000 options outstanding range in exercise price from $12.38 to $28.00 with a weighted average remaining contractual life of 6.7 years and a weighted average exercise price of $20.98. Options for 12,000 shares are currently exercisable with a weighted average exercise price of $20.75. 29 30 Coherent Communications Systems Corporation Notes to Consolidated Financial Statements, Continued [7] Financing Arrangements The Company has a $10,000,000 uncommitted, unused line of credit with a bank that expires in June 1997, unless renegotiated. Borrowings under the line of credit bear interest at the bank's prime rate and are collateralized by accounts receivable of the Company. In 1996 and 1995, no amounts were outstanding under the line of credit. [8] Income Taxes The provision for taxes on income at December 31 is comprised of:
(000's omitted) 1996 1995 1994 -------------- ------------ ------------- Current Federal $ 5,289 $ 4,546 $ 2,345 State 397 606 389 ------------ ------------ ------------- 5,686 5,152 2,734 -------------- ------------ ------------- Deferred Federal (174) (74) (134) State (8) (18) (12) -------------- ------------ ------------- (182) (92) (146) -------------- ------------ ------------- $ 5,504 $ 5,060 $ 2,588 ============== ============ =============
A reconciliation of the effective tax rate to the Federal statutory rate follows:
(000's omitted) 1996 1995 1994 -------------- ------------- -------------- Statutory tax provision $ 5,186 $ 4,301 $ 2,172 Increase (decrease) in taxes resulting from: State taxes, net of federal benefits 262 387 254 Other 56 372 162 -------------- ------------- -------------- $ 5,504 $ 5,060 $ 2,588 ============== ============= ==============
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below:
(000's omitted) 1996 1995 --------------- -------------- Deferred tax assets: Accounts receivable allowances $ 258 $ 180 Inventory 244 195 Goodwill amortization 45 - =============== ============== $ 547 $ 375 =============== ============== Deferred tax liabilities: Accelerated depreciation (167) (177) =============== ============== $ (167) $ (177) =============== ==============
Management of the Company believes that it is more likely than not that net deferred tax assets will be realized through future taxable earnings or alternative tax strategies. 30 31 Coherent Communications Systems Corporation Notes to Consolidated Financial Statements, Continued [9] Savings Plan The Company has a 401(k) Profit Sharing Plan for the benefit of eligible employees who may contribute up to 15% of eligible base compensation to the plan. During 1996 the company matched dollar for dollar the first 4% of employees contributions and one half of the next 2% of contributions. In 1995 and 1994, the Company matched one half of the first 6% of the employees' contributions. The Company contributed $545,000, $394,000 and $361,000 in 1996, 1995 and 1994, respectively. [10] Other Assets and Accrued Expenses During 1995 and 1994, the Company loaned $1,400,000 to Seattle Silicon, Inc., a chip supplier to the Company. In June 1996, the Company exercised its Warrants to purchase 1,380,304 (as adjusted for stock split) shares of Seattle Silicon, using a $1,000,000 note due from Seattle Silicon to fund the purchase. This investment (included in other assets) is accounted for on the cost basis. The Company renegotiated the remaining $400,000 note from Seattle Silicon (dated July 14,1994) to defer payment until June 30, 1997. The interest accruing on the $400,000 note, at 7%, is paid to the Company monthly. The Company owns approximately 12% of Seattle Silicon and may convert the remaining $400,000 note into additional 10 % interest in Seattle Silicon. Accrued expenses at December 31, 1996 and 1995 include the following: (000's omitted) --------------------------------- 1996 1995 -------------- -------------- Employee benefits $ 242 $ 201 Accrued bonus and profit sharing 730 1,016 Accrued commissions 193 103 Accrued professional fees 155 319 Accrued warranty reserves 337 420 Miscellaneous other 1,018 648 -------------- -------------- $ 2,675 $ 2,707 ============== ============== [11] Contingencies The Company is involved in various legal actions incidental to the normal conduct of its business. Management does not believe that the ultimate resolution of these actions will have a material adverse affect on the Company's consolidated financial position. [12] Export Sales Marketing in foreign countries is accomplished through independent sales representatives paid on a commission basis and through a sales office in England, Japan and Singapore. Export sales accounted for 69%, 75% and 71% of the Company's net sales in 1996, 1995 and 1994, respectively. Sales are principally denominated in U.S. dollars. During 1996, 1995 and 1994, net sales into Europe, Africa and the Middle East contributed 42%, 51% and 50%; net sales into Asia/Pacific contributed 18%, 20% and 10%; and net sales into other foreign countries accounted for 9%, 4% and 11%, respectively. 31 32 Coherent Communications Systems Corporation Quarterly Information (unaudited) (in thousands except per share amounts)
1996, Quarter Ended March 31 June 30 September 30 December 31 -------------- -------------- ----------------- ---------------- Net Sales $ 11,109 $ 13,165 $ 14,102 $ 16,055 Gross Profit 7,022 8,361 8,874 9,981 Net Income 2,118 2,280 2,445 2,905 EPS $ 0.14 $ 0.15 $ 0.16 $ 0.19 1995, Quarter Ended March 31 June 30 September 30 December 31 -------------- -------------- ----------------- ---------------- Net Sales $ 9,780 $ 11,001 $ 11,018 $ 12,030 Gross Profit 5,965 6,701 6,612 7,526 Net Income 1,645 1,816 1,864 2,265 EPS $ 0.11 $ 0.12 $ 0.12 $ 0.15
Earnings per share calculations for each of the quarters are based on the weighted average number of shares outstanding in each period. Therefore, the sum of the quarters does not necessarily equal the year to date earnings per share. 32 33 Coherent Communications Systems Corporation Schedule II - Valuation and Qualifying Accounts For the Years Ended December 31, 1996, 1995 and 1994
Balance at Charged to Description beginning of costs and Balance at year expenses Deductions end of year ----------------- --------------- --------------- --------------- 1994: Allowance for doubtful accounts $ 232,300 $ 110,000 $ -- $ 342,300 1995: Allowance for doubtful accounts $ 342,300 $ 156,700 $ (50,000) $ 449,000 1996: Allowance for doubtful accounts $ 449,000 $ 235,200 $ -- $ 684,200
33 34 Coherent Communications Systems Corporation ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the directors of the Company is set forth in the Proxy Statement to be delivered to stockholders in connection with the Company's Annual Meeting of Stockholders to be held on May 15, 1997 (the "Proxy Statement"), which information is incorporated herein by reference. The name, age and position of each executive officer of the Company is set forth under "Executive Officers of the Registrant" in Part I of this report, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information concerning executive compensation and transactions with management is set forth in the Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information concerning relationships and related transactions is set forth in the Proxy Statement, which information is incorporated herein by reference. 34 35 Coherent Communications Systems Corporation Part IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report on Form 10-K: 1. Consolidated Financial Statements: The consolidated financial statements filed as a part of this report are listed in the "Index to Consolidated Financial Statements and Financial Statement Schedule" at Item 8. 2. Consolidated Financial Statement Schedule: The consolidated financial statement schedule filed as part of this report is listed in the "Index to Consolidated Financial Statements and Financial Statement Schedule" at Item 8. Schedules other than those listed on the accompanying Index to Consolidated Financial Statements and Financial Statement Schedule are omitted for the reason that they are either not required, not applicable, or the required information is included in the consolidated financial statements or notes thereto. (b) Reports on Form 8-K None. (c) Exhibits: The following is a list of exhibits required by Item 601 of Regulation S-K filed as part of this report. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. Exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses. All other exhibits are being filed with this report. Exhibit No. Description 3(i) - Certificate of Incorporation of the Company, as amended by a Certificate of Amendment.(3) (Exhibit 3.1(i)) 3(ii) - By-laws of the Company as amended.(5)(Exhibit 3(ii)) 4.1 - Specimen stock certificate representing the Common Stock.(3)(Exhibit 4.1) 10.1 - Administrative Services Agreement dated as of December 1, 1993, between the Company and Safeguard Scientifics, Inc.(3)(Exhibit 10.1) 10.2 - Asset Purchase Agreement dated as of March 18, 1987 between COMSAT Telesystems, Inc. and the Company.(1) (Exhibit 10.2) *10.3 - 1982 Stock Option Plan.(1)(Exhibit 10.3) *10.4 - 1993 Equity Compensation Plan, as amended and restated. *10.4.1 - Stock Ownership Plan(5)(Exhibit 10.4.1) 10.4.2 - Compensation Plan for Outside Directors *10.5 - Form of Non-Qualified Stock Option Agreement of the Company for Employees.(2)(Exhibit 10.5) *10.6 - Form of Non-Qualified Stock Option Agreement of the Company for Directors.(2)(Exhibit 10.6) *10.7 - Form of Incentive Stock Option Agreement of the Company for Employees.(2)(Exhibit 10.7) 10.8 - Lease dated as of February 1, 1980, as amended, between LE-AX Corp. and the Company, for the property at 60 Commerce Drive, Hauppauge, New York.(1)(Exhibit 10.8) 35 36 Coherent Communications Systems Corporation Item 14. Exhibits, Financial Statement Schedules And Reports On Form 8-K (c) Exhibits (continued): 10.9.1 - Lease dated as of July 31, 1992 between Linpro Lansdowne Two Limited Partnership and the Company, for the property at 44084 Riverside Parkway, Leesburg, Virginia.(1)(Exhibit 10.9.1) 10.9.2 - Sublease dated as of August 1993 between G.D. Searle & Co. and the Company, for the property at 44084 Riverside Parkway, Leesburg, Virginia.(1)(Exhibit 10.9.2) 10.9.3 - Lease dated August 9, 1996 by and between Opus East,, L.L.C., Landlord, and the Company for the premises located in Loudon County, Virginia known as University Center. 10.10 - Lease dated as of October 15, 1990 between Kibswell Holdings Limited and the Company, for the property at Unit B The Quadrant, Barton Lane, Abingdon, England.(1)(Exchange 10.10) 10.11 - Tax Agreement dated January 1, 1983 between Safeguard Scientifics, Inc. and the Company.(1)(Exhibit 10.11) *10.12 - Severance and Non-Competition Agreement dated as of February 10, 1994 between Daniel McGinnis and the Company. (1)(Exhibit 10.12) 10.13 - Form of Demand Promissory Note of Safeguard Scientifics, Inc., dated April 2, 1993, payable to the Company, as amended by letter Agreement dated January 12, 1994.(1)(Exhibit 10.13) 10.14 - Form of Promissory Note of the Company payable to Safeguard Scientifics, Inc. with respect to the redemption of redeemable convertible preferred stock.(3) (Exhibit 10.14) 10.15 - Supply and License Agreement dated February 7, 1992, between the Company and TRT Telecommunications Radioelectriques et Telephoniques.(1)(Exhibit 10.15) 10.16 - International Distribution Agreement dated as of January 2, 1992 between the Company and Cohpac Communications Systems Pty Limited.(1)(Exhibit 10.16) 10.17 - North America Value Added Reseller Agreement dated as of December 7, 1992 between the Company and Wandel & Goltermann Inc.(1)(Exhibit 10.17) *10.18 - Management Incentive Compensation Plan, as adopted by the Company.(2)(Exhibit 10.18) 10.19 - License Agreement, effective as of June 1, 1994, between the Company and Systems Technology Associates, Inc. (3)(Exhibit 10.19) 10.20 - Value Added Reseller Agreement dated December 31, 1992 as amended June 13, 1995 between the Company and Nokia Telecommunications Oy(5)(Exhibit 10.21)** 10.21 - Memorandum of Understanding dated February 27,1997 between the Company and Nokia Telecommunications Oy** 11.0 - Computation of net income per share. 36 37 Coherent Communications Systems Corporation Item 14. Exhibits, Financial Statement Schedules And Reports On Form 8-K (c) Exhibits (continued): 21.0 - Subsidiaries of registrant. 23.0 - Consent of KPMG Peat Marwick LLP 27.0 - Financial Data Schedule. - ---------------- (1) Filed on March 31, 1994 as an exhibit to the Company's Registration Statement on Form S-1 (No.33-77160) and incorporated by reference. (2) Filed on May 24, 1994 as an exhibit to the Company's Registration Statement on Form S-1 Amendment #1 (No.33-77160) and incorporated by reference. (3) Filed on June 10, 1994 as an exhibit to the Company's Registration Statement on Form S-1 Amendment #2 (No.33-77160) and incorporated by reference. (4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated by reference. (5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference. * Management contract or compensatory plan or arrangement. ** Confidential portions of the exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 37 38 Coherent Communications Systems Corporation SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this to be signed on its behalf by the undersigned, thereunto duly authorized. COHERENT COMMUNICATIONS SYSTEMS CORPORATION By: /s/ Charles A. Root ----------------------------------------- Charles A. Root, Chairman of the Board of Directors Date: March 28,1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title(s) Date --------- -------- ---- March 28,1997 / s/ Charles A. Root Chairman of the Board of Directors - ---------------------------- Charles A. Root / s/ Daniel L. McGinnis Chief Executive Officer and Director March 28,1997 - ---------------------------- (Principal Executive Officer) Daniel L. McGinnis March 28,1997 /s/ David L. Powell President and Chief Operating Officer - ---------------------------- David L. Powell /s/ Michael P. Gendron Vice President, Chief Financial Officer March 28,1997 - ---------------------------- (Principal Financial and Accounting Michael P. Gendron Officer) /s/ Lawrence J. Gallick Director March 28,1997 - ---------------------------- Lawrence J. Gallick /s/ Delbert W. Johnson Director March 28,1997 - ---------------------------- Delbert W. Johnson /s/ Warren V. Musser Director March 28,1997 - ---------------------------- Warren V. Musser /s/ Charles M. Skibo Director March 28,1997 - ---------------------------- Charles M. Skibo /s/ Ernst Volgenau Director March 28,1997 - ---------------------------- Ernst Volgenau
38 39 Coherent Communications Systems Corporation EXHIBIT INDEX The following is a list of exhibits required by Item 601 of Regulation S-K filed as part of this Report. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses. The page numbers listed refer to the page numbers where such exhibits are located using the sequential numbering system specified by Rule 0-3. Exhibit No. Description 3(i) - Certificate of Incorporation of the Company, as amended by a Certificate of Amendment.(3) (Exhibit 3.1(i)) 3(ii) - By-laws of the Company as amended.(5)(Exhibit 3(ii)) 4.1 - Specimen stock certificate representing the Common Stock.(3)(Exhibit 4.1) 10.1 - Administrative Services Agreement dated as of December 1, 1993, between the Company and Safeguard Scientifics, Inc.(3)(Exhibit 10.1) 10.2 - Asset Purchase Agreement dated as of March 18, 1987 between COMSAT Telesystems, Inc. and the Company.(1)(Exhibit 10.2) *10.3 - 1982 Stock Option Plan.(1)(Exhibit 10.3) *10.4 - 1993 Equity Compensation Plan, as amended and restated. *10.4.1 - Stock Ownership Plan(5)(Exhibit 10.4.1) 10.4.2 - Compensation Plan for Outside Directors *10.5 - Form of Non-Qualified Stock Option Agreement of the Company for Employees.(2)(Exhibit 10.5) *10.6 - Form of Non-Qualified Stock Option Agreement of the Company for Directors.(2)(Exhibit 10.6) *10.7 - Form of Incentive Stock Option Agreement of the Company for Employees.(2)(Exhibit 10.7) 10.8 - Lease dated as of February 1, 1980, as amended, between LE-AX Corp. and the Company, for the property at 60 Commerce Drive, Hauppauge, New York.(1)(Exhibit 10.8) 10.9.1 - Lease dated as of July 31, 1992 between Linpro Lansdowne Two Limited Partnership and the Company, for the property at 44084 Riverside Parkway, Leesburg, Virginia.(1)(Exhibit 10.9.1) 10.9.2 - Sublease dated as of August 1993 between G.D. Searle & Co. and the Company, for the property at 44084 Riverside Parkway, Leesburg, Virginia.(1)(Exhibit 10.9.2) 10.9.3 - Lease dated August 9, 1996 by and between Opus East, L.L.C., Landlord, and the Company, for the premises located in Loudon County, Virginia known as University Center. 10.10 - Lease dated as of October 15, 1990 between Kibswell Holdings Limited and the Company, for the property at Unit B The Quadrant, Barton Lane, Abingdon, England.(1)(Exchange 10.10) 10.11 - Tax Agreement dated January 1, 1983 between Safeguard Scientifics, Inc. and the Company.(1)(Exhibit 10.11) *10.12 - Severance and Non-Competition Agreement dated as of February 10, 1994 between Daniel McGinnis and the Company. (1)(Exhibit 10.12) 39 40 Coherent Communications Systems Corporation 10.13 - Form of Demand Promissory Note of Safeguard Scientifics, Inc., dated April 2, 1993, payable to the Company, as amended by letter Agreement dated January 12, 1994.(1) (Exhibit 10.13) 10.14 - Form of Promissory Note of the Company payable to Safeguard Scientifics, Inc. with respect to the redemption of redeemable convertible preferred stock.(3)(Exhibit 10.14) 10.15 - Supply and License Agreement dated February 7, 1992, between the Company and TRT Telecommunications Radioelectriques et Telephoniques.(1)(Exhibit 10.15) 10.16 - International Distribution Agreement dated as of January 2, 1992 between the Company and Cohpac Communications Systems Pty Limited.(1)(Exhibit 10.16) 10.17 - North America Value Added Reseller Agreement dated as of December 7, 1992 between the Company and Wandel & Goltermann Inc.(1)(Exhibit 10.17) *10.18 - Management Incentive Compensation Plan, as adopted by the Company.(2)(Exhibit 10.18) 10.19 - License Agreement, effective as of June 1, 1994, between the Company and Systems Technology Associates, Inc. (3)(Exhibit 10.19) 10.20 - Value Added Reseller Agreement dated December 31, 1992 as amended June 13, 1995 between the Company and Nokia Telecommunications Oy (5)(Exhibit 10.21)** 10.21 - Memorandum of Understanding dated February 27,1997 between the Company and Nokia Telecommunications Oy** 11.0 - Computation of net income per share. 21.0 - Subsidiaries of registrant. 23.0 - Consent of KPMG Peat Marwick LLP 27.0 - Financial Data Schedule - ---------------- (1) Filed on March 31, 1994 as an exhibit to the Company's Registration Statement on Form S-1 (No.33-77160) and incorporated by reference. (2) Filed on May 24, 1994 as an exhibit to the Company's Registration Statement on Form S-1 Amendment #1 (No.33-77160) and incorporated by reference. (3) Filed on June 10, 1994 as an exhibit to the Company's Registration Statement on Form S-1 Amendment #2 (No.33-77160) and incorporated by reference. (4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated by reference. (5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference. * Management contract or compensatory plan or arrangement. ** Confidential portions of the exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. 40 EX-10.4 2 1993 EQUITY COMPENSATION PLAN 1 Coherent Communications Systems Corporation EXHIBIT 10.4 COHERENT COMMUNICATIONS SYSTEMS CORPORATION AMENDED AND RESTATED 1993 EQUITY COMPENSATION PLAN SECTION 1. Purpose; Definitions The purpose of the Coherent Communications Systems Corporation 1993 Equity Compensation Plan (the "Plan") is to provide employees (including employees who are also officers or directors), non-employee directors, and Eligible Independent Contractors (as hereinafter defined) of Coherent Communications Systems Corporation (the "Company") with the opportunity to receive grants of incentive stock options, nonqualified stock options, stock appreciation rights and restricted stock awards. The Company believes that the Plan will enable the Company to attract, retain and motivate its employees, non-employee directors and Eligible Independent Contractors, will encourage Plan participants to contribute materially to the growth of the Company for the benefit of the Company's stockholders, and will align the economic interests of the Plan participants with those of the stockholders. For the purposes of the Plan, the following terms shall be defined as set forth below: a. "Board" means the Board of Directors of the Company. b. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. c. "Committee" means the Committee designated by the Board to administer the Plan. d. "Company" means Coherent Communications Systems Corporation, its subsidiaries or any successor organization. e. "Disability" means permanent and total disability within the meaning of Section-22(e)(3) of the Code. f. "Eligible Independent Contractor" means an independent consultant or advisor hired by the Company to provide bona fide services for the Company that are not in connection with the offer or sale of securities in a capital-raising transaction. g. "Employed by the Company" shall mean employment as an employee or Eligible Independent Contractor or member of the Board, so that for purposes of exercising Stock Options and Stock Appreciation Rights and satisfying conditions with respect to Restricted Stock Grants, a Participant shall not be considered to have terminated employment until the Participant ceases to be an employee, Eligible Independent Contractor or member of the Board, unless the Committee determines otherwise. 2 Coherent Communications Systems Corporation EXHIBIT 10.4 h. "Exchange Act" means the Securities Exchange Act of 1934, as amended. i. "Fair Market Value" means the fair market value of the Stock as determined by the Committee in good faith based on the best available facts and circumstances at the time; provided, however, that where there is a public market for the Stock and the Stock is registered under the Exchange Act, Fair Market Value shall mean the per share or aggregate value of the Stock as of any given date, determined as follows: (i) if the principal trading market for the Stock is a national securities exchange or the Nasdaq National Market, the last reported sale price thereof on the relevant date or, if there were no trades on that date, the latest preceding date upon which a sale was reported, or (ii) if the Stock is not principally traded on such exchange or market, the mean between the last reported "bid" and "asked" prices of Stock on the relevant date, as reported on Nasdaq or, if not so reported, as reported by the National Daily Quotation Bureau, Inc. or as reported in a customary financial reporting services, as applicable and as the Committee determines. j. "Grant" means any Stock Option, Stock Appreciation Right or Restricted Stock award granted pursuant to the Plan. k. "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. l. "Insider" means a Participant who is subject to Section 16 of the Exchange Act. m. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. n. "Participant" means an employee, non-employee director or Eligible Independent Contractor to whom an award is granted pursuant to the Plan. o. "Plan" means the Coherent Communications Systems Corporation 1993 Equity Compensation Plan, as hereinafter amended from time to time. p. "Restricted Stock" means an award of shares of Stock that is subject to restrictions pursuant to Section 7 below. q. "Securities Act" shall mean the Securities Act of 1933, as amended. r. "Securities Broker" means the registered securities broker acceptable to the Company who agrees to effect the cashless exercise of an Option pursuant to Section 5(d) hereof. s. "Stock" means the Common Stock of the Company, par value $.01 per share. -2- 3 Coherent Communications Systems Corporation EXHIBIT 10.4 t. "Stock Appreciation Right" means the right, pursuant to an award granted under Section 6 below, to surrender to the Company all (or a portion) of a Stock Option in exchange for an amount in cash and/or shares of Stock equal in value to the excess of (i) the Fair Market Value, as of the date such right is exercised and the related Stock Option (or such portion thereof) is surrendered, of the shares of Stock covered by such Stock Option (or such portion thereof), over (ii) the aggregate exercise price of such Stock Appreciation Right (or such portion thereof). u. "Stock Option" or "Option" means any option to purchase shares of Stock (including Restricted Stock, if the Committee so determines) granted pursuant to Section 5 below. v. "Termination for Cause" shall mean, except to the extent specified otherwise by the Committee, a finding by the Committee that the Participant has breached his or her employment or service contract, non-competition agreement or other obligation with the Company, or has been engaged in disloyalty to the Company, including, without limitation, fraud, embezzlement, theft, commission of a felony or proven dishonesty in the course of his or her employment or service, or has disclosed trade secrets or confidential information of the Company to persons not entitled to receive such information. SECTION 2. Administration The Plan shall be administered by a Committee which shall consist of two or more non-employee directors appointed by the Board. In the absence of the designation of a Committee to administer the Plan, the Plan shall be administered by the full Board. The Committee shall have the authority to: (a) select the Participants to whom Grants may from time to time be made hereunder; (b) determine the type, size and terms of the Grants to be made to each such Participant; (c) determine the time when the Grants will be made and the duration of any applicable exercise or restriction period, including the criteria for exercisability and the acceleration of exercisability; (d) amend the terms of any outstanding award (with the consent of the Participant) to reflect terms not otherwise inconsistent with the Plan, including, but not limited to, amendments concerning vesting acceleration or forfeiture waiver regarding any award or the extension of a Participant's right with respect to Grants under the Plan as a result of termination of employment or service or otherwise, based on such factors -3- 4 Coherent Communications Systems Corporation EXHIBIT 10.4 as the Committee shall determine, in its sole discretion, or substitution of new Stock Options for previously granted Stock Options, including previously granted Stock Options having high option prices; (e) establish from time to time any policy or program to encourage or require Participants to achieve or maintain equity ownership in the Company through the use of the Plan upon such terms and conditions as the Committee may determine in its sole discretion, and thereafter to amend, modify or terminate such policy or program as the Committee may from time to time deem appropriate; and (f) deal with any other matters arising under the Plan. The Committee shall have full power and authority to administer and interpret the Plan and any Grant made under the Plan, to make factual determinations and to adopt, alter and repeal such administrative rules, guidelines, practices, agreements and instruments for implementing the Plan and for the conduct of its business as it deems necessary or advisable, in its sole discretion. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons having any interest in the Plan or in any Grants made hereunder. All power of the Committee shall be executed in its sole discretion, in the best interest of the Company, not as a fiduciary, and in keeping with the objectives of the Plan. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Grant made under it. Nothing herein shall be deemed to expand the personal liability of a member of the Board or Committee beyond that which may arise under any applicable standards set forth in the Company's Certificate of Incorporation, by-laws and Delaware law, nor shall anything herein limit any rights to indemnification or advancement of expenses to which any member of the Board or the Committee may be entitled under any applicable law, the Company's Certificate of Incorporation or by-laws, agreement, vote of the stockholders or directors, or otherwise. SECTION 3. Stock Subject to the Plan (a) The aggregate number of shares of Stock that may be issued or transferred under the Plan is 1,500,000, subject to adjustment pursuant to Section 3(b) below. Such shares may be authorized but unissued shares or reacquired shares of Stock, including shares purchased by the Company on the open market for purposes of the Plan. In the event the number of shares of Stock issued under the Plan and the number of shares of Stock subject to outstanding awards equals the maximum number of shares of Stock authorized under the Plan, no further awards shall be made unless the Plan is amended to increase the number of shares of Stock issuable and transferable hereunder or additional shares of Stock become available for further awards under the Plan. If and to the extent that Options or Stock Appreciation Rights granted under the -4- 5 Coherent Communications Systems Corporation EXHIBIT 10.4 Plan terminate, expire or are canceled, forfeited, exchanged or surrendered without having been exercised, or if any shares of Restricted Stock are forfeited, the shares subject to such Grants shall again be available for subsequent awards under the Plan. (b) If there is any change in the number or kind of shares of Company Stock outstanding (i) by reason of a stock dividend, spin off, recapitalization, stock split, or combination or exchange of shares, (ii) by reason of a merger, reorganization or consolidation in which the Company is the surviving corporation, (iii) by reason of a reclassification or change in par value, or (iv) by reason of any other extraordinary or unusual event affecting the outstanding Company Stock as a class without the Company's receipt of consideration, or if the value of outstanding shares of Company Stock is substantially reduced as a result of a spin off or the Company's payment of an extraordinary dividend or distribution, then unless such event or change results in the termination of all outstanding awards under the Plan, the Committee shall preserve the value of the outstanding awards by adjusting the maximum number and class of shares issuable under the Plan to reflect the effect of such event or change in the Company's capital structure, and by making appropriate adjustments to the number and class of shares subject to an outstanding award and/or the option price of each outstanding Option and Stock Appreciation Right, except that any fractional shares resulting from such adjustments shall be eliminated by rounding any portion of a share equal to .5 or greater up, and any portion of a share equal to less than .5 down, in each case to the nearest whole number. SECTION 4. Eligibility; Participant Limitations Concerning Issuances All employees, non-employee directors and Eligible Independent Contractors are eligible to participate in the Plan. The maximum aggregate number of shares of Stock that shall be subject to Grants made under the Plan to any Participant shall not exceed 600,000. The terms and provisions of Grants made under the Plan may vary between Participants or as to the same Participant to whom more than one Grant may be awarded. SECTION 5. Stock Options Stock Options may be granted alone, in addition to, or in tandem with other awards granted under the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. The Committee shall have the authority to grant Incentive Stock Options, Non-Qualified Stock Options or both types of Stock Options (in each case with or without Stock Appreciation Rights). To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a Non-Qualified Stock Option. -5- 6 Coherent Communications Systems Corporation EXHIBIT 10.4 Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the Participant affected, to disqualify any Incentive Stock Option under Section 422. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem appropriate: (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant, provided, however, that the option price per share for any Incentive Stock Option shall be not less than 100% of the Fair Market Value of the Stock at the time of grant. Any Incentive Stock Option granted to any Participant who, at the time the Option is granted, owns more than 10% of the voting power of all classes of stock of the Company or of a Parent or Subsidiary corporation (within the meaning of Section 424 of the Code), shall have an exercise price no less than 110% of the Fair Market Value per share on the date of the grant. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than ten years after the date the Stock Option is granted. However, any Incentive Stock Option granted to any Participant who, at the time the Option is granted, owns more than 10% of the voting power of all classes of stock of the Company or of a Parent or Subsidiary corporation may not have a term of more than five years. No Stock Option may be exercised by any person after expiration of the term of the Stock Option. (c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant. If the Committee provides, in its discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after grant in whole or in part, based on such factors as the Committee shall determine, in its sole discretion. (d) Method of Exercise. Subject to whatever installment exercise provisions apply under Section 5(c), Stock Options may be exercised, in whole or in part at any time and from time to time during the Option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by cash, check, or such other instrument as the Committee may accept. As determined by the Committee, in its sole discretion, at or after grant, -6- 7 Coherent Communications Systems Corporation EXHIBIT 10.4 payment in full or in part may also be made in the form of unrestricted Stock already owned by the Participant (including Company Stock acquired in connection with the exercise of an Option, subject to such restrictions as the Committee deems appropriate); provided, however, that (i) in the case of an Incentive Stock Option, the right to make a payment in the form of unrestricted Stock already owned by the Participant may be authorized only at the time the Option is granted and (ii) the Company may require that the Stock has been owned by the Participant for the requisite period of time necessary to avoid a charge to the Company's earnings for financial reporting purposes and adverse accounting consequences to the Company with respect to the Option. If specified by the Committee in the agreement governing a Stock Option at the time of grant, the Committee may, in its sole discretion, upon receipt of such Participant's written notice to exercise, elect to cash out all or part of the portion of the Stock Option to be exercised by paying the Participant an amount, in cash or Stock, equal to the excess of the Fair Market Value of the Stock over the option price on the effective date of such cash-out. To the extent permitted under the applicable laws and regulations, at the request of the Participant and if authorized by the Committee, in its sole discretion, at or after grant, the Company agrees to cooperate in a "cashless exercise" of a Stock Option. The cashless exercise shall be effected by the Participant delivering to the Securities Broker instructions to sell a sufficient number of shares of Stock to cover the cost and expenses associated therewith. No shares of Stock shall be issued until full payment therefor has been made. A Participant shall not have any right to dividends or other rights of a stockholder with respect to shares subject to the Option until such time as Stock is issued in the name of the Participant following exercise of the Option in accordance with the Plan. (e) Stock Option Agreement. Each Option granted under this Plan shall be evidenced by an appropriate Stock Option agreement, which agreement shall expressly specify whether such Option is an Incentive Stock Option or a Non-Qualified Stock Option and shall be executed by the Company and the Participant. The agreement shall contain such terms and provisions, not inconsistent with the Plan, as shall be determined by the Committee. (f) Replacement Options. The Committee may, in its sole discretion and at the time of the original option grant, authorize the Participant to automatically receive replacement Options pursuant to this part of the Plan. Any such replacement option shall be granted upon such terms and subject to such conditions and limitations as the Committee may deem appropriate. Any replacement option shall cover a number of shares determined by the Committee, but in no event equal to more than the number of shares covered by the original option exercised. The per share exercise price of any replacement option shall equal the then current Fair Market Value of a share of Stock, and -7- 8 Coherent Communications Systems Corporation EXHIBIT 10.4 shall have a term as determined by the Committee at the time of grant of the original Option. The Committee shall have the right, and may reserve the right in any Option grant, in its sole discretion and at any time, to discontinue the automatic grant of replacement options if it determines the continuance of such grants to no longer be in the best interest of the Company. (g) Non-transferability of Options. Except as provided below, no Stock Option shall be transferable by the Participant other than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the Participant's lifetime, only by the Participant. When a Participant dies, the representative or other person entitled to succeed to the rights of the Grantee may exercise such rights, subject to the Company receiving satisfactory proof of his or her right to receive the Grant under the Participant's will or under the applicable laws of descent and distribution. Notwithstanding the foregoing, the Committee may provide, at or after Grant, that a Participant may transfer Nonqualified Stock Options pursuant to a domestic relations order or to family members or other persons or entities according to such terms as the Committee may determine. (h) Termination of Employment; Disability; Death (i) Unless otherwise determined by the Committee at or after grant, in the event of a Participant's termination of employment (voluntary or involuntary) for any reason other than as provided below, any Stock Option held by such Participant may thereafter be exercised by the Participant, to the extent it was exercisable at the time of such termination or on such accelerated basis as the Committee may determine at or after grant, for a period of three months (or such shorter period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is shorter. (ii) Unless otherwise determined by the Committee at or after grant, if any Participant ceases to be employed by the Company on account of a Termination for Cause by the Company, any Stock Option held by such Participant shall terminate as of the date the Participant ceases to be employed by the Company, and the Participant shall automatically forfeit all Stock underlying any exercised portion of an Option for which the Company has not yet delivered the share certificates, upon refund by the Company of the Exercise Price paid by the Participant for such Stock. (iii) Unless otherwise determined by the Committee at or after grant, if a Participant's employment by the Company terminates by reason of Disability, any Stock Option held by such Participant may thereafter be exercised by the Participant, to the extent it was exercisable at the time -8- 9 Coherent Communications Systems Corporation EXHIBIT 10.4 of termination, or on such accelerated basis as the Committee may determine at or after grant, for a period of one year (or such shorter period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is shorter. (iv) Unless otherwise determined by the Committee at or after grant, if any Participant dies while employed by the Company or within three months after the date on which the Participant ceases to be employed by the Company on account of termination of employment specified in Section 5(h)(i) above (or within such other period of time as may be specified by the Committee), any Stock Option held by such Participant may thereafter be exercised, to the extent then exercisable or on such accelerated basis as the Committee may determine at or after grant, by the legal representative of the estate or by the legatee of the Participant under the will of the Participant, for a period of one year (or such shorter period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is shorter. (i) Incentive Stock Option Limitation. The aggregate Fair Market Value (determined as of the time of grant) of the Stock with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year under the Plan and/or any other stock option plan of the Company shall not exceed $100,000. An Incentive Stock Option shall not be granted to any person who is not an employee of the Company or a parent or subsidiary (within the meaning of section 424(f) of the Code). (j) Issuance of Shares Issuance of Shares and Compliance with Securities Acts. Within a reasonable time after exercise of an Option, the Company shall cause to be delivered to the Participant a certificate for the Stock purchased pursuant to the exercise of the Option. -9- 10 Coherent Communications Systems Corporation EXHIBIT 10.4 SECTION 6. Stock Appreciation Rights (a) Grant and Exercise. Stock Appreciation Rights may be granted either separately or in tandem with all or part of any Stock Option granted under the Plan. The provisions of Stock Appreciation Rights awarded under the Plan need not be the same with respect to each Participant. In the case of a Non-Qualified Stock Option, such rights may be granted either at the grant of such Stock Option or at any time thereafter while the Option remains outstanding. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Stock Option. The Committee shall establish the base amount of the Stock Appreciation Rights at the time the Stock Appreciation Right is granted. Unless the Committee determines otherwise, the base amount of each Stock Appreciation Right shall be equal to the per share option price of the related Stock Option or, if there is no related Stock Option, the Fair Market Value of a share of Stock as of the date of grant of such Stock Appreciation Right. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, except that, unless otherwise determined by the Committee, in its sole discretion, at the time of grant, a Stock Appreciation Right granted with respect to less than the full number of shares covered by a related Stock Option shall not be reduced until the number of shares covered by an exercise or termination of the related Stock Option exceeds the number of shares not covered by the Stock Appreciation Right. A Stock Appreciation Right may be exercised by a Participant, in accordance with Section 6(b), by surrendering the applicable portion of the related Stock Option. Upon such exercise and surrender, the Participant shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. (b) Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate, if any, shall be exercisable in accordance with the provisions of Section 5 and this Section 6 of the Plan. (ii) Upon the exercise of a Stock Appreciation Right, a Participant shall be entitled to receive up to, but not more than, an amount in cash -10- 11 Coherent Communications Systems Corporation EXHIBIT 10.4 and/or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock (as of the date the Stock Appreciation Right is exercised and the related Stock Option is surrendered) over the exercise price of the Stock Appreciation Right, multiplied by the number of shares of Stock in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under Section 5(g) of the Plan. (iv) A Stock Appreciation Right granted in connection with an Incentive Stock Option may be exercised only if and when the market price of the Stock subject to the Incentive Stock Option exceeds the exercise price of such Stock Option. SECTION 7. Restricted Stock (a) Administration. Shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan. The Committee shall determine the employees, non-employee directors or Eligible Independent Contractors to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price (if any) to be paid by the recipient of Restricted Stock (subject to Section 7(b)), the time or times within which such awards may be subject to forfeiture, and all other conditions of the awards. The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine, in its sole discretion. The provisions of Restricted Stock awards need not be the same with respect to each Participant. (b) Awards and Certificates. The prospective recipient of a Restricted Stock award shall not have any rights with respect to such award unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such award. (i) The purchase price for shares of Restricted Stock shall be established by the Committee and may be zero. (ii) Awards of Restricted Stock may be accepted within a period of 60 days (or such shorter period as the Committee may specify at grant) after the grant date, by executing a Restricted Stock award agreement and paying whatever price (if any) is required under Section 7(b)(i). (iii) Each Participant receiving a Restricted Stock award shall be issued a certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such Participant, and shall -11- 12 Coherent Communications Systems Corporation EXHIBIT 10.4 bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Coherent Communications Systems Corporation 1993 Equity Compensation Plan and an Agreement entered into between the registered owner and Coherent Communications Systems Corporation. Copies of such Plan and Agreement are on file at the offices of Coherent Communications Systems Corporation." (iv) The Committee shall require that the certificates evidencing such Restricted Stock be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the Participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to this Section 7 shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the Restricted Stock award agreement, during a period set by the Committee commencing with the date of such award (the "Restriction Period"), the Participant shall not be permitted to sell, transfer, pledge, assign or otherwise encumber shares of Restricted Stock awarded under the Plan. Within these limits, the Committee, at its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part, based on service, performance and/or such other factors or criteria as the Committee may determine, in its sole discretion. (ii) Except as provided in this paragraph (ii) and Section 7(c)(i), the Participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company, including the right to vote the shares and the right to receive any cash dividends. The Committee, in its sole discretion, as determined at the time of award, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested in additional Restricted Stock to the extent shares are available under Section 3. (iii) Subject to the applicable provisions of the Restricted Stock award agreement and this Section 7, upon termination of a Participant's employment with the Company for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the Participant, subject to any payments for such shares as may be provided in the Restricted Stock award agreement. -12- 13 Coherent Communications Systems Corporation EXHIBIT 10.4 (iv) The Committee may, in its sole discretion, waive in whole or in part any or all remaining restrictions with respect to such Participant's shares of Restricted Stock, based on such factors as the Committee may deem appropriate. (v) If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, the certificates for such shares shall be delivered to the Participant promptly. SECTION 8. Withholding and Use of Shares to Satisfy Tax Obligations (a) Required Withholding. All Grants under the Plan shall be subject to applicable federal (including FICA), state and local withholding requirements. The Company shall have the right to deduct from all Grants paid in cash, or from other wages paid to the Participant, any federal, state or local taxes required by law to be withheld with respect to such Grants. In the case of Grants paid in Company Stock, the Company may require the Participant or other person receiving such Stock to pay to the Company the amount of any such taxes that the Company is required to withhold with respect to such Grants, or the Company may deduct from other wages paid by the Company the amount of any withholding taxes due with respect to such Grants. (b) Election to Withhold Shares. If the Committee so permits, a Participant may elect to satisfy the Company's income tax withholding obligation with respect to a Grant paid in Company Stock by having shares withheld up to an amount that does not exceed the Participant's maximum marginal tax rate for federal (including FICA), state and local tax liabilities. The election must be in a form and manner prescribed by the Committee and shall be subject to the prior approval of the Committee. SECTION 9. Amendments and Termination The Board may amend or terminate the Plan at any time and from time to time, but no amendment or termination shall be made which would impair the rights of a Participant under a Grant theretofore awarded without the Participant's consent; and provided, further, that the Board shall not amend the Plan without stockholder approval if such approval is required pursuant to the Code or the rules of any national securities exchange or over-the-counter market on which the Company's Stock is then listed or included. Subject to the above provisions, the Board shall have broad authority to amend the Plan to take into account changes in applicable tax laws, securities laws and accounting rules, as well as other developments. SECTION 10. Unfunded Status of Plan The Plan is intended to constitute an "unfunded" plan. The Company shall not be required to establish any special or separate fund or to make any other -13- 14 Coherent Communications Systems Corporation EXHIBIT 10.4 segregation of assets to assure the payment of any Grants under this Plan. In no event shall interest be paid or accrued on any Grant, including unpaid installments of Grants. SECTION 11. General Provisions (a) The Committee may require each person purchasing shares pursuant to a Stock Option or receiving Stock upon the expiration of any Restriction Period under the Plan to represent to and agree with the Company in writing that the Participant is acquiring the shares for investment and not with a view to distribution thereof and that such Participant will not dispose of such Stock in any manner that would involve a violation of applicable securities laws. In such event no Stock shall be issued to such Participant unless and until the Company is satisfied with such representation. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer under the Securities Act or any state securities law. All certificates for shares of Stock or other securities delivered under the Plan shall be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities Act, the Exchange Act, any stock exchange or over-the-counter market upon which the Stock is then listed or included, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required, and such arrangements may be either generally applicable or applicable only in specific cases. (c) The adoption of the Plan shall not confer upon any Participant any right to continued employment with the Company nor shall it interfere in any way with the right of the Company to terminate its relationship with any of its employees, directors or independent contractors at any time. (d) At the time of grant, the Committee may provide in connection with any grant made under this Plan that (i) the shares of Stock received as a result of such grant shall be subject to a right of first refusal, pursuant to which the Participant shall be required to offer to the Company any shares that the Participant wishes to sell, with the price being the then Fair Market Value of the Stock, subject to such other terms and conditions as the Committee may specify at the time of grant; and (ii) the shares of Stock received or to be received as a result of such grant shall be subject to repurchase by the Company upon termination of employment, subject to a repurchase price and such other terms and conditions as the Committee may specify at the time of grant. -14- 15 Coherent Communications Systems Corporation EXHIBIT 10.4 (e) The reinvestment of dividends in additional Restricted Stock at the time of any dividend payment shall only be permissible if sufficient shares of Stock are available under Section 3 for such reinvestment. (d) The Committee shall establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the Participant's death are to be paid. (e) The Plan shall be governed by and subject to all applicable laws and to the approvals by any governmental or regulatory agency as may be required. SECTION 12. Effective Date and Term of Plan The Plan shall be effective as of December 10, 1993, subject to the consent or approval of the Company's stockholders. No Stock Option, Stock Appreciation Right or Restricted Stock award shall be granted pursuant to the Plan on or after December 10, 2003, but awards granted prior to such tenth anniversary may extend beyond that date; provided, however, that if the Plan is not approved by the unanimous consent of all stockholders or by a majority of the votes cast at a duly held meeting at which a quorum representing a majority of all outstanding voting stock of the Company is, either in person or by proxy, present and voting on the Plan, within 12 months after said date, the Plan and all Grants awarded hereunder shall be null and void and no additional Grants shall be awarded hereunder. SECTION 13. Interpretation A determination of the Committee as to any question which may arise with respect to the interpretation of the provisions of this Plan or any Grants awarded thereunder shall be final and conclusive, and nothing in this Plan, or in any regulation hereunder, shall be deemed to give any Participant, his legal representatives, assigns or any other person any right to participate herein except to such extent, if any, as the Committee may have determined or approved pursuant to this Plan. The Committee may consult with legal counsel who may be counsel to the Company and shall not incur any liability for any action taken in good faith in reliance upon the advice of such counsel. SECTION 14. Governing LawGoverning Law. With respect to any Incentive Stock Options granted pursuant to the Plan and the agreements thereunder, the Plan, such agreements and any Incentive Stock Options granted pursuant thereto shall be governed by the applicable Code provisions to the maximum extent possible. Otherwise, the laws of the State of Delaware shall govern the operation of, and the rights of Participants under, the Plan, the agreements and any Grants awarded thereunder. SECTION 15. Compliance With Section 16b of the Exchange Act. -15- 16 Coherent Communications Systems Corporation EXHIBIT 10.4 Unless an Insider could otherwise transfer shares of Stock issued hereunder without incurring liability under Section 16b of the Exchange Act, at least six months must elapse from the date of grant of an Option, Stock Appreciation Right or Restricted Stock award to the date of disposition of the Stock issued upon exercise of such Option or Stock Appreciation Right or grant of such Restricted Stock award. -16- EX-10.9.3 3 LEASE 1 Exhibit 10.9.3 DEED OF LEASE THIS DEED OF LEASE, dated this 9th day of August, 1996, by and between Opus East, L.L.C., a Delaware limited liability company, ("Landlord") and Coherent Communications Systems Corp., a Delaware corporation ("Tenant"). WITNESSETH: That Landlord, in consideration of the rents and mutual covenants hereinafter set forth, does hereby lease, demise and let unto Tenant, and Tenant does hereby hire and take from Landlord the Premises (as hereinafter defined) which includes all of the space located in the office building ("Building") to be constructed on the land located in Loudoun County, Virginia described on Exhibit A attached hereto and incorporated herein by reference, the exact acreage of such land being subject to adjustment pursuant to the terms of the Purchase Contract (as defined in Section 16.33 hereof). The Building will be constructed in accordance with the Work Agreement attached hereto as Exhibit B. The land (including all easement areas appurtenant thereto) upon which the Building is located is hereinafter referred to as the "Property"; the Property and the Building are collectively hereinafter referred to as the "Premises"; and the Premises and all buildings and improvements and personal property of Landlord used in connection with the operation or maintenance thereof located therein and thereon and the appurtenant parking facilities are hereinafter called the "Office Complex". Tenant hereby accepts this Lease and the Premises upon the covenants and conditions set forth herein and subject to any encumbrances, covenants, conditions, restrictions and other matters of record as of the date hereof and all applicable zoning, municipal, county, state and federal laws, ordinances and regulations governing and regulating the use of the Premises. TO HAVE AND TO HOLD THE SAME, for a "term" of approximately fifteen (15) years commencing on the earlier to occur of (i) substantial completion of that portion of the Building to be initially occupied by Tenant as described in the Work Agreement ("Initial Premises"), or (ii) use and occupancy by Tenant of any portion of the Building, but in no event prior to September 1, 1997, and ending on the 31st day of August, 2012, unless sooner terminated in the manner provided hereinafter. The date on which the term of the Lease begins is sometimes hereinafter referred to as the "Commencement Date". Following the Commencement Date, Landlord shall deliver to Tenant a Commencement Notice which shall contain the exact Commencement Date, the number of square feet of net rentable area contained in the Building, and other reasonably pertinent date. If Tenant disputes the square footage as set forth in the Commencement Notice, Tenant shall notify Landlord in writing within ten (10) days of Landlord's delivery of the Commencement Notice. If Landlord and Tenant are unable to resolve the dispute within twenty (20) days of Landlord's delivery of the Commencement Notice, a measurement shall be made by a third party mutually acceptable to Landlord and Tenant and the third party's determination shall govern. Upon execution of the Commencement Notice by Landlord and Tenant, the Commencement Notice shall be conclusive and binding on Tenant as to all matters set forth therein. Notwithstanding anything to the contrary contained in this Lease, in the event the Commencement Date has not occurred on or before September 1, 1997, the terms of paragraph A(3) of the Work Agreement shall govern. ARTICLE I BASE RENT SECTION 1.1 BASE RENT. In consideration of the leasing aforesaid, Tenant agrees to pay to Landlord, at 6707 Democracy Boulevard, Suite 510, Bethesda, Maryland, 20817 or at such other place as Landlord from time to time may designate in writing, annual rental based on the number of square feet of net rentable area contained in the Building (even if Tenant does not occupy the entire net rentable area of the Building) as the same are measured in accordance with Section 16.31 below, calculated as follows: 1 2
Lease Years Rate Per Sq. Ft. of Net Rentable Area 1-5 $12.25 6-10 $13.48 1 1-15 $14.82
The aforesaid amount is sometimes hereinafter referred to as the "Base Rent," and shall be payable monthly, in advance, in equal installments commencing on the first day of the term and continuing on the first day of each and every month thereafter for the next succeeding months during the balance of the term. If the term commences on a date other than the first day of a calendar month or ends on a date other than the last day of a calendar month, monthly rent for the first month of the term or the last month of the term, as the case may be, shall be prorated based upon the ratio that the number of days in the term within such month bears to the total number of days in such month. ARTICLE 2 ADDITIONAL RENT SECTION 2.1 ADDITIONAL RENT. In addition to the Base Rent payable by Tenant under the provisions of Article 1 hereof, Tenant shall pay to Landlord "Additional Rent" as hereinafter provided for in this Article 2. All sums under this Article and all other sums and charges required to be paid by Tenant under the Lease (except Base Rent), however denoted, shall be deemed to be "Additional Rent." If any such amounts or charges are not paid at the time provided in the Lease, they shall nevertheless be collectible as Additional Rent with the next installment of Base Rent falling due. SECTION 2.2 DEFINITIONS. For the purposes of this Article 2, the parties hereto agree upon the following Definitions: (a) "Lease Year" shall mean each twelve (12) month period commencing with and including the month during which the term of this Lease commences, and ending with the month during which the term of this Lease (including any extensions or renewals) terminates. (b) "Real Estate Taxes" shall mean and include all personal property taxes of Landlord relating to Landlord's personal property located in the Office Complex and used in connection with the operation and maintenance thereof (however, if the equipment is shared between the Office Complex and other projects, only the proportionate share of taxes applicable to the Office Complex shall be included), real estate taxes, water rates and charges, sewer rates and charges, charges for public utilities, street lighting, excise levies, licenses, permits, inspection fees, installments of special assessments, including interest thereon, relating to the Property and Office Complex, and all other governmental charges, general and special, ordinary and extraordinary, foreseen as well as unforeseen, of any kind and nature whatsoever, or other tax, however described, which is levied or assessed in substitution for any of the foregoing by the United States of America or the state in which the Office Complex is located or any political subdivision thereof, against Landlord or all or any part of the Office Complex as a result of Landlord's ownership of the Property or Office Complex, and payable during the respective Lease Year. It shall not include any net income tax, estate tax, or inheritance tax. Tenant shall be solely responsible for all Real Estate Taxes. (c) "Operating Expenses" shall mean and include all expenses incurred with respect to the maintenance and operation of the Property and Office Complex as determined by Landlord's accountant in accordance with generally accepted accounting principles consistently followed, including, but not limited to, insurance premiums, maintenance and repair costs, steam, electricity, water, sewer, gas and other utility charges, fuel, lighting, window washing, janitorial services, trash and rubbish removal, wages payable to employees of Landlord whose duties are connected with the operation and maintenance of the Property and Office Complex (but only for the portion of their time allocable to work related to the Property and Office Complex), amounts paid to contractors or subcontractors for work or services performed in connection with the operation and maintenance of the Property and Office Complex including air quality monitoring and remediation efforts, all costs of uniforms, supplies and materials used in connection with the operation and maintenance of the Property and Office Complex, all payroll taxes, unemployment insurance costs, vacation allowances, and the cost of providing disability insurance or benefits, pensions, profit sharing benefits, hospitalization, retirement or other so-called fringe benefits to employees below the level of building manager (but only for the portion of their time allocable to work 2 3 related to the Property and Office Complex), and any other expense imposed on Landlord, its contractors or subcontractors, pursuant to law or pursuant to any collective bargaining agreement covering such employees, all services, supplies, repairs, replacements or other expenses for maintaining and operating the Property and Office Complex, reasonable attorneys' fees and costs in connection with appeal or contest of real estate or other taxes or levies, and such other expenses as may be ordinarily incurred in the operation and maintenance of an office complex in Loudoun County and not specifically set forth herein, including reasonable management fees, not to exceed 3% of the applicable Base Rent plus 3% of current Operating Expenses, exclusive of electricity costs. Until the Building is fully occupied, such management fees shall be adjusted by multiplying the full management fee otherwise due hereunder by the percentage of the Building occupied as of the first day of each calendar month, and the resulting product shall be the management fee for such month. The term "Operating Expenses" shall also include capital improvement to the Office Complex, and replacements required for normal maintenance and repair, and expenses incurred by Landlord in connection with sidewalks adjacent to the Property and any pedestrian walkway system (either above or below ground) or other public facility required by applicable law to which Landlord of the Office Complex is from time to time subject in connection with operations of the Property and Office Complex. Tenant shall be solely responsible for all Operating Expenses. The term "Operating Expenses" shall not include Real Estate Taxes (as hereinafter defined), repairs, restoration or other work occasioned by fire, windstorm or other insured casualty, or occasioned by condemnation; leasing commissions; legal expenses incident to enforcement by Landlord of the terms of any existing or potential lease; interest or principal payments on any mortgage or other indebtedness of Landlord; payment under any ground lease; compensation paid to any employee of Landlord above the grade of building superintendent; any depreciation allowance or expense; capital expenditures required by Landlord's failure to comply with Legal Requirements (as defined in the Work Agreement); overtime expenses to Landlord due to Landlord's defaults hereunder; any cost representing an amount paid for first class services and/or materials to a related person, firm, or entity to the extent such amount exceeds the amount that would be paid for such first class services and/or materials at the then existing market rates to an unrelated person, firm or entity; costs directly resulting from the gross negligence or misconduct of Landlord, its employees, agents or contractors; costs or fees relating to the defense of Landlord's title or interest in the Property; costs and expenses incurred by Landlord in forming, operating or maintaining the ownership entity for the Premises including legal fees incurred in connection therewith; or costs or expenses incurred by Landlord in financing, refinancing, pledging, selling, granting or otherwise transferring or encumbering ownership rights in the Premises. Any costs incurred by Landlord in connection with its construction guaranty referenced in the Work Agreement, or in connection with repairing any latent defects discovered in the Building during the first twelve (12) months of the term shall also be excluded from "Operating Expenses". All items contracted for and paid directly by Tenant that would otherwise be included within the term Operating Expenses shall be excluded from such definition. In no event shall the Operating Expenses billed to Tenant exceed one hundred percent (100%) of the costs incurred by Landlord for same. Notwithstanding the foregoing provisions of this Section 2.2, prior to or on the Commencement Date, Tenant shall secure all utilities for the Premises in Tenant's name and for Tenant's account. During the term of this Lease, Tenant will pay, when due, all charges of every nature, kind or description for such utilities furnished to the Premises or chargeable against the Premises, including all charges for water, sewage, heat, gas, light, garbage, electricity, telephone, steam, power, or other public or private utility services. Prior to the Commencement Date, Tenant shall reimburse Landlord for all utilities or services at the Premises used directly and exclusively by Tenant or its agents, employees or contractors. In the event that any charge or fee is required after the Commencement Date by the state in which the Premises are located, or by any agency, subdivision, or instrumentality thereof, or by any utility company furnishing services or utilities to the Premises, as a condition precedent to furnishing or continuing to furnish utilities or services to the Premises, such charge or fee shall be deemed to be a utility charge payable by Tenant. The provisions of this Section 2.2 shall include, but not be limited to, any charges or fees for present or future water or sewer capacity to serve the Premises, any charges for the underground installation of gas or other utilities or services, and other charges relating to the extension of or change in the facilities necessary to provide the Premises with adequate utility services, but shall specifically exclude any charges levied to satisfy proffered conditions as set forth in the proffers applicable to the Office Complex dated August 10, 1988, as revised February, 1994, a copy of which has been 3 4 provided to Tenant. In the event that Landlord has paid any such charge or fee after the date hereof, Tenant shall reimburse Landlord for such utility charge. SECTION 2.3 ADJUSTMENT OF OPERATING EXPENSES. Intentionally Deleted. SECTION 2.4 ESTIMATED OPERATING EXPENSES FOR INITIAL LEASE YEAR. As to the Lease Year during which the term of this Lease commences, Landlord's estimated amount of Operating Expenses and Real Estate Taxes (based upon the estimated number of months of the term within such initial Lease Year) shall be Three and no/100 Dollars per square foot of net rentable area in the Building. The actual budget on which the estimate is based is attached hereto as Exhibit G and incorporated herein by reference. SECTION 2.5 ESTIMATED EXPENSES FOR SUBSEQUENT YEAR. As to each Lease Year after the initial Lease Year, Landlord shall estimate for each such Lease Year the total amount of Operating Expenses. Said estimate shall be in writing and shall be delivered or mailed to Tenant at the Premises within ninety (90) days following the start of the Lease Year. SECTION 2.6 PAYMENT OF ADDITIONAL RENT. Tenant shall pay, as Additional Rent, Operating Expenses for each Lease Year, so estimated, in equal monthly installments, in advance, on the first day of each month during each applicable Lease Year. If for any reason Landlord has not provided Tenant with Landlord's estimate of Operating Expenses at least thirty one (31) days prior to the commencement of any Lease Year, then, Tenant shall be entitled to suspend payment of Operating Expenses until it receives Landlord's estimate of same. Within thirty (30) days of receipt of the Operating Expense estimate, Tenant shall pay to Landlord all amounts due for the then current Lease Year, and during the remainder of such Lease Year, Tenant shall pay to Landlord an amount equal to one-twelfth (1/12th) of Tenant's Expenses as noted on Landlord's estimate. SECTION 2.7 RE-ESTIMATES OF TAXES AND EXPENSES. From time to time during any applicable Lease Year, but not more than one (1) time per Lease Year, Landlord may re-estimate the amount of Operating Expenses, and in such event Landlord shall notify Tenant, in writing, of such re-estimate in the manner above set forth and fix monthly installments for the then remaining balance of such Lease Year in an amount sufficient to pay the re-estimated amount over the balance of such Lease Year after giving credit for payments made by Tenant on the previous estimate. SECTION 2.8 ADJUSTMENT OF ACTUAL EXPENSES. Upon completion of each Lease Year, Landlord shall cause its accountants to determine the actual amount of Operating Expenses for such Lease Year and deliver a written certification of the amounts thereof to Tenant within ninety (90) days after the end of each Lease Year. If Tenant has paid less than the actual Operating Expenses for any Lease Year, Tenant shall pay such deficiency within thirty (30) days after receipt of such statement. If Tenant has paid more than the actual Operating Expenses for any Lease Year, Landlord shall, at Tenant's option, either (a) refund such excess, or (b) credit such excess against the most current monthly installment or installments due Landlord for its estimate of Operating Expenses for the next following Lease Year. If Tenant's overpayment is greater than the equivalent of one month of Operating Expenses, Landlord shall refund the excess to Tenant together with interest thereon at the Default Rate. A pro rata adjustment shall be made for a fractional Lease Year occurring during the term of this Lease or any renewal or extension thereof based upon the number of days of the term of this Lease during said Lease Year as compared to three hundred sixty-five (365) days and all additional sums payable by Tenant or credits due Tenant as a result of the provisions of this Article 2 shall be adjusted accordingly. SECTION 2.9 TENANT AUDIT RIGHTS. Tenant shall have the right to examine and audit Landlord's annual statement of Operating Expenses as presented in Landlord's statement. Tenant shall commence its examination and if applicable, its audit within forty five (45) days after receipt of the annual statement, shall perform its examination and audit with diligence and continuity and shall complete its examination and audit within one hundred twenty (120) days after receipt of the annual statement. The cost of any such examination and audit shall be paid by Tenant, except that, if it is determined on the basis of such audit (or if, in accordance with the following provisions, it is otherwise ultimately determined) that the amount of Tenants obligations for Operating Expenses for any calendar year was overstated by more than three percent (3%), then the reasonable cost of the audit shall be paid by Landlord. Landlord shall 4 5 refund to Tenant any overpayment for the calendar year in question within thirty (30) days after the amount of the overpayment has been established by the audit or as provided in this subsection. If Tenant fails to exercise its right of audit within the forty five (45) day period, the amount of Tenant's obligations for Operating Expenses shall be conclusively established as the amount set forth in the annual statement delivered by Landlord to Tenant. If, however, Tenant timely exercises its right of audit, the amount of Tenant's obligations for Operating Expenses shall be conclusively established as the amount determined as a result of such audit unless, within sixty (60) days after receipt of a report of the same from the independent auditors selected by Tenant, Landlord, at its expense, shall contest the amount thereof, in which event Tenant shall be entitled to pursue any legal remedies it may have to finally ascertain the amount thereof and, if appropriate, a refund on account thereof. SECTION 2.10 TAXES AND OTHER ADDITIONAL RENT. Beginning on the Commencement Date and continuing throughout the Term of the Lease, Tenant shall be responsible for all Real Estate Taxes. Tenant shall pay all amounts due within thirty (30) days of receipt of written request and an invoice therefor, including a copy of the tax bill. If by law any special assessment is payable (without default) in installments (whether or not interest shall accrue on the unpaid balance of such special assessment), and if Landlord elects to pay same in installments, Tenant shall pay all amounts due in connection therewith, together with any interest accrued, in installments within thirty (30) days of receipt of Landlord's written request and invoice therefor. Landlord shall be responsible for all installments of special assessments (including interest accrued on the unpaid balance) which are payable prior to the Commencement Date and after the termination date of the term of this Lease. Further, Tenant shall pay, also as Additional Rent, all other sums and charges required to be paid by Tenant under this Lease, and any tax or excise on rents, gross receipts tax, or other tax, however described, which is levied or assessed by the United States of America or the state in which the Office Complex is located or any political subdivision thereof, against Landlord in respect to the Base Rent, Additional Rent, or other charges reserved under this Lease or as a result of Landlord's receipt of such rents or other charges accruing under this Lease but only to the extent such levy, tax, assessment or charge on rent shall be expressly in lieu of or in substitution for any existing Real Estate Taxes; provided, however, tenant shall have no obligation to pay net income taxes of Landlord. SECTION 2.11 TENANT'S RIGHT TO CONTEST REAL ESTATE TAXES. Tenant shall have the right at its own expense to contest the amount or validity, in whole or in part, of any Real Estate Taxes by appropriate proceedings diligently conducted in good faith, but only after payment of such Real Estate Taxes, unless such payment, or a payment thereof under protest, would operate as a bar to such contest or interfere materially with the prosecution thereof, in which event, notwithstanding the provisions of Article 2, Tenant may postpone or defer payment of such Real Estate Taxes if (a) neither the Premises nor any portion thereof would, by reason of such postponement or deferment, be in danger of being forfeited or lost, and (b) Tenant shall have deposited with Landlord cash or a letter of credit payable to Landlord issued by a national bank or federal savings and loan association in the amount of the Real Estate Taxes so contested and unpaid. If, during the continuance of such proceedings, Landlord shall, from time to time, reasonably deem the amount deposited, as aforesaid, insufficient, Tenant shall, upon demand of Landlord, make additional deposits of such additional sums of money or such additional certificates of deposit as Landlord may reasonably request. Upon failure of Tenant to make such additional deposits within thirty (30) days, the amount theretofore deposited may be applied by Landlord to the payment, removal and discharge of such Real Estate Taxes, and the interest, fines and penalties in connection therewith, and any reasonable costs, fees (including reasonable attorney's fees) and other liability (including costs incurred by Landlord, but excluding consequential or punitive damages) accruing in any such proceedings. Upon the termination of any such proceedings, Tenant shall pay the amount of such Real Estate Taxes or part thereof, if any, as finally determined in such proceedings, the payment of which may have been deferred during the prosecution of such proceedings, together with any reasonable costs, fees (including reasonable attorney's fees), interest, penalties, fines and other liability in connection therewith, and upon such payment Landlord shall return all amounts deposited with it with respect to the contest of such Real Estate Taxes, as aforesaid, or, at the written direction of Tenant, Landlord shall make such payment out of the funds on deposit with Landlord and the balance, if any, shall be returned to Tenant. Tenant shall be entitled to the refund of any Real Estate Taxes, penalty, fine and interest thereon received by Landlord which has been paid by Tenant or which has been paid by Landlord but for which 5 6 Landlord has been previously reimbursed in full by Tenant, such amount to be paid within thirty (30) days of receipt by Landlord. Landlord shall not be required to join in any proceedings referred to in this Section 2.11 unless the provisions of any law, rule or regulation at the time in effect shall require that such proceedings be brought by or in the name of Landlord, in which event Landlord shall join in such proceedings or permit the same to be brought in Landlord's name upon compliance with such conditions as Landlord may reasonably require. Landlord shall not ultimately be subject to any liability for the payment of any fees, including attorney's fees, costs and expenses in connection with such proceedings. Tenant agrees to pay all such fees (including reasonable attorney's fees), costs and expenses or, on demand, to make reimbursement to Landlord for such payment. During the time when any such amount is on deposit with Landlord, and prior to the time when the same is returned to Tenant or applied against the payment, removal or discharge of Real Estate Taxes, as above provided, Tenant shall be entitled to receive all interest paid thereon, if any. Landlord agrees to cooperate with Tenant's efforts in connection with this Section 2. 11, at no cost or expense to Landlord. SECTION 2.12 LANDLORD'S RIGHT TO CONTEST REAL ESTATE TAXES. In addition to the right of Tenant under Section 2.11 to contest the amount or validity of Real Estate Taxes, Landlord shall also have the right to contest same; provided however, Landlord shall first give Tenant written notice of such intention and Tenant shall have twenty (20) days from the date of Landlord's notice within which to give Landlord written notice that Tenant will contest the Real Estate Taxes, and to thereafter diligently pursue same. Landlord shall not be obligated to contest Real Estate Taxes, and any such contest shall be by appropriate proceedings conducted in the name of Landlord or in the name of Landlord and Tenant. If Landlord elects to contest the amount or validity, in whole or in part, of any Real Estate Taxes, such contests by Landlord shall be at Landlord's expense, provided, however, that if the amounts payable by Tenant for Real Estate Taxes are reduced (or if a proposed increase in such amounts is avoided or reduced) by reason of Landlord's contest of Real Estate Taxes, Tenant shall reimburse Landlord for costs incurred by Landlord in contesting Real Estate Taxes, but such reimbursements shall not be in excess of the amount saved by Tenant by reason of Landlord's actions in contesting such Real Estate Taxes. If Real Estate Taxes are retroactively increased following a contest by Landlord, Tenant shall not be responsible for such incremental increase. SECTION 2.13 EVIDENCE OF PAYMENT. Landlord covenants to furnish Tenant written evidence of the payment of any Real Estate Taxes (i.e. paid tax bills) for which Tenant has already paid Landlord. SECTION 2.14 ESCROW FOR TAXES AND ASSESSMENTS. At Landlord's written demand after any Event of Default and for as long as such Event of Default is uncured, Tenant shall pay to Landlord the known yearly Real Estate Taxes assessments and other impositions payable with respect to the Property and Office Complex in monthly payments equal to one-twelfth of the known yearly Real Estate Taxes, assessments and other impositions next payable with respect to the Property and Office Complex. If the total monthly payments made by Tenant pursuant to this Section 2.14 shall exceed the amount of payments necessary for said Real Estate Taxes, such excess shall be credited on subsequent monthly payments of the same nature or, at Tenant's option, promptly refunded, but if the total of such monthly payments so made under this paragraph shall be insufficient to pay such Real Estate Taxes when due, then Tenant shall pay to Landlord such amount as may be necessary to make up the deficiency. Payment by Tenant of Real Estate Taxes under this section shall be considered as performance of such obligation under the provisions of Section 2.14 hereof. ARTICLE 3 BASE AND ADDITIONAL RENT SECTION 3.1 INTEREST AND LATE FEE ON PAST DUE OBLIGATIONS. Any installment of Base Rent, Additional Rent, or other charges to be paid by Tenant accruing under the provisions of this Lease which shall not be paid within ten (10) days of the date when due, shall bear interest at the rate ("Default Rate") of fifteen percent (15%) per annum from the date when the same is due until the same shall be paid, but if such rate exceeds the maximum interest rate permitted by law, such rate shall be reduced to the highest rate allowed by law under the circumstances. In addition, any installments of Base Rent or Additional Rent or any other charges payable by Tenant under the provisions hereof which shall not be paid when due and which remain unpaid ten (10) days thereafter shall be subject to a late payment fee of five percent (5%) of the unpaid amount. 6 7 SECTION 3.2 RENT INDEPENDENT. Except as otherwise expressly set forth herein, Tenant's covenants to pay the Base Rent and the Additional Rent are independent of any other covenant, condition, provision or agreement herein contained, and nothing herein contained shall be deemed to suspend or delay the payment of any amount of money or charge at the time the same becomes due and payable hereunder, or limit any other remedy of Landlord. Base Rent and Additional Rent are sometimes collectively referred to as "Rent." Except as otherwise expressly set forth in this Lease, Rent shall be payable without deduction, offset, prior notice or demand, in lawful money of the United States. SECTION 3.3 SECURITY DEPOSIT. Intentionally Deleted. ARTICLE 4 POSSESSION OF PREMISES SECTION 4.1 DELAYED OR EARLIER POSSESSION. If Landlord shall be unable to give possession of the Initial Premises on the date of the commencement of the term because the construction of the Building or the completion of the Initial Premises has not been sufficiently completed to make the Initial Premises ready for occupancy or for any other reason, Landlord shall not be subject to any claims, damages or liabilities for the failure to give possession on said date except for hold over rent as provided above and except as set forth in the Work Agreement. Under said circumstances, the rent reserved and Tenant's covenant to pay same shall not commence until possession of the Initial Premises is given or the Initial Premises are ready for occupancy, whichever is earlier. Failure to give possession on the date of commencement of the term shall in no way affect the validity of this Lease or the obligations of Tenant hereunder, nor shall the same be construed in any way to extend the expiration date of the term. If Tenant is given and accepts possession of the Premises or a portion thereof on a date earlier than the date above specified for commencement of the term the rent reserved herein and all covenants, agreements and obligations herein and the term of this Lease shall commence on the date that possession is given to Tenant. SECTION 4.2 EFFECT OF POSSESSION. Intentionally Deleted. SECTION 4.3 PERMITTED USE. The Premises shall be occupied and used by Tenant for general office purposes, including, but not limited to, research, development and testing of telecommunications equipment, and for no other purpose, subject to the covenants and agreements hereinafter contained. Tenant shall not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord. SECTION 4.4 TENANT'S COMPLIANCE WITH ENVIRONMENTAL LAWS. Tenant shall at all times and in all respects comply with all federal, state and local laws, ordinances and regulations ("Hazardous Materials Laws") relating to the industrial hygiene, environmental protection or the use, analysis, generation, manufacture, storage, presence, disposal or transportation of any oil, petroleum products, flammable explosives, asbestos, urea formaldehyde, polychlorinated biphenyls, radioactive materials or waste, or other hazardous, toxic, contaminated or polluting materials, substances or wastes, including without limitation any "hazardous substances," "hazardous wastes," "hazardous materials" or "toxic substances" under any such laws, ordinances or regulations (collectively, "Hazardous Materials"). The foregoing shall not be construed to prohibit Tenant from storing and using reasonable quantities of customary office and cleaning supplies in the Building as contemplated by the permitted use contained in Section 4.3 above. Tenant shall at its own expense procure, maintain in effect and comply with all conditions of any and all permits, licenses and other governmental and regulatory approvals required for Tenant's use of the Premises and Office Complex including, without limitation, discharge of (appropriately treated) materials or waste into or through any sanitary sewer system serving the Premises and Office Complex. Except as discharged into the sanitary sewer in strict accordance and conformity with all applicable Hazardous Materials Laws, Tenant shall cause any and all Hazardous Materials to be removed from the Premises and Office Complex and transported solely by duly licensed haulers to duly licensed facilities for final disposal of such Hazardous Materials and wastes. Tenant shall in all respects, handle, treat, deal with and manage any and all Hazardous Materials in, on, under or about the Premises and Office Complex in complete 7 8 conformity with all applicable Hazardous Materials Laws and prudent industry practices regarding the management of such Hazardous Materials. All reporting obligations to the extent imposed upon Tenant by Hazardous Materials Laws are solely the responsibility of Tenant. Upon expiration or earlier termination of this Lease, Tenant shall cause all Hazardous Materials (except to the extent such Hazardous Materials are generated, stored, released or disposed of during the term of this Lease by Landlord) to be removed from the Premises and Office Complex and transported for use, storage or disposal in accordance and in compliance with all applicable Hazardous Materials Laws. Tenant shall not take any remedial action in response to the presence of any Hazardous Materials in, on, about or under the Premises, the Building, the Office Complex or the Property, nor enter into any settlement agreement, consent, decree or other compromise in respect to any claims relating to any way connected with the foregoing without first Landlord of Tenant's intention to do so and affording Landlord ample opportunity to appear, intervene or otherwise appropriately assert and protect Landlord's interest with respect thereto. In addition, at Landlord's written request, at the expiration of the term of this Lease or within sixty (60) days following the date of such request, whichever is later, Tenant shall remove all tanks or fixtures which were placed on the Premises and Office Complex during the term of this Lease and which contain, or are contaminated with, Hazardous Materials. Tenant shall immediately notify Landlord in writing of (a) any enforcement, clean-up, removal or other governmental or regulatory action instituted, completed or threatened pursuant to any Hazardous Materials Laws; (b) any claim made or threatened by any person against Landlord, or the Premises or the Office Complex, relating to damage, contribution, cost recovery, compensation, loss or injury resulting from or claimed to result from any Hazardous Materials; and (c) any reports made to any environmental agency arising out of or in connection with any Hazardous Materials in, on or about the Premises or the Office Complex, or with respect to any Hazardous Materials removed from the Premises or the Office Complex, including, any complaints, notices, warnings, reports or asserted violations in connection therewith. Tenant shall also provide to Landlord, as promptly as possible, and in any event within five business days after Tenant first receives or sends the same, copies of all claims, reports, complaints, notices, warnings or asserted violations relating in any way to the Hazardous Materials in or on the Office Complex or Premises. Upon written request of Landlord (to enable Landlord to defend itself from any claim or charge related to any Hazardous Materials Law), Tenant shall promptly deliver to Landlord notices of hazardous waste manifests reflecting the legal and proper disposal of all such Hazardous Materials removed or to be removed from the Premises or Office Complex. All such manifests shall list the Tenant or its agent as a responsible party and in no way shall attribute responsibility for any such Hazardous Materials to Landlord. SECTION 4.5 LANDLORD'S COMPLIANCE WITH ENVIRONMENTAL LAWS. Landlord covenants not to bring onto the Office Complex or into the Building, or common areas, any Hazardous Materials, as that term is defined herein. Notwithstanding the foregoing, Tenant recognizes and acknowledges that Landlord or its agents may use and store within the Building reasonable quantities of customary office and cleaning supplies; provided such items are stored, used and disposed of in accordance with applicable federal, state or local law. ARTICLE 5 SERVICES AND MAINTENANCE SECTION 5.1 SERVICES PROVIDED BY LANDLORD. Subject to the provisions of Article 2 hereof, Landlord shall provide the following services on all days excepting Saturdays, Sundays, holidays, and as otherwise stated in this Section 5.1: (a) JANITORIAL SERVICE. Both Landlord and Tenant acknowledge that Tenant shall provide janitorial and CHAR services for the entire Building at its sole cost and expense. (b) PARKING FACILITIES AND LANDSCAPED AREAS. Maintenance in good order, condition and repair and appropriate illumination of the parking facilities and all driveways leading thereto and keeping the same free from any unreasonable accumulation of snow. Landlord shall keep and maintain the landscaped area and parking facilities in a neat, safe and orderly condition. 8 9 (c) HEATING AND AIR CONDITIONING. Heating and air conditioning in amounts and ranges required by Tenant's Plans (as defined in the Work Agreement) during regular business hours as the same are set by Tenant from time to time. Except in the case of an emergency, Landlord will give Tenant at least five (5) business days prior notice if Landlord intends to interrupt any of the services required to be furnished by Landlord. Provided Tenant gives Landlord notice of its need for overtime HVAC service during normal business hours, Landlord shall provide such service and Tenant shall only be responsible for the actual utility costs relating to such overtime service. SECTION 5.2 TENANT'S UTILITY SERVICES. During the term of this lease, Tenant will pay, when due, all charges of every nature, kind or description for utilities furnished to the Premises including all charges for water, sewage, heat, gas, light, garbage, electricity, telephone, power or other public or private utility services. Prior to the Commencement Date, Tenant shall pay for all utilities or services at the Premises directly and exclusively used by Tenant or its agents, employees or contractors. SECTION 5.3 OTHER PROVISIONS RELATING TO SERVICES. Except as specifically provided in this Section 5.3, no interruption in, or temporary stoppage of, any of the aforesaid services caused by repairs, renewals, improvements' alterations, strikes, lockouts, labor controversy, accidents, inability to obtain fuel or supplies, or other Unavoidable Delays shall be deemed an eviction or disturbance of Tenant's use and possession, or render Landlord liable for damages, by abatement of rent or otherwise or relieve Tenant from any obligation herein set forth. In no event shall Landlord be required to provide any service in excess of that permitted by involuntary guidelines or laws, ordinances or regulations of governmental authority. Landlord reserves the right, from time to time, to make reasonable and non-discriminatory modifications to the standards for utilities and services set forth in this Article 5 upon providing not less than thirty (30) days' notice to Tenant. If utility services to the Premises are interrupted for more than five (5) consecutive business days and, as a result thereof, Tenant ceases operating at the Premises, Rent shall abate on a daily basis beginning on the sixth (6th) consecutive business day and continuing until services are restored. SECTION 5.4 EFFECTS ON UTILITIES. Tenant shall not connect with electric current or water pipes, except through existing electrical or water outlets already in the Premises, any apparatus or device for the purposes of using electric current or water. SECTION 5.5 PARK DUES. Tenant acknowledges that the Property is part of a larger development and that certain dues or assessments are owed on a regular periodic basis for additional services or maintenance pursuant to covenants, conditions and restrictions of record. Tenant will pay all such dues attributable to the Property as Additional Rent, or directly, if possible. SECTION 5.6 MAINTENANCE. Subject to Tenant's reimbursement obligations and Tenant's right to assume the property management functions contained in Article 2 and Section 5.7 of this Lease respectively, Landlord shall keep and maintain in good order and repair consistent with a first class office building in Loudoun County the Premises and the remainder of the Office Complex including but not limited to, the exterior structure and systems, the walls, load bearing elements, foundations, pipes and conduits, roof and common areas that form a part of the Premises, parking areas, elevators and the building standard mechanical, electrical, HVAC and plumbing systems; provided, however, Tenant shall perform certain maintenance obligations as required by Section 9.1 hereof. SECTION 5.7 TENANT'S ASSUMPTION OF PROPERTY MANAGEMENT FUNCTIONS. Tenant shall have the right, at its option, to assume all property management functions which are the responsibility of Landlord under this Lease. In such event, Tenant shall provide written notice of such election to Landlord and shall execute and deliver to Landlord an Assumption of Property Management Services Certificate ("Assumption Certificate") to be prepared by Landlord in form and content reasonably satisfactory to Tenant, in which Tenant agrees to undertake all management and maintenance obligations with respect to the Property and the Building and to comply with the terms of all existing third-party contracts for the provision of such services. Landlord agrees that the form and content of the service contracts which it enters into in connection with the Premises shall be consistent with then current industry standards and shall contain a provision permitting Landlord to terminate same upon the giving of no more than sixty (60) days prior written notice. Landlord shall provide the service contracts to Tenant for its review upon request. Such assumption shall be effective as of the date specified in the Assumption 9 10 Certificate, which shall in no event be more than 60 days from the date of initial notice. Upon execution and delivery of the Assumption Certificate, all management fees shall be excluded from Operating Expenses as of the date specified in the Assumption Certificate. ARTICLE 6 INSURANCE SECTION 6.1 LANDLORD'S CASUALTY INSURANCE OBLIGATIONS. Landlord shall keep the Office Complex insured in an amount equivalent to the full replacement value thereof (excluding foundation, grading and excavation costs) against: (a) loss or damage by fire; and (b) such other risk or risks of a similar or dissimilar nature as are now or may be customarily covered with respect to buildings and improvements similar in construction, general location, use, occupancy and design to the Office Complex, including, but without limiting the generality of the foregoing, windstorms, hail, explosion, vandalism, malicious mischief, civil commotion, and such other coverage as may be deemed necessary by Landlord, provided such additional coverage is obtainable and provided such additional coverage is such as is customarily carried with respect to buildings and improvements similar in construction, general location, use, occupancy and design to the Office Complex. These insurance provisions shall in no way limit or modify any of the obligations of Tenant under any provision of this Lease. Landlord agrees that such policy or policies of insurance shall permit releases of liability as provided herein and/or waiver of subrogation clause in favor of Tenant and Landlord waives, releases and discharges Tenant from all claims or demands whatsoever which Landlord may have or acquire arising out of damage to or destruction of the Office Complex or loss of use thereof occasioned by fire or other casualty, which claim or demand may arise because of the negligence or fault of Tenant, its agents, employees, customers or business invitees, or otherwise, and Landlord agrees to look to the insurance coverage only in the event of such loss. Notwithstanding the foregoing, Tenant shall be obligated to pay the rental called for hereunder in the event of damage to or destruction of the Premises or the Office Complex if such damage or destruction is occasioned by the negligence or fault of Tenant, its agents or employees, such fault to be established by arbitration or a judicial proceeding. Insurance premiums paid for insurance coverage required under this Article 6 by Landlord shall be a portion of the "Operating Expenses" described in Article 2 hereof. SECTION 6.2 TENANT'S CASUALTY INSURANCE OBLIGATIONS. Tenant shall keep all of its machinery, equipment, furniture, fixtures and personal property which may be located in, upon, or about the Premises insured for the benefit of Tenant in an amount equivalent to the full insurable value thereof against: (a) loss or damage by fire; and (b) such other risk or risks of a similar or dissimilar nature as are now, or may in the future be, customarily covered with respect to a tenant's machinery, equipment, furniture, fixtures, personal property and business located in a building similar in construction, general location, use, occupancy and design to the Office Complex, including, but without limiting the generality of the foregoing, windstorms, hail, explosions, vandalism theft malicious mischief, civil commotion, and such other coverage as Tenant may deem appropriate or necessary. Tenant agrees that such policy or policies of insurance shall permit release of liability as provided herein and/or waiver of subrogation clause as to Landlord and Tenant waives, releases and discharges Landlord, its agents, employees, and contractors from all claims or demands whatsoever which Tenant may have or acquire arising out of damage to or destruction of the machinery, equipment, furniture, fixtures, personal property, and loss of use thereof occasioned by fire or other casualty, whether such claim or demand may arise because of the negligence or fault of Landlord, its agents, employees, contractors or otherwise, and Tenant agrees to look to the insurance coverage only in the event of such loss. 10 11 SECTION 6.3 LANDLORD'S LIABILITY AND OTHER INSURANCE OBLIGATIONS. Landlord shall, as a portion of the Operating Expenses defined in Article 2, maintain, for its benefit and the benefit of its managing agent and Tenant, general public liability insurance against claims for personal injury, death or property damage occurring upon, in or about the Office Complex, such insurance to afford protection to Landlord and its managing agent of a combined single limit of Two Million and No/100 Dollars ($2,000,000.00) in respect to the injury, death or property damage arising out of any accident or occurrence. In addition, Landlord shall carry employer's liability insurance with a minimum limit of $1,000,000 for bodily injury; excess liability insurance over the public and employer's liability insurance required above with combined, minimum coverage of $5,000,000; worker's compensation insurance in statutory limits; and such other insurance coverage or increased amounts of referenced coverages or deductibles as is customarily carried in respect of comparable buildings in Loudoun County, Virginia. Landlord agrees to include in its general public liability insurance policy the contractual liability coverage insuring Landlord's indemnification obligations provided for herein. Any such coverage shall be deemed primary to any liability coverage secured by Tenant. Such insurance shall also afford coverage for all claims based upon acts, omissions, injury or damage, which claims occurred or arose (or the onset of which occurred or arose) in whole or in part during the policy period. At Tenant's request, Landlord shall furnish Tenant with a certificate of insurance certifying that the insurance coverage required of Landlord pursuant to this Article 6 is in effect. Any insurance required by the terms of this Lease to be carried by Landlord may be under a blanket policy (or policies) covering the other properties of the Landlord and/or its related or affiliated entities so long as the insurance requirements set forth herein are satisfied. If such insurance is maintained under a blanket policy, Landlord shall procure and deliver to Tenant a statement from the insurer or general agent of the insurer setting forth the coverage maintained and the amounts thereof allocated to the risks intended to be insured hereunder. SECTION 6.4 TENANT'S LIABILITY INSURANCE OBLIGATIONS. Tenant shall, at Tenant's sole cost and expense but for the mutual benefit of Landlord, its managing agent and Tenant, maintain general public liability insurance against claims for personal injury, death or property damage occurring upon, in or about the Premises, such insurance to afford protection to Landlord, its managing agent and Tenant of a combined single limit of Two Million and No/100 Dollars ($2,000,000.00) in respect to the injury, death or property damage arising out of any accident or occurrence in the Office Complex. In addition, Tenant shall carry employer's liability insurance with a minimum limit of $500,000 for bodily injury; worker's compensation insurance in statutory limits; and excess liability insurance over the public and employer's liability insurance required above with combined, minimum coverage of $5,000,000. Such policies of insurance shall be written in companies reasonably satisfactory to Landlord, naming Landlord and its managing agent as additional insureds thereunder (on a primary basis), and such policies, or a memorandum or certificate of such insurance, shall be delivered to Landlord with evidence reasonably satisfactory to Landlord that the premium thereon has been paid. At such time as insurance limits required of tenants in office buildings in the area in which the Office Complex is located are generally increased to greater amounts, Landlord shall have the right to require such greater limits as may then be customary. Tenant agrees to include in such policy the contractual liability coverage insuring Tenant's indemnification obligations provided for herein. Any such coverage shall be deemed primary to any liability coverage secured by Landlord. Such insurance shall also afford coverage for all claims based upon acts, omissions, injury or damage, which claims occurred or arose (or the onset of which occurred or arose) in whole or in part during the policy period. SECTION 65 INDEMNIFICATIONS. Tenant agrees to indemnify, protect, defend and hold Landlord and Landlord's shareholders, employees, lender and managing agent harmless from and against any and all claims, costs, liabilities, actions, and damages, including, without limitation, attorneys' fees and costs on behalf of any person or persons, firm or firms, corporation or corporations, arising from any breach or default on the part of Tenant in the performance of any covenant or agreement on the part of Tenant to be performed, pursuant to the terms of this Lease, or arising from any act or negligence on the part of Tenant or its agents, contractors, servants, employees or licensees, or arising from any accident, injury or damage to the extent caused by Tenant, its agents, and employees to any person, firm or corporation occurring during the term of this Lease or any renewal thereof, in or about the Premises and Office Complex, and from and against all reasonable costs, reasonable counsel fees, expenses and liabilities incurred in or about any such claim or action or proceeding brought thereon; and in case any action or proceeding be brought against Landlord or its managing agent by reason of any such claim, 11 12 Tenant, upon notice from Landlord, covenants to resist or defend such action or proceeding by counsel reasonably satisfactory to Landlord. Tenant's indemnification shall not apply to losses, claims, costs and the like arising as a result of the negligence or willful misconduct of Landlord or its agents. Landlord hereby waives all claims against Tenant for damage to any property or injury to, or death of, any person in, upon, or about the Office Complex, including the Premises, arising at any time and from any cause other than by reason of the negligent or willful misconduct, or negligent omission of Tenant, its employees, agents, contractors or representatives. Landlord shall, and hereby agrees to, indemnify and hold Tenant harmless from any damage to any property or injury to, or death of, any person arising from Landlord's breach of its obligation hereunder, unless the damage is caused by the negligence or willful misconduct of the Tenant, its employees, agents, contractors or representatives. Landlord's foregoing indemnity shall include reasonable attorneys' fees, investigation costs, and all other reasonable costs and expenses incurred by Tenant in any connection therewith; and in case any action or proceeding be brought against Tenant or its managing agent by reason of any such claim, Landlord, upon notice from Tenant, covenants to resist or defend such action or proceeding by counsel reasonably satisfactory to Tenant. The provisions of this paragraph shall survive the termination of this Lease with regard to any occurrence prior to such termination and any resulting damage, injury, or death. If Tenant is made a party to any litigation commenced by or against Landlord or relating to this Lease, and provided that in any such litigation Tenant is not adjudicated in a court of final appeal to be at fault, then Landlord shall pay all costs and expenses, including actual, but not unreasonable attorneys' fees and court costs incurred by or imposed upon Tenant because of any such litigation, and the amount of all such costs and expenses including actual but not unreasonable attorneys' fees and court costs shall be a demand obligation owing by Landlord to Tenant. SECTION 6.6 TENANT'S WAIVER. Except to the extent covered by Landlord's indemnity in Section 6.5 above, Tenant agrees, to the extent not expressly prohibited by law, that Landlord, its agents, employees and servants shall not be liable, and Tenant waives all claims for damage to property and business sustained during the term of this Lease by Tenant occurring in or about the Office Complex, resulting directly or indirectly from any existing or future condition, defect, matter or thing in the Premises, the Office Complex, or any part thereof, or from equipment or appurtenances becoming out of repair or from accident, or from any occurrence or act or omission of Landlord, its agents, employees or servants, or any tenant or occupant of the Building or any other person. This paragraph shall apply especially but not exclusively, to damage caused by aforesaid or by the flooding of basements or other subsurface areas, or by refrigerators, sprinkling devices, air conditioning apparatus, water, snow, frost, steam, excessive heat or cold, falling plaster, broken glass, sewage, gas, odors or noise, or the bursting or leaking of pipes or plumbing fixtures, and shall apply equally, whether any such damage results from the act or omission of other tenants or occupants in the Office Complex or any other persons, and whether such damage be caused by or result from any of the aforesaid, or shall be caused by or result from other circumstances of a similar or dissimilar nature. SECTION 6.7 LANDLORD'S DEDUCTIBLE AND TENANT'S PROPERTY. Provisions herein to the contrary notwithstanding, in the event any damage to the Office Complex results directly and exclusively from any act or omission of Tenant, its agents, employees or invitees, and all or any portion of Landlord's loss is "deductible," Tenant shall pay to Landlord the amount of such deductible loss (not to exceed $1,000 per event). SECTION 6.8 TENANT'S PROPERTY. All property in the Office Complex or on the Premises belonging to Tenant, its agents, employees, invitees or otherwise located at the Premises, shall be at the risk of Tenant only, and Landlord, except to the extent covered by Landlord's indemnity in Section 6. 5, shall not be liable for damage thereto or theft, misappropriation or loss thereof and Tenant agrees to defend and hold Landlord, its agents, employees and servants harmless and indemnify them against claims and liability for injuries to such property. SECTION 6.9 INCREASE IN INSURANCE. Intentionally Deleted. SECTION 6.10 TENANT'S FAILURE TO INSURE. In the event Tenant fails to provide Landlord with evidence of insurance required under this Article 6 within thirty (30) days of Landlord's written request therefor, but in any event at least ten (l0) days prior to the expiration of the existing policy, Landlord 12 13 may, but shall not be obligated to, without further demand upon Tenant, and without waiving or releasing Tenant from any obligation contained in this Lease, effect such insurance and Tenant agrees to repay, upon demand, all such sums incurred by Landlord in effecting such insurance. All such sums shall become a part of the Additional Rent payable hereunder, but no such payment by Landlord shall relieve Tenant from any default under this Lease. ARTICLE 7 CERTAIN RIGHTS RESERVED BY LANDLORD SECTION 7.1 RIGHTS RESERVED BY LANDLORD. Landlord reserves the following rights exercisable without notice and without liability to Tenant and without effecting an eviction, constructive or actual, or disturbance of Tenant's use or possession, or giving rise to any claim for set off or abatement of rent except as otherwise expressly set forth herein: (a) RETAIN KEYS. To retain at all times and to use in appropriate instances keys to all doors within and into the Premises, except keys to the "secure areas" designated on the Tenant's Plans, as such areas may be changed by Tenant from time to time following written notice to Landlord. No locks shall be changed (except locks in or to the "secure areas") without the prior written notice to Landlord. This provision shall not apply to Tenant's safes, or other areas maintained by Tenant for the safety and security of monies, securities, negotiable instruments or similar items. To the extent reasonably possible, (i) Landlord shall give Tenant notice prior to entering the Premises, (ii) Landlord's entry shall be during normal business hours, and (iii) if required by Tenant, Landlord shall be accompanied by a representative of Tenant. (b) MAKE REPAIRS. To make repairs, alterations, additions, or improvements, whether structural or otherwise, in and about the Office Complex, or any part thereof, and for such purposes to enter upon the Premises, and during the continuation of any of said work to temporarily close doors, entryways, public spaces, and corridors in the Office Complex and to interrupt or temporarily suspend services and facilities, so long as Landlord at all times uses its best commercially reasonable efforts and endeavors in good faith to limit any interference with the conduct of Tenant's business or its occupancy and use of the Premises. If, as a result of Landlord's material and adverse interference, Tenant ceases operating at the Premises for five (5) consecutive business days, Tenant shall be entitled to an abatement of Rent on a daily basis beginning on the sixth (6th) consecutive business day and continuing until the earlier of(i) cessation of such material and adverse interference, or (ii) the date on which Tenant resumes business operations at the Premises. If as a result of Landlord's material and adverse interference, Tenant ceases operating at the Premises for ninety (90) consecutive business days, Tenant shall be entitled to terminate the Lease by delivering written notice to Landlord prior to the one hundredth (100th) consecutive business day of material and adverse interference. In exercising its right to make repairs, alterations and the like, to the extent reasonably possible, (i) Landlord shall give Tenant notice prior to entering the Premises, (ii) Landlord's entry shall be during normal business hours, and (iii) if required by Tenant, Landlord shall be accompanied by a representative of Tenant. (c) REGULATE HEAVY EQUIPMENT. To approve the weight, size and location of safes and other heavy equipment and articles in and about the Premises and the Office Complex and to require all such items to be moved into and out of the Office Complex and the Premises only at such times and in such manner as Landlord shall direct in writing excluding initial move in and final move out. Landlord hereby consents to the weight, size and location of equipment shown on Tenant's Plans. SECTION 7.2 EMERGENCY ENTRY. Landlord and its agents may enter the Premises at any time in case of emergency and shall have the right to use any and all means which Landlord may reasonably deem proper to open such doors during an emergency in order to obtain entry to the Premises, provided Landlord promptly repairs all damages caused thereto. Any entry to the Premises obtained by Landlord in the event of an emergency shall not, under any circumstances, be construed or deemed to be a forcible or unlawful entry into, or detainer of, the Premises, or to be an eviction of Tenant from the Premises or any portion thereof. SECTION 7.3 EXHIBITION OF PREMISES. Tenant shall permit Landlord and its agents, upon not less than twenty four hours' (24) notice, to enter and pass through the Premises or any part thereof at 13 14 reasonable times during normal business hours to: (a) post notices of non-responsibility; (b) exhibit the Premises to holders of encumbrances on the interest of Landlord under the Lease and to prospective purchasers or mortgagees of the Office Complex; and (c) during the period of six (6) months prior to the expiration of the Lease Term, exhibit the Premises to prospective tenants thereof. In addition, Landlord may post commercially reasonable signage indicating that the Premises will be available for occupancy. If during the last month of the Lease Term, Tenant shall have removed substantially all of Tenant's property and personnel from the Premises, Landlord may, after obtaining the consent of Tenant and satisfying such reasonable insurance obligations and indemnification requirements as Tenant may impose, enter the Premises and repair, alter, and redecorate the same, without abatement of Rent and without liability to Tenant; and such acts shall have no effect on this Lease. SECTION 7.4 RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of Rent. If Tenant shall fail to pay any sum of money (other than Rent due Landlord) required to be paid by it hereunder or shall fail to perform any other act on its part to be performed hereunder, and such failure shall continue for five (5) days following receipt of detailed notice from Landlord including, but not limited to, the failure to commence and complete repairs promptly and adequately, and the failure to remove any liens or otherwise to perform any act or fulfill any obligation required of Tenant under this Lease, Landlord may, but shall not be obligated to, and without waiving or releasing Tenant from any obligations of Tenant, make any such payment or perform any such act on Tenant's part to be made or performed as in this Lease provided. Notwithstanding the foregoing, Landlord shall not be required to give Tenant written notice prior to performing on Tenant's behalf in the event of an emergency. All sums so paid by Landlord and all necessary incidental costs, together with an administrative overhead charge equal to twenty percent (20%) of the actual costs incurred, shall be payable to Landlord by Tenant as Rent on demand and Tenant covenants to pay all such sums. Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of Tenant's nonpayment of such sums, as in the case of default by Tenant in the payment of Rent to Landlord. Notwithstanding the foregoing, except in the case of an emergency, Landlord agrees not to perform for Tenant's account until the expiration of all applicable notice and cure periods referenced in this Lease. ARTICLE 8 ALTERATIONS AND IMPROVEMENTS SECTION 8.1 TENANT'S CHANGES AND ALTERATIONS. Tenant shall have the right at any time, and from time to time during the term of this Lease, to make such changes and alterations, structural or otherwise, to the Premises, improvements and fixtures hereafter erected on the Premises as Tenant shall deem necessary or desirable in connection with the requirements of its business, which changes and alterations (other than changes or alterations of Tenant's movable trade fixtures and equipment) shall be made in all cases subject to the following conditions, which Tenant covenants to observe and perform: (a) PERMITS. No change or alteration shall be undertaken until Tenant shall have procured and paid for, so far as the same may be required by the applicable governmental authorities from time to time, all municipal, state and federal permits and authorizations of the various governmental bodies and departments having jurisdiction thereof, and Landlord agrees to join in the application for such permits or authorizations whenever such action is necessary, all at Tenant's sole cost and expense. (b) COMPLIANCE WITH PLANS AND SPECIFICATIONS. Before commencement of any change, alteration, restoration or construction (hereinafter sometimes referred to as "Work") involving in the aggregate an estimated cost of more than $10,000 or which would materially alter the mechanical, structural, or electrical systems of the Building, Tenant shall (i) furnish Landlord with detailed plans and specifications of the proposed change or alteration; (ii) obtain Landlord's prior written consent, which consent shall not be unreasonably withheld; (iii) provide Landlord with the name of the licensed architect or licensed professional engineer selected and paid for by Tenant, who shall supervise any such work (hereinafter referred to as "Alterations Architect or Engineer"); and (iv) obtain Landlord's prior written approval of detailed plans and specifications prepared and 14 15 approved in writing by said Alterations Architect or Engineer, and of each amendment and change thereto. (c) VALUE MAINTAINED. Any change or alteration shall, when completed, be of such character as not to reduce the value of the Premises or the Building to which such change or alteration is made below its value immediately before such change or alteration, nor shall such change or alteration reduce the area or cubic content of the Building, nor change the Building as to use without Landlord's e xpress written consent. Tenant further agrees that in no event shall any change or alteration void or impair any of Landlord's warranties on the Building and, to the extent same are voided or impaired, Landlord's corresponding warranties to Tenant as contained in this Lease shall be likewise voided. (d) COMPLIANCE WITH LAWS. All Work done in connection with any change or alteration shall be done promptly and in a good and workmanlike manner and in compliance with all building and zoning laws of the place in which the Premises are situated, and with all laws, ordinances, orders, rules, regulations and requirements of all federal, state and municipal governments and appropriate departments, commissions, boards and officers thereof, and in accordance with the orders, rules and regulations of the Board of Fire Underwriters where the Premises are located, or any other body exercising similar functions. The cost of any such change or alteration shall be paid so that the Premises and all portions thereof shall at all times be free of liens for labor and materials supplied to the Premises, or any portion thereof. The Work of any change or alteration shall be prosecuted with reasonable dispatch, delays due to strikes, lockouts, acts of God, inability to obtain labor or materials, governmental restrictions or similar causes beyond the control of Tenant excepted. Tenant shall obtain and maintain, or cause to be obtained and maintained, at no expense to Landlord, during the performance of the Work, workers' compensation insurance in normal and customary amounts, covering all persons employed in connection with the Work and with respect to which death or injury claims could be asserted against Landlord or Tenant or against the Premises or any interest therein. Tenant shall also cause any contractor performing work on Tenant's behalf to carry and maintain, at no expense to Landlord, a non-deductible comprehensive general liability insurance policy, which shall include contractor's liability coverage, contractual liability coverage, completed operations coverage, a broad form property damage endorsement and contractor's protective liability coverage to afford protection with limits, for each occurrence, of not less than Three Million Dollars ($3,000,000) combined single limit, written on an occurrence basis. In addition, the fire insurance with "extended coverage" endorsement required by Section 6.1 hereof shall be supplemented with "builder's risk" insurance on a completed value form or other comparable coverage on the Work. All such insurance shall be in a company or companies authorized to do business in the state in which the Premises are located and reasonably satisfactory to Landlord, and all such policies of insurance or, at Tenant's option, certificates of insurance shall be delivered to Landlord endorsed "Premium Paid" by the company or agency issuing the same, or with other evidence of payment of the premium satisfactory to Landlord. (e) PROPERTY OF LANDLORD. Unless otherwise designated by Tenant at the time Landlord's consent is obtained, all improvements and alterations (other than Tenant's movable trade fixtures and equipment) made or installed by Tenant shall immediately, upon completion or installation thereof, become the property of Landlord without payment therefor by Landlord, and shall be surrendered to Landlord on the expiration of the term of this Lease. (f) LOCATION OF IMPROVEMENTS. No change, alteration, restoration or new construction shall be in or connect the Premises with any property, building or other improvement located outside the boundaries of the Land, nor shall the same obstruct or interfere with any existing easement. (g) REMOVAL OF IMPROVEMENTS. As a condition to granting approval for any changes or alterations Landlord, by written notice to Tenant, given at or prior to the time of granting 15 16 such approval, may require Tenant to remove any improvements, additions or installations installed by Tenant in the Premises at Tenant's sole cost and expense, and repair and restore any damage caused by the installation and removal of such improvements, additions, or installations; provided, however, the only improvements, additions or installations which Tenant shall remove shall be those specified in such notice. All improvements, additions or installations installed by Tenant which did not require Landlord's prior approval shall be removed by Tenant as provided for in this Section 8.1(g), unless Tenant has obtained a written waiver of such condition from Landlord. (h) WRITTEN NOTIFICATION REQUIRED. Tenant shall notify Landlord in writing ten (10) days prior to commencing any alterations, additions or improvements to the Premises which have been approved by Landlord so that Landlord shall have the right to record and post notices of non-responsibility on the Premises. SECTION 8.2 NONSTRUCTURAL ALTERATIONS/WITHOUT LANDLORD'S CONSENT. Notwithstanding the foregoing, Tenant shall have the right from time to time and at any time, without Landlord's consent, to perform the following work within the Premises: (i) install, remove and relocate nonstructural office partitioning provided such work does not materially and adversely affect the base building structure or HVAC systems, (ii) paint and install wall coverings, (iii) install and remove office furniture, (iv) relocate electrical outlets, (v) install and remove workstations, (vi) install and remove Tenant's equipment and perform cable pulls in connection therewith, and (vii) install and remove carpeting and other floor coverings. SECTION 8.3 FREEDOM FROM LIENS. Tenant shall not suffer or permit any mechanic's lien or other lien to be filed against the Office Complex, or any portion thereof, by reason of work labor, skill, services, equipment or materials supplied or claimed to have been supplied to the Office Complex at the request of Tenant, or anyone holding the Premises, or any portion thereof, through or under Tenant. If any such mechanic's lien or other lien shall at any time be filed against the Office Complex, or any portion thereof, Tenant shall cause the same to be discharged of record or satisfied by bonding within 30 days of the date of filing the same. If Tenant shall fail to discharge or bond off such mechanic's lien or liens or other lien within such period, then, in addition to any other right or remedy of Landlord, after five (5) days prior written notice to Tenant, Landlord may, but shall not be obligated to, discharge the same by paying to the claimant the amount claimed to be due or by procuring the discharge of such lien as to the Office Complex by deposit in the court having jurisdiction of such lien, the foreclosure thereof or other proceedings with respect thereto, of a cash sum sufficient to secure the discharge of the same, or by the deposit of a bond or other security with such court sufficient in form, content and amount to procure the discharge of such lien, or in such other manner having reasonable cost as is now or may in the future be provided by present or future law for the discharge of such lien as a lien against the Office Complex. Such amount paid by Landlord, or the value of such deposit so made by Landlord, together with all reasonable costs, fees and expenses in connection therewith (including reasonable attorney's fees of Landlord), together with interest thereon at the Default Rate, shall be repaid by Tenant to Landlord within thirty (30) days following demand by Landlord and if unpaid may be treated as Additional Rent. Tenant shall indemnify and defend Landlord against and save Landlord and the Office Complex, and any portion thereof, harmless from all losses, costs, damages, expenses, liabilities, suits, penalties, claims, demands and obligations, including, without limitation, reasonable attorney's fees resulting from the assertion, filing, foreclosure or other legal proceedings with respect to any such mechanic's lien or other lien. Tenant shall specifically notify all materialmen, contractors, artisans, mechanics, laborers and any other person now or hereafter furnishing any labor, services, materials, supplies or equipment to Tenant with respect to the Office Complex, or any portion thereof, that they must look exclusively to Tenant to obtain payment for the same, and that Landlord shall not be liable for any labor, services, materials, supplies, skill, machinery, fixtures or equipment furnished or to be furnished to Tenant upon credit, and that no mechanic's lien or other lien for any such labor, services, materials, supplies, machinery, fixtures or equipment shall attach to or affect the estate or interest of Landlord in and to the Office Complex, or any portion thereof. SECTION 8.4 LANDLORD'S INDEMNIFICATION. The provisions of Section 8.3 above shall not apply to any mechanic's lien or other lien for labor, services, materials, supplies, machinery, fixtures or 16 17 equipment furnished to the Office Complex in the performance of Landlord's obligations to construct required by the Work Agreement, and Landlord does hereby agree to indemnify and defend Tenant against and save Tenant and the Office Complex, and any portion thereof, harmless from all losses, costs, damages, expenses, liabilities, suits, penalties, claims, demands and obligations, including, without limitation, reasonable attorney's fees resulting from the assertion, filing, foreclosure or other legal proceedings with respect to any such mechanic's lien or other lien. SECTION 8.5 REMOVAL OF LIENS. Except as otherwise provided for in this Article 8, Tenant shall not create, permit or suffer, and shall promptly discharge and satisfy of record, any other lien, encumbrance, charge, security interest, or other right or interest which shall be or become a lien, encumbrance, charge or security interest upon the Office Complex, or any portion thereof, or the income therefrom, or on the interest of Landlord or Tenant in the Office Complex, or any portion thereof, save and except for those liens, encumbrances, charges, security interests, or other rights or interests consented to, in writing, by Landlord, or those mortgages, assignments of rents, assignments of leases and other mortgage documentation placed thereon by Landlord in financing or refinancing the Office Complex. ARTICLE 9 REPAIRS SECTION 9.1 TENANT'S REPAIR OBLIGATIONS. Subject to Article 6 hereof, and except to the extent the responsibility of Landlord hereunder, Tenant shall, during the term of this Lease, at Tenant's expense, keep the non-structural elements of the Building and all changes and alterations made by Tenant to the Building (whether non-structural or structural) in as good order, condition and repair as they were at the time Tenant took possession of the same, reasonable wear and tear and damage from fire and other casualties excepted. Tenant shall keep the Premises in a neat and sanitary condition and shall not commit any nuisance or waste on the Premises or in, on, or about the Office Complex or throw foreign substances in the plumbing facilities. All uninsured damage or injury to the Premises, or to the Office Complex caused by Tenant moving furniture, fixtures, equipment, or other devices in or out of the Premises or Office Complex or by installation or removal of furniture, fixtures, equipment, devices or other property of Tenant, its agents, contractors, servants or employees, due to carelessness, omission, neglect, improper conduct, or other cause of Tenant, its servants, employees, agents, visitors, or licensees, shall be repaired, restored and replaced promptly by Tenant at its sole cost and expense to the reasonable satisfaction of Landlord. All repairs, restorations and replacements shall be in quality and class equal to the original work and shall comply with all requirements of the Lease. SECTION 9.2 LANDLORD'S INSPECTION. Intentionally Deleted. SECTION 9.3 JOINT INSPECTION UPON VACATION. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Premises for the express purpose of arranging a meeting with Landlord for a joint inspection of the Premises. In the event of Tenant's failure to give such notice and arrange such joint inspection, Landlord's inspection at or after Tenant's vacation of the Premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration hereunder. ARTICLE 10 ASSIGNMENT AND SUBLETTING SECTION 10.1 RESTRICTION ON TRANSFER. Tenant shall not sublet the Premises, or any portion thereof, nor assign, mortgage, pledge, transfer or otherwise encumber or dispose of this Lease, or any interest therein, or in any manner assign, mortgage, pledge, transfer or otherwise encumber or dispose of its interest or estate in the Premises, or any portion thereof, without obtaining Landlord's prior written consent in each and every instance, which consent shall not be unreasonably withheld or delayed, provided the following conditions are complied with: (a) Any assignment of this Lease (but specifically excluding any sublease) shall transfer to the assignee all of Tenant's right, title and interest in this Lease and all of Tenant's estate or interest in the Premises. 17 18 (b) At the time of any assignment or subletting, and at the time when Tenant requests Landlord's written consent thereto, this Lease must be in full force and effect, without any breach or default thereunder on the part of Tenant beyond any applicable notice and cure period. (c) Any such assignee (but specifically excluding any sublessee) shall assume, by written, recordable instrument, in form and content reasonably satisfactory to Landlord and such assignee, the due performance of all of Tenant's obligations under this Lease, and such assumption agreement shall state that the same is made by the assignee for the express benefit of Landlord as a third party beneficiary thereof. A copy of the assignment and assumption agreement, both in form and content reasonably satisfactory to Landlord, fully executed and acknowledged by assignee, together with a certified copy of a properly executed corporate resolution (if the assignee be a corporation) authorizing the execution and delivery of such assumption agreement, shall be sent to Landlord ten (10) days prior to the effective date of such assignment. (d) In the case of a subletting, a copy of any sublease fully executed and acknowledged by Tenant and the sublessee shall be mailed to Landlord within thirty (30) days following the effective date of such subletting. (e) Such assignment or subletting shall be subject to all the provisions, terms, covenants and conditions of this Lease (except, in the case of a sublease, payment of the Base Rent and Additional Rent due under this Lease), and Tenant-assignor (and the guarantor or guarantors of this Lease, if any) and the assignee or assignees shall continue to be and remain liable under this Lease. (f) Each sublease permitted under this Section 10.1 shall contain provisions to the effect that (i) such sublease is only for the use and occupancy by the sublessee and not any other third party; (ii) such sublease is subject and subordinate to all of the terms, covenants and conditions of this Lease and to all of the rights of Landlord thereunder; and (iii) in the event this Lease shall terminate before the expiration of such sublease, the sublessee thereunder will, provided Landlord and its lender(s) recognizes such sublessee's rights under the sublease and agrees not to disturb Tenant's occupancy and possession so long as Tenant is not in default thereunder, attorn to Landlord and waive any rights the sublessee may have to terminate the sublease or to surrender possession thereunder, as a result of the termination of this Lease. Landlord agrees to enter into a Subordination, Non-Disturbance and Attornment Agreement ("SNDA") with the subtenants, the substance of which shall be substantially similar to the SNDA attached as Exhibit C, and Landlord agrees to use its best commercially reasonable efforts to obtain such an SNDA from Landlord's Mortgagee(s) (as defined in Section 15.3 hereof) for the benefit of the subtenants. (g) Tenant agrees to pay on behalf of Landlord any and all reasonable, actual out-of-pocket costs of Landlord, including reasonable attorney's fees actually paid or payable to outside counsel, occasioned by such assignment or subletting. Landlord agrees to use good faith efforts to minimize the fees of outside counsel. For purposes of this Lease, any transfer of less than fifty percent (50%) in the aggregate of stock membership interest or partnership interest in Tenant shall not constitute an assignment. Notwithstanding the terms of this Section 10.1, Tenant may sublet up to seventy percent (70%) of the square footage contained in the Building in the aggregate without Landlord's prior written consent, provided (i) every such sublease shall be subject to the conditions contained in sections 10.1 (b), (d), (e), (f) and (g) above, and (ii) any sublessee shall be of a type and quality consistent with a first class office building. Tenant shall be entitled to erect commercially reasonable signage on the Property signifying that space in the Building is available for sublease, such signage to be in compliance with all Legal Requirements, recorded covenants and restrictions and the like governing the Property. In addition, Tenant may, without Landlord's prior written consent, (a) sublet all or a portion of the Premises to any related corporation or entity which controls Tenant, is controlled by Tenant or is under common control 18 19 with Tenant; or (b) assign this Lease to a successor corporation into which or with which Tenant is merged or consolidated or which acquires substantially all of Tenant's assets and property; provided that (i) in the case of an assignment, such successor entity assumes all of the obligations and liabilities of Tenant, (ii) in the case of an assignment or a sublease, such successor entity's net worth indicates that the entity has similar financial capability as Tenant and the ability to meet the obligations herein, and (iii) such subletting or assignment does not violate the terms of any deeds of trust encumbering the Building of which Tenant has been provided notice. SECTION 10.2 RESTRICTION FROM FURTHER ASSIGNMENT. Any further assignment or subleasing shall be governed by the terms of this Article 10. No assignment or subleasing shall relieve Tenant from any of Tenant's obligations set forth in this Lease. SECTION 10.3 LANDLORD'S TERMINATION RIGHTS. Intentionally Deleted. SECTION 10.4 TENANT'S FAILURE TO COMPLY. Tenant's failure to comply with all of the foregoing provisions and conditions of this Article 10 shall (whether or not Landlord's consent is required under this Article), at Landlord's option, render any purported assignment or subletting null and void and of no force and effect. Notwithstanding the foregoing, in the event Landlord receives written notice of Tenant's failure to comply with the terms of this Article 10, then if Landlord desires to exercise its right to render the applicable sublease and/or assignment null and void, Landlord must do so within sixty (60) days of the date of receipt of such notice. SECTION 10.5 SHARING OF EXCESS RENT. If Landlord consents to Tenant assigning its interest under this Lease or subletting all or any portion of the Premises, Tenant shall pay to Landlord (in addition to Rent and all other amounts payable by Tenant under this Lease) 50% of the rents and other considerations payable by such assignee or subtenant (net of brokerage commissions, improvement costs, legal fees and other reasonable costs and expenses incurred in connection with the assignment or subletting) in excess of the Rent otherwise payable by Tenant from time to time under this Lease. For the purposes of this computation, the additional amount payable by Tenant shall be determined by either (i) application of the rental rate per square foot for the Building or any portion thereof sublet, or (ii) the fair market rental rate for rooftop space or other space at the Premises sublet, as applicable. Said additional amount shall be paid to Landlord immediately upon receipt by Tenant of such Rent or other considerations from the assignee or subtenant. ARTICLE 11 DAMAGE BY FIRE OR OTHER CASUALTY SECTION 11.1 TENANTABLE WITHIN 150 DAYS. If fire or other casualty shall render the whole or any material portion of the Premises untenantable, Landlord shall obtain an estimate for the time required to rebuild from a reputable licensed contractor, and shall forward the time estimate to Tenant within thirty (30) days from the date of such damage or destruction. If, pursuant to the estimate, the Premises can reasonably be expected to be made tenantable within one hundred fifty (150) days from the date of such event, then Landlord shall repair and restore the Premises and the Office Complex within such one hundred fifty (150) day period. In the event of the foregoing, this Lease shall remain in full force and effect. SECTION 11.2 NOT TENANTABLE WITHIN 150 DAYS. If, pursuant to the time estimate referenced in Section 11.1 above, the Premises cannot reasonably be expected to be made tenantable within one hundred (150) days from the date of the casualty event, then Tenant may, by written notice to Landlord within thirty (30) days from the date of Landlord's time estimate, terminate this Lease. Tenant's termination notice shall state a termination date which shall be at least thirty (30) days but no more than sixty (60) days from the date of the termination notice. SECTION 11.3 DAMAGE OCCURRING AT END OF TERM. Notwithstanding the terms of Sections 11.1 and 11.2 above, in the event the Premises are damaged during the last twenty-four (24) months of the initial term to the extent of twenty-five percent (25%) or more of the replacement cost thereof, Landlord or Tenant may terminate this Lease by giving written notice of such termination to the other 19 20 party within sixty (60) days of the date of the casualty. The termination notice shall specify a termination date at least thirty (30) days but not more than sixty (60) days after the date of such notice. Notwithstanding anything to the contrary contained in this Section 11.3, Tenant shall be entitled to nullify Landlord's termination notice by delivering to Landlord written notice ("Renewal Notice") of Tenant's exercise of any then outstanding renewal options granted to Tenant pursuant to Section 16.32 of this Lease. The Renewal Notice shall be delivered within thirty (30) days of the date of Landlord's termination notice. SECTION 11.4 UNINSURED CASUALTY. If an uninsured casualty event shall render any portion of the Premises or any material portion of the Office Complex untenantable, then so long as Landlord shall have had in effect all insurance required by the terms of this Lease, Landlord may, by notice to Tenant, mailed within thirty (30) days from the date of such damages or destruction, terminate this Lease effective upon a date within thirty (30) days from the date of such notice. SECTION 11.5 DEDUCTIBLE PAYMENTS. If the Premises or the Office Complex is damaged, and such damage is of the type insured against under the fire and special form property damage insurance required to be maintained by Landlord hereunder, the cost of repairing said damage up to the amount of the deductible under said insurance policy shall be included as a part of the Operating Expenses. If the damage is not covered by such insurance policies and Landlord elects to repair the damage, then Tenant shall pay Landlord the "deductible amount" (if any) under Landlord's insurance policies, and, if the damage was directly and exclusively caused by an act or omission of Tenant, the difference between the actual cost of repair and any insurance proceeds received by Landlord. SECTION 11.6 LANDLORD'S REPAIR OBLIGATIONS. If fire or other casualty shall render the whole or any material part of the Premises untenantable and neither Landlord nor Tenant terminates this Lease pursuant to its rights herein, then Landlord shall repair and restore the Premises and the Office Complex to as near their condition prior to the fire or other casualty as is reasonably possible with all due diligence and speed and within the applicable time period required by this Article 11 (subject to delays for causes beyond Landlord's reasonable control) and the Rent for the period during which the Premises are untenantable shall be equitably abated (based upon the portion of the Premises which is untenantable). In no event shall Landlord be obligated to repair or restore any special equipment or improvements installed by Tenant at Tenant's expense. SECTION 11.7 RENT APPORTIONMENT. In the event of a termination of this Lease pursuant to this Article 11, Rent shall be apportioned on a per diem basis and paid to the date of the Lease termination. SECTION 11.8 INSURANCE TRUSTEE. If Landlord fails to comply with its obligation to rebuild the Premises pursuant to this Article 11 and Tenant elects to exercise its self-help rights as set forth in Section 14.7 hereof, upon receipt of written instructions from Tenant, Landlord shall inform its insurance company that Tenant has undertaken the rebuilding of the Premises and all insurance proceeds shall thereafter be placed with an insurance trustee and disbursed upon terms and conditions similar to those contained in an industry standard construction loan agreement. ARTICLE 12 EMINENT DOMAIN SECTION 12.1 TENANT'S TERMINATION. If the whole of or a substantial part of the Premises is taken by any public authority under the power of eminent domain, or taken in any manner for any public or quasi-public use, so as to render (in Tenant's reasonable judgment) the remaining portion of the Premises unsuitable for the purposes intended hereunder, then Tenant shall give Landlord written notice within thirty (30) days of receiving notice of the taking and the term of this Lease shall cease as of the day possession shall be taken by such public authority and Landlord shall make a pro rata refund of any prepaid rent. Subject to Section 12.2, all damages awarded for such taking under the power of eminent domain or any like proceedings shall belong to and be the property of Landlord, Tenant hereby assigning to Landlord its interest, if any, in said award. Further, if all or any material part of the Office Complex is taken by public authority under the power of eminent domain, or taken in any manner for any public or 20 21 quasi-public use, so as to render any remaining portion of the Premises unsuitable in Tenant's reasonable opinion, for the purposes intended hereunder, upon delivery of possession to the condemning authority pursuant to the proceedings, Tenant may, at its option, terminate this Lease as to the remainder of the Premises by written notice to Landlord, such notice to be given to Landlord within thirty (30) days after Tenant receives notice of the taking. Tenant shall not have the right to terminate this Lease pursuant to the preceding sentence unless the business of Tenant cannot in Tenant's reasonable judgment be carried on with substantially the same utility and efficiency in the remainder of the Premises. Any notice of termination shall specify the date not more than sixty (60) days after the giving of such notice as the date for such termination. SECTION 12.2 TENANT'S PARTICIPATION. Provisions in this Article 12 to the contrary notwithstanding, Tenant shall have the right to prove in any condemnation proceedings and to receive any separate award which may be made for damages to or condemnation of Tenant's movable trade fixtures and equipment and for moving expenses; provided, however, Tenant shall in no event have any right to receive any award for its interest in this Lease or for loss of leasehold. Provisions in this Article 12 to the contrary notwithstanding, in the event of a partial condemnation of the Office Complex or the Premises and this Lease is not terminated, Landlord shall, at its sole cost and expense, promptly restore the Premises and Office Complex to a complete architectural unit as near as possible to that condition which existed prior to such partial condemnation and the Base Rent provided for herein during the period from and after the date of delivery of possession pursuant to such proceedings to the termination of this Lease shall be reduced to the fair market rent of the Premises after such taking. ARTICLE 13 SURRENDER OF PREMISES SECTION 13.1 SURRENDER OF POSSESSION. On the last day of the term of this Lease, or on the sooner termination thereof, Tenant shall peaceably surrender the Premises in good condition and repair consistent with Tenant's duty to make repairs as herein provided, reasonable wear and tear and casualty loss excluded. On or before the last day of the term of this Lease, or the date of sooner termination thereof, Tenant shall, at its sole cost and expense, remove all of its property and trade fixtures and equipment from the Premises which Tenant is required to remove pursuant to the terms of this Lease. All property not removed within ten (10) days following receipt of notice from Landlord shall be deemed abandoned. Tenant hereby appoints Landlord its agent to remove all abandoned property of Tenant from the Premises upon termination of this Lease and to cause its transportation and storage for Tenant's benefit, all at the sole cost and risk of Tenant and Landlord shall not be liable for damage, theft, misappropriation or loss thereof and Landlord shall not be liable in any manner in respect thereto. Tenant shall pay all reasonable costs and expenses of such removal, transportation and storage. Tenant shall reimburse Landlord upon demand for any reasonable expenses incurred by Landlord with respect to removal, transportation, or storage of abandoned property and with respect to restoring said Premises to good order, condition and repair. All alterations, additions and fixtures, other than those which Tenant may, or is required to, remove pursuant to the terms of this Lease, shall remain the property of Landlord and shall be surrendered with the Premises as a part thereof. Tenant shall promptly surrender all keys for the Premises to Landlord at the place then fixed for the payment of rent and shall inform Landlord of combinations on any vaults, locks and safes left on the Premises. Notwithstanding any provision to the contrary contained herein, in no event shall Tenant be liable for, or otherwise be obligated to pay, lost actual or potential profits or any other damages of a consequential, speculative, special, punitive or similar nature. SECTION 13.2 TENANT RETAINING POSSESSION. In the event Tenant remains in possession of the Premises after expiration of this Lease, and without the execution of a new lease, but with Landlord's written consent, it shall be deemed to be occupying the Premises as a tenant from month to month, subject to all the provisions, conditions and obligations of this Lease insofar as the same can be applicable to a month-to-month tenancy, except that the Base Rent shall be 150% of the then current Base Rent for the Premises. In the event Tenant remains in possession of the Premises after expiration of this Lease and without the execution of a new lease and without Landlord's written consent, Tenant shall be deemed to be occupying the Premises without claim of right and Tenant shall pay a charge for each day of occupancy an amount equal to double the Base Rent and Additional Rent (on a daily basis) then due under this Lease. Notwithstanding any provision to the contrary contained herein, in no event shall Tenant be liable 21 22 for, or otherwise be obligated to pay, lost actual or potential profits or any other damages of a consequential, speculative, special, punitive or similar nature. ARTICLE 14 DEFAULT OF TENANT SECTION 14.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following events (in this Article sometimes called "Event of Default") shall constitute a default and breach of this Lease by Tenant: (a) If Tenant fails to pay any Base Rent or Additional Rent payable under this Lease or fails to pay any obligation required to be paid by Tenant when and as the same shall become due and payable, and such default continues for a period often (10) days after receipt of written notice thereof given by Landlord to Tenant. (b) If Tenant fails to perform any of Tenant's nonmonetary obligations under this Lease for a period of thirty (30) days after receipt of written notice from Landlord; provided that if more time is required to complete such performance, Tenant shall not be in default if Tenant commences such performance within the thirty (30) day period and thereafter diligently pursues its completion within ninety (90) days. However, Landlord shall not be required to give such notice if Tenant's failure to perform constitutes a non-curable breach of this Lease. The notice required by this subsection is intended to satisfy any and all notice requirements imposed by law on Landlord and is not in addition to any such requirement. (c) If Tenant, by operation of law or otherwise, violates the provisions of Article 10 hereof relating to assignment, sublease, mortgage or other transfer of Tenant's interest in this Lease or in the Premises and such violation continues for five (5) days after written notice from Landlord. (d) If default shall be made by Tenant in keeping, observing or performing any of the terms contained in this Lease, other then those referred to in Subparagraphs (a) and (c) of this Section 14.1, and such default will result in Landlord being subject to criminal liability, and such default shall continue after written notice thereof given by Landlord to Tenant, and Tenant fails to thereafter proceed timely and promptly with all due diligence and in good faith to cure the same and thereafter to prosecute the curing of such default with all due diligence, it being intended that in connection with a default which exposes Landlord to criminal liability that Tenant shall proceed immediately to cure or correct such condition with continuity and with all due diligence and in good faith. SECTION 14.2 LANDLORD'S REMEDIES. Upon the occurrence of an Event of Default by Tenant, and at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have, Landlord shall be entitled to the rights and remedies set forth below. (a) TERMINATION OF POSSESSION. Terminate Tenant's right to possession of the Premises by any lawful means, in which case the Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event, Landlord shall have the immediate right to reenter and remove all persons and property, and such property may be removed and stored in a public warehouse or elsewhere at the cost of, and for the account of Tenant, all without service of notice or resort to legal process and without being deemed guilty of trespass, or becoming liable for any loss or damage which may be occasioned thereby, except for Landlord's gross negligence or willful misconduct. In the event that Landlord shall elect to so terminate this Lease, then Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including: (i) The equivalent of the amount of the Base Rent and Additional Rent which would be payable under this Lease by Tenant if this Lease were still in effect, less (ii) The net proceeds of any commercially reasonable reletting affected pursuant to the provisions of Section 14.2 hereof after deducting all of Landlord's reasonable expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, legal 22 23 expenses, reasonable attorneys' fees, alteration costs, and expenses of preparation of the Premises, or any portion thereof, for such reletting. Tenant shall pay such current damages in the amount determined in accordance with the terms of this Section 14.2 as set forth in a written statement thereof from Landlord to Tenant (hereinafter caged the "Deficiency"), to Landlord in monthly installments on the days on which the Rent would have been payable under this Lease if this Lease were still in effect, and Landlord shall be entitled to recover from Tenant each monthly installment of the Deficiency as the same shall arise. (b) DAMAGES. At any time after an Event of Default and termination of this Lease, whether or not Landlord shall have collected any monthly Deficiency as set forth in Section 14.2, Landlord shall be entitled to recover from Tenant, in lieu of continuing monthly payments for the Deficiency, and Tenant shall pay to Landlord, on demand, as and for final damages for Tenant's default, an amount equal to the difference between the then present worth of the aggregate of the Base Rent and Additional Rent and any other charges to be paid by Tenant hereunder for the remainder of the temm of this Lease, and the then present worth of the then aggregate fair and reasonable fair market rent of the Premises for the same period, net of the costs and expenses referenced in Section 14.2(a)(ii). In the computation of present worth, a discount at the rate of nine percent (9%) per annum shall be employed. If the Premises, or any portion thereof, shall be relet by Landlord on commercially reasonable temms for the unexpired term of this Lease, or any part thereof, before presentation of proof of such damages to any court, commission or tribunal, the amount of Rent reserved upon such reletting shall, prima facie, be the fair and reasonable fair market rent for the part or the whole of the Premises so relet during the term of the reletting. Nothing herein contained or contained in Section 14.2 shall limit or prejudice the right of Landlord to prove for and obtain, as damages by reason of such expiration or termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to or less than the amount of the difference referred to above. (c) REENTRY AND REMOVAL. Upon the occurrence of an Event of Default by Tenant, Landlord shall also have the right, with or without terminating this Lease, to reenter the Premises to remove all persons and property from the Premises. Such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. If Landlord shall elect to reenter the Premises, Landlord shall not be liable for, and Tenant shall indemnify and hold Landlord harmless for, damages by reason of such reentry except for Landlord's gross negligence or willful misconduct. (d) NO TERMINATION; RECOVERY OF RENT. If Landlord does not elect to terminate this Lease as provided in this Section 14.2, then Landlord may, from time to time, recover all Rent as it becomes due under this Lease. At any time thereafter, Landlord may elect to terminate this Lease and to recover damages to which Landlord is entitled pursuant to this Article 14. (e) RELETTING THE PREMISES. In the event that Landlord should elect to terminate this Lease, Landlord shall use commercially reasonable efforts to relet the Premises on commercially reasonable terms, in which event it may execute any new lease in its own name. Tenant hereunder shall have no right or authority whatsoever to collect any Rent from such tenant. The proceeds of any such reletting shall be applied as follows: (i) First, to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord, including but not limited to reasonable storage charges or reasonable brokerage commissions owing from Tenant to Landlord as the result of such reletting; (ii) Second, to the payment of the reasonable costs and expenses of reletting the Premises, including alterations and repairs which Landlord, in its sole discretion, reasonably deems necessary in connection with such re-letting and reasonable attorneys' fees incurred by Landlord in connection with the retaking of the said Premises and such reletting; (iii) Third, to the payment of Rent and other charges due and unpaid hereunder; and 23 24 (iv) Fourth, to the payment of future Rent and other damages payable by Tenant under this Lease. The parties hereto shall, and they hereby do, waive trial by jury in any action, proceeding, or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of, or in any way connected with, this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises and/or Office Complex, and/or claim or injury or damage. In the event Landlord commences any proceeding to enforce this Lease or the Landlord/Tenant relationship between the parties or for nonpayment of Rent (of any nature whatsoever) or additional monies due Landlord from Tenant under this Lease, Tenant will not interpose any counterclaim of whatever nature or description in any such proceedings. In the event Tenant must, because of applicable court rules, interpose any counterclaim or other claim against Landlord in such proceedings, Landlord and Tenant covenant and agree that, in addition to any other lawful remedy of Landlord, upon motion of Landlord, such counterclaim or other claim asserted by Landlord shall be severed out of the proceeding instituted by Landlord (and, if necessary, transferred to a court of different jurisdiction), and the proceedings, instituted by Landlord may proceed to final judgment separately and apart from and without consolidation with or reference to the status of each counterclaim or any other claim asserted by Tenant. SECTION 14.3 WRITTEN NOTICE OF TERMINATION REQUIRED. Landlord shall not be deemed to have terminated this Lease and the Tenant's right to possession of the leasehold or the liability of Tenant to pay Rent thereafter to accrue or its liability for damages under any of the provisions hereof, unless Landlord shall have notified Tenant in writing that it has so elected to terminate this Lease. Tenant covenants that the service by Landlord of any notice pursuant to the applicable unlawful detainer statutes of the state in which the Office Complex is located and the Tenant's surrender of possession pursuant to such notice shall not (unless Landlord elects to the contrary at the time of, or at any time subsequent to the service of, such notice, and such election be evidenced by a written notice to Tenant) be deemed to be a termination of this Lease or of Tenant's right to possession thereof. SECTION 14.4 REMEDIES CUMULATIVE; NO WAIVER. All rights, options and remedies of Landlord contained in this Lease shall be construed and held to be cumulative, and no one of them shall be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided at law or in equity whether or not stated in this Lease, including, without limitation, the right of self help, but subject to all applicable provisions of this Lease. No waiver by Landlord or Tenant ("Waiving Party") of a breach of any of the terms, covenants or conditions of this Lease by the other party ("Breaching Party") shall be construed or held to be a waiver of any succeeding or preceding breach of the same or any other term, covenant or condition therein contained. No waiver of any default of the Breaching Party hereunder shall be implied from any omission by the Waiving Party to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect default other than as specified in said waiver. The consent or approval by the Waiving Party to or of any act by the Breaching Party requiring the Waiving Party's consent or approval shall not be deemed to waive or render unnecessary the Waiving Party's consent to or approval of any subsequent similar acts by the Breaching Party. SECTION 14.5 LEGAL COSTS. Tenant shall reimburse Landlord, upon demand, for any costs or expenses incurred by Landlord in connection with any Event of Default of Tenant under this Lease, whether or not suit is commenced or judgment entered. Such costs shall include reasonable legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if any action for an Event of Default to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered a reasonable sum as attorneys' fees and costs. Such attorneys' fees and costs shall be paid by the losing party in such action at such time as it is no longer subject to appeal. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands and liability incurred by Landlord if Landlord becomes or is made a party to any claim or action (a) instituted by Tenant, or by any third party against Tenant; (b) for foreclosure of any lien for labor or material furnished to or for Tenant or such other person; (c) otherwise arising out of or resulting from any act or transaction of Tenant or such other person; or (d) necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the United States Code, as amended. Tenant shall defend Landlord against any such claim or action at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant 24 25 shall reimburse Landlord for any reasonable legal fees or costs incurred by Landlord in any such claim or action. In addition, Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection with Tenant's request for Landlord's consent in connection with any act which Tenant proposes to do and which requires Landlord's consent. SECTION 14.6 WAIVER OF DAMAGES FOR REENTRY. Intentionally Deleted. SECTION 14.7 TENANT SELF-HELP. Tenant may provide Landlord written notice if Landlord fails to (i) comply with any of its repair and maintenance obligations under this Lease, or (ii) comply with its obligations to provide services under the terms of this Lease, both subject to Unavoidable Delay (as defined in the Work Agreement). Tenant's written notice shall specify the action required to be taken, demand that Landlord proceed with such action, and indicate that Tenant may perform on Landlord's behalf if Landlord fails to timely respond. Landlord shall, within three (3) days after receipt of such notice (or immediately after receipt of such notice if Landlord's failure to comply with its Lease obligations gives rise to an emergency), commence investigation of the cause of the asserted problem. Landlord shall promptly commence such repair or replacement, or other action, and diligently pursue completion thereof. In the event that (x) Landlord fails to respond to Tenant's notice within the foregoing three (3) day period, or (y) fails to promptly commence, diligently pursue and ultimately complete same within thirty (30) days of commencement (or such shorter or longer period of time as is commercially reasonable under the circumstances) any action set forth in clauses (i) and (ii) above, then, if the repair, replacement or other action required to be taken does not affect the structure of the Building and does not affect the mechanical, electrical, plumbing or other base building systems then, upon written notice to Landlord, Tenant shall have the right to effect such repair or replacement, or pursue such other action as may reasonably be necessary in order to correct the condition. Landlord shall reimburse Tenant on demand for all of the reasonable costs and expenses incurred by Tenant in connection with such foregoing remedial activities plus an administrative overhead charge equal to twenty percent (20%) of the actual cost of repair. Any repair, replacement or other work performed by Tenant shall be performed in a good and workmanlike manner and in strict compliance with any Federal, state, local and municipal laws, rules, regulations and ordinances, and shall be performed by licensed and bonded contractors carrying customary insurance coverage, which insurance shall include Landlord as an additional insured. Notwithstanding anything to the contrary contained herein, no payment by Tenant shall be construed as a waiver of a default by Landlord under this Section 14.7. ARTICLE 15 SUBORDINATION/ESTOPPEL SECTION 15.1 LEASE SUBORDINATE. This Lease shall be subject and subordinate to any mortgage, deed of trust or ground lease now encumbering the Premises, the Office Complex, the Property, or any portion thereof by Landlord, its successors or assigns. The foregoing subordination shall be effective without the necessity of the execution and delivery of any further instruments on the part of Tenant to effectuate such subordination. Provided Tenant receives a non-disturbance agreement substantially in the form attached hereto as Exhibit C, this Lease shall be further subject and subordinate to any future mortgages, deeds of trust or ground leases and any amendments, replacements, renewals and extensions thereof. Tenant agrees at any time hereafter, within fifteen (15) days following demand, to execute and deliver any instruments, releases, or other documents that may be reasonably required for the purpose of subjecting and subordinating this Lease, as above provided, to the lien of any such mortgage, deed of trust or ground lease, provided such documents shall be reasonably acceptable to Tenant. It is agreed, nevertheless, that as long as Tenant is not in default in the payment of Base Rent, Additional Rent, and the payment of other charges to be paid by Tenant under this Lease, and the performance of all covenants, agreements and conditions to be performed by Tenant under this Lease beyond any applicable notice and cure period, then neither Tenant's right to quiet enjoyment under this Lease, nor the right of Tenant to continue to occupy the Premises and to conduct its business thereon, in accordance with the terms of this Lease as against any Landlord, Tenant, mortgagee, trustee, or their successors or assigns shall be interfered with. 25 26 SECTION 15.2 ATTORNMENT. Subject to the terms of this Article 15, in the event the holder of any mortgage, deed of trust or ground lease shall at any time elect to have this Lease constitute a prior and superior lien to its mortgage, deed of trust or ground lease, then, and in such event, upon any such holder or landlord notifying Tenant to that effect in writing, this Lease shall be deemed prior and superior in lien to such mortgage, deed of trust, ground lease, whether this Lease is dated prior or subsequent to the date of such mortgage, deed of trust or ground lease and Tenant shall execute such attornment agreement as may be reasonably requested by said holder or landlord, provided the form and content thereof are reasonably acceptable to Tenant and contain recognition and non-disturbance covenants satisfactory to Tenant. SECTION 15.3 TENANT'S NOTICE OF DEFAULT. Tenant agrees, provided the mortgagee, ground landlord or trust deed holder under any mortgage, ground lease, deed of trust or other security instrument ("Mortgagee") shall have notified Tenant in writing (by the way of a notice of assignment of lease or otherwise) of its address, Tenant shall give such Mortgagee, simultaneously with delivery of notice to Landlord, by registered or certified mail, a copy of any such notice of default served upon Landlord. Tenant further agrees that said Mortgagee shall have the right to cure any alleged default during the same period that Landlord has to cure such default. SECTION 15.4 ESTOPPEL CERTIFICATES. Landlord and Tenant shall, each without charge at any time and from time to time, within fifteen (15) days after written request by the other party, but not more frequently than two (2) times in any twelve month period, certify, to the extent true, by written instrument, duly executed, acknowledged and delivered to any mortgagee, assignee of a mortgagee, proposed mortgagee, or to any purchaser or proposed purchaser, or to any other person transacting business with Landlord or Tenant and relating to the Premises: (a) That this Lease (and all guaranties, if any) is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect, as modified, and stating the modifications); (b) The dates to which the Base Rent or Additional Rent have been paid in advance; (c) Whether or not there are then existing any breaches or defaults by such party or the other party known by such party under any of the covenants, conditions, provisions, terms or agreements of this Lease, and specifying such breach or default, if any, or any setoffs or defenses against the enforcement of any covenant, condition, provision, term or agreement of this Lease (or of any guaranties) upon the part of Landlord or Tenant (or any guarantor), as the case may be, to be performed or complied with (and, if so, specifying the same and the steps being taken to remedy the same), and (d) Such other statements or certificates as Landlord, Tenant or any mortgagee may reasonably request. It is the intention of the parties hereto that any statement delivered pursuant to this Section may be relied upon by any of such parties transacting business with Landlord or Tenant and relating to the Premises. If Landlord or Tenant does not deliver such statement to the requesting party within such fifteen (lS) day period, and such failure continues for five (5) additional days following receipt of a second notice stipulating that such continuing failure shall have the consequences set forth herein, the requesting party, and any applicable party transacting business relative to the Premises with the requesting party, may conclusively presume and rely upon the following facts: (i) that the terms and provisions of this Lease have not been changed except as otherwise represented by the requesting party; (ii) that this Lease has not been canceled or terminated and is in full force and effect, except as otherwise represented by the requesting party; that the current amount of the Base Rent is as represented by the requesting party; that there have been no subleases or assignments of the Lease; (iii) that not more than one month's Base Rent or other charges have been paid in advance; and (iv) that the requesting party is not in default under the Lease. In such event, the non-requesting party shall be estopped from denying the truth of such facts. 26 27 ARTICLE 16 MISCELLANEOUS SECTION 16.1 TIME IS OF THE ESSENCE. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. SECTION 16.2 MEMORANDUM OF LEASE. Upon not less than ten (10) days prior written request by either party, the parties hereto agree to execute and deliver to each other a Memorandum Lease, in recordable form, setting forth the following: (a) The date of this Lease; (b) The parties to this Lease; (c) The term of this Lease; (d) The legal description of the Premises; and (e) Such other matters reasonably requested by Landlord or Tenant to be stated therein. The cost of recording the memorandum shall be at the expense of the requesting party. SECTION 16.3 JOINT AND SEVERAL LIABILITY. All parties signing this Lease as Tenant shall be jointly and severally liable for all obligations of Tenant. SECTION 16.4 BROKER. Landlord and Tenant represent to each other that they have not dealt with any brokers in connection with this Lease. Landlord and Tenant acknowledge that the Nichols Company has served as consultant and will be paid pursuant to a separate agreement. Landlord and Tenant shall indemnify and hold each other harmless against any claims for brokerage or other commissions arising by reason of a breach of the aforesaid representation and warranty. Section 16.5 Notices. All notices, demands and requests shall be in writing, and shall be effectively served by forwarding such notice, demand or request by certified or registered mail, postage prepaid, or by commercial overnight courier service, or by hand delivery with signed receipts, addressed as follows: (a) IF ADDRESSED TO TENANT: Coherent Communications Systems Corp. (prior to the Commencement Date) 44084 Riverside Parkway Leesburg, Virginia 22075 Attn: Daniel L. McGinnis, CEO (after the Commencement Date: The Premises) with a copy to: McGuire, Woods, Battle & Boothe, L.L.P. 8280 Greensboro Drive, Suite 900 McLean, Virginia 22102 Attn: Stanley M. Franklin, Esq., and John G. Lavoie, Esq. (b) IF ADDRESSED TO LANDLORD: Opus East, L.L.C. 6707 Democracy Boulevard Suite 510 Bethesda, Maryland 20817 27 28 with a copy to: Opus U.S. Corporation 700 Opus Center 9900 Bren Road Minnetonka, Minnesota 55343 Attn: Dan F. Nicol, Esq. and Hazel & Thomas, P.C. 3110 Fairview Park Drive Suite 1400 Falls Church, Virginia 22042 Attn: Donna P. Shafer, Esq. or at such other address as Landlord and Tenant may hereafter designate by written notice to the other party. The effective date of all notices shall be (i) three (3) days after the date of mailing if sent by United States Postal Service, (ii) the date of delivery if sent by a nationally recognized overnight courier service, or (iii) the date of receipt if sent by hand delivery with signed receipts. SECTION 16.6 LANDLORD'S AGENT. All rights and remedies of Landlord under this Lease or that may be provided by law may be executed by Landlord in its own name individually, or in the name of its agent, and all legal proceedings for the enforcement of any such rights or remedies, including those set forth in Article 14, may be commenced and prosecuted to final judgment and execution by Landlord in its own name or in the name of its agent. SECTION 16.7 QUIET POSSESSION. Landlord covenants and agrees that Tenant, upon paying the Base Rent, Additional Rent and other charges herein provided for and observing and keeping the covenants, agreements and conditions of this Lease on its part to be kept and performed, shall lawfully and quietly hold, occupy and enjoy the Premises during the term of this Lease without hindrance or molestation by Landlord or by any person claiming under or through Landlord. SECTION 16.8 SUCCESSORS AND ASSIGNS. The covenants and agreements herein contained shall bind and inure to the benefit of the Landlord, its successors and assigns, and Tenant and its permitted successors and assigns. SECTION 16.9 SEVERABILITY. If any term or provision of this Lease shall to any extent be held invalid or unenforceable, the remaining terms and provisions of this Lease shall not be affected thereby, but each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law. This Lease shall be construed and enforced in accordance with the laws of the state in which the Premises are located. SECTION 16.10 NO ABANDONMENT OR WASTE. Tenant covenants not to do or suffer any waste or damage or disfigurement or injury to the Premises or Office Complex. SECTION 16.11 TRANSFERS BY LANDLORD. The term "Landlord" as used in this Lease so far as covenants or obligations on the part of Landlord are concerned shall be limited to mean and include only the owner or owners of the Office Complex at the time in question, and in the event of any transfer or transfers or conveyances the then grantor shall be automatically freed and released (except to the extent otherwise provided in Section 16.20 hereof) from all liability accruing from and after the date of such transfer or conveyance as respects the performance of any covenant or obligation on the part of Landlord contained in this Lease to be performed so long as the successor landlord agrees to assume the original landlord's obligations and a copy of such instrument is promptly delivered to Tenant. It is intended hereby that the covenants and obligations contained in this Lease on the part of Landlord shall be binding on the Landlord, its successors and assigns, only during and in respect to their respective successive periods of ownership. 28 29 In the event of a sale or conveyance by Landlord of the Office Complex or any part of the Office Complex, the same shall operate to release Landlord from any future liability upon any of the covenants or conditions herein contained and in such event Tenant agrees to look solely to the responsibility of the successor in interest of Landlord in and to this Lease. This Lease shall not be affected by any such sale or conveyance, and Tenant agrees to attorn to the purchaser or grantee, which shall be personally obligated on this Lease only so long as it is the owner of Landlord's interest in and to this Lease. Notwithstanding anything to the contrary contained in this Section 16.11, Landlord shall not assign its interest in this Lease prior to the Commencement Date without the prior written consent of Tenant. SECTION 16.12 HEADINGS. The marginal or topical headings of the several articles and sections are for convenience only and do not define, limit or construe the contents of said articles and sections. SECTION 16.13 WRITTEN AGREEMENT. All preliminary negotiations are merged into and incorporated in this Lease, except for written collateral agreements executed contemporaneouslv herewith. SECTION 16.14 MODIFICATIONS OR AMENDMENTS. This Lease can only be modified or amended by an agreement in writing signed by the parties hereto. No receipt of money by Landlord from Tenant or any other person after termination of this Lease or after the service of any notice or after the commencement of any suit, or after final judgment for possession of the Premises shall reinstate, continue or extend the term of this Lease or affect any such notice, demand or suit, or imply consent for any action for which Landlord's consent is required, unless specifically agreed to in writing by Landlord. Any amounts received by Landlord may be allocated to any specific amounts due from Tenant to Landlord as Landlord determines. SECTION 16.15 LANDLORD CONTROL. Landlord shall have the right to temporarily close any portion of the building area or land area to the extent as may, in Landlord's reasonable opinion, be necessary to prevent a dedication thereof or the accrual of any rights to any person or the public therein. SECTION 16.16 UTILITY EASEMENT. Provided such does not materially interfere with Tenant's business or reduce the size or utility of the Premises as contemplated by this Lease, Tenant shall permit Landlord (or its designees) to erect, use, maintain, replace and repair pipes, cables, conduits, plumbing, vents, and telephone, electric and other wires or other items, in, to and through the Premises, as and to the extent that Landlord may now or hereafter deem necessary or appropriate for the proper operation and maintenance of the Office Complex. SECTION 16.17 NOT BINDING UNTIL PROPERLY EXECUTED. Employees or agents of Landlord have no authority to make or agree to make a lease or other agreement or undertaking in connection herewith. The submission of this document for examination does not constitute an offer to lease, or a reservation of, or option for, the Premises. This document becomes effective and binding only upon the execution and delivery hereof by the proper officers of Landlord and by Tenant. Tenant confirms that Landlord and its agents have made no representations or promises with respect to the Premises or the making of or entry into this Lease except as in this Lease expressly set forth, and agrees that no claim or liability shall be asserted by Tenant against Landlord for, and Landlord shall not be liable by reason of, breach of any representations or promises not expressly stated in this Lease. This Lease, except for the Building Rules and Regulations, in respect to which Section 16.18 of this Article shall prevail, can be modified or altered only by agreement in writing between Landlord and Tenant, and no act or omission of any employee or agent of Landlord shall alter, change or modify any of the provisions hereof. SECTION 16.18 BUILDING RULES AND REGULATIONS. Tenant shall perform, observe and comply with the Building Rules and Regulations of the Office Complex as set forth below, with respect to the safety, care and cleanliness of the Premises and the Office Complex, and the preservation of good order thereon, and, upon written notice thereof to Tenant, Tenant shall perform, observe, and comply with any changes, amendments or additions thereto as from time to time shall be established and deemed advisable by Landlord for tenants of the Office Complex. Notwithstanding the foregoing, in no event shall any amendments or revisions to the Rules and Regulations change or alter Tenant's obligations or rights under this Lease, and in the event of a discrepancy between the Rules and Regulations and the Lease, the Lease shall govern. 29 30 SECTION 16.19 COMPLIANCE WITH LAWS AND RECORDED COVENANTS. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will, in any way, conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules and regulations now in force or which may hereafter be in force, and with the requirements of any fire insurance underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises. Tenant shall use the Premises and comply with any recorded covenants, conditions, and restrictions affecting the Premises and the Office Complex as of the commencement of the Lease or which are recorded during the lease term following notice to and acceptance by Tenant. Tenant shall have the responsibility to comply with the requirements of the ADA in the Premises only after the Commencement Date. As used in this Lease, "ADA" shall mean the Americans with Disabilities Act of 1991, 42 U.S.C. Section 12.101 et seq. and all regulations applicable thereto promulgated as of the date hereof (collectively, "ADA"). SECTION 16.20 OBLIGATIONS SURVIVE TERMINATION. All obligations of Landlord and Tenant hereunder not fully performed as of the expiration or earlier termination of the term of this Lease shall survive the expiration or earlier termination of the term hereof, including, without limitation, all payment or repayment/refund obligations with respect to Operating Expenses and Real Estate Taxes and all obligations concerning the condition of the Premises. SECTION 16.21 TENANT'S WAIVER. Intentionally Deleted. SECTION 16.22 AUTHORIZATION. Landlord and Tenant shall furnish to each other, within ten (10) business days of written request from the other party, a corporate resolution, proof of due authorization of partners, or other appropriate and reasonable documentation evidencing the due authorization to enter into this Lease. SECTION 16.23 NO PARTNERSHIP OR JOINT VENTURE. This Lease shall not be deemed or construed to create or establish any relationship or partnership or joint venture or similar relationship or arrangement between Landlord and Tenant hereunder. SECTION 16.24 LANDLORD'S RIGHT TO SUBSTITUTE PREMISES. Intentionally Deleted. SECTION 16.25 TENANT'S OBLIGATION TO PAY MISCELLANEOUS TAXES. Tenant shall pay, prior to delinquency, all taxes assessed or levied upon its occupancy of the Premises, or upon the trade fixtures, furnishings, equipment and all other personal property Of Tenant located in the Premises, and when possible, Tenant shall cause such trade fixtures, furnishings, equipment and other personal property to be assessed and billed separately from the property of Landlord. In the event any or all of Tenant's trade futures, furnishings, equipment or other personal property, or Tenant's occupancy of the Premises, shall be assessed and taxed with the property of Landlord, Tenant shall pay to Landlord its share of such taxes within thirty (30) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's personal property. SECTION 16.26 SIGNS. In addition to the signs shown on the Final Plans and Specifications, Tenant may erect additional signs on the exterior or interior of the Building or on the landscaped area adjacent thereto, provided that such sign or signs are acceptable to Landlord in Landlord's reasonable discretion, and such signs (a) do not cause any structural damage or other damage to the Building; (b) do not violate applicable governmental laws, ordinances, rules or regulations; (c) do not violate any existing restrictions affecting the Demised Premises; and (d) are compatible with the architecture of the Building and the landscaped area adjacent thereto. Landlord further agrees that Tenant's name and the names of its key employees shall be listed on the lobby directory of the Premises without additional cost to Tenant. SECTION 16.27 EXHIBITS. The following are made a part hereof, with the same force and effect as if specifically set forth herein: 30 31 (a) Exhibit A - Legal Description of the Land (b) Exhibit B - Work Agreement (c) Exhibit C - Non Disturbance Agreement (d) Exhibit D - Expansion Option (e) Exhibit E - Rules and Regulations (f) Exhibit F - Base Building (g) Exhibit G - Budget for Operating Expenses SECTION 16.28 LANDLORD'S LIMITED LIABILITY. Anything contained in this Lease to the contrary notwithstanding, but subject to the terms of this Section 16.28, from and after the Final Completion of the Building (as defined in the Work Agreement), Tenant agrees that Tenant shall look solely to the estate and property of Landlord in the Premises or the proceeds from the sale, transfer, foreclosure, refinance or conversion thereof, and insurance and condemnation proceeds for the collection of any judgment or other judicial process requiring the payment of money by Landlord for any default or breach by Landlord under this Lease, subject, however, to the prior rights of any mortgagee or Landlord of the Premises. No other assets of Landlord or any partners, shareholders, or other principals of Landlord shall be subject to levy, execution or other judicial process for the satisfaction of Tenant's claim. In the event Tenant obtains a final, non-appealable judgment against Landlord, but the estate and property of Landlord in the Premises are not sufficient to satisfy the judgment, then Tenant may, at its option, offset the judgment against Rent coming due under the Lease and, if the judgment remains unsatisfied as of the end of the term, extend the term and continue to offset its Rent obligations. SECTION 16.29 ROOFTOP RIGHTS. Subject to Landlord's review and prior written approval, which shall not be unreasonably withheld, and subject to compliance with applicable laws and all restrictions of record, Tenant shall at all times during, the term of this Lease, have the right to use the Building's shafts for conduits between the Premises and the roof of the Building for the installation and maintenance of conduits and cables to extend to communications equipment located or to be located on the roof. Further, subject to availability of space and Landlord's prior written approval (not to be unreasonably withheld, conditioned or delayed) of the size, location, esthetics, and height thereof, Tenant shall have the right at all times to install and operate microwave or satellite dishes or other antenna communications system on the roof of the Building subject to compliance with all applicable laws and all restrictions or record. Landlord's approval rights shall include without limitation, review and approval of the procedures and personnel with respect to installation, maintenance, and operation. Tenant shall not be obligated to pay rental for any equipment which may be installed. Use of such roof space shall be subject to reasonable rules and regulations specified by Landlord and to Tenant's obtaining such insurance coverage as Landlord shall reasonably require. At the expiration or earlier termination of the Lease, Tenant, at its expense, shall remove the communications equipment. Any work required to restore the roof or any other part of the Building from any damage occasioned by the installation, maintenance, relocation or removal of the communications equipment shall be borne by Tenant. Tenant shall indemnify and hold harmless Landlord from all costs, damages, expenses, liabilities, and suits, including reasonable attorneys' fees, occasioned by Tenant's installation, maintenance, relocation, removal or use of the communications equipment, including without limitation, any damage to property and/or injury or death to persons caused thereby from the installation, maintenance, and operation. The installation, maintenance, relocation, and removal of the communications equipment will be performed in such a manner as not to interfere with the operation of the Building. All communications equipment shall be maintained by the Tenant at Tenant's sole cost and expense in good and safe condition. The communications equipment shall be used solely by Tenant in the ordinary course of its business, and Tenant shall not allow any parties other than Tenant to use such equipment or the rooftop without Landlord's prior written consent, not be unreasonably withheld. SECTION 16.30 PARKING. Notwithstanding anything to the contrary contained in this Lease, if any event or action or omission by Landlord renders the parking areas for the Building and/or Tenant's parking space allocation (including reserved spaces, if any) for whatever reason inaccessible or unusable, or which causes the number of parking spaces for the Premises to be reduced below applicable Loudoun County code requirements (which reasons may include but are not limited to repairs, maintenance, casualty, condemnation, or displacement or dislocation caused by future construction), Landlord shall immediately provide substitute parking areas for Tenant's use and its invitees which areas shall (i) cause no net reduction in Tenant's parking space allocation, (ii) be similarly convenient in terms of location, quality and safety, and (iii) except in the case of an emergency, be designated by prior written notice to 31 32 Tenant with the exact location of such substitute parking areas subject to Tenant's approval not to be unreasonably withheld, conditioned or delayed. In no event shall Landlord charge any separate or additional charge or rent for use of the parking areas located on the Property from time to time. SECTION 16.31 MEASUREMENT OF PREMISES. As used in this Lease, the term "net rentable area" shall mean the number of square feet as measured in accordance with the Greater Washington Commercial Association of Realtors Standard Method of Measurement. SECTION 16.32 RENEWAL OPTIONS. Tenant shall have the right to renew and extend the term of this Lease for the Renewal Terms (herein so called) upon and subject to the following terms and conditions: Tenant may extend this Lease for two (2) Renewal Terms of five (5) years each by Tenant's giving Landlord a Renewal Notice no more than six (6) months prior to the expiration of the initial term or the immediately preceding Renewal Term, as applicable. Such Renewal Term(s) shall commence immediately upon the expiration of the initial term or subsequent Renewal Term, and upon exercise of each renewal option the expiration date of the term shall automatically become the last day of the applicable Renewal Term(s). If Tenant does not renew the Lease in a timely manner for the Renewal Term(s), then Tenant's rights with respect to all successive Renewal Term(s) shall expire and be of no further force and effect. The exercise by Tenant of the renewal option(s) set forth herein must be made, if at all, by delivery of the Renewal Notice to Landlord on or before the dates set forth above. Once Tenant shall exercise such renewal option(s), Tenant may not thereafter revoke such exercise. At Landlord's election, Tenant's renewal options shall terminate and be of no further force or effect if (i) an Event of Default exists under the Lease at the time Tenant attempts to exercise its renewal option, (ii) Tenant defaults under any provision of the Lease after exercising its renewal option and such default continues beyond any applicable cure period provided in the Lease, (iii) at any time during the Term of the Lease, as extended, Tenant assigns the Lease to a third party, or (iv) at the time Tenant attempts to exercise its renewal option, Tenant has subleased or has demonstrated an intention to sublease more than seventy percent (70%) or more of the Premises to an unrelated third party. Tenant shall take the Premises "as is" for the Renewal Term(s) and, other than as may then be a component of the "Fair Market Rental Rate", Landlord shall have no obligation to make any improvements or alterations to same; provided, however, Landlord shall comply with its repair and maintenance obligations as set forth in this Lease. Annual Base Rent for the Renewal Term(s) shall be the "Fair Market Rental Rate" multiplied by the number of square feet of net rentable area in the Building. Within thirty (30) days after the date of Tenant's Renewal Notice, Landlord and Tenant shall endeavor in good faith to agree upon the Fair Market Rental Rate applicable to the Building for each year of the Renewal Term. In the event Landlord and Tenant are unable to agree upon the Fair Market Rental Rate within the aforesaid thirty (30) day period, Landlord and Tenant shall each select a broker to determine the Fair Market Rental Rate within thirty five (35) days after the date of the Renewal Notice. Each broker shall make an independent determination of the Fair Market Rental Rate of the Building for each year of the Renewal Term. If the two brokers so appointed agree on the Fair Market Rental Rate for each year of the Renewal Term within forty (40) days after the date of the Renewal Notice, the Fair Market Rental Rate shall be the amount determined by them. If the two brokers so appointed do not agree on the Fair Market Rental Rate within forty (40) days after the date of the Renewal Notice, the two brokers shall jointly appoint a third broker on or before the forty fifth (45th) day after the date of the Renewal Notice. The third broker shall make a valuation within fifty (50) days after the date of the Renewal Notice and the Fair Market Rental Rate for each year of the Renewal Term shall be an amount equal to the quotient obtained by dividing the sum of the Fair Market Rental Rates determined by the two brokers who were closest to each other in amount, by two. Each broker appointed shall be an individual of recognized competence who has a minimum of ten (l0) consecutive years' experience in the leasing of office space in the suburban Northern Virginia area immediately preceding such engagement. All valuations of the Fair Market Rental Rate shall be in writing, shall be expressed in terms of an annual rent per square foot of rentable area, and shall take into 32 33 consideration that the Premises are to be taken in "as is" condition for any renewal period. Each broker shall determine the Fair Market Rental Rate on the basis of all relevant factors affecting Fair Market Rental Rates such as concessions then being offered in the marketplace. The party appointing each broker shall be obligated, promptly after receipt ofthe valuation report prepared by the broker appointed by such party, to deliver a copy of such valuation report to the other party in the manner provided elsewhere in this Lease for the giving of notices. If a third broker is appointed, the third broker shall be directed, at the time of his appointment, to deliver copies of his valuation report, promptly after its completion, to Landlord and Tenant in the manner provided elsewhere in this Lease for the giving of notices. The expenses of each of the first two brokers appointed shall be borne by the party appointing such broker. The expenses of the third broker appointed shall be paid one-half by Landlord and one-half by Tenant. Tenant shall not be entitled to any rental abatement concessions, additional renewal options or other similar concessions during any Renewal Term, except to the extent they constitute part of the determination of the Fair Market Rental Rate. Except as set forth herein, the leasing of the Premises for the Renewal Term(s) shall be upon the same terms and conditions as are applicable for the initial term and any subsequent Renewal Term(s), and shall be upon and subject to all of the provisions of this Lease, including, without limitation, the obligation of Tenant to pay any costs or amounts payable by Tenant to Landlord under the Lease. Tenant's rights under this Section 16.32 shall be personal to Tenant and shall not inure to the benefit of any assignee or occupant of the Premises other than an assignee which is a successor corporation into which or with which Tenant is merged or consolidated or which acquires substantially all of Tenant's assets and property, or to any subsidiary, affiliate or parent company of Tenant, or any subsidiary of the parent company of Tenant. SECTION 16.33 EXPANSION OPTION. Landlord has negotiated an option to purchase the parcel immediately adjacent to the Land containing approximately 5.24 acres upon the terms and conditions more particularly set forth in the Standard Retail Purchase and Sale Agreement ("Purchase Contract") attached hereto as Exhibit D. As additional consideration for this Lease, Landlord hereby assigns any and all interest in and to such option to Tenant and shall request the Memorandum of Option contemplated by section 9.18.c. be prepared with Tenant as the holder of the option. Tenant shall have the right, at its expense, to record the memorandum among the land records of Loudoun County, Virginia. SECTION 16.34 RIGHT OF FIRST OFFER TO PURCHASE. Landlord shall notify Tenant of its intent to market the Property for sale, and shall accord Tenant thirty (30) days from the date of notice (which notice shall include the purchase price to be sought by Landlord) to reach agreement with Landlord on terms and conditions of sale, in which event, the parties will enter into a contract memorializing such terms and proceed to closing. If the parties do not reach agreement within such thirty (30) day period, Landlord shall have the absolute right to sell the Property to any other party on such terms and conditions as may be acceptable to Landlord in its sole discretion. SECTION 16.35 INDOOR AIR QUALITY. Landlord shall have the Building tested for indoor air quality on an annual basis. Landlord shall promptly provide to Tenant copies of such annual written test reports relating to the air quality in the Building, or any other written report, information, or data prepared as an evaluation ofthe indoor air quality of the Building. Landlord shall implement recommendations set forth in the report as appropriate to cause all air quality in the Building to conform to then existing local, state or federal regulations. In the event that any problem with indoor air quality which is caused by the negligent actions or omissions of Landlord or Landlord's licensees, employees, agents, contractors or invitees use or occupancy of the Building prevents Tenant from conducting its business in the Building for five (5) consecutive business days, then beginning on the sixth (6th) consecutive business day, Tenant's obligation to pay Rent shall abate until the air quality condition is corrected and Tenant is able to resume its business operations in the Building. Tenant covenants and agrees that the Building shall be a "smoke free" building. 33 34 SECTION 16.36 LANDLORD'S REPRESENTATIONS AND WARRANTIES. Landlord represents and warrants to Tenant as follows: (i) To the best of Landlord's knowledge and belief and based on an environmental report prepared by ECS Limited dated July 26, 1996, a copy of which has been delivered to Tenant, there are no Hazardous Materials on, in or under the Property, Building or Office Complex. Landlord further represents that the current owner of the Property ("Owner") has not provided Landlord with, nor has Landlord otherwise received, copies of any summons, citation, directive, notice, complaint, letter or other written communication, from the United States Environmental Protection Agency or other governmental authority concerning any alleged violation of any environmental law or rule or regulation at the Property. Landlord further represents and warrants that, to its actual knowledge, there are no buried fuel tanks within the Property or the Option Parcel (as defined in the Purchase Contract) or within any land adjoining or in the immediate vicinity of either. The representations and warranties contained in this Section 16.36 shall be true and correct as of the Commencement Date, and Landlord shall indemnify Tenant and hold it harmless against any claims, damages, losses or liabilities (including reasonable attorney's fees) incurred by Tenant and arising from any breach of same. (ii) To the best of Landlord's knowledge and belief, the Premises will be in compliance with applicable laws, statutes, ordinances and regulations in effect as of the Commencement Date. Landlord hereby agrees that Tenant shall have no responsibility for failure of the Premises or the Office Complex to comply with applicable laws, statutes, ordinances and regulations which are in effect and applicable to the Premises or the Office Complex as of the Commencement Date. (iii) As of the Commencement Date, the Premises shall be in compliance with all recorded covenants, conditions and restrictions affecting the Premises. (iv) To the best of Landlord's knowledge and belief, the Premises will be in compliance with the requirements of the ADA as of the Commencement Date. Landlord further represents and warrants that the work to be performed in accordance with the Work Agreement shall be in compliance with or shall be made to comply with the requirements of the ADA. (v) To the best of Landlord's knowledge, fiber optic service is available to the development of which the Property is a part. Landlord will cooperate with Tenant at Tenant's sole cost and expense to bring the fiber optic service to the Premises. (vi) Based on a representation and warranty from Owner contained in the Purchase Contract, Owner has not received any written notice of any violation ("Violation Notice") of any applicable laws, ordinances, regulations, statutes, rules and restrictions pertaining to and affecting the Property. Landlord further represents and warrants that it has not received any Violation Notice relating to the Property. (vii) Based on a representation and warranty from Owner contained in the Purchase Contract, there is no pending, or to Owner's actual knowledge, threatened condemnation or similar proceeding affecting the Property or any portion thereof, and Owner has no knowledge that any such action is presently contemplated. Landlord represents and warrants that to its actual knowledge, there is no such condemnation proceeding affecting any portion of the Property, and Landlord does not have knowledge that a condemnation proceeding affecting the Property is contemplated. (viii) Based on a representation and warranty from Owner contained in the Purchase Contract, (a) Owner has granted to no other person, firm corporation or other entity any right or option to acquire the Property or any portion thereof or any interest therein from Owner, and (b) Owner shall not enter into any other agreement, contract or option to sell the Property or any portion thereof or interest therein with any other person, firm or entity during the term of the Purchase Contract. Landlord represents and warrants that, to its knowledge, neither Landlord nor Owner has granted any other person, firm, corporation or entity any right or option to acquire any portion of the Property or the Option Parcel. (ix) Based on a representation and warranty from Owner contained in the Purchase Contract, Owner has not received any notice regarding proceedings to change the zoning or land use classification 34 35 of the Property or the conditions applicable thereto. Landlord represents and warrants that it has not received any such notice to change the zoning applicable to the Property. (x) Based on a representation and warranty from Owner contained in the Purchase Contract, Owner has not received any notice that the Property was ever used as a landfill or as a garbage dump during the period of Owner's ownership. Landlord represents and warrants that it has not received any notice that the Property was ever used as a landfill or a garbage dump during the period of Owner's ownership. (xi) Based on a representation and warranty from Owner contained in the Purchase Contract, neither Owner nor any of its agents or employees have made unrecorded commitments or side agreements with any governmental authority, utility company, school board, church or other religious body, or any homeowners or homeowners' association, or with any other organization, group, party, or individual (collectively, "Side Agreements"), relating to the Property which would impose an obligation upon Landlord or its successors or assigns to make any contribution or dedication of money or land or to construct, install, or maintain any improvements of a public or private nature on or off the Property. Landlord represents and warrants that, to its knowledge, Owner has not entered into any such Side Agreements. (xii) Based on a representation and warranty from Owner contained in the Purchase Contract, Owner has not received written notice ("Preservation Notice") that the Property has not been identified by any governmental body or private organization as the habitat of any species of plant or animal which is endangered or which requires special conservation measures. Landlord represents and warrants that Landlord has not received any such Preservation Notice. (xiii) Based on a representation and warranty from Owner contained in the Purchase Contract, Owner has not received written knowledge that any human burial grounds or archaeological sites have been identified as existing upon the Property and no improvements upon the Property have been designated by any governmental authority as having special architectural or historical significance. Landlord represents and warrants that, to its knowledge, the Property has not been so designated as having special architectural or historical significance. (xiv) After Closing (as defined in the Purchase Contract), Landlord will own fee simple title to the Property, free and clear of all restrictions, liens, encumbrances, easements, exceptions, covenants, conditions and reservations, except for Permitted Exceptions (as defined in the Purchase Contract), financing agreements for which Tenant has received a non-disturbance agreement as contemplated by Section 15.1 of this Lease, and other title matters expressly permitted by the terms of this Lease. IN WITNESS WHEREOF the parties have executed this Lease as of the day and year first above written. Landlord: Opus East, L.L.C. By [SEAL] Its President Tenant: Coherent Communications System Corp. By [SEAL] Its CEO 35 EX-10.21 4 MEMORANDUM OF UNDERSTANDING 1 Exhibit 10.21 [LOGO] COHERENT(TM) NTEC0297 - -------------------------------------------------------------------------------- Memorandum of Understanding - --------------------------- - ----------------------- Table 1 - Nokia Pricing - ----------------------- Channel Channel Price $ Volumes - ----------------------- 1997 * * 1998 * * 1999 * * - ----------------------- Based upon the estimated volumes as specified in Table 1 Coherent agrees to the above pricing to be effective immediately. In addition to this the following items were agreed in principal and will be finalised in an amendment to Agreement No. H7810/92 no later than April 4th 1997. 1. Coherent has received Nokias best estimate to purchase the volume requirements for 1997, 1988 and 1999, a total of * channels. 2. The Products to be supplied are the NIEC, IDEC2X and/or EC2X. 3. The NIEC will be supplied with no further modifications to the specification, until * . The EC2X will be released to Production * for shipments expected * . In accordance with the PDA all Beta * units will be shipped * for which payment shall be made in full. 4. The IDEC2X Product Specification will be the same as that for the NIEC but * with the additional feature specification as described in Attachment A. If the future software and hardware options are required by Nokia then these are to be agreed and the revelant prices for these additional features will be agreed. An NRE charge of * is payable for the development of the IDEC2X, payable in three installments in accordance with the following milestones: Signing of the PDA - not later than end of April 4, 1997 Delivery of * Beta units * at a cost of * per unit. Delivery of first Production Units * . * Confidential treatment requested. 2 [LOGO] COHERENT(TM) NTEC0297 - -------------------------------------------------------------------------------- 5. Both parties agree to include a statement in the amendment to Agreement No. H 7810/92 to the effect that based upon the volue requirements contained herein, Nokia will not source an alternative product for the applications for which Coherent are already supplying Product. 6. Delivery Times - Agreement No. H 7810/92 Clause 2.7.2 Each month Nokia will provide a forecast for * with an Authorisation to Manufacture covering * . This commitment to deliver is based upon the following: * weeks firm * weeks * of the volume can be rescheduled up to * * weeks * of the volume can be rescheduled up to * This clause replaces 2.8.1.. 7. Payment Terms Payment terms as specified in Nokia's Netting Payment System will become affective during 1997. Payments will be made within * maximum. Until such change the current payment will remain effective. For new orders the invoicing shall be as follows to reflect the charge for a Software Licence: Hardware Software Licence (ILS-NIEC) NIEC and IDEX2X * EC2X * ILS-NIECx is a Software Fee and Licence to use. Each order for Hardware must be accompanied by an order for an equal number of Software Licences which will be invoiced at the same time. * Confidential treatment requested. 3 [LOGO] COHERENT(TM) NTEC0297 - -------------------------------------------------------------------------------- MEMORANDUM OF UNDERSTANDING FOR PROPOSED AMENDMENTS TO AGREEMENT No. H7810/92 In Witness Whereof, the Parties have agreed these minutes and both parties do hereby sign in Espoo on 26th February, 1997. SIGNED FOR AND ON BEHALF OF SIGNED FOR AND ON BEHALF OF NOKIA TELECOMMUNICATIONS OY COHERENT COMMUNICATIONS SYSTEMS CORPORATION /s/ /s/ - ------------------------------- ------------------------------- Erkki Sipila Miles Pratt /s/ /s/ - ------------------------------- ------------------------------- Vesa Sarkikangas Simon Taylor EX-11 5 COMPUTATION OF NET INCOME PER SHARE 1 Coherent Communications Systems Corporation Exhibit XI - Computation of net income per share For the Years Ended December 31, 1996, 1995 and 1994 (Amounts in thousands except per share amounts)
1996 1995 1994 ---------------- ------------- ------------- Net earnings $ 9,748 $ 7,590 $ 3,801 Less preferred stock dividend 0 0 148 ---------------- ------------- ------------- Net income available for common stockholders $ 9,748 $ 7,590 $ 3,653 ================ ============= ============= Average common shares outstanding (a)(b) 14,969 14,554 12,208 Average common share equivalents:(b) Options 511 886 1,660 ---------------- ------------- ------------- Average number of common and common share equivalents outstanding 15,480 15,440 13,868 ---------------- ------------- ------------- Net income per common share $ .63 $ .49 $ .26 ---------------- ------------- -------------
(a) Average common shares outstanding include the reduction of 2,820,850 shares of common stock contributed by Safeguard Scientifics, Inc. on June 16, 1994 for the 1994 period. (b) Adjusted to reflect the two-for-one stock split effective June 9, 1995. 41 EX-21 6 SUBSIDIARIES OF REGISTRANT 1 Coherent Communications Systems Corporation Exhibit 21.1 SUBSIDIARIES OF COHERENT COMMUNICATIONS SYSTEMS CORPORATION As of March 28, 1997, the Registrant had the following subsidiaries: Name Place of Incorporation E. Coherent Communications Systems Limited England Telecon Acquisition Corporation Delaware CCSC International Corporation St. Thomas U.S.V.I. Coherent Communications Systems(Japan) Corporation Delaware Coherent Communications Systems Corporation (NY) Delaware 42 EX-23 7 CONSENT OF KPMG PEAT MARWICK LLP 1 Coherent Communications Systems Corporation Exhibit 23.0 Independent Auditor's Report The Board of Directors Coherent Communications Systems Corporation We consent to incorporation by reference in the Registration Statement (No. 33-86612) on Form S-8 and the Registration Statement (No. 33-86620) on Form S-8 of Coherent Communications Systems Corporation of our report dated January 31,1997, relating to the consolidated balance sheets of Coherent Communications Systems Corporation and subsidiaries as of December 31,1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, and the related financial statement schedule II, which report appears in the December 31,1996, annual report on Form 10-K of Coherent Communications Systems Corporation. KPMG PEAT MARWICK LLP Jericho, New York March 26,1997 43 EX-27 8 FINANCIAL DATA SCHEDULE
5 FINANCIAL DATA SCHEDULE For Period Ended December 31, 1996 (Dollars in thousands) This schedule contains summary financial information extracted from the Condensed Consolidated Statement of Financial Condition at December 31,1996 (unaudited) and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1996 DEC-31-1996 9,251 7,518 10,749 684 3,301 31,244 6,399 2,577 37,558 5,592 0 151 0 0 31,648 37,558 54,431 54,431 20,193 20,193 19,429 0 123 15,252 5,504 9,748 0 0 0 9,748 .63 .63
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