-----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, PHUilue0nvrn1dhzizXQTJ4sng6fGO7KhRZPGozCXRwzFetdy9MowurG/gzfuqkl NCAAoX1yXkEezgEZZQieCA== 0000950169-00-000167.txt : 20000307 0000950169-00-000167.hdr.sgml : 20000307 ACCESSION NUMBER: 0000950169-00-000167 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000301 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED DEFENSE INDUSTRIES INC CENTRAL INDEX KEY: 0001051719 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS TRANSPORTATION EQUIPMENT [3790] IRS NUMBER: 522059782 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-43619 FILM NUMBER: 558714 BUSINESS ADDRESS: STREET 1: 1525 WILSON BLVD STREET 2: SUITE 700 CITY: ARLINGTON STATE: VA ZIP: 22209-2411 BUSINESS PHONE: 7033126100 MAIL ADDRESS: STREET 1: 1525 WILSON BLVD STREET 2: SUITE 700 CITY: ARLINGTON STATE: VA ZIP: 22209-2411 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IRON HORSE INVESTORS LLC CENTRAL INDEX KEY: 0001052971 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS TRANSPORTATION EQUIPMENT [3790] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-43619-01 FILM NUMBER: 558715 BUSINESS ADDRESS: STREET 1: 1525 WILSON BLVD STREET 2: SUITE 700 CITY: ARLINGTON STATE: VA ZIP: 22209-2411 BUSINESS PHONE: 7033126100 MAIL ADDRESS: STREET 1: 1525 WILSON BLVD STREET 2: SUITE 700 CITY: ARLINGTON STATE: VA ZIP: 22209-2411 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UDLP HOLDINGS CORP CENTRAL INDEX KEY: 0001052972 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS TRANSPORTATION EQUIPMENT [3790] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-43619-02 FILM NUMBER: 558716 BUSINESS ADDRESS: STREET 1: 1525 WILSON BLVD STREET 2: SUITE 700 CITY: ARLINGTON STATE: VA ZIP: 22209-2411 BUSINESS PHONE: 7033126100 MAIL ADDRESS: STREET 1: 1525 WILSON BLVD STREET 2: SUITE 700 CITY: ARLINGTON STATE: VA ZIP: 22209-2411 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED DEFENSE LP CENTRAL INDEX KEY: 0001052973 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS TRANSPORTATION EQUIPMENT [3790] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-43619-03 FILM NUMBER: 558717 BUSINESS ADDRESS: STREET 1: 1525 WILSON BLVD STREET 2: SUITE 700 CITY: ARLINGTON STATE: VA ZIP: 22209-2411 BUSINESS PHONE: 7033126100 MAIL ADDRESS: STREET 1: 1525 WILSON BLVD STREET 2: SUITE 700 CITY: ARLINGTON STATE: VA ZIP: 22209-2411 10-K 1 UNITED DEFENSE INDUSTRIES, INC ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 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, 1999 Commission file number 333-43619. UNITED DEFENSE INDUSTRIES, INC. (Exact name of registrant as specified in its charter) ---------------------- Delaware 52-2059782 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) CO-REGISTRANTS AND GUARANTORS IRON HORSE INVESTORS, L.L.C. DELAWARE 52-2059783 UDLP HOLDINGS CORP. DELAWARE 52-2059780 UNITED DEFENSE, L.P. DELAWARE 54-1693796 ---------------------- 1525 Wilson Boulevard, Suite 700, Arlington, Virginia, 22209-2411 (703)312-6100 (Address and telephone number of principal executive offices of Registrant and each Co-Registrant) ---------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 or Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant. None as of March 1, 2000. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common Stock outstanding as of March 1, 2000. No. of shares Par Value ------------- --------- United Defense Industries, Inc. .............. 18,042,524 $0.01 Iron Horse Investors, L.L.C. ................. -NONE- UDLP Holdings Corp. .......................... 1,000 $0.01 United Defense, L.P. ......................... -NONE- ================================================================================ Forward-Looking Statements This report on Form 10-K contains forward-looking statements that are based on management's expectations, estimates, projections and assumptions. Words such as "expects," "anticipates," "plans," "believes," "estimates," variations of these words, and similar expressions are intended to identify forward-looking statements which include but are not limited to projections of revenues, earnings, performance, cash flows and contract awards. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks and uncertainties which are difficult to predict. Therefore, actual future results and trends may differ materially from those made in or suggested by any forward-looking statements due to a variety of factors, including: the ability of United Defense Industries, Inc. (the "Company") to design and implement key technological improvements (such as, in the Crusader program discussed herein) and to execute its internal performance plans; performance issues with key suppliers and subcontractors; developments with respect to contingencies such as legal proceedings and environmental matters; labor negotiations; changing priorities or reductions in the U.S. government defense budget including developments in the U.S. Army's Medium Force Brigade initiative; the performance of, and political and other risks associated with, the Company's international operations and joint ventures; and termination of government contracts due to unilateral government action. For additional information, see "Risk Factors" in the Company's Registration Statement on Form S-4, SEC File Number 333-43619. ITEM 1. Description of Business Overview The Company is a subsidiary of Iron Horse Investors, L.L.C. ("Iron Horse"), organized under the laws of the state of Delaware in 1997 for the primary purpose of facilitating the acquisition of United Defense, L. P. ("UDLP") by Iron Horse. Iron Horse is owned by an investment group led by the Carlyle Group ("Carlyle"). On October 6, 1997, the Company acquired 100% of the partnership interests of UDLP from FMC Corporation ("FMC") and Harsco Corporation ("Harsco"), (collectively the "Sellers"). The Company is the only asset of Iron Horse; therefore, except as indicated, the discussion herein is the same for both entities. The Company is a supplier of tracked, armored combat vehicles and weapons delivery systems to the U.S. Department of Defense and a number of allied military forces worldwide. The Company's primary initiatives include production of the Bradley Fighting Vehicle ("BFV") and its derivatives, and development for the Crusader Field Artillery System. These two key programs comprise over 40% of the Company's annual revenues. The BFV is the leading domestically produced vehicle able to fulfill the dual role of troop transport and armored fighting vehicle. The Company has maintained its prime contractor position on the Bradley program since production began in 1981, and has added a number of technology- based upgrades and derivative vehicles that continue to extend the program's life cycle. Building on over twenty years of experience on the M109 self- propelled howitzer and upgrades, the Company is also the prime contractor for the development of the Crusader Field Artillery System. The U.S. Army has identified the Crusader as its planned multi-billion dollar next-generation field artillery system, but the nature and scale of the Crusader program could be impacted by the U.S. Army's Medium Force Brigade initiative as described in Item 7. In addition to managing the fighting vehicle and howitzer programs, the Company serves as the prime contractor for a number of mission critical military programs, several of which have spanned decades, including the M88 tank recovery vehicle since 1960, the M113 armored personnel carrier since 1960, and the U.S. Navy's Mk45 naval gun system since 1968. The Company's major programs are summarized below, in major customer groups: Tracked Combat Vehicles (land vehicles for the U.S. Army, allied customers, and the U.S. Marine Corps), Naval Systems (fleet programs for the U. S. Navy) and International Operations. Tracked Combat Vehicles ("TCVs"). TCVs are highly mobile vehicles that can cross natural and man-made obstacles and urban terrain in all weather conditions, while under fire from enemy combat forces. The U.S. Army and Marines use tracked combat vehicles for four basic missions: (i) close combat, where the combination of tanks, scout vehicles, fighting vehicles, armored personnel carriers, and command and control vehicles provide the capability to present an integrated and flexible combat front to face enemy forces at close range; (ii) fire support, by providing lethal indirect firepower through self-propelled armament and multiple launch rocket systems; (iii) combat support, including the provision of operational assistance, such as crossing barriers, clearing or laying obstacles and recovering disabled systems; and (iv) amphibious assaults, in which amphibious assault vehicles are able to initiate attack from the sea and continue the attack on land. During 1999, 1998, and 1997, the Company derived approximately 81%, 84%, and 81% of its revenues, respectively, from TCVs. The Bradley Fighting Vehicle. The Company has been the sole-source, prime contractor of the BFV to the U.S. Army since its initial production in 1981. The BFV is a tracked armored vehicle with a 25mm cannon, TOW missiles and a stabilized turret, and is the leading domestically produced vehicle able to fulfill the dual role of troop transport and armored fighting vehicle. The BFV is outfitted with armor and day/night sights, and can transport up to nine people across rough terrain. The vehicle's combination of lethality, survivability, and mobility has established it as a critical component of the U.S. government's full-spectrum warfare strategy. A total of 6,742 BFVs have been built, of which 400 were for the Saudi Arabian Army. Although new BFVs are no longer being built, the Company derives significant revenue from upgrading the Army's existing fleet of BFVs to the BFV A2 version. The Company initiated delivery of a further upgrade, the BFV A3 version, in October of 1998 as part of a low rate initial production contract awarded in July of 1997. The BFV A3 provides enhancements such as situation awareness capability, lethality, survivability and sustainability and is a key component to the U.S. Army's program to digitize the battlefield. The U.S. Army is currently planning to upgrade 1,109 older version BFVs to the A3 configuration by 2005, with annual funding allocations. The first of these upgrade contracts was awarded to the Company in December 1998 for 70 vehicles with delivery starting in March 2000. The Company is preparing a proposal for the follow-on award, the FY00 quantity of 80 vehicles, and expects to be under contract by June 2000. BFV Derivatives and Support. The BFV has served as a platform for a number of derivative vehicles developed by the Company. One such derivative, the Multiple Launch Rocket System ("MLRS") carrier, was developed to provide a carrier for a long-range rocket artillery system and is outfitted with rockets, a launcher and fire control system developed and produced by Lockheed Martin Vought Systems. The Company was awarded a contract to initiate an MLRS remanufacture program, with the first delivery completed in August 1997. Another derivative, the Fire Support Vehicle, supports armor and mechanized forces by pinpointing enemy targets using laser technology, which allows more accurate and timely calls for fire from the artillery. The Company provided 22 kits to convert BFVs under a workshare arrangement with Red River Army depot to produce Fire Support Vehicles. Another such vehicle is the Command and Control Vehicle ("C2V"). The C2V is a self-contained vehicle that keeps pace with armored maneuver forces while providing the crew with a protected environment. The Company was awarded the third year production contract for C2V conversions in December 1998 with scheduled deliveries to be completed in May 2001. However, the Army's Program Budget Decision #745, released in late 1999, removed additional production funding for the C2V in FY01 and beyond and it is unclear whether the FY00 extension will be awarded. Finally, the Army's Linebacker air defense vehicle integrates the BFV with Stinger missiles and adds improvements to turret fire control, target acquisition subsystems and survivability. The Company received a new contract for Linebacker conversions in July 1998 and completed delivery in 1999. In addition to the development and manufacture of BFV derivatives, the Company provides BFV upgrade kits and field services. Kits allow for the upgrade of BFVs to incorporate advancements in technology. The Company also deploys experts to provide on-site training and advice to customers, complete maintenance and repairs, and assess the necessity of replacement parts. The Company is also under contract with the U.S. Army's Simulation, Training and Instrumentation Command for the development and demonstration of a multi-purpose simulator/trainer for the BFV family of vehicles. Crusader. The Crusader is an integrated and automated two-vehicle artillery system consisting of a 155-mm, self-propelled howitzer and a resupply vehicle. The Company is the sole-source, prime contractor and systems integrator responsible for the design and development of the Crusader, including delivery of a prototype system, under a $1.1 billion Product Development Risk Reduction contract, which is scheduled to be completed in 2003. The follow on development phase, known as Engineering and Manufacturing Development ("EMD"), is scheduled to begin in 2002, with delivery of the first EMD prototype in 2004. Activity on the first Low Rate Initial Production ("LRIP") system is scheduled to begin in Elgin, Oklahoma in 2006, which is three years later than previously planned, reflecting the Army's latest funding schedule. The revised Army plan calls for fielding 480 Crusader systems to its III Corps as opposed to the earlier projected procurement of 1,138 systems. The Crusader is designed to achieve the U.S. Army's stated objectives for the next-generation howitzer. These specifications include: (i) increased mobility, (ii) increased lethality, (iii) improved survivability, (iv) better sustainability, and (v) increased strategic deployability. The Crusader is being designed to be the first howitzer capable of keeping pace with the mechanized maneuver force, and will be a key part of the Army's new, more rapidly deployable force. The Crusader is also being designed to provide substantially greater responsiveness and high rates of fire through long-range and accurate firings enabled by the vehicle's advanced autoloading technology and actively- cooled cannon, thereby giving it a multiple round simultaneous impact capability. This firing capability is being designed to allow commanders to extend and dominate the battle space and set a higher tempo for land operations. The Crusader is being developed with an embedded digitized command, control, communications and intelligence system for enhanced situational awareness, and for new capabilities for battlefield movement and resupply. M109 Self-Propelled Howitzer ("M109"). The M109 has been the most widely used field artillery vehicle for the U.S. military and certain foreign governments since it was first produced by the Company in 1974. The M109 is recognized for its ability to deliver rapid and high volume artillery support and to maximize survivability through mobility. The latest generation of the M109, the M109A6 Paladin, is the most advanced M109 upgrade fielded to date. FY00 funding will allow procurement of 6-8 Paladins. The Company also designs and produces unique configurations of the M109 and offers M109 upgrade kits, servicing and training to various foreign governments. M992 Field Artillery Ammunition Supply Vehicle ("FAASV"). The single mission of the FAASV, the battlefield partner of the M109, is to safely transport personnel, ammunition, and supplies to howitzer artillery vehicles on the battlefield during both firing and non-firing conditions. By utilizing synchronized and semi-automated resupply strategies and mechanisms to carry the M109 ammunition, the FAASV enables the howitzer to remain in the field longer and thereby increase its lethality. The heavily armored chassis provides ballistic protection to its munitions supply crew and accommodates all standard 155mm rounds. In 1999, the Company completed a production contract for 96 new vehicles and 36 converted vehicles. The Company was awarded an option to deliver 6 additional converted FAASVs in 2000. M88 Armored Recovery Vehicle ("M88"). The M88 currently has an installed base of more than 3,325 vehicles throughout the world. The M88 performs towing, lifting and pulling tasks in the recovery of impaired tanks or in basic tracked vehicle maintenance. In preparation for the deployment of heavier M1 tanks by the U.S. Army, in 1986 the Company began the development effort for the M88A2 ("HERCULES") upgrade. The HERCULES is the least expensive recovery vehicle worldwide that can safely recover 70-ton tanks (for example, the M1A1/A2). The U.S. Army has been awarding annual contracts for M88 upgrades over the past several years and the Company is currently under contract to deliver vehicles through January 2001. M113 Armored Personnel Carrier ("M113"). The M113 has been the main troop transport vehicle used by the U.S. military and allied governments throughout the world, with more than 80,000 units delivered since initial production in 1960. The Company has produced several M113 models in cooperation with U.S. allies, including various configurations of the Armored Infantry Fighting Vehicle, historically produced in Europe and currently produced by the Company's Turkish affiliate, FNSS. The U.S. Army, which received its last delivery of new M113s from the Company in 1992, continues to upgrade its M113s to the latest A3 configuration. This upgrade work currently occurs in the Company's Anniston, Alabama facility and continues to be a source of revenue for the Company. The upgrade work is performed in a partnering arrangement with the Anniston Army Depot. In addition, the Company is supplying kits for the Canadian Army to upgrade their M113A2 vehicles to the latest M113A3 configuration and the new improved Mobile Tactical Vehicle Light ("MTVL"). The MTVL variant, which is a patented UDLP M113 derivative, has significantly more cross-country mobility, payload capacity and under armor volume than the standard M113A3. The Company will be offering the MTVL as the foundation for the U.S. Army's Medium Force Brigade initiative. M8 Armored Gun System ("M8"). The M8 was designed to meet the Army's need for a rapidly deployable, multi-purpose tracked weapon system to support and protect light infantry forces in conflict and peacekeeping missions worldwide. It carries a rapid-fire, 105mm cannon and can be dropped by parachute from the U.S. Air Force's C-130 Hercules and larger aircraft. It has armor that makes it survivable against heavy machine guns and medium automatic cannons, and is designed for lethality against tanks, fortifications, and enemy troops. The M8 was developed by the Company under a U.S. Army contract but did not go into volume production, as the program was cancelled in 1997 due to Army budgetary constraints. The Company has not to date achieved a production sale of the M8. However, the Company believes that the M8 would satisfy an important portion of the Army's emerging requirement for the Medium Force Brigade, and the Company accordingly is continuing its efforts to market the M8. M9 Armored Combat Earthmover ("M9 ACE"). The M9 ACE is an 18-ton, fully tracked, aluminum armored vehicle, used on the battlefield to bulldoze, rough grade, excavate, haul and scrape. With a crew of one, the multi-purpose M9 ACE can attain road speeds of up to 35 miles per hour, and unlike a standard bulldozer, requires no transport vehicle. The M9 ACE can serve as the prime mover of vehicles weighing up to 39,000 pounds and can clear debris left in the wake of battles or civil disasters. The Company completed production of 52 vehicles in November 1999. Those vehicles are currently being fielded to Engineer Units at Ft. Hood, Texas. In-Stride Breacher ("Grizzly"). The Grizzly is a 70-ton vehicle currently under development designed to clear mines and other complex obstacles. Mounted on a modified M1 chassis, the Grizzly features a mine-clearing blade outfitted with complex software that provides automatic depth control. It is also equipped with a power-driven arm for digging, grappling and lifting, as well as external cameras for vision and remote operation, with full electronic integration. Currently nearing completion of the Engineering and Manufacturing Development phase, the program's Low Rate Initial Production (LRIP) funds were cancelled by the Office of the Secretary of Defense (OSD) in December 1999. This action was taken by OSD solely due to not having sufficient funds to support the Army's Medium Force Brigade initiative. The 3 Heavy Armor Divisions that remain still require the in-stride, complex obstacle breaching capabilities that the Company believes can only be accomplished by Grizzly. As a result of this requirement, the Company is hopeful that production funds for the Grizzly will be restored at a later date. AAV7A1 Amphibious Assault Vehicle ("AAV"). The AAV has been the U.S. Marine Corps' amphibious assault vehicle for over two decades with more than 1,500 vehicles delivered. In July 1998, the Company was awarded a $158 million four year contract by the U.S. Marine Corps to rebuild the existing fleet of AAVs in a partnering arrangement with the Albany, Georgia and Barstow, California Marine Corps Logistic Bases. The Company currently produces different kit configurations of the AAV for foreign customers such as Korea, Spain and Italy, and then assists these countries in assembling the kits locally. Naval Systems. The U.S. Navy plans for additional missile launcher firepower in its surface combatant ship building program for the 21st century ("DD 21"). In addition, the U.S. Navy plans to bolster surface land attack capability with modifications to existing ships. The U.S. Navy's focus on land attack warfare is spurring the development of new and modified weapon systems, including (i) a modified naval gun system, the Mk45 Mod4; (ii) a new 155mm gun system; (iii) land attack missile integration into the Vertical Launch System, requiring new cannisters; and (iv) new or modified launching systems. The Company expects that the design, engineering and production of these systems will be the primary focus of naval ordnance manufacturers for the foreseeable future. The Company is currently the sole source producer of the Mk45 gun and sole-source developer of the 155mm advanced gun system (AGS). In addition, the Company has a work split arrangement with Lockheed Martin to produce vertical missile launchers. During 1999, 1998 and 1997, the Company derived approximately 19%, 16%, and 19% of its revenues, respectively, from Naval Systems. Mk45 Naval Gun System ("Mk45"). The Mk45 is the U.S. Navy's sole 5-inch gun system, with more than 150 systems installed. For the Navy's newest class of destroyers, the Arleigh Burke DDG 51 class ("DDG51"), one 5-inch gun is being installed on each ship built. In February 2000, the Company expects to complete negotiations on FY 98, 99 and 00 DDG-51 requirements. The U.S. Navy currently plans to continue building DDG-51 class ships through FY05. Furthermore, the U.S. government supports foreign allied navies having compatible armaments, and has recently increased its assistance to the Company's efforts to place Mk45s on foreign ships. Management believes the improvements included in the Mod4 configuration which provide significantly greater range will make the Mk45 more competitive internationally. In December 1999, the Company made its first international sales of Mk45 Mod4 to Korea. The Company is also the lead agent for the gun weapons systems integration for the Naval Surface Fire Support program, with responsibility for the development and integration of a new naval gun system, which includes managing the interfaces of other components with the gun weapons system. The Company also anticipates a sole-source, prime development contract to upgrade Mk45 guns on older Navy ships from Mod2 to Mod4 configuration, which extends the Mk45's range and improves surface fire support capability. Mk41 Vertical Launching System ("VLS"). The VLS is the U.S. Navy's primary missile launcher on surface combatants, firing the anti-air Standard Missile, strike mission-related Tomahawk cruise missile, anti-submarine VLASROC, and ship self-defense Sea Sparrow missile. The VLS is manufactured under a work split agreement with Lockheed Martin Corporation, which is the prime contractor of the VLS launcher. The Company is the designated mechanical subcontractor and, separately from the work split agreement, is the sole-source, prime provider of VLS cannisters, which hold a variety of missiles. The U.S. Navy places the VLS, like the Mk45, on all DDG 51s, each of which contains twelve 8-cell VLS modules. In 1998 the Company entered into a five-year contract with Lockheed Martin Corporation which provides for VLS production and ancillary work for the Company from 1998 through 2002. The Company is currently negotiating two additional option years that will provide production and ancillary work through 2004. Advanced Gun System ("AGS"). The U.S. Navy is currently developing its next-generation destroyer, DD21, with land attack as its primary mission. The Company is the sole-source developer of AGS, the primary gun weapon system on DD21, providing AGS to each of the two industry teams competing for development of the ship. Each of the 32 planned DD21's will have two AGS on board, providing the equivalent firepower of two battalions of Army M198 howitzers, at ranges of up to 100 nautical miles. Funded gun development was initiated in 1999, with completion of development scheduled for 2006. In addition to designing the gun itself, the Company is expected to have significant responsibility for developing the associated family of guided and ballistic ammunition. Revenues from this ammunition and associated propelling charges could approach or exceed those for the gun itself through 2010 and beyond. Overhaul, Repair, Maintenance and Other. The Company also provides aftermarket service for the Mk45 and smaller caliber gun mounts, guided missile launching systems, vertical launching systems, surface vessel torpedo tubes, gun fire control systems, target and decoy launchers and other naval Combat Systems equipment. Work is performed for the U.S. Navy and various international allied forces. These services include engineering, repair, upgrade, maintenance, logistic support, replacement parts and onboard technical assistance. A significant amount of the service work is performed at the Company's Louisville operation which is located at the facilities of the former U.S. Navy operated Naval Ordnance Station. Other strategic work sites include San Diego, CA; Norfolk, VA; and Mayport, FL. International Operations. The Company operates joint ventures and co-production programs in countries throughout the world. Current operations include joint ventures in Saudi Arabia and Turkey, in each of which the Company owns a 51% interest, and a co-production program in South Korea. The Company's objective in setting up a joint venture or co-production program is to provide the host country with an indigenous production capability that will utilize the Company's developed programs, adapted to local requirements. The Company uses project financing, letters of credit and offsets to structure programs that meet unique customer needs. FMC-Arabia. The joint venture was formed in 1994 to pursue defense contracts within the Kingdom of Saudi Arabia. The Company's 51% interest in the joint venture is a beneficial interest, but record ownership has remained with FMC for administrative convenience. The Company accounts for FMC-Arabia on an equity basis, due to the Saudi partner's ability to assert supermajority rights which limit the control of the Company. The initial contract was to provide contractor logistics support (CLS) and training to the Royal Saudi Land Forces Infantry Corps for Bradley Fighting Vehicles previously purchased from the Company. This contract is scheduled to be complete in the second quarter of 2000. FMC-Arabia has submitted a proposal for follow-on work with substantially the same scope as the existing contract. In early 1997, FMC-Arabia was awarded a three-year contract to commence the modernization of 523 of Saudi Arabia's M113s (from a fleet of approximately 1,700 vehicles) to an A3 configuration. Because of overall budgeting constraints affecting the Saudi Arabian government, the funding for both the M113 and CLS programs has been substantially reduced, with the result that FMC-Arabia operated both programs at only a nominal level during 1999. Current funding will only support work in Saudi Arabia through March of 2000. The Company is continuing to work with the Saudi Arabian government and the U.S. government in an effort to arrange increased and more stable funding for the programs, but there can be no assurance as to when or whether such funding will be provided. FNSS-Turkey. The FMC-Nurol Savunma Sanayii A.S. ("FNSS") joint venture was formed in 1987 to pursue armored combat vehicle sales to the Turkish Army. Four types of armored vehicles using a common chassis are included in the contract: personnel carrier, fighting vehicle, TOW missile vehicle and mortar vehicle. The initial production contract for 1,698 vehicles has been completed, and a follow- on contract for 665 additional vehicles is being pursued. In 1998, FNSS signed its first export contract with the United Arab Emirates (Abu Dhabi) to provide 133 vehicles comprised of a mix of forward observation vehicles, engineer squad vehicles and recovery vehicles, with deliveries scheduled to occur throughout the year 2000. FNSS is pursuing additional orders with UAE as well as other export opportunities within its licensed territory, which includes much of the Middle East and Southeast Asia. The Company's investment in FNSS is carried at cost since there is uncertainty regarding the Company's ability to control the repatriation of earnings. Royalties are reported as revenues, while dividends are reported as earnings from foreign affiliates. Dividends and royalties are paid and reported in U.S. dollars. South Korea. In 1994, the Company formalized a teaming agreement with Samsung Aerospace to jointly produce AAV's for the South Korean Marine Corps, under a five-year contract. A new contract was signed in 1999 for $125 million, extending the coproduction through 2005. Research and Development and Engineering Capabilities Among the Department of Defense's ("DoD") procurement requirements is the research and development of new technologies for application to weapon systems and upgrades. The Company's ability to compete for defense contracts depends to a large extent on the impact and innovation of its research and development programs. The Company's engineering capability has been a critical component of its success. Extensive experience in simulation, systems integration, armor, mobility, survivability and armaments, as well as its software development, engineering and electronics capabilities have allowed the Company to stay at the forefront of the development, manufacture and upgrade of its products. The Company expended $16.7 million, $13.0 million, and $12.8 million on research and development in 1997, 1998, and 1999 respectively, a substantial portion of which was included in overhead allocable to both U.S. government and foreign government contracts. Government Contracts; Regulatory Matters Management expects that, for the foreseeable future, approximately 90% of the Company's sales will continue to result from contracts with the U.S. government, either directly, through prime contractors, or pursuant to the U.S. government's Foreign Military Sales program. The Company's U.S. government business is performed under cost-plus contracts (cost-plus-fixed-fee, cost-plus- incentive-fee, or cost-plus-award-fee) and under fixed-price contracts (firm fixed-price, fixed-price incentive, or fixed-price- level-of-effort). Generally, the Company's engineering and development programs are performed under cost-plus contracts, while the production contracts are awarded on a fixed-price basis. Cost-plus and fixed-price contracts accounted for approximately 53% and 47%, respectively of the Company's business in 1999. The Company's U.S. government business is subject to unique procurement and administrative rules based on both laws and regulations. These laws and rules include compliance with socio-economic requirements, the distribution of costs to contracts and non-reimbursement of certain costs such as lobbying expenses. The Company's contract administration and cost accounting policy and practices are subject to oversight by government inspectors, technical specialists and auditors. U.S. government contracts are, by their terms, subject to termination by the U.S. government either for its convenience or default by the contractor. In addition, U.S. government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract performance may take many years. Consequently, at the outset of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years. As is common in the industry, the Company is subject to business risks, including changes in governmental appropriations, national defense policies or regulations, service modernization plans, and availability of funds. Any of these factors could materially adversely affect the Company's business with the U.S. government in the future. Competition Management believes that the Company will continue to be able to compete successfully based upon the quality, technological advancement and cost competitiveness of its products and services. With respect to certain products and programs, the Company competes with one or more companies, several of which are multinational firms with substantially greater resources and capital. The Company from time to time faces competition from a number of competitors, both domestic and foreign, and in the tracked, armored combat vehicle market, the Company encounters General Dynamics Corporation most frequently. The Company's ability to compete for defense contracts depends to a large extent on the impact and innovation of its research and development programs, its capability as a systems integrator, its willingness to partner with military depots, its ability to offer best value to its government customers, and its readiness in facilities, equipment and personnel to undertake the programs for which it competes. Historically, the Company concentrated on TCVs because it believes that TCVs provide better capability than wheeled combat vehicles. However, the U. S. Army has recently shown a strong interest in shifting its combat vehicles to a wheeled platform, which the Company does not currently offer. In some instances, programs are sole-sourced by the U.S. government to a single supplier, and in other cases involve a prime contractor and multiple suppliers. In cases where the Company is the sole-source provider, there may be other suppliers who have the capability to compete for the programs involved, but they can only enter or reenter the market if the U.S. government should choose to reopen the particular program to competition. The Company's customers, particularly the industrial facilities operated by DoD, often compete with the Company for aftermarket business, such as upgrade work and various overhaul and servicing work performed by the Company. Major Customers The Company's sales are predominantly derived from contracts with agencies of the U.S. government. See Note 13 to the Consolidated Financial Statements, included in Item 8. Backlog As of December 31, 1999, the Company's funded backlog was approximately $1.4 billion compared with $1.4 billion at the end of 1998 as well. Funded backlog does not include the awarded but unfunded portion of total contract values. This backlog provides management with a useful tool to project sales and plan its business on an on-going basis. A substantial majority of this backlog is expected to be earned as revenues by the end of 2000. Intellectual Property Although the Company owns a number of patents and has filed applications for additional patents, it does not believe that its operations depend upon its patents. In addition, the Company's U.S. government contracts generally license it to use patents owned by others. Similar provisions in the U.S. government contracts awarded to other companies make it impossible for the Company to prevent the use by other companies of its patents in most domestic work. Additionally, the Company owns certain data rights in its products under certain of its government contracts. The protection of data developed by the Company from use by other government contractors is from time to time a source of negotiation between the Company and the U.S. government, and the extent of the Company's data rights in any particular product generally depends upon the degree to which that product was developed by the Company, rather than with U.S. government funds. The Company routinely enters into confidentiality and non- disclosure agreements with its employees to protect its trade secrets. Employees At December 31, 1999, the Company had approximately 4,850 employees and approximately 360 contract workers (excluding employees of the foreign joint ventures). Approximately 1,160 of these employees at five locations are represented by six unions, including the Glass, Molders, Pottery, Plastics and Allied Workers (Anniston); the International Association of Machinists (Louisville and San Jose); the United Automobile, Aerospace and Agricultural Implement Workers (Minneapolis); the International Guards (Minneapolis); the International Brotherhood of Teamsters (San Jose); and the United Steelworkers (York). The next bargaining unit contract scheduled for negotiation is in York with the United Steelworkers. This contract is up for renewal on May 1, 2000. The Company considers its relations with its employees to be generally good, and has not experienced a work stoppage since 1986. Sources and Availability of Raw Materials The Company's manufacturing operations require raw materials, primarily aluminum and steel, which are purchased in the open market and are normally available from a number of suppliers. The Company also purchases a variety of electronic and mechanical components for which the Company has multiple commercial sources. The Company has not experienced any significant delays in obtaining timely deliveries of essential raw materials. Environmental Matters The Company's operations are subject to federal, state and local laws and regulations relating to, among other things, emissions to air, discharges to water, the handling and disposal of hazardous and solid wastes and the cleanup of hazardous substances ("Environmental Laws"). The Company continually assesses its compliance status and believes that its operations currently are in substantial compliance with Environmental Laws. Operating and maintenance costs associated with environmental compliance and prevention of contamination at the Company's facilities are a normal, recurring part of operations, are not significant relative to total operating costs or cash flows, and are generally allowable as contract costs under the Company's contracts with the U.S. government ("Allowable Costs"). Such costs have not been material in the past and, based on information presently available to the Company and on U.S. government environmental policies relating to Allowable Costs in effect at this time (all of which are subject to change), are not expected to have a material adverse effect on the Company. As with compliance costs, a significant portion of the Company's expenditures for remediation at its facilities consists of Allowable Costs. Management believes that it has sufficient reserves to cover any remediation costs that may not be allowable costs under its U.S. government contracts and does not expect that such costs will materially adversely affect the Company. Based on historical experience, the Company expects that a significant percentage of the total remediation and compliance costs associated with its facilities will continue to be Allowable Costs. In addition, pursuant to the terms of the acquisition agreement between Iron Horse and the Sellers, the Sellers are required to reimburse the Company for 75% of certain non-allowable remediation costs relating to operations prior to the acquisition. Items 2. Properties The table below sets forth information with respect to the Company's manufacturing facilities and properties. The Company believes that its facilities are adequate for its operations. Location Leased/Owned Square Footage - -------- ------------ -------------- Albany, GA Gov't Owned 42,600 Arlington, VA Leased 22,512 Anniston, AL Leased 96,000 Anniston, AL Owned 267,000 Aiken, SC Leased 21,000 Aiken, SC Owned 189,000 Aberdeen, SD Owned 105,000 Aberdeen, SD Leased 30,000 Fayette County, PA Leased 179,700 Fridley, MN* Gov't Owned 1,712,240 Fridley, MN* Owned 326,023 Louisville, KY Leased 633,609 Orlando, FL Leased 16,300 Hollister, CA Leased 1,218 acres Santa Clara, CA 1125 Coleman Leased 37,450 1205 Coleman Leased 124,940 1450 Coleman Leased 36,600 340 Brokaw Leased 4,400 328 Brokaw Leased 174,300 2830 De La Cruz Leased 86,785 2890 De La Cruz Leased 68,708 Triangle, VA Leased 6,000 York County, PA Owned 996,518 York County, PA Leased 10,000 *The U.S. government is currently attempting to divest its Fridley, Minnesota facility that has historically been provided rent free to the Company for production of systems and spares for the U.S. government. UDLP is participating with the government in an effort to sell the combined facility. The proposed divestiture requires any purchaser to make the facility available for the performance of government contracts and subcontracts for a minimum of five years. ITEM 3. Legal Proceedings On August 27, 1998, Alliant Techsystems, Inc. ("Alliant"), a subcontractor to the Company in connection with the M109A6 Paladin howitzer prime contract, filed a lawsuit against the Company and its prior owners in Minnesota state court, Alliant Techsystems, Inc. v. United Defense, L.P., FMC Corp., and Harsco ------------------------------------------------------------------------ Corp., Fourth Judicial District Court, Hennepin County, Minnesota. The lawsuit - ----- arose out of a U.S. Army-directed termination for convenience in 1996 of certain subcontract work under the program which, until the time of termination, had been performed by Alliant and was thereafter replaced by a subcontract which the Company awarded to another contractor, Sechan Electronics. Alliant sought damages in an amount asserted to be in excess of $50,000, but not otherwise quantified. In response to motions by the Company, the Minnesota District Court (i) dismissed four of the five counts of Alliant's state court case on March 4, 1999, and (ii) dismissed the remaining portion of the case on February 15, 2000. Management does not believe that any appeal by Alliant of the dismissals would succeed, or that, even in the case of a successful appeal, Alliant's suit would have a material adverse effect on the Company. The Company is also a defendant in a so-called qui tam case filed jointly under the U.S. Civil False Claims Act (the "FCA") by one present and one former employee of the Company's Armament Systems Division ("ASD") in Fridley, Minnesota. The FCA, among other things, permits private parties (called "relators" under the FCA) to seek, on behalf of the U.S. Government, recovery of amounts which under certain circumstances have been improperly claimed from the Government by its contractors. Beyond recovery of the Government's actual damages, the FCA also authorizes the recovery of multiple penalties, and provides as well that the relators may personally receive 15-30% of any recovery obtained. The case, U.S. ex rel. Seman v. United Defense, FMC Corp., and Harsco ----------------------------------------------------------- Corp., was filed against the Company and its prior owners on July 23, 1997 in - ----- the U.S. District Court for the District of Minnesota and primarily alleges that the Company improperly obtained payment under various of ASD's government contracts by supplying components which did not comply with applicable technical specifications. Relators in this case do not quantify the alleged damages, but seek the full range of treble damages, civil penalties, and attorney fees available under the FCA. Since qui tam cases assert rights on behalf of the U.S. Government, the Department of Justice ("DoJ") has the statutory right to intervene in such cases and essentially take control of such litigation. Historically, DoJ has chosen to intervene in cases which appear to offer relatively better prospects of ultimate recovery. DoJ investigated the Seman matter and declined to intervene. The Company has filed an answer denying the material allegations in the Seman case. Management does not believe the outcome of this case will have a material adverse effect on the Company. The Company is also subject to other claims and lawsuits arising in the ordinary course of business. Management believes that the outcome of any such proceedings to which the Company is party will not have a material adverse effect on the Company. ITEM 4. Submission of Matters a Vote of Security Holders None. ITEM 5. Market for Registrant's Stock and Related Stockholder Matters The Company's common stock is not publicly traded. As of March 1, 2000, there were forty holders of record of the Company's common stock. No dividends were paid in 1999. In addition, the Company's Senior Subordinated Notes include provisions restricting its ability to pay dividends in the future. See Note 8 to the Consolidated Financial Statements in Item 8 for further information. Item 6. Selected Financial Data (In thousands) The selected financial data presented below are derived from the Company's consolidated financial statements, audited by Ernst & Young and should be read in conjunction with such audited statements and the notes that are included in Item 8.
(In thousands) Nine months || Three months ended || ended Year ended December 31, September 30, || December 31, Year ended December 31, 1995 1996 1997 || 1997 1998 1999 -------------------------------------------- || -------------------------------------------- (Predecessor) || || Net sales $ 967,553 $1,029,333 $ 913,925 || $ 342,627 $1,217,555 $1,213,526 || Net income(loss) 107,665 98,170 68,893 || (36,259) (120,007) 1,541 || Total assets 569,604 644,979 610,475 || 1,246,083 989,741 873,998 || Long term debt || 647,800 490,343 326,757
Note: As a result of the Acquisition and the related revaluation of assets, net income and total assets for periods ended after September 30, 1997 are not comparable to prior periods. Information for Iron Horse is identical except its total assets were $991,080 and $875,337 at December 31, 1998 and 1999, respectively and its net income(loss) was ($116,462) and $1,477 for the years ended December 31, 1998 and 1999, respectively. ITEM 7. Management's Discussion and Analysis of the Results of Operations and Financial Condition The following discussion and analysis should be read in conjunction with the financial statements and related notes and the other financial information, included elsewhere in this report. Introduction In October 1997, the Company's direct parent, Iron Horse, was funded with $173 million of equity capital from several partnerships controlled by The Carlyle Group. The equity was invested in the Company. On October 6, 1997, the Company acquired (the "Acquisition") directly or through its wholly owned subsidiary, UDLP Holdings Corp., 100% of the partnership interests in UDLP for $880.0 million from FMC and Harsco. This price was subsequently adjusted downward by $16.1 million to reflect adjustment clauses in the Acquisition Agreement. United Defense Industries, Inc. is the only asset of Iron Horse. Accordingly, Management's Discussion and Analysis of the Results of Operations and Financial Condition is the same for both Iron Horse and United Defense Industries, Inc. The Company's subsidiary guarantors, UDLP Holdings Corp. and UDLP, are directly or indirectly wholly owned by the Company and both such subsidiary guarantors have guaranteed the Company's 8 3/4% Senior Subordinated Notes on a full, unconditional, and joint and several basis. Any non-guarantor subsidiaries have assets, equity, income and cash flows on an individual and combined basis less than 3% of related amounts of the Company. Accordingly, separate financial statements of those subsidiaries are not considered material or provided herein. Overview Variability in Quarterly and Annual Performance. The Company's operating performance frequently varies significantly from period to period, depending upon the terms and schedules for the Company's contracts, export sales, and, in particular, the award or expiration of one or more contracts and the timing of manufacturing and delivery of products under such contracts. As a result, period-to-period comparisons may show substantial increases and decreases disproportionate to underlying business activity and results for any given period should not be considered indicative of longer-term results. Medium Force Brigade. Beginning with a public announcement by the U.S. Army's Chief of Staff in October 1999, the Army has embarked upon an initiative to transform a significant portion, and perhaps as much as half, of its combat forces to a lighter and more rapidly deployable form known as the "medium force." The conceptual essence of the medium force appears to be that it would be lighter and less-heavily armed and armored than the Army's existing so-called heavy forces (which currently constitute approximately six out of the Army's total of ten divisions), but more lethal and survivable than the Army's current light forces (currently approximately four divisions). The medium force would take the form of a series of so-called Brigade Combat Teams (BCT) each equipped with 300-400 combat vehicles. The Army has indicated that such vehicles (currently referred to as medium armored vehicles, or MAVs) must be transportable on the C130 aircraft (DoD's smallest aircraft capable of transporting vehicles on a so-called roll-on, roll-off basis), and the Army leadership has also expressed a predisposition that the new BCT vehicles be wheeled. For military combat vehicles, there are substantial manufacturing, design and engineering differences between wheeled and tracked vehicles, and the Company historically has not produced wheeled vehicles. Beyond a token experimental or test force of perhaps 200 vehicles, the extent to which the Army would ultimately purchase MAVs will depend upon such factors as testing results, evaluation of competing vehicles within DoD, and the availability of acquisition funds for such vehicles in light of competitive budgetary pressures from other DoD programs as well as non-military funding requirements. For example, a recent public estimate that the MAV price tag could total $10 billion over approximately six years would mean that the corresponding level of Army acquisition spending in recent years would need to more than double. To whatever extent the Army were to procure MAVs, the Company would likely be affected in two ways. First, any purchase of MAVs from the Company would tend to improve the Company's sales and profits; and conversely, purchases of MAVs from the Company's competitors would tend to strengthen such competitors and depress the Company's revenues and profits. Second, funds used by the Army to purchase MAVs (whether from the Company or its competitors) may well be derived, at least in part, by cutting back or cancelling other Army acquisition programs, including programs involving the Company's other product lines. Indeed, in January 2000 the press began to report widely that the Army intended to cancel both the C2V and Grizzly programs and to restructure the Crusader program (all three programs are described above under Item 1, Description of Business) in order to free up funds for the procurement of MAVs. The Company strongly believes that certain of its current products, particularly the M8 and the MTVL (see Item 1, Description of Business, above), would fulfill the Army's emerging requirements for MAVs with stronger capability, earlier availability, and at lower cost than any comparable wheeled vehicle. It remains uncertain, however, whether, when, or to what extent the Army will actually procure MAVs, as well as what final technical and performance requirements (which might or might not favor a wheeled rather than a tracked vehicle, or vice versa) the Army might ultimately announce as governing any MAV procurement. To whatever extent the Army were to procure MAVs, there can be no assurance that any portion(s) of such procurement would be from the Company, and/or that Army programs for the Company's other products would not be reduced in scale or cancelled in order to make funds available for the procurement of MAVs. Senior Subordinated Notes. The Company received authorization from its bank-lending group in February 1999 to purchase up to $50 million of the Senior Subordinated Notes, but has not attempted to acquire any of the notes yet. This authorization was granted due to the Company's performance of making bank debt prepayments in excess of scheduled amortization payments. The Company will consider purchasing the Senior Subordinated Notes in the open market if market conditions are appropriate and if excess cash is available to make a purchase. However, the Company may decide to continue to apply any excess cash balances towards the prepayment of bank debt as it has to date. Results of Operations Year Ended December 31, 1999 Compared with Year Ended December 31, 1998 Revenue. Revenue for 1999 was $1,213.5 million, a slight decline of $4.0 million or 0.3%, from 1998. The lower revenue was largely due to the wind down of the Paladin artillery upgrade program at the end of the second quarter of 1999 and the completion of the self-propelled howitzer and the M113 shipments to foreign customers. This decline was offset by higher revenue from the shipments of vertical launcher systems, increased billings for the Crusader program, and new deliveries of M9 armored combat earth movers, self propelled howitzers and rebuilt AAV7 amphibious vehicles. Gross Profit. Gross profit increased $103.4 million, or 87.4%, to $221.6 million for 1999 from $118.3 million for 1998. The gross profit rate improved 8.6 percentage points to 18.3% for 1999. The improvement in 1999 was due to lower costs related to assets revalued in connection with the Acquisition. In 1998 reserves were established including a sizeable non-cash pension charge for restructuring the Company's Armament Systems Division, the write-off of unusable, capitalized software and other impaired assets which did not recur in 1999. Selling, general and administrative expenses. Selling, general and administrative expenses were $167.9 million in 1999, a decrease of $9.6 million, or 5.4% from 1998. The marginal decrease in expenses is attributable to lower depreciation and amortization of goodwill and other intangible assets related to assets revalued in connection with the Acquisition. Earnings from Foreign Affiliates. Earnings from foreign affiliates were $.5 million in 1999, a decline of $5.7 million from 1998. The decline was due to the establishment of additional reserves for the potential offset penalty for the joint venture in Turkey equivalent to dividends received from the venture in 1999. Interest Expense. Net interest expense including the amortization of financing costs was $37.0 million for 1999 which was $13.7 million or 27.1% lower than 1998. The decline in interest expense was the result of lower debt levels in 1999. Net Income. As a result of the foregoing, the Company earned net income of $1.5 million for 1999 compared with a net loss of $120.0 million for 1998. Year Ended December 31, 1998 Compared with Year Ended December 31, 1997 Revenue. Revenue for 1998 was $1,217.6 million, a decline of $39.0 million or 3.1%, from 1997. The lower revenue was due to reduced vehicle shipments to foreign customers, lower deliveries of naval five-inch guns and of Paladin artillery upgrades, and the shipment in 1997 of a large component for the Seawolf submarine, which did not recur in 1998. This decline was partially offset by higher revenue from the Crusader contract in 1998, the shipment of ammunition supply vehicles, and higher engineering sales such as for development contracts. Gross Profit. Gross profit declined $59.2 million, or 33.4%, to $118.3 million for 1998 from $177.5 million for 1997. The gross profit rate deteriorated 4.4 percentage points to 9.7% for 1998. The decline is a result of a full year of amortization in 1998 related to assets revalued in the Acquisition versus only one quarter of amortization in 1997, the establishment of reserves including a sizeable non-cash pension charge for restructuring the Company's Armament Systems Division, the write-off of unusable, capitalized software and other impaired assets, and the lower revenue described above. Reserves established for contracting issues and downward adjustments to contract profit estimates in 1997 partially offset the decline. Selling, general and administrative expenses. Selling, general and administrative expenses were $177.4 million in 1998, an increase of $51.1 million, or 40.4% from 1997. The increase in expenses is attributable to the amortization of goodwill and other intangible assets established in conjunction with the Acquisition. The higher costs were partially offset by lower expense for corporate services, lower commissions to foreign representatives, and savings related to the consolidation of certain staff functions. Research and Development. Research and development costs were $13.0 million for 1998 which was $3.6 million, or 21.8%, below spending for 1997. The reason for the decline is that costs in 1997 were higher than usual as the culmination of several projects required heightened spending to insure that they were completed in a timely fashion. Earnings from Foreign Affiliates. Earnings from foreign affiliates were $6.2 million in 1998, a decline of $7.7 million from 1997. The decline was due to lower earnings derived from the Company's Saudi Arabian joint venture as a result of lower funding available from the Saudi government and, as a consequence, decreased activity on Saudi contracts. Interest Expense. Net interest expense including the amortization of financing costs for 1998 was $50.8 million, which was $36.6 million higher than for 1997. The Company began incurring interest expense in the fourth quarter of 1997 associated with debt that was obtained to finance the Acquisition. Net Income. As a result of the foregoing, including the addition of interest expense and amortization of assets revalued in connection with the Acquisition discussed earlier, there was a net loss of $120.0 million in 1998 compared with net income of $32.6 million for 1997. Liquidity, Capital Resources and Financial Condition The Company's liquidity requirements depend on a number of factors relative to the timing of production and deliveries under its U.S. government and direct foreign sales ("DFS") contracts. The Company generally receives performance based payments or progress payments on U.S. government contracts based either on meeting performance milestones or on a percentage of contract expenditures, and it generally negotiates for the payment of advances from customers on DFS contracts. Advances on DFS contracts vary depending on the specific programs involved. These payments reduce the need for Company financed working capital, and changes in working capital between periods are frequently due to program status changes and the level of such payments for the specific programs by period. Cash provided by operating activities. Cash provided by operating activities for 1999, 1998 and 1997 was $189.6 million, $197.3 million and $194.8 million, respectively. During 1999 the majority of cash was generated from net income plus depreciation and amortization of $137.4 million, and significant collections of progress payments from U.S. Government and foreign advance payments. In 1998 the Company likewise generated a high volume of cash resulting from net income plus depreciation and amortization of $58.0 million, and sizeable reductions in receivables and inventories as the U.S. government payment office paid all billings received by a certain deadline, and the Company aggresively reduced inventories consistent with shipping schedules. Cash flow was also high in 1997 due to net income plus depreciation and amortization of $98.6 million, plus significant reductions in inventory resulting from major shipments to foreign customers in Thailand, Austria and Brazil and also of VLS launchers. Cash flow has essentially remained consistent in the last three years. Cash provided by operating activities is anticipated to be considerably lower in 2000 than in recent years as the Company expects that it will need to increase working capital in connection with the Company's anticipated workload under current contracts. In recent years, the Company has been able to generate substantial cash from reducing working capital. Cash used in investing activities. Capital spending in 1999 was $25.2 million compared with $24.0 million in 1998 and $39.6 million in 1997. The Company received $16.1 million in 1998 representing a downward purchase price adjustment related to the Acquisition. 1997 includes a cash use of $838.9 million representing the payment of the Acquisition purchase price net of cash on hand at the closing. Financing activities. In 1998, the Company raised $6.1 million from the sale of additional shares of its common stock to certain officers, directors and other management members of the Company and to individuals affiliated with Iron Horse. In 1997, the Company raised $707.0 million of debt and $173.0 million of equity to finance the Acquisition and paid $28.7 million associated with the Acquisition transaction costs. Cash used for financing activities included the pay down of $157.1 million in debt for 1999, $152.8 million for 1998 and $47.2 million for 1997. Also, $114.4 million was distributed to FMC and Harsco in 1997. Impact of The Year 2000 ("Y2K") Each of the Company's divisions executed a Y2K program to identify, assess and remediate Y2K problems. The approach was a five-phase strategy of awareness, assessment, renovation, validation and implementation. Contingency and business recovery plans were developed to address unexpected critical systems failures. The Company experienced no material Y2K-related impacts before, during or after the millennium rollover. In order to obviate Y2K problems, the Company spent $30.1 million repairing or replacing existing business and information technology computing systems and assets with embedded systems. The Company will monitor systems during the first quarter of 2000 to ensure continued systems operation and supply line deliveries. ITEM 7A. Market Risk In October 1997, the Company entered into a three-year interest rate swap agreement involving the exchange of floating rate interest payment obligations for fixed rate interest payment obligations. The notional amount of this interest rate swap agreement is $160 million. The Company entered into this agreement as a hedge to manage interest costs and risks associated with fluctuating interest rates. The agreement entitles the Company to pay a base interest rate amount of 5.75%, in return for the right to receive a floating interest rate which is based on the three-month LIBOR as of the quarterly measurement date. In the event the three-month LIBOR at the measurement date exceeds 6.99% the base interest rate is adjusted to the then effective LIBOR up to a maximum rate of 9%. The net cash amounts paid or received on the agreement are accrued and recognized as an adjustment to interest expense. As of December 1999, the Company had debt totaling $350 million of which $150 million were subject to variable interest rates. ITEM 8. Consolidated Financial Statements and Supplementary Data The following consolidated financial statements of Iron Horse Investors, L.L.C. and United Defense Industries, Inc. are provided in response to the requirements of Item 8: IRON HORSE INVESTORS, L.L.C. AND UDLP Report of Independent Auditors.............................................. F1 Consolidated Balance Sheets as of December 31, 1998 and 1999................ F2 Consolidated Statements of Operations for the nine months ended September 30, 1997, the three months ended December 31, 1997, and the years ended December 31, 1998 and 1999...... F3 Consolidated Statements of Partners' Capital and Members' Capital for the nine months ended September 30, 1997, the three months ended December 31, 1997, and the years ended December 31, 1998 and 1999...... F4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997, the three months ended December 31, 1997, and the years ended December 31, 1998 and 1999......................... F5 Notes to Consolidated Financial Statements.................................. F6- 22 UNITED DEFENSE INDUSTRIES, INC. and UDLP Report of Independent Auditors.............................................. F23 Consolidated Balance Sheets as of December 31, 1998 and 1999................ F24 Consolidated Statements of Operations for the nine months ended September 30, 1997, the three months ended December 31, 1997, and the years ended December 31, 1998 and 1999...... F25 Consolidated Statements of Partners' Capital and Members' Capital for the nine months ended September 30, 1997, the three months ended December 31, 1997, and the years ended December 31, 1998 and 1999...... F26 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997, the three months ended December 31, 1997, and the years ended December 31, 1998 and 1999......................... F27 Notes to Consolidated Financial Statements.................................. F28- 45
United Defense Industries, Inc. has no operations independent from its subsidiaries. Its subsidiaries that are guarantors of the Senior Subordinated Notes, UDLP Holdings Corp. and United Defense, L.P., are directly or indirectly wholly-owned and both of those subsidiary guarantors have guaranteed the Senior Subordinated Notes on a full, unconditional and joint and several basis. Any non-guarantor subsidiaries have assets, equity, income and cash flows on an individual combined basis less than 3% of related amounts of United Defense Industries, Inc. Accordingly, separate audited financial statements of the guarantor subsidiaries are not provided herein. Report of Ernst & Young LLP, Independent Auditors Board of Directors Iron Horse Investors, L.L.C. We have audited the accompanying consolidated balance sheets of Iron Horse Investors, L.L.C. and subsidiaries as of December 31, 1998 and 1999 and the related consolidated statements of operations, stockholders' equity, and cash flows for the three months ended December 31, 1997 and the years ended December 31, 1998 and 1999. We have also audited the consolidated statements of operations, partners' capital, and cash flows of United Defense, L.P. (predecessor) and subsidiaries for the nine months ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Iron Horse Investors, L.L.C. and subsidiaries at December 31, 1998 and 1999 and the consolidated results of their operations and their cash flows for the three months ended December 31, 1997 and the years ended December 31, 1998 and 1999, and the consolidated results of operations and cash flows of United Defense, L.P. and subsidiaries for the nine months ended September 30, 1997, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP January 31, 2000 Washington D.C. Iron Horse Investors, L.L.C. Consolidated Balance Sheets (In thousands)
Assets December 31, 1998 December 31, 1999 --------------------------------------- Current assets: Cash and marketable securities $ 85,520 $ 94,325 Trade receivables 64,395 57,198 Inventories 254,343 254,750 Other current assets 4,255 4,056 --------------------------------------- Total current assets 408,513 410,329 Property, plant and equipment, net 122,721 84,693 Intangible assets, net 330,024 254,276 Prepaid pension and postretirement benefit cost 123,912 119,883 Other assets 5,910 6,156 --------------------------------------- Total assets $ 991,080 $ 875,337 ======================================= Liabilities and Capital Current liabilities: Current portion of long-term debt $ 16,643 $ 23,086 Accounts payable, trade and other 88,497 64,639 Advanced payments 258,395 303,065 Accrued and other liabilities 75,832 91,340 --------------------------------------- Total current liabilities 439,367 482,130 Long-term liabilities net of current portion: Accrued pension and postretirement benefit cost 14,610 5,075 Long-term debt 490,343 326,757 Other liabilities 22,630 35,675 --------------------------------------- Total liabilities 966,950 849,637 Minority interest 3,851 3,944 Commitments and contingencies (Notes 8 & 9) Members' capital 20,279 21,756 --------------------------------------- Total liabilities and members' capital $ 991,080 $ 875,337 =======================================
See accompanying notes. Iron Horse Investors, L.L.C. Consolidated Statements of Operations (In thousands)
Nine months || Three months Year Year ended || ended ended ended September 30, || December 31, December 31, December 31, 1997 || 1997 1998 1999 --------------------||------------------------------------------------------ || Revenue: || Sales $913,925 || $342,627 $1,217,555 $1,213,526 || Costs and expenses: || Cost of sales 754,977 || 324,123 1,099,291 991,907 Selling, general and || administrative expenses 91,413 || 34,947 177,449 167,877 Research and development 12,096 || 4,558 13,021 12,782 --------------------||---------------------------------------------------- Total expenses 858,486 || 363,628 1,289,761 1,172,566 || Earnings related to investments || in foreign affiliates 13,521 || 432 6,208 533 --------------------||---------------------------------------------------- Income(loss) from operations 68,960 || (20,569) (65,998) 41,493 || Other income (expense): || Interest income 1,456 || - 1,396 1,820 Interest expense - || (15,622) (52,155) (38,835) Miscellaneous, net - || (68) - - --------------------||---------------------------------------------------- Total other income (expense) 1,456 || (15,690) (50,759) (37,015) --------------------||----------------------------------------------------- || Income(loss) before income taxes || and minority interest 70,416 || (36,259) (116,757) 4,478 || Provision for income taxes 1,523 || - 3,250 2,937 --------------------||---------------------------------------------------- Income (loss) before minority || interest 68,893 || (36,259) (120,007) 1,541 Minority Interest - || - 3,545 (64) --------------------||---------------------------------------------------- Net income (loss) $ 68,893 || ($36,259) ($ 116,462) $ 1,477 ==========================================================================
See accompanying notes. Iron Horse Investors, L.L.C. Consolidated Statements of Partners' Capital and Members' Capital (In thousands)
Partners' Members' (Predecessor) Capital Capital Total ---------------------------------------------- Balance, January 1, 1997 $ 179,638 $ - $ 179,638 Distributions (114,409) - (114,409) Liabilities transferred from FMC (3,120) - (3,120) Net income for the nine months ended September 30, 1997 68,893 - 68,893 ---------------------------------------------- Balance, September 30, 1997 $ 131,002 $ - $ 131,002 ============================================== ============================================== Balance, October 1, 1997 $ - $ - $ - Members' contributions - 173,000 173,000 Net loss for the three months ended December 31, 1997 - (36,259) (36,259) ---------------------------------------------- Balance, December 31, 1997 - 136,741 136,741 Net loss for the year ended December 31, 1998 - (116,462) (116,462) ---------------------------------------------- Balance, December 31, 1998 - 20,279 20,279 Net income for the year ended December 31, 1999 - 1,477 1,477 ---------------------------------------------- Balance, December 31, 1999 $ - $ 21,756 $ 21,756 ==============================================
See accompanying notes. Iron Horse Investors, L.L.C. Consolidated Statements of Cash Flows
(In thousands) Nine months || Three months Year Year ended || ended ended ended September 30, || December 31, December 31, December 31, 1997 || 1997 1998 1999 --------------------||------------------------------------------------ || Operating activities || Net income (loss) $ 68,893 || ($ 36,259) ($116,462) $ 1,477 Adjustments to reconcile net income (loss) to cash || provided by operating activities: || Depreciation 19,331 || 20,660 83,153 55,528 Amortization 9,673 || 16,263 94,806 80,317 Minority interest - || - (3,545) 64 Other (4,039) || 9,001 5,291 1,123 Changes in assets and liabilities: || Trade receivables 7,600 || (13,335) 30,452 7,197 Inventories 15,546 || 92,875 76,030 (407) Other assets (745) || (2,187) 1,636 474 Prepaid pension and postretirement benefit cost (8,783) || (2,736) 15,519 4,029 Accounts payable, trade and other (14,585) || 17,639 (5,144) (23,858) Advanced payments 15,082 || (12,671) (3,006) 44,670 Accrued and other liabilities 11,626 || (16,717) 14,360 28,554 Accrued pension and postretirement benefit cost 3,181 || (475) 4,212 (9,535) --------------||---------------------------------------------- Cash provided by operating activities 122,780 || 72,058 197,302 189,633 --------------||---------------------------------------------- || Investing activities || Capital spending (23,722) || (15,893) (24,020) (25,246) Disposal of property, plant and equipment 6,938 || 3,170 7,298 1,532 Short term investment with FMC Corporation 19,497 || - - - Purchase of business (net of $11,107 cash acquired) - || (838,893) - - Adjustment to purchase price of business - || - 16,074 - ----------------||---------------------------------------------- Cash provided by (used in) investing activities 2,713 || (851,616) (648) (23,714) ----------------||---------------------------------------------- || Financing activities || Payments on long-term debt - || (47,200) (152,814) (157,143) Payments for financing and transaction costs - || (28,726) - - Proceeds from issuance of long-term debt - || 707,000 - - Proceeds from sale of common stock by subsidiary - || 173,000 6,057 29 Partners' distributions (114,409) || - - - ----------------||---------------------------------------------- Cash (used in) provided by financing activities (114,409) || 804,074 (146,757) (157,114) ----------------||---------------------------------------------- || Increase in cash and marketable securities 11,084 || 24,516 49,897 8,805 Cash and marketable securities, beginning of period 23 || 11,107 35,623 85,520 ----------------||---------------------------------------------- Cash and marketable securities, end of period $ 11,107 || $ 35,623 $ 85,520 $ 94,325 ================================================================
See accompanying notes. Iron Horse Investors, L.L.C. Notes to Consolidated Financial Statements 1. Basis of Presentation Iron Horse Investors, L.L.C. together with its subsidiaries, (the "Company") was formed for the primary purpose of facilitating the acquisition of United Defense, L.P. ("UDLP") via its investment in United Defense Industries, Inc. ("UDI"). In October 1997, the Company was funded with $173 million of equity capital, from an investment group led by the Carlyle Group ("Carlyle"), which was invested in UDI. On October 6, 1997, UDI acquired 100% of the partnership interests of UDLP from FMC Corporation ("FMC") and Harsco Corporation ("Harsco") (the "Sellers"). As a result of adjustments to the carrying value of assets and liabilities pursuant to this transaction (see Note 3), the financial position and results of operations for periods subsequent to the acquisition are not comparable to UDLP amounts. The Company through UDI designs, develops and manufactures various tracked armored combat vehicles and a wide spectrum of weapons delivery systems for the armed forces of the United States and nations around the world. The financial statements include the accounts of the Company and its subsidiaries. Prior to the acquisition, the financial statements include the accounts of UDLP and its subsidiaries. Intercompany accounts and transactions are eliminated in consolidation. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, in particular, estimates of contract cost and revenues used in the earnings recognition process. Actual results could differ from those estimates. Cash and Marketable Securities Cash and marketable securities consist of investments with initial maturities of three months or less. Iron Horse Investors, L.L.C. Notes to Consolidated Financial Statements (continued) Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation is provided principally on the sum-of-the-years digits and straight-line methods over estimated useful lives of the assets (land improvements--twenty years; buildings--twenty to thirty-five years; and machinery and equipment--two to twelve years). Maintenance and repairs are expensed as incurred. Expenditures that extend the useful life of property, plant and equipment or increase its productivity are capitalized and depreciated. Long-lived Assets, Including Intangible Assets and Goodwill The Company evaluates on a quarterly basis its long-lived assets to be held and used, including certain identifiable intangible assets and goodwill, to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company bases its evaluation on such impairment indicators as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, the Company would use an estimate of the undiscounted value of expected future operating cash flows to determine whether the asset is recoverable and measure the amount of the impairment based on the difference between the carrying amount of the asset and its estimated fair value. Investments in Affiliated Companies The Company's investment in a majority owned foreign joint venture in Turkey is carried at cost since there is uncertainty regarding the ability to control the venture or to repatriate earnings. Income is recognized as dividends are received. Dividends received net of amounts accrued for taxes and future obligations were $5.3 million for the nine months ended September 30, 1997, $0 for the three months ended December 31, 1997, and $4.6 million for the year ended December 31, 1998. A provision of $1.1 million was recorded for the year ended December 31, 1999. The Company's investment in a foreign joint venture in Saudi Arabia is accounted for by using the equity method. Equity in earnings from this investment was $8.2 million for the nine months ended September 30, 1997, $0.4 million for the three months ended December 31, 1997, $1.6 million for the year ended December 31, 1998, and $1.6 million for the year ended December 31, 1999. Iron Horse Investors, L.L.C. Notes to Consolidated Financial Statements (continued) Advanced Payments Advanced payments by customers for deposits on orders not yet billed and progress payments on contracts-in-progress are recorded as current liabilities. Revenue and Profit Recognition for Contracts-in-Progress The Company recognizes sales on most production contracts as deliveries are made or accepted. Gross margin on sales is based on the estimated margin to be realized over the life of the related contract. Sales under cost reimbursement contracts for research, engineering, prototypes, repair and maintenance and certain other contracts are recorded when funded, as costs are incurred and include estimated fees in the proportion that costs incurred to date bear to total estimated costs. Changes in estimates for sales and profits are recognized in the period in which they are determinable using the cumulative catch-up method. Claims are considered in the estimated contract performance at such time as realization is probable. Any anticipated losses on contracts (i.e., cost of sales exceeds sales) are charged to operations as soon as they are determinable. Gross profit for the nine months ended September 30, 1997 includes approximately $13.5 million of noncash charges for changes in estimated contract profitability related to contractual issues with customers and other matters resulting from the periodic reassessment of the estimated profitability of contracts in progress. Stock-Based Compensation Provided the option price is not less than fair value of the common stock at the date an option is granted, the Company records no compensation expense in its consolidated statements of operations. See Note 10 for the pro forma effect on operating results had the Company recorded compensation expense for the fair value of stock options. Income Taxes As a limited partnership, income earned by UDLP passed to its partners and was taxable at that level, except for taxes payable on the income of UDLP's Foreign Sales Corporation ("FSC") subsidiary. As a limited liability company, income which has not been taxed previously is passed through to its members. The Company's corporate subsidiaries are responsible for income taxes on earnings at that level, and accordingly the Company's subsidiaries provide for income taxes at Iron Horse Investors, L.L.C. Notes to Consolidated Financial Statements (continued) the corporate level determined under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws expected to be effective when these differences reverse. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. 3. Business Purchase On October 5, 1997, the Company via its direct investment in UDI, acquired 100% of the partnership interests of UDLP and certain other related business assets of FMC. The purchase price including expenses was $864 million after an adjustment of $16 million agreed to during 1998. The Company financed the acquisition through a cash equity investment of $173 million and debt (see Note 8). The acquisition was accounted for using the purchase method of accounting. 4. Inventories The majority of the Company's inventories are recorded at cost determined on a LIFO basis. Inventory costs include manufacturing overhead. The current replacement cost of LIFO inventories exceeded their recorded values by approximately $5.2 million at December 31, 1998 and December 31, 1999. 5. Property, Plant and Equipment Property, plant and equipment consist of the following (in thousands):
December 31 1998 1999 ------------------------------ Buildings $ 38,213 $ 39,978 Machinery and equipment 160,788 166,257 Land and improvements 7,802 8,126 Construction in progress 7,500 7,754 ------------------------------ 214,303 222,115 Less: accumulated depreciation (91,582) (137,422) ------------------------------ Net property, plant and equipment $122,721 $ 84,693 ==============================
Iron Horse Investors, L.L.C. Notes to Consolidated Financial Statements (continued) 6. Intangible Assets Intangible assets consist of the following (in thousands):
December 31 1998 1999 ------------------------------ Software and other intangibles $ 75,200 $ 92,119 Firm business and ongoing programs 225,103 225,103 Goodwill 125,130 124,339 ------------------------------ 425,433 441,561 Less: accumulated amortization (95,409) (187,285) ------------------------------ Net intangible assets $330,024 $ 254,276 ==============================
The Company's software and other intangibles are being amortized over their estimated useful lives on a straight-line basis over three to five years or using other methods based on revenues of related contracts or programs. The excess of purchase cost over the fair value of the net assets acquired (goodwill) that resulted from the application of purchase accounting for the acquisition of UDLP is being amortized over thirty years. 7. Pensions and Other Postretirement Benefits Substantially all of the Company's domestic employees are covered by retirement plans. Plans covering salaried employees provide pension benefits based on years of service and compensation. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. The Company's funding policy is to make contributions based on the projected unit credit method and to limit contributions to amounts that are currently deductible for tax purposes. Substantially all of the Company's employees are also covered by postretirement health care and life insurance benefit programs. Employees generally become eligible to receive benefits under these plans after they retire when they meet minimum retirement age and service requirements. The cost of providing most of these benefits is shared with retirees. The Company has reserved the right to change or eliminate these benefit plans. Iron Horse Investors, L.L.C. Notes to Consolidated Financial Statements (continued) The change in benefit obligation and plan assets of the plans and prepaid or accrued pension and postretirement costs recognized in the balance sheets at December 31, 1998 and 1999 are as follows (in thousands):
Pension Benefits Postretirement Benefits 1998 1999 1998 1999 ------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year $ 348,199 $442,651 $ 52,992 $54,795 Service cost 11,751 13,747 1,382 1,489 Interest cost 27,017 27,982 3,515 3,420 Net benefits paid, including settlements (22,289) (25,174) (4,330) (5,594) Actuarial (gain) loss 61,576 (38,130) 1,236 (4,923) Plan amendments - 1,238 - - Special termination benefits and curtailments 16,397 - - - ------------------------------------------------------------------------- Benefit obligation at end of year 442,651 422,314 54,795 49,187 Change in plan assets Fair value of plan assets at beginning of year 480,522 548,003 49,702 60,412 Assets transferred from Sellers 4,469 - - - Actual return on plan assets 82,668 13,874 12,830 (6,558) Employer contributions 2,633 1,066 2,210 3,568 Net benefits paid, including settlements (22,289) (25,174) (4,330) (5,594) ------------------------------------------------------------------------- Fair value of plan assets at end of year 548,003 537,769 60,412 51,828 ------------------------------------------------------------------------- Funded status 105,352 115,455 5,617 2,641 Unrecognized actuarial (gain) loss 1,626 (6,012) (7,420) (1,514) Unrecognized prior service cost 4,127 4,238 - - ------------------------------------------------------------------------- Net amount recognized $ 111,105 $113,681 $ (1,803) $ 1,127 ========================================================================= Amounts recognized in the consolidated balance sheet consist of: Prepaid pension and postretirement benefit cost $ 123,912 $118,756 $ - $ 1,127 Accrued pension and postretirement benefit cost (12,807) (5,075) (1,803) - ------------------------------------------------------------------------- Net amount recognized $ 111,105 $113,681 $ (1,803) $ 1,127 =========================================================================
Iron Horse Investors, L.L.C. Notes to Consolidated Financial Statements (continued) The following table summarizes the assumptions used in the determination of net pension and postretirement benefit costs and benefit obligations for the nine months ended September 30, 1997, the three months ended December 31, 1997, and the years ended December 31, 1998 and 1999:
Nine months Three months Year Year ended ended ended Ended September 30, December 31, December 31, December 31, 1997 1997 1998 1999 --------------------------------------------------------------------------------- Weighted-average assumptions Discount rate 8.00% 7.00% 6.50% 7.50% Expected return on plan assets 9.62% 9.00% 9.00% 9.00% Rate of compensation increase 5.00% 4.00% 3.50% 5.00%
The following tables show the components of the net periodic benefit cost (in thousands):
|| Pension Benefits || ---------------- Nine months || Three months Year Year ended || ended ended ended September 30, || December 31, December 31, December 31, 1997 || 1997 1998 1999 ------------------||-------------------------------------------------------- || Service cost $ 7,286 || $ 3,275 $ 11,751 $ 13,747 Interest cost 16,309 || 5,941 27,017 27,982 Expected return on plan assets (27,721) || (10,512) (43,080) (45,213) Net amortization and recognized losses 1,172 || - 703 1,324 Special termination benefits and || curtailments 3,992 || - 27,500 650 ------------------||-------------------------------------------------------- Net periodic benefit cost (income) $ 1,038 || $ (1,296) $ 23,891 $ (1,510) ============================================================================
Iron Horse Investors, L.L.C. Notes to Consolidated Financial Statements (continued)
|| Postretirement Benefits || ------------------------ Nine months || Three months Year Year ended || ended ended ended September 30, || December 31, December 31, December 31, 1997 || 1997 1998 1999 -----------------||--------------------------------------------------------- || Service cost $ 901 || $ 300 $ 1,382 $ 1,489 Interest cost 2,985 || 898 3,515 3,420 Expected return on plan assets (2,761) || (1,076) (4,422) (4,797) Net amortization and recognized losses (1,043) || - - - -------------------||--------------------------------------------------------- Net periodic benefit cost $ 82 || $ 122 $ 475 $ 112 ==============================================================================
Pension special termination benefits and curtailments cost relates to various early retirement incentive and involuntary workforce reduction programs related to the Company's downsizing and consolidation of operations. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plan with accumulated benefit obligations in excess of plan assets were $6.7 million, $3.2 million and zero, respectively, at December 31, 1999 and $234.9 million, $187.4 million and $206.3 million, respectively, at December 31, 1998. For measurement purposes, a 5% annual rate of increase in the per capita cost of covered health care benefits is assumed for 2000. The rate is assumed to decrease gradually to 4% for 2002 and remain at that level thereafter. Assumed health care cost trend rates have an effect on the amounts reported for the postretirement health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1% Increase 1% Decrease --------------- --------------- Effect on total of service and interest cost components $ 224 $ (178) Effect on the postretirement benefit obligation $1,679 $(1,378)
Iron Horse Investors, L.L.C. Notes to Consolidated Financial Statements (continued) 8. Long-term Debt Borrowings under long-term debt arrangements are as follows:
December 31 1998 1999 -------------------------------- Senior credit facility $306,986 $149,843 Senior subordinated notes 200,000 200,000 -------------------------------- 506,986 349,843 Less: current portion 16,643 23,086 -------------------------------- $490,343 $326,757 ================================
Senior Credit Facility In October 1997, the Company entered into a senior credit facility that included $495 million of term loan facilities and a $230 million revolving credit facility. Outstanding borrowings on the term loan were $306,986 and $149,843 at December 31, 1998 and 1999, respectively. The term loan facilities bear interest at variable rates with a weighted average rate of 6.75% and 8.82% at December 31, 1998 and 1999, respectively. These loans are due through 2006 and provide for quarterly principal payments. The revolving credit facility provides for loans and letters of credit and matures in 2003. The Company has outstanding letters of credit under the facility of $101 million at December 31, 1999. There was $129 million available under the revolving credit facility at December 31, 1999. The Company is obligated to pay a fee of 0.25% on the unused revolving credit facility. Amounts outstanding under the senior credit facility are secured by a lien on all the assets of the Company and its domestic subsidiaries and by a pledge of all the stock of the Company and its domestic subsidiaries and two-thirds of the stock of certain of the Company's foreign subsidiaries and joint ventures. Mandatory prepayments and reductions of outstanding principal amounts are required upon the occurrence of certain events. The senior credit facility contains customary covenants restricting the incurrence of debt, encumbrances on and sales of assets, limitations on mergers and certain acquisitions, limitations on changes in control, provision for the maintenance of certain financial ratios, and various other financial covenants and restrictions. Iron Horse Investors, L.L.C Notes to Consolidated Financial Statements (continued) Senior Subordinated Notes In October 1997, the Company issued $200 million of senior subordinated notes. The senior subordinated notes are unsecured, bear interest at 8.75% payable semiannually, and mature in 2007. The payment of principal and interest is subordinated in right of payment to all senior debt. The subordinated notes are not redeemable other than in connection with a public equity offering or a change in control prior to November 2002, at which time the notes may be redeemed at a premium, initially at 104.375% of the principal amount. The subordinated notes have customary covenants for subordinated debt facilities including the right to require repurchase upon a change in control, restrictions on payment of dividends, and restrictions on the acquisition of equity interests by the Company. Annual Maturities Annual maturities of long-term debt are as follows (in thousands):
Year ended December 31, ----------------------- 2000 $ 23,086 2001 23,086 2002 23,086 2003 23,085 2004 - Thereafter 257,500 ------------ Total $349,843 ============
Cash paid for interest was $2.9 million for the three months ended December 31, 1997, $45.4 million for the year ended December 31, 1998 and $36.2 million for the year ended December 31, 1999. 9. Commitments and Contingencies Operating Leases The Company leases office space, plants and facilities, and various types of manufacturing, data processing and transportation equipment. Rent expense for the nine months ended September 30, 1997, the three months ended December 31, 1997, and the years ended December 31, 1998 and 1999 was $11.7 million, $6.4 million, $13.5 million and $12.4 million, respectively. Minimum future rentals under noncancellable leases are estimated to be $11.4 Iron Horse Investors, L.L.C Notes to Consolidated Financial Statements (continued) million in 2000, $11.1 million in 2001, $10.5 million in 2002, $10.3 million in 2003, $9.5 million in 2004 and $9.7 million thereafter. Legal Proceedings Alliant Techsystems, Inc. ("Alliant"), a subcontractor to the Company in connection with the M109A6 Paladin howitzer prime contract, filed a lawsuit against the Company and its prior owners in Minnesota state court. The lawsuit arose out of a U.S. Army-directed termination for convenience in 1996 of certain subcontract work under the program which, until the time of termination, had been performed by Alliant and was thereafter replaced by a subcontract which the Company awarded to another contractor, Sechan Electronics. The lawsuit has been dismissed in response to pretrial motions by the Company. Management does not believe that any appeal by Alliant of the dismissals would succeed, or that, even in the case of a successful appeal, Alliant's suit would have a material adverse effect on the Company. The Company and its prior owners are also the defendants in a so-called qui tam case filed under the U.S. Civil False Claims Act (the "FCA") by one present and one former employee of the Company's Armament Systems Division in Fridley, Minnesota, U.S. ex rel. Shukla v. United Defense, L.P., et al. The FCA, among -------------------------------------------------- other things, permits private parties to seek, on behalf of the U.S. Government, recovery of amounts which under certain circumstances have been improperly claimed from the government by its contractors. Beyond recovery of the Government's actual damages, the FCA also authorizes the recovery of multiple penalties, and provides as well that the private plaintiffs may personally receive 15-30% of any recovery obtained. The case primarily alleges that the Company improperly obtained payment under various government contracts by supplying components which did not comply with applicable technical specifications. The Department of Justice has declined to intervene in the case. The Company has filed an answer denying the material allegations in the case. Management does not believe the outcome of this case will have a material adverse effect on the Company. The Company is also subject to other claims and lawsuits arising in the ordinary course of business. Management believes that the outcome of any such proceedings to which the Company is party will not have a material adverse effect on the Company. Environmental Matters The Company spends certain amounts annually to maintain compliance with environmental laws and to remediate contamination. Operating and maintenance costs associated with environmental compliance and prevention of contamination at the Company's facilities are a normal, recurring part of operations, are not significant relative to total operating Iron Horse Investors, L.L.C Notes to Consolidated Financial Statements (continued) costs or cash flows, and are generally allowable as contract costs under the Company's contracts with the U.S. government (Allowable Costs). As with compliance costs, a significant portion of the Company's expenditures for remediation at its facilities consists of Allowable Costs. Management believes that it has sufficient reserves to cover remediation costs that are not allowable costs under its U.S. government contracts (Non-Allowable Costs). In addition, pursuant to the terms of the acquisition of UDLP, the Sellers are required to reimburse the Company for 75% of certain remediation costs relating to operations prior to the acquisition that are Non-Allowable Costs. The Company has reflected a liability for the gross amount of environmental remediation costs which it expects to be liable for after giving effect to reimbursement under government contracts. The Company has recorded an asset for the amounts expected to be reimbursed by the Sellers under the terms of the acquisition agreement. Turkey Joint Venture Offset Reserves The Company's joint venture in Turkey is required by agreement with its customer to achieve a significant level of export sales by October 2002 to meet the "offset" requirements of the contract or pay a penalty of 9% of the unpaid offset obligations. Such payment could be as high as $37 million if no additional offset sales are completed. Production from a potential award which would approximately halve the remaining liability is currently being pursued. There can be no assurance that the joint venture will be able to complete this potential sale, otherwise fulfill its offset obligations or renegotiate an acceptable alternative. The Company has established reserves for its share of the potential "offset" obligation at December 31, 1999. 10. Subsidiary Equity Plans During 1998, UDI adopted the 1998 Stock Option Plan (the "Option Plan") under which 1,500,000 shares of common stock were reserved for issuance at December 31, 1998. The options generally vest over a period of 10 years; however, vesting may be accelerated over 5 years if certain targets related to earnings and cash flow are met. Iron Horse Investors, L.L.C Notes to Consolidated Financial Statements (continued) Common stock options activity is as follows:
Year ended December 31, 1999 --------------------- Options granted during 1998 and outstanding at December 31, 1998 1,436,000 Options granted 31,000 Options canceled 6,200 Options exercised 2,900 --------------------- Options outstanding at December 31, 1999 1,457,900 ===================== Options exercisable December 31, 1999 418,425 =====================
Options were granted at $10 per share during the year ended December 31, 1998 and had an estimated grant date fair value of $4.51 per option. Options granted in 1999 were at $20 per share and had an estimated grant date fair value of $9.56 per option. The weighted-average exercise price and weighted-average remaining contractual life of the stock options outstanding at December 31, 1999 was $10.40 and nine years, respectively. Had compensation cost for the UDI's stock option plans been determined based upon the fair value at the grant date for awards under the plan consistent with the methodology prescribed under Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation, the Company's net loss in 1998 would have increased by approximatley $560,000, and the net income in 1999 would have decreased by approximately $1,459,000. The effect of applying SFAS No. 123 on the net income (loss) as stated above is not necessarily representative of the effects on reported net income (loss) for future years due to, among other things, (1) the vesting period of the stock options and (2) additional stock options that may be granted in future years. The fair value of each option grant is estimated on the date of grant using the minimum value model with the following assumptions used for grants in 1998 and 1999: dividend yield of 0%; risk-free interest rate of 6% and 6.5% respectively; and expected life of the option term of 10 years. Employee Stock Purchase Plan Under an Employee Stock Purchase Plan (the "ESPP") adopted by UDI, certain employees are provided the opportunity to purchase shares of UDI's common stock at its estimated fair value. Certain of these purchases were eligible for financing provided by UDI. Related loans including interest at 7.5%, are due in five years. During 1998, 739,624 shares were sold at a price of $10 per share. Iron Horse Investors, L.L.C Notes to Consolidated Financial Statements (continued) 11. Income Taxes The provision for income taxes for the nine months ended September 30, 1997 and the year ended December 31, 1998 was solely for federal income taxes payable by the Company's Foreign Sales Corporation ("FSC") subsidiary. The FSC paid income taxes amounting to $1.1 million, $3.3 million, and $1.7 million during the nine months ended September 30, 1997, and the years ended December 31, 1998 and 1999, respectively. For the year ended December 31, 1999, the provision for income taxes also includes alternative minimum tax currently payable by the Company of $1.2 million. The components of the net deferred tax asset are as follows (in thousands):
December 31 1998 1999 -------------------------------------- Deferred tax assets: Accrued expenses $ 42,224 $ 43,113 Net operating loss carryforwards 111,110 88,093 Depreciation 22,496 13,701 Other - 2,954 -------------------------------------- 175,830 147,861 Deferred tax liabilities: Intangibles, accrued compensation, and benefits (109,634) (84,994) Other (1,799) - -------------------------------------- (111,433) (84,994 -------------------------------------- Net deferred tax asset 64,397 62,867 Valuation allowance (64,397) (62,867) -------------------------------------- Net deferred taxes on balance sheet $ - $ - ======================================
The net deferred tax asset at December 31, 1998 and 1999 has been offset by a valuation allowance. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible and subject to any limitations applied to the use of carryforward tax attributes. The Company has approximately $220 million in net operating loss carryforwards which expire at varying dates through 2018. Iron Horse Investors, L.L.C Notes to Consolidated Financial Statements (continued) 12. Fair Value of Financial Instruments To reduce the impact of changes in interest rates on its floating rate debt, the Company entered into a three-year interest rate swap agreement that expires in October 2000 for a notional amount of $160 million. A swap agreement is a contract to exchange floating rate interest payments for fixed rate payments periodically over the term of the agreement without the exchange of the underlying notional amount. The notional amount is used to measure the interest to be paid or received and does not represent the amount of exposure to credit loss. The agreement entitles the Company to pay a base interest rate amount of 5.75%, in return for the right to receive a floating interest rate which is based on the three-month LIBOR as of the quarterly measurement date. In the event the three-month LIBOR at the measurement date exceeds 6.99% the base interest rate is adjusted to the then effective LIBOR up to a maximum rate of 9%. The net cash amounts paid or received on the agreement are accrued and recognized as an adjustment to interest expense. The fair value of interest rate instruments are the estimated amounts the Company would have to pay to terminate the agreement, taking into account the current interest rates and the creditworthiness of the parties to the agreement. At December 31, 1999, the termination value of the swap (i.e., the fair value) was $.7 million in favor of the Company. The carrying amount of the Company's financial instruments included in current assets and current liabilities approximates their fair value due to their short-term nature. At December 31, 1998, the fair market value of the Company's long-term debt was estimated to be $307.0 million and $202.0 million for the senior credit facility and subordinated debt, respectively. At December 31, 1999, the fair market value of the Company's long-term debt was estimated to be $149.8 million and $191.5 million for the senior credit facility and subordinated debt, respectively. 13. Significant Customer and Export Sales Sales to various agencies of the U.S. Government aggregated $625.5 million, $203.1 million, $968.3 million and $995.0 million during the nine months ended September 30, 1997, the three months ended December 31, 1997, and the years ended December 31, 1998 and 1999, respectively. At December 31, 1998 and 1999, trade accounts receivable from the U.S. Government totaled $50.8 million and $29.8 million, respectively. Iron Horse Investors, L.L.C Notes to Consolidated Financial Statements (continued) Export sales, including sales to foreign governments transacted through the U.S. Government, were $264.5 million, $89.1 million, $230.3 million and $218.6 million during the nine months ended September 30, 1997, the three months ended December 31, 1997, the years ended December 31, 1998 and 1999, respectively. 14. Related Party Transactions Through September 30, 1997, UDLP contracted with FMC for various administrative and support services. These services included computer services, systems and programming, data communications, employee relocation support, payroll processing, insurance and general management support. During the nine months ended September 30, 1997, UDLP paid $22.3 million to FMC for their support. UDLP also leased office and manufacturing facilities in San Jose, California from FMC. Under the lease agreement monthly rent payments were comprised of fixed base rent plus depreciation on the facilities. During the nine months ended September 30, 1997, UDLP incurred rent amounting to $2.6 million under this lease. Upon the acquisition of UDLP by the Company in 1997, Carlyle was paid $4.5 million, which was included in the transaction costs for advisory services related to the placement of the Senior and Senior Subordinated financing. Additionally, during 1998 Carlyle provided consulting assistance in development of management operating policies and procedures, for which the Company incurred a charge to operations of $2.0 million. The management agreement between the Company and Carlyle requires an annual fee of $2.0 million for various management services. During the three months ended December 31, 1997 and the years ended December 31, 1998 and 1999, the Company recorded $0.5 million, $2.0 million and $2.0 million, respectively, of charges relating to these services. 15. Restructuring During the third quarter of 1998, the Company approved a restructuring plan designed to rationalize production and lower costs at the Armament Systems Division's Fridley, Minnesota facility. The plan calls for shifting a significant portion of production and final assembly to other Company sites and outsourcing certain other operations. In 1998 the Company recorded a charge of $36.2 million for estimated employee termination expenses, acceleration of recognition for benefit costs that were curtailed, and charges for impaired assets. This charge will not significantly impact operating funds as it mostly represents either asset write-offs or costs that will be provided for out of an overfunded pension plan. There were no adjustments to the recorded provisions during 1999. Remaining accrued expenses are $ 1.6 million at December Iron Horse Investors, L.L.C Notes to Consolidated Financial Statements (continued) 31, 1999. The Company anticipates the restructuring activity will be complete in the third quarter 2000 with the final relocation of production to another site. 16. Employees' Thrift Plan Substantially all of the Company's employees are eligible to participate in defined contribution savings plans designed to comply with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and Section 401(k) of the Internal Revenue Code. Charges against income for matching contributions to the plans were $7.1 million, $1.4 million, $8.1 million, and $8.1 million, in the nine months ended September 30, 1997, the three months ended December 31, 1997, and the years ended December 31, 1998 and 1999, respectively. Report of Ernst & Young LLP, Independent Auditors Board of Directors United Defense Industries, Inc. We have audited the accompanying consolidated balance sheets of United Defense Industries, Inc. (a wholly owned subsidiary of Iron Horse Investors, L.L.C.) and subsidiaries as of December 31, 1998 and 1999 and the related consolidated statements of operations, stockholders' equity, and cash flows for the three months ended December 31, 1997 and the years ended December 31, 1998 and 1999. We have also audited the consolidated statements of operations, partners' capital, and cash flows of United Defense, L.P. (predecessor) and subsidiaries for the nine months ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Defense Industries, Inc. and subsidiaries at December 31, 1998 and 1999 and the consolidated results of their operations and their cash flows for the three months ended December 31, 1997 and the years ended December 31, 1998 and 1999, and the consolidated results of operations and cash flows of United Defense, L.P. and subsidiaries for the nine months ended September 30, 1997, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP January 31, 2000 Washington D.C. United Defense Industries, Inc. Consolidated Balance Sheets (In thousands)
Assets December 31, 1998 December 31, 1999 ------------------------------------------------ Current assets: Cash and marketable securities $85,520 $94,325 Trade receivables 64,395 57,198 Inventories 254,343 254,750 Other current assets 4,255 4,056 ------------------------------------------------ Total current assets 408,513 410,329 Property, plant and equipment, net 122,721 84,693 Intangible assets, net 330,024 254,276 Prepaid pension and postretirement cost 123,912 119,883 Other assets 4,571 4,817 ------------------------------------------------ Total assets $989,741 $873,998 ================================================ Liabilities and Equity Current liabilities: Current portion of long-term debt $16,643 $23,086 Accounts payable, trade and other 88,497 64,639 Advanced payments 258,395 303,065 Accrued and other liabilities 75,832 91,340 ------------------------------------------------ Total current liabilities 439,367 482,130 Long-term liabilities net of current portion: Accrued pension and postretirement cost 14,610 5,075 Long-term debt 490,343 326,757 Other liabilities 22,630 35,675 ------------------------------------------------ Total liabilities 966,950 849,637 Commitments and contingencies (Notes 8 & 9) Stockholders' Equity: Common Stock $.01 par value, 20,000,000 authorized; 18,039,624 and 18,042,524 issued and outstanding at December 31, 1998 and 1999 180 180 Additional paid-in-capital 180,216 180,245 Stockholders' loans (1,339) (1,339) Retained deficit (156,266) (154,725) ------------------------------------------------ Total stockholders' equity 22,791 24,361 ------------------------------------------------ Total liabilities and stockholders' equity $989,741 $873,998 ================================================
See accompanying notes. United Defense Industries, Inc. Consolidated Statements of Operations (In thousands)
Nine months || Three months Year Year ended || ended ended ended September 30, || December 31, December 31, December 31, 1997 || 1997 1998 1999 -------------------||----------------------------------------------------------- || Revenue: || Sales $913,925 || $342,627 $1,217,555 $1,213,526 || Costs and expenses: || Cost of sales 754,977 || 324,123 1,099,291 991,907 Selling, general and || administrative expenses 91,413 || 34,947 177,449 167,877 Research and development 12,096 || 4,558 13,021 12,782 -------------------||----------------------------------------------------------- Total expenses 858,486 || 363,628 1,289,761 1,172,566 || Earnings related to investments || in foreign affiliates 13,521 || 432 6,208 533 -------------------||----------------------------------------------------------- Income(loss) from operations 68,960 || (20,569) (65,998) 41,493 || Other income (expense): || Interest income 1,456 || - 1,396 1,820 Interest expense - || (15,622) (52,155) (38,835) Miscellaneous, net - || (68) - - -------------------||----------------------------------------------------------- Total other income (expense) 1,456 || (15,690) (50,759) (37,015) -------------------||----------------------------------------------------------- || Income(loss) before income taxes 70,416 || (36,259) (116,757) 4,478 || Provision for income taxes 1,523 || - 3,250 2,937 -------------------||----------------------------------------------------------- || Net income(loss) $68,893 || ($36,259) ($120,007) $1,541 ================================================================================
See accompanying notes. United Defense Industries, Inc. Consolidated Statements of Partners' Capital and Stockholders' Equity (In thousands)
Additional Partners' Common Paid-In Retained Stockholders' (Predecessor) Capital Stock Capital Deficit Loans Total -------------------------------------------------------------------------------------- Balance, January 1,1997 $ 179,638 $ - $ - $ - $ - $ 179,638 Distributions (114,409) - - - - (114,409) Liabilities transferred from FMC (3,120) - - - - (3,120) Net income for the nine months ended September 30, 1997 68,893 - - - - 68,893 -------------------------------------------------------------------------------------- Balance, September 30, 1997 $131,002 $ - $ - $ - $ - $ 131,002 ====================================================================================== ====================================================================================== Balance, October 1, 1997 $ - $ - $ - $ - $ - $ - Issuance of common stock - 173 172,827 - - 173,000 Net loss for the three months ended December 31, 1997 - - - (36,259) - (36,259) -------------------------------------------------------------------------------------- Balance, December 31, 1997 - 173 172,827 (36,259) - 136,741 Issuance of Common Stock - 7 7,389 - (1,339) 6,057 Net loss for the year ended December 31, 1998 - - - (120,007) - (120,007) -------------------------------------------------------------------------------------- Balance, December 31, 1998 - 180 180,216 (156,266) ($1,339) 22,791 Issuance of common stock - - 29 - - 29 Net income for the year ended December 31, 1999 - - - 1,541 - 1,541 -------------------------------------------------------------------------------------- Balance, December 31, 1999 $ - $ 180 $ 180,245 ($ 154,725) ($1,339) $ 24,361 ======================================================================================
See accompanying notes. United Defense Industries, Inc. Consolidated Statements of Cash Flows (In thousands)
Nine months || Three months Year Year ended || ended ended ended September 30, || December 31, December 31, December 31, 1997 || 1997 1998 1999 ---------------||--------------------------------------------- || Operating activities || Net income (loss) $ 68,893 || ($36,259) ($120,007) $ 1,541 Adjustments to reconcile net income (loss) to cash || provided by operating activities: || Depreciation 19,331 || 20,660 83,153 55,528 Amortization 9,673 || 16,263 94,806 80,317 Other (4,039) || 9,001 5,291 1,123 Changes in assets and liabilities: || Trade receivables 7,600 || (13,335) 30,452 7,197 Inventories 15,546 || 92,875 76,030 (407) Other assets (745) || (2,187) 1,636 474 Prepaid pension and postretirement benefit cost (8,783) || (2,736) 15,519 4,029 Accounts payable, trade and other (14,585) || 17,639 (5,144) (23,858) Advanced payments 15,082 || (12,671) (3,006) 44,670 Accrued and other liabilities 11,626 || (16,717) 14,360 28,554 Accrued pension and postretirement benefit cost 3,181 || (475) 4,212 (9,535) ---------------||--------------------------------------------- Cash provided by operating activities 122,780 || 72,058 197,302 189,633 ---------------||--------------------------------------------- || Investing activities || Capital spending (23,722) || (15,893) (24,020) (25,246) Disposal of property, plant and equipment 6,938 || 3,170 7,298 1,532 Short term investment with FMC Corporation 19,497 || - - - Purchase of business (net of $11,107 cash acquired) - || (838,893) - - Adjustment to purchase price of business - || - 16,074 - ---------------||--------------------------------------------- Cash provided by (used in) investing activities 2,713 || (851,616) (648) (23,714) ---------------||--------------------------------------------- || Financing activities || Partner distributions (114,409) || - - - Payments on long-term debt - || (47,200) (152,814) (157,143) Payments for financing and transaction costs - || (28,726) - - Proceeds from issuance of long-term debt - || 707,000 - - Proceeds from sale of common stock by subsidiary - || 173,000 6,057 29 ---------------||--------------------------------------------- Cash (used in) provided by financing activities (114,409) || 804,074 (146,757) (157,114) ---------------||--------------------------------------------- || Increase in cash and marketable securities 11,084 || 24,516 49,897 8,805 Cash and marketable securities, beginning of period 23 || 11,107 35,623 85,520 ---------------||--------------------------------------------- Cash and marketable securities, end of period $ 11,107 || $ 35,623 $ 85,520 $ 94,325 ==============================================================
See accompanying notes. United Defense Industries, Inc. Notes to Consolidated Financial Statements 1. Basis of Presentation United Defense Industries, Inc. (the "Company") is a subsidiary of Iron Horse Investors, L.L.C. ("Iron Horse") and is organized under the laws of the state of Delaware and was formed for the primary purpose of facilitating the acquisition of United Defense, L.P. ("UDLP") by Iron Horse. Iron Horse is owned by an investment group led by the Carlyle Group ("Carlyle"). On October 6, 1997, the Company acquired 100% of the partnership interests of UDLP from FMC Corporation ("FMC") and Harsco Corporation ("Harsco") (the "Sellers"). As a result of adjustments to the carrying value of assets and liabilities pursuant to this transaction (see Note 3), the financial position and results of operations for periods subsequent to the acquisition are not comparable to UDLP amounts. The Company designs, develops and manufactures various tracked armored combat vehicles and a wide spectrum of weapons delivery systems for the armed forces of the United States and nations around the world. The financial statements include the accounts of the Company and its subsidiaries. Prior to the acquisition, the financial statements include the accounts of UDLP and its subsidiaries. Intercompany accounts and transactions are eliminated in consolidation. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, in particular, estimates of contract cost and revenues used in the earnings recognition process. Actual results could differ from those estimates. Cash and Marketable Securities Cash and marketable securities consist of investments with initial maturities of three months or less. United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation is provided principally on the sum-of-the-years digits and straight-line methods over estimated useful lives of the assets (land improvements--twenty years; buildings--twenty to thirty-five years; and machinery and equipment--two to twelve years). Maintenance and repairs are expensed as incurred. Expenditures that extend the useful life of property, plant and equipment or increase its productivity are capitalized and depreciated. Long-lived Assets, Including Intangible Assets and Goodwill The Company evaluates on a quarterly basis its long-lived assets to be held and used, including certain identifiable intangible assets and goodwill, to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company bases its evaluation on such impairment indicators as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, the Company would use an estimate of the undiscounted value of expected future operating cash flows to determine whether the asset is recoverable and measure the amount of the impairment based on the difference between the carrying amount of the asset and its estimated fair value. Investments in Affiliated Companies The Company's investment in a majority owned foreign joint venture in Turkey is carried at cost since there is uncertainty regarding the ability to control the venture or to repatriate earnings. Income is recognized as dividends are received. Dividends received net of amounts accrued for taxes and future obligations were $5.3 million for the nine months ended September 30, 1997, $0 for the three months ended December 31, 1997, and $4.6 million for the year ended December 31, 1998. A provision of $1.1 million was recorded for the year ended December 31, 1999. The Company's investment in a foreign joint venture in Saudi Arabia is accounted for by using the equity method. Equity in earnings from this investment was $8.2 million for the nine months ended September 30, 1997, $0.4 million for the three months ended December 31, 1997, $1.6 million for the year ended December 31, 1998, and $1.6 million for the year ended December 31, 1999. United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) Advanced Payments Advanced payments by customers for deposits on orders not yet billed and progress payments on contracts-in-progress are recorded as current liabilities. Revenue and Profit Recognition for Contracts-in-Progress The Company recognizes sales on most production contracts as deliveries are made or accepted. Gross margin on sales is based on the estimated margin to be realized over the life of the related contract. Sales under cost reimbursement contracts for research, engineering, prototypes, repair and maintenance and certain other contracts are recorded when funded, as costs are incurred and include estimated fees in the proportion that costs incurred to date bear to total estimated costs. Changes in estimates for sales and profits are recognized in the period in which they are determinable using the cumulative catch-up method. Claims are considered in the estimated contract performance at such time as realization is probable. Any anticipated losses on contracts (i.e., cost of sales exceeds sales) are charged to operations as soon as they are determinable. Gross profit for the nine months ended September 30, 1997 includes approximately $13.5 million of noncash charges for changes in estimated contract profitability related to contractual issues with customers and other matters resulting from the periodic reassessment of the estimated profitability of contracts in progress. Stock-Based Compensation Provided the option price is not less than fair value of the common stock at the date an option is granted, the Company records no compensation expense in its consolidated statements of operations. See Note 10 for the pro forma effect on operating results had the Company recorded compensation expense for the fair value of stock options. Income Taxes As a limited partnership, income earned by UDLP passed to its partners and was taxable at that level, except for taxes payable on the income of UDLP's Foreign Sales Corporation ("FSC") subsidiary. As a corporation, the Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws expected to be effective when these differences reverse. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. 3. Business Purchase On October 5, 1997, the Company acquired 100% of the partnership interests of UDLP and certain other related business assets of FMC. The purchase price including expenses was $864 million after an adjustment of $16 million agreed to during 1998. The Company financed the acquisition through a cash equity investment of $173 million and debt (see Note 8). The acquisition was accounted for using the purchase method of accounting. The excess purchase price over the book value of the net assets acquired in the amount of $733 million was allocated to inventory; property, plant and equipment; other tangible assets; and intangible assets based on management's estimate of their fair values. The excess purchase price over the fair value of the net assets acquired was allocated to goodwill. 4. Inventories The majority of the Company's inventories are recorded at cost determined on a LIFO basis. Inventory costs include manufacturing overhead. The current replacement cost of LIFO inventories exceeded their recorded values by approximately $5.2 million at December 31, 1998 and December 31, 1999. United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) 5. Property, Plant and Equipment Property, plant and equipment consist of the following (in thousands):
December 31 1998 1999 -------------------------------- Buildings $ 38,213 $ 39,978 Machinery and equipment 160,788 166,257 Land and improvements 7,802 8,126 Construction in progress 7,500 7,754 -------------------------------- 214,303 222,115 Less: accumulated depreciation (91,582) (137,422) -------------------------------- Net property, plant and equipment $122,721 $ 84,693 ================================
6. Intangible Assets Intangible assets consist of the following (in thousands):
December 31 1998 1999 ------------------------------- Software and other intangibles $ 75,200 $ 92,119 Firm business and ongoing programs 225,103 225,103 Goodwill 125,130 124,339 -------------------------------- 425,433 441,561 Less: accumulated amortization (95,409) (187,285) -------------------------------- Net intangible assets $330,024 $ 254,276 ===============================
The Company's software and other intangibles are being amortized over their estimated useful lives on a straight-line basis over three to five years or using other methods based on revenues of related contracts or programs. The excess of purchase cost over the fair value of the net assets acquired (goodwill) that resulted from the application of purchase accounting for the acquisition of UDLP is being amortized over thirty years. United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) 7. Pensions and Other Postretirement Benefits Substantially all of the Company's domestic employees are covered by retirement plans. Plans covering salaried employees provide pension benefits based on years of service and compensation. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. The Company's funding policy is to make contributions based on the projected unit credit method and to limit contributions to amounts that are currently deductible for tax purposes. Substantially all of the Company's employees are also covered by postretirement health care and life insurance benefit programs. Employees generally become eligible to receive benefits under these plans after they retire when they meet minimum retirement age and service requirements. The cost of providing most of these benefits is shared with retirees. The Company has reserved the right to change or eliminate these benefit plans. United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) The change in benefit obligation and plan assets of the plans and prepaid or accrued pension and postretirement costs recognized in the balance sheets at December 31, 1998 and 1999 are as follows (in thousands):
Pension Benefits Postretirement Benefits 1998 1999 1998 1999 ------------------------------------------------------------------------------ Change in benefit obligation Benefit obligation at beginning of year $348,199 $442,651 $ 52,992 $54,795 Service cost 11,751 13,747 1,382 1,489 Interest cost 27,017 27,982 3,515 3,420 Net benefits paid, including settlements (22,289) (25,174) (4,330) (5,594) Actuarial (gain) loss 61,576 (38,130) 1,236 (4,923) Plan amendments - 1,238 - - Special termination benefits and curtailments 16,397 - - - ------------------------------------------------------------------------------ Benefit obligation at end of year 442,651 422,314 54,795 49,187 Change in plan assets Fair value of plan assets at beginning of year 480,522 548,003 49,702 60,412 Assets transferred from Sellers 4,469 - - - Actual return on plan assets 82,668 13,874 12,830 (6,558) Employer contributions 2,633 1,066 2,210 3,568 Net benefits paid, including settlements (22,289) (25,174) (4,330) (5,594) ------------------------------------------------------------------------------ Fair value of plan assets at end of year 548,003 537,769 60,412 51,828 ------------------------------------------------------------------------------ Funded status 105,352 115,455 5,617 2,641 Unrecognized actuarial (gain) loss 1,626 (6,012) (7,420) (1,514) Unrecognized prior service cost 4,127 4,238 - - ------------------------------------------------------------------------------ Net amount recognized $111,105 $113,681 $(1,803) $ 1,127 ============================================================================== Amounts recognized in the consolidated balance sheet consist of: Prepaid pension and postretirement benefit cost $123,912 $118,756 $ - $ 1,127 Accrued pension and postretirement benefit cost (12,807) (5,075) (1,803) - ------------------------------------------------------------------------------ Net amount recognized $111,105 $113,681 $(1,803) $ 1,127 ===========================================================================
United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) The following table summarizes the assumptions used in the determination of net pension and postretirement benefit costs and benefit obligations for the nine months ended September 30, 1997, the three months ended December 31, 1997, and the years ended December 31, 1998 and 1999:
Nine months Three months Year Year ended ended ended Ended September 30, December 31, December 31, December 31, 1997 1997 1998 1999 ------------------------------------------------------------------------------------ Weighted-average assumptions Discount rate 8.00% 7.00% 6.50% 7.50% Expected return on plan assets 9.62% 9.00% 9.00% 9.00% Rate of compensation increase 5.00% 4.00% 3.50% 5.00%
The following tables show the components of the net periodic benefit cost (in thousands):
Pension Benefits ---------------- Nine months || Three months Year Year ended || ended ended ended September 30, || December 31, December 31, December 31, 1997 || 1997 1998 1999 --------------------||--------------------------------------------------------- || Service cost $ 7,286 || $ 3,275 $ 11,751 $ 13,747 Interest cost 16,309 || 5,941 27,017 27,982 Expected return on plan assets (27,721) || (10,512) (43,080) (45,213) Net amortization and recognized losses 1,172 || - 703 1,324 Special termination benefits and || curtailments 3,992 || - 27,500 650 --------------------||--------------------------------------------------------- Net periodic benefit cost (income) $ 1,038 || $ (1,296) $ 23,891 $ (1,510) ===============================================================================
United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued)
Postretirement Benefits ------------------------ Nine months || Three months Year Year ended || ended ended ended September 30, || December 31, December 31, December 31, 1997 || 1997 1998 1999 ----------------||------------------------------------------------------ || Service cost $ 901 || $ 300 $ 1,382 $ 1,489 Interest cost 2,985 || 898 3,515 3,420 Expected return on plan assets (2,761) || (1,076) (4,422) (4,797) Net amortization and recognized losses (1,043) || - - - ----------------||------------------------------------------------------ Net periodic benefit cost $ 82 || $ 122 $ 475 $ 112 ========================================================================
Pension special termination benefits and curtailments cost relates to various early retirement incentive and involuntary workforce reduction programs related to the Company's downsizing and consolidation of operations. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plan with accumulated benefit obligations in excess of plan assets were $6.7 million, $3.2 million and zero, respectively, at December 31, 1999 and $234.9 million, $187.4 million and $206.3 million, respectively, at December 31, 1998. For measurement purposes, a 5% annual rate of increase in the per capita cost of covered health care benefits is assumed for 2000. The rate is assumed to decrease gradually to 4% for 2002 and remain at that level thereafter. Assumed health care cost trend rates have an effect on the amounts reported for the postretirement health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1% Increase 1% Decrease ----------- ----------- Effect on total of service and interest cost components $ 224 $ (178) Effect on the postretirement benefit obligation $ 1,679 $ (1,378)
United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) 8. Long-term Debt Borrowings under long-term debt arrangements are as follows:
December 31 1998 1999 -------------------------------- Senior credit facility $ 306,986 $ 149,843 Senior subordinated notes 200,000 200,000 -------------------------------- 506,986 349,843 Less: current portion 16,643 23,086 -------------------------------- $ 490,343 $ 326,757 ================================
Senior Credit Facility In October 1997, the Company entered into a senior credit facility that included $495 million of term loan facilities and a $230 million revolving credit facility. Outstanding borrowings on the term loan were $306,986 and $149,843 at December 31, 1998 and 1999, respectively. The term loan facilities bear interest at variable rates with a weighted average rate of 6.75% and 8.82% at December 31, 1998 and 1999, respectively. These loans are due through 2006 and provide for quarterly principal payments. The revolving credit facility provides for loans and letters of credit and matures in 2003. The Company has outstanding letters of credit under the facility of $101 million at December 31, 1999. There was $129 million available under the revolving credit facility at December 31, 1999. The Company is obligated to pay a fee of 0.25% on the unused revolving credit facility. Amounts outstanding under the senior credit facility are secured by a lien on all the assets of the Company and its domestic subsidiaries and by a pledge of all the stock of the Company and its domestic subsidiaries and two-thirds of the stock of certain of the Company's foreign subsidiaries and joint ventures. Mandatory prepayments and reductions of outstanding principal amounts are required upon the occurrence of certain events. The senior credit facility contains customary covenants restricting the incurrence of debt, encumbrances on and sales of assets, limitations on mergers and certain acquisitions, limitations on changes in control, provision for the maintenance of certain financial ratios, and various other financial covenants and restrictions. United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) Senior Subordinated Notes In October 1997, the Company issued $200 million of senior subordinated notes. The senior subordinated notes are unsecured, bear interest at 8.75% payable semiannually, and mature in 2007. The payment of principal and interest is subordinated in right of payment to all senior debt. The subordinated notes are not redeemable other than in connection with a public equity offering or a change in control prior to November 2002, at which time the notes may be redeemed at a premium, initially at 104.375% of the principal amount. The subordinated notes have customary covenants for subordinated debt facilities including the right to require repurchase upon a change in control, restrictions on payment of dividends, and restrictions on the acquisition of equity interests by the Company. Annual Maturities Annual maturities of long-term debt are as follows (in thousands): Year ended December 31, ---------------------- 2000 $ 23,086 2001 23,086 2002 23,086 2003 23,085 2004 - Thereafter 257,500 ---------- Total $ 349,843 ========== Cash paid for interest was $2.9 million for the three months ended December 31, 1997, $45.4 million for the year ended December 31, 1998 and $36.2 million for the year ended December 31, 1999. 9. Commitments and Contingencies Operating Leases The Company leases office space, plants and facilities, and various types of manufacturing, data processing and transportation equipment. Rent expense for the nine months ended September 30, 1997, the three months ended December 31, 1997, and the years ended December 31, 1998 and 1999 was $11.7 million, $6.4 million, $13.5 million and $12.4 million, United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) respectively. Minimum future rentals under noncancellable leases are estimated to be $11.4 million in 2000, $11.1 million in 2001, $10.5 million in 2002, $10.3 million in 2003, $9.5 million in 2004 and $9.7 million thereafter. Legal Proceedings Alliant Techsystems, Inc. ("Alliant"), a subcontractor to the Company in connection with the M109A6 Paladin howitzer prime contract, filed a lawsuit against the Company and its prior owners in Minnesota state court. The lawsuit arose out of a U.S. Army-directed termination for convenience in 1996 of certain subcontract work under the program which, until the time of termination, had been performed by Alliant and was thereafter replaced by a subcontract which the Company awarded to another contractor, Sechan Electronics. The lawsuit has been dismissed in response to pretrial motions by the Company. Management does not believe that any appeal by Alliant of the dismissals would succeed, or that, even in the case of a successful appeal, Alliant's suit would have a material adverse effect on the Company. The Company and its prior owners are also the defendants in a so-called qui tam case filed under the U.S. Civil False Claims Act (the "FCA") by one present and one former employee of the Company's Armament Systems Division in Fridley, Minnesota, U.S. ex rel. Shukla v. United Defense L.P., et al. The FCA, among ------------------------------------------------- other things, permits private parties to seek, on behalf of the U.S. Government, recovery of amounts which under certain circumstances have been improperly claimed from the government by its contractors. Beyond recovery of the Government's actual damages, the FCA also authorizes the recovery of multiple penalties, and provides as well that the private plaintiffs may personally receive 15-30% of any recovery obtained. The case primarily alleges that the Company improperly obtained payment under various government contracts by supplying components which did not comply with applicable technical specifications. The Department of Justice has declined to intervene in the case. The Company has filed an answer denying the material allegations in the case. Management does not believe the outcome of this case will have a material adverse effect on the Company. The Company is also subject to other claims and lawsuits arising in the ordinary course of business. Management believes that the outcome of any such proceedings to which the Company is party will not have a material adverse effect on the Company. Environmental Matters The Company spends certain amounts annually to maintain compliance with environmental laws and to remediate contamination. Operating and maintenance costs associated with environmental compliance and prevention of contamination at the Company's United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) facilities are a normal, recurring part of operations, are not significant relative to total operating costs or cash flows, and are generally allowable as contract costs under the Company's contracts with the U.S. government (Allowable Costs). As with compliance costs, a significant portion of the Company's expenditures for remediation at its facilities consists of Allowable Costs. Management believes that it has sufficient reserves to cover remediation costs that are not allowable costs under its U.S. government contracts (Non-Allowable Costs). In addition, pursuant to the terms of the acquisition of UDLP, the Sellers are required to reimburse the Company for 75% of certain remediation costs relating to operations prior to the acquisition that are Non-Allowable Costs. The Company has reflected a liability for the gross amount of environmental remediation costs which it expects to be liable for after giving effect to reimbursement under government contracts. The Company has recorded an asset for the amounts expected to be reimbursed by the Sellers under the terms of the acquisition agreement. Turkey Joint Venture Offset Reserves The Company's joint venture in Turkey is required by agreement with its customer to achieve a significant level of export sales by October 2002 to meet the "offset" requirements of the contract or pay a penalty of 9% of the unpaid offset obligations. Such payment could be as high as $37 million if no additional offset sales are completed. Production from a potential award which would approximately halve the remaining liability is currently being pursued. There can be no assurance that the joint venture will be able to complete this potential sale, otherwise fulfill its offset obligations or renegotiate an acceptable alternative. The Company has established reserves for its share of the potential "offset" obligation at December 31, 1999. 10. Stockholders' Equity Common Stock Options During 1998, the Company adopted the 1998 Stock Option Plan (the "Option Plan") under which 1,500,000 shares of common stock were reserved for issuance at December 31, 1998. The options generally vest over a period of 10 years; however, vesting may be accelerated over 5 years if certain targets related to earnings and cash flow are met. United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) Common stock options activity is as follows: Year ended December 31, 1999 ----------------- Options granted during 1998 and outstanding at December 31, 1998 1,436,000 Options granted 31,000 Options canceled 6,200 Options exercised 2,900 ----------------- Options outstanding at December 31, 1999 1,457,900 ================= Options exercisable December 31, 1999 418,425 ================= Options were granted at $10 per share during the year ended December 31, 1998 and had an estimated grant date fair value of $4.51 per option. Options granted in 1999 were at $20 per share and had an estimated grant date fair value of $9.56 per option. The weighted-average exercise price and weighted-average remaining contractual life of the stock options outstanding at December 31, 1999 was $10.40 and nine years, respectively. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under the plan consistent with the methodology prescribed under Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation, the Company's net loss in 1998 would have increased by approximately $560,000, and the net income in 1999 would have decreased by approximately $1,459,000. The effect of applying SFAS No. 123 on the net income (loss) as stated above is not necessarily representative of the effects on reported net income (loss) for future years due to, among other things, (1) the vesting period of the stock options and (2) additional stock options that may be granted in future years. The fair value of each option grant is estimated on the date of grant using the minimum value model with the following assumptions used for grants in 1998 and 1999: dividend yield of 0%; risk-free interest rate of 6% and 6.5%; and expected life of the option term of 10 years. Employee Stock Purchase Plan Under an Employee Stock Purchase Plan (the "ESPP"), certain employees are provided the opportunity to purchase shares of the Company's common stock at its estimated fair value. Certain of these purchases were eligible for financing provided by the Company. Related loans including interest at 7.5%, are due in five years. During 1998, 739,624 shares were sold at a price of $10 per share. United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) 11. Income Taxes The provision for income taxes for the nine months ended September 30, 1997 and the year ended December 31, 1998 was solely for federal income taxes payable by the Company's Foreign Sales Corporation ("FSC") subsidiary. The FSC paid income taxes amounting to $1.1 million, $3.3 million, and $1.7 million during the nine months ended September 30, 1997, and the years ended December 31, 1998 and 1999, respectively. For the year ended December 31, 1999, the provision for income taxes also includes alternative minimum tax currently payable by the Company of $1.2 million. The components of the net deferred tax asset are as follows (in thousands):
December 31 1998 1999 ------------------- Deferred tax assets: Accrued expenses $ 42,224 $ 43,113 Net operating loss carryforwards 111,110 88,093 Depreciation 22,496 13,701 Other - 2,954 ------------------- 175,830 147,861 Deferred tax liabilities: Intangibles, accrued compensation, and benefits (109,634) (84,994) Other (1,799) - ------------------- (111,433) (84,994) Net deferred tax asset 64,397 62,867 Valuation allowance (64,397) (62,867) ------------------- Net deferred taxes on balance sheet $ - $ - ===================
The net deferred tax asset at December 31, 1998 and 1999 has been offset by a valuation allowance. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible and subject to any limitations applied to the use of carryforward tax attributes. United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) The Company has approximately $220 million in net operating loss carryforwards which expire at varying dates through 2018. 12. Fair Value of Financial Instruments To reduce the impact of changes in interest rates on its floating rate debt, the Company entered into a three-year interest rate swap agreement that expires in October 2000 for a notional amount of $160 million. A swap agreement is a contract to exchange floating rate interest payments for fixed rate payments periodically over the term of the agreement without the exchange of the underlying notional amount. The notional amount is used to measure the interest to be paid or received and does not represent the amount of exposure to credit loss. The agreement entitles the Company to pay a base interest rate amount of 5.75%, in return for the right to receive a floating interest rate which is based on the three-month LIBOR as of the quarterly measurement date. In the event the three-month LIBOR at the measurement date exceeds 6.99% the base interest rate is adjusted to the then effective LIBOR up to a maximum rate of 9%. The net cash amounts paid or received on the agreement are accrued and recognized as an adjustment to interest expense. The fair value of interest rate instruments are the estimated amounts the Company would have to pay to terminate the agreement, taking into account the current interest rates and the creditworthiness of the parties to the agreement. At December 31, 1999, the termination value of the swap (i.e., the fair value) was $.7 million in favor of the Company. The carrying amount of the Company's financial instruments included in current assets and current liabilities approximates their fair value due to their short-term nature. At December 31, 1998, the fair market value of the Company's long-term debt was estimated to be $307.0 million and $202.0 million for the senior credit facility and subordinated debt, respectively. At December 31, 1999, the fair market value of the Company's long-term debt was estimated to be $149.8 million and $191.5 million for the senior credit facility and subordinated debt, respectively. 13. Significant Customer and Export Sales Sales to various agencies of the U.S. Government aggregated $625.5 million, $203.1 million, $968.3 million and $995.0 million during the nine months ended September 30, 1997, the three months ended December 31, 1997, and the years ended December 31, 1998 and 1999, respectively. United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) At December 31, 1998 and 1999, trade accounts receivable from the U.S. Government totaled $50.8 million and $29.8 million, respectively. Export sales, including sales to foreign governments transacted through the U.S. Government, were $264.5 million, $89.1 million, $230.3 million and $218.6 million during the nine months ended September 30, 1997, the three months ended December 31, 1997, the years ended December 31, 1998 and 1999, respectively. 14. Related Party Transactions Through September 30, 1997, UDLP contracted with FMC for various administrative and support services. These services included computer services, systems and programming, data communications, employee relocation support, payroll processing, insurance and general management support. During the nine months ended September 30, 1997, UDLP paid $22.3 million to FMC for their support. UDLP also leased office and manufacturing facilities in San Jose, California from FMC. Under the lease agreement monthly rent payments were comprised of fixed base rent plus depreciation on the facilities. During the nine months ended September 30, 1997, UDLP incurred rent amounting to $2.6 million under this lease. Upon the acquisition of UDLP by the Company in 1997, Carlyle was paid $4.5 million, which was included in the transaction costs for advisory services related to the placement of the Senior and Senior Subordinated financing. Additionally, during 1998 Carlyle provided consulting assistance in development of management operating policies and procedures, for which the Company incurred a charge to operations of $2.0 million. The management agreement between the Company and Carlyle requires an annual fee of $2.0 million for various management services. During the three months ended December 31, 1997 and the years ended December 31, 1998 and 1999, the Company recorded $0.5 million, $2.0 million and $2.0 million, respectively, of charges relating to these services. 15. Restructuring During the third quarter of 1998, the Company approved a restructuring plan designed to rationalize production and lower costs at the Armament Systems Division's Fridley, Minnesota facility. The plan calls for shifting a significant portion of production and final assembly to other Company sites and outsourcing certain other operations. In 1998 the Company recorded a charge of $36.2 million for estimated employee termination expenses, acceleration of recognition for benefit costs that were curtailed, and charges for impaired assets. This charge will not United Defense Industries, Inc. Notes to Consolidated Financial Statements (continued) significantly impact operating funds as it mostly represents either asset write- offs or costs that will be provided for out of an overfunded pension plan. There were no adjustments to the recorded provisions during 1999. Remaining accrued expenses are $ 1.6 million at December 31, 1999. The Company anticipates the restructuring activity will be complete in the third quarter 2000 with the final relocation of production to another site. 16. Employees' Thrift Plan Substantially all of the Company's employees are eligible to participate in defined contribution savings plans designed to comply with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and Section 401(k) of the Internal Revenue Code. Charges against income for matching contributions to the plans were $7.1 million, $1.4 million, $8.1 million, and $8.1 million, in the nine months ended September 30, 1997, the three months ended December 31, 1997, and the years ended December 31, 1998 and 1999, respectively. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. ITEM 10: Directors and Executive Officers The following table sets forth certain information with respect to the members of the Board of Directors and the executive officers of the Company. Executive officers of the Company are chosen by the Board of Directors and serve at its discretion. The Board of Directors maintains an Executive Committee, a Compensation Committee, and an Audit and Ethics Committee. Bill Conway and Allan Holt serve as President and Chairman, respectively, of Iron Horse; and Peter Clare, Daniel D'Aniello and David Rubenstein each serve as Vice Presidents of Iron Horse. Messrs. D'Aniello and Rubenstein have been Managing Directors of The Carlyle Group for the past six years. Officers of Iron Horse receive no compensation for their position.
Years Name/1/ Position Age with Co./2/ - --------------------------------------------------------------------------------------------------------------------------- William E. Conway, Jr. Chairman 50 ------ - --------------------------------------------------------------------------------------------------------------------------- Frank C. Carlucci Director 69 ------ - --------------------------------------------------------------------------------------------------------------------------- Peter J. Clare Director 34 ------ - --------------------------------------------------------------------------------------------------------------------------- Allan M. Holt Director 48 ------ - --------------------------------------------------------------------------------------------------------------------------- Robert M. Kimmitt Director 52 ------ - --------------------------------------------------------------------------------------------------------------------------- J.H. Binford Peay, III Director 59 ------ - --------------------------------------------------------------------------------------------------------------------------- John M. Shalikashvili Director 63 ------ - --------------------------------------------------------------------------------------------------------------------------- Thomas W. Rabaut Director, President, Chief Executive Officer 51 22 - --------------------------------------------------------------------------------------------------------------------------- Francis Raborn Director, Vice President & Chief Financial Officer 56 22 - --------------------------------------------------------------------------------------------------------------------------- David V. Kolovat Vice President, General Counsel & Secretary 55 11 - --------------------------------------------------------------------------------------------------------------------------- Arthur L. Roberts Vice President, General Manager-International Division 59 32 - --------------------------------------------------------------------------------------------------------------------------- Frederick M. Strader Vice President, General Manager-Armament Systems Div. 47 19 - --------------------------------------------------------------------------------------------------------------------------- Dennis A. Wagner, III Vice President, Business Development & Marketing 49 18 - --------------------------------------------------------------------------------------------------------------------------- Peter C. Woglom Vice President, General Manager-Ground Systems Division 55 26 - ---------------------------------------------------------------------------------------------------------------------------
William E. Conway, Jr. was elected as a Director of the Company in 1997. He has been a Managing Director of The Carlyle Group, a Washington, DC-based global investment firm, since 1987. Mr. Conway was Senior Vice President and Chief Financial Officer of MCI Communications Corporation from 1984 until 1987, and was a Vice President and Treasurer of MCI from 1981 to 1984. Mr. Conway presently serves on the Board of Directors of Nextel Communications, Inc., Global Crossing Ltd., and several privately held companies. Frank C. Carlucci was elected as a Director of the Company in 1997. He is Chairman of The Carlyle Group, a Washington, DC-based global investment firm. Prior to joining The Carlyle Group in 1989, Mr. Carlucci served as Secretary of Defense from 1987-1989. Previously, he had served as President Reagan's National Security Advisor in 1987. Mr. Carlucci serves on the following boards: Ashland, Inc.; IRI International Corporation; Kaman Corporation; Neurogen Corporation; Nortel Networks; The Quaker Oats Company; SunResorts, Ltd., NV; Texas Biotechnology Corporation; Pharmacia & Upjohn, Inc., Westinghouse Electric Corporation; and the Board of Trustees for the RAND Corporation and the Advisory Committee of East New York Savings Bank. ________________________ /1/ Prior to the Acquisition, Allan M. Holt was the sole director and President of the Company. Other directors and officers listed above were elected following the Acquisition. /2/ Includes the Company and its predecessors. Peter J. Clare was elected as a Director of the Company in 1997. He is currently a Managing Director with The Carlyle Group, a Washington, DC-based global investment firm, which he joined in 1992. Mr. Clare was previously with First City Capital, a private investment group. From 1987 to 1989, he worked in the mergers and acquisitions and merchant banking groups at Prudential-Bache. Mr. Clare currently serves on the boards of several privately-held companies. Allan M. Holt Was elected as a Director of the Company in 1997. He is a Managing Director of The Carlyle Group, a Washington, DC-based global investment firm, which he joined in 1991. Mr. Holt was previously with Avenir Group, a private investment and advisory group, and from 1984 to 1987 was Director of Planning and Budgets at MCI Communications Corporation, which he joined in 1982. Mr. Holt currently serves on the boards of several privately-held companies. Robert M. Kimmitt was elected as a Director of the Company in 1998. He was named Vice Chairman and Chief Operating Officer of Commerce One, Inc., an e-commerce company headquartered in Walnut Creek, California in February 2000. Previously, he was a partner in the law firm of Wilmer, Cutler and Pickering from 1997 to 2000 and currrently serves as counsel to the firm. From 1993 to 1997 he was a Managing Director of Lehman Brothers. Mr. Kimmitt served as American Ambassador to Germany from 1991 to 1993. Previously, he has served as Under Secretary for Political Affairs, General Counsel to the Treasury Department, and a member of the National Security Council Staff. Mr. Kimmitt serves on the boards of Allianz Life Insurance Company of North America, Big Flower Holdings, Inc., Mannesmann AG and Siemans AG, as well as numerous non-profit boards. J. H. Binford Peay, III was elected as a Director of the Company in 1997. General Peay is a career U.S. Army officer who attained the rank of General and retired from the Army on October 1, 1997. He is the former Commander-In-Chief of the U.S. Central Command (1994-1997), and also served as Vice Chief of Staff, United States Army (1993-1994). Prior to serving as Vice Chief of Staff, he was Deputy Chief of Staff for Operations and Plans, Department of the Army and Senior Army Member, U.S. Military Committee, United Nations in Washington, DC (1991-1993), and was Commanding General, 101/st/ Airborne Division (Air Assault) at Ft. Campbell, Kentucky (1989 to 1991). General Peay serves as a Director of MPRI, Trustee of George C. Marshall Foundation and a Trustee of Virginia Military Institute Foundation. John M. Shalikashvili was elected as Director of the Company in June 1998. He currently is a visiting professor to the Center for International Security at Stanford University. Previously, General Shalikashvili was a career U.S. Army officer who attained the rank of General and retired from the Army in September 1997. He was appointed the 13/th/ Chairman of the Joints Chiefs of Staff on October 25, 1993. Prior major commands were Supreme Allied Commander, Europe (SACEUR) and Commander-In-Chief, United States European Command, Commander Operation PROVIDE COMFORT (the relief operation that returned hundreds of thousands of Kurdish refugees to Northern Iraq), Deputy Commander-In-Chief, United States Army, Europe and Seventh Army, and Commander of the 9/th/ Infantry Division (Motorized). The General was born in Warsaw, Poland on June 27, 1936. General Shalikashvili serves on the board of L3 Communications Corporation, the Frank Russell Trust Company, and Plug Power, Inc. Thomas W. Rabaut has been President and Chief Executive Officer of UDLP since its formation in 1994. Before joining UDLP, Mr. Rabaut worked at FMC since 1977 and held several executive positions, including General Manager of FMC's Steel Products Division from 1986 to 1988, Operations Director and then Vice President and General Manager of FMC's Ground Systems Division from 1988 to 1993, and General Manager of FMC's Defense Systems Group, overseeing operations in the U.S., Turkey, Pakistan, and Saudi Arabia for U.S. and allied armies, navies, and marines from 1993 to 1994. In 1994, he was also elected Vice President of FMC. Mr. Rabaut graduated from the U.S. Military Academy at West Point and from the Harvard Business School. Francis Raborn was elected as a Director of the Company in 1997. He has been Vice President and Chief Financial Officer of UDLP since its formation in 1994, with responsibility for financial, contract, administrative and government compliance matters. Mr. Raborn joined FMC in 1977, and held a variety of financial and accounting positions, including Controller of FMC's Defense Systems Group from 1985 to 1993, and Controller of FMC's Special Products Group from 1979 to 1985. Mr. Raborn received a B.S. in Economics from the University of Pennsylvania's Wharton School and an MBA from UCLA. David V. Kolovat has been Vice President and General Counsel of UDLP since its formation in 1994. He has also served as FMC's Associate General Counsel in charge of defense business legal work from 1988 until consummation of the Acquisition. Mr. Kolovat served as Vice President and General Counsel of Premisys, Inc., from 1986 to 1988, during which Premisys was acquired by Pacific Telesis Corporation, and from 1984 to 1986 as Vice President and General Counsel of Robot Defense Systems, Inc. Mr. Kolovat received his undergraduate degree from the University of Iowa, and his law degree from Stanford Law School. Arthur L. Roberts has been Vice President and General Manager-International Division of UDLP since its formation in 1994. His responsibilities include management of joint ventures in Turkey and Saudi Arabia and development of new co-production programs. Prior to joining UDLP, Mr. Roberts was General Manager of FMC's Defense Systems International Division since 1993. Mr. Roberts held a number of positions at FMC since 1967, including management of the Turkey joint venture program from its initial proposal in 1988 through 1992. Mr. Roberts holds a Bachelor's Degree in Mechanical Engineering from Yale University and an MBA from Harvard Business School. Frederick M. Strader has been Vice President and General Manager-Armament Systems Division of UDLP since May 1994. Prior to joining UDLP, Mr. Strader was Division Manager of FMC's Agricultural Machinery Division from October 1992 to May 1994, and Manager of FMC's Strategic Planning Group from September 1991 to October 1992. Prior thereto, he held a number of operations, planning and financial positions at the Steel Products Division of FMC. Mr. Strader received his BA Degree from Ripon College and his MBA Degree from the Wharton School at the University of Pennsylvania. Dennis A. Wagner, III has been Vice President, Business Development and Marketing of UDLP since its formation in 1994 with responsibility for the development and coordination of world-wide strategies for the design, manufacture, and sale of combat vehicles. Mr. Wagner joined FMC's Defense Systems Group in 1982 and held a number of marketing and management positions, including Division General Manager of FMC's Steel Products Division from 1989 to 1994 and Program Director for the M113 family of vehicles from 1987 to 1989. Mr. Wagner received a BS in General Engineering from the U.S. Military Academy and an MBA in Finance from the University of Detroit. Peter C. Woglom has been Vice President and General Manager-Ground Systems Division of UDLP since 1994. Prior thereto, he held a number of line and executive positions at FMC after joining FMC in 1973, including Vice President and General Manager of FMC's Ground Systems Division from 1993 to 1994, and Vice President and Director, Business Strategies and Initiatives for FMC's Defense Systems Group from 1990 to 1993. Mr. Woglom received BSCE and Master of Engineering Degrees from Cornell University and an MBA from the University of Pittsburgh. ITEM 11: Executive Compensation The following table sets forth information with respect to the compensation paid by the Company for services rendered for the years ended December 31, 1999, 1998 and 1997 to the Chief Executive Officer and to each of the four other most highly compensated executive officers of the Company (the "Named Executive Officers").
Summary Compensation Table -------------------------- Annual Compensation Long-Term Compensation --------------------------------------- ---------------------------------------------- Awards Payouts ----------------------- ------------------- Other Restricted Securities All Other Name and Annual Stock Underlying LTIP Compen- Principal Salary Bonus Compen- Award(s) Options Payouts sation Position Year ($) ($) sation ($)/1/ ($)/2/ (#) ($) ($)/3/ - --------------------- ------- -------- ------- -------------- ----------- ---------- --------- ---------- Thomas W. Rabaut 1999 364,167 421,341 0 0 0 0 40,094 President & CEO 1998 363,197 393,082 0 0 200,000 0 0 1997 311,238 436,213 0 0 0 0 0 Peter C. Woglom 1999 245,587 237,728 0 0 0 0 20,895 Vice President, 1998 250,525 239,922 0 0 100,000 0 0 General Manager - 1997 226,578 139,028 0 0 0 0 0 Ground Systems Francis Raborn 1999 210,600 206,177 0 0 0 0 20,161 Vice President & 1998 216,354 211,083 0 0 100,000 0 0 CFO 1997 163,120 123,237 0 0 0 0 0 Frederick M. Strader 1999 198,749 158,721 0 0 0 0 22,137 Vice President, 1998 213,456 168,420 0 0 100,000 0 0 General Manager - 1997 183,708 245,195 0 0 0 0 0 Armament Systems David V. Kolovat 1999 203,562 134,839 0 0 0 0 13,732 Vice President 1998 201,225 133,291 0 0 60,000 0 0 General Counsel 1997 194,548 159,088 0 0 0 0 0 And Secretary
______________________ /1/ Amounts of less than $50,000 or 10% of the Named Executive Officer's compensation are excluded. /2/ There are no Company Restricted Stock Awards. /3/ Includes matching contributions under the Company's 401(k) Plan for salaried employees for 1999. Directors Compensation - ---------------------- The three outside directors (Messrs. Peay, Kimmitt and Shalikashvili) are paid annual retainers of $25,000 for all services rendered. There are no other fees paid for attendance at meetings, etc. These three directors may elect to receive their annual retainer in cash, options to purchase Company stock, or a combination. The Company does not maintain a medical, dental, or retirement benefits plan for these directors. The remaining directors are employed either by The Carlyle Group or the Company, and are not separately compensated for their service as directors. Compensation Committee Interlocks and Insider Participation - ----------------------------------------------------------- The Compensation Committee of the Board of Directors is a standing committee charged with the responsibilities, subject to full Board approval, of establishing, periodically re-evaluating and (as appropriate) adjusting, and administering policies concerning compensation of management personnel, including the CEO and all of the Company's other executive officers. The Compensation Committee was established in 1998 and Messrs. Peay and Clare serve on the Committee. Mr. Clare is a member of The Carlyle Group, which is the majority stockholder of the Company. By virtue of his position as President and Chief Executive Officer, Mr. Rabaut has been invited to attend all meetings of the Committee, but he is not a voting member. Retirement Plan - --------------- Each Named Executive Officer is covered under the UDLP Salaried Employees' Retirement Plan (the "Pension Plan") and the UDLP Excess Pension Plan (the "Excess Plan") described below. The following table shows the estimated annual pension benefits under such plans for the specified compensation and years of service. A portion of the retirement benefits for service prior to 1986, computed under the Pension Plan, is payable from annuity contracts maintained by Aetna Life Insurance Company.
Pension Plan Table ------------------ Estimated Annual Retirement Benefits For years of Service Indicated ----------------------------------------------------------------------------------------------------------- Final Average Earnings 15 Years 20 Years 25 Years 30 Years 35 Years - --------------- ---------------- ----------------- ---------------- ----------------- ----------------- $150,000 $ 31,270 $ 41,693 $ 52,117 $ 62,540 $ 72,963 250,000 53,770 71,693 89,617 107,540 125,463 350,000 76,270 101,693 127,117 152,540 177,963 450,000 98,770 131,693 164,617 197,540 230,463 550,000 121,270 161,693 202,117 242,540 282,963 650,000 143,770 191,693 239,617 287,540 335,463 900,000 200,020 266,693 333,367 400,040 466,713
Compensation included in the final average earnings for the pension benefit computation includes base annual salary and annual bonuses, but excludes payments for most other compensation. Unreduced retirement pension benefits are calculated pursuant to the Pension Plan's benefit formula as an individual life annuity payable at age 65. Benefits may also be payable as a joint and survivor annuity or a level income option. Final average earnings in the above table means the average of covered remuneration for the highest 60 consecutive calendar months out of the 120 calendar months immediately preceding retirement. Benefits applicable to a number of years of service or final average earnings different from those in the above table are equal to the sum of (A) 1 percent of allowable Social Security Covered Compensation ($33,066) for a participant retiring at age 65 in 1999 times years of credited service and (B) 1.5 percent of the difference between final average earnings and allowable Social Security Covered Compensation times years of credited service. ERISA limits the annual benefits that may be paid from a tax-qualified retirement plan. Accordingly, as permitted by ERISA, the Company has adopted the excess plan to maintain total benefits upon retirement at the levels shown in the table. Messrs. Rabaut, Woglom, Strader, Raborn and Kolovat currently have 22, 26, 19, 22 and 11 years of service under the Pension Plan, respectively. The Company also maintains the Supplemental Thrift and Savings Plan designed to provide select employees a benefit equal to the benefit the participant would receive under the 401(k) plan if the Code and such plan did not require the exclusion of compensation above a certain level. All Named Executive Officers are eligible to participate in the Supplemental Thrift and Savings Plan. Severance Arrangements - ---------------------- In 1999, the Company entered into executive compensation agreements with certain management employees, including each Named Executive Officer. These agreements generally provide that in the event the executive's employment is terminated by the company other than for "cause" or by the executive with "good reason" (each as defined therein), including an Acquisition or Merger, the executive will be entitled to (i) a payment equal to a multiple (ranging from one to three) of the executive's base pay and target bonus; (ii) Company-paid outplacement services; and (iii) the right to continue to participate in the Company's health, life and accidental death and dismemberment and long-term disability benefits plan for one year to three years at the rates in effect for active employees. The Company also maintains a severance plan that generally covers most salaried and non-union hourly employees, and provides severance payments in the event of the employee's involuntary termination of employment due to a reduction in force. Severance payments are calculated as a percentage (up to 100% maximum) of base pay. Stock Option Plan - ----------------- The Company adopted an option plan for key employees (including the Named Executive Officers) of the Company, pursuant to which options to purchase an aggregate of approximately 8% of the Company's fully-diluted common stock at the Closing Date were granted, subject to vesting requirements based on performance and/or length of service after the options were granted. None of the Named Executive Officers received option grants in 1999. AGGREGATED OPTIONS EXERCISED IN 1999 ------------------------------------ Shown below is information with respect to options to purchase the Company's common stock awarded to the Named Executive Officers and the value and number of unexercised options held at December 31, 1999 by such Named Executive Officers.
Aggregated Options Exercised in 1999 And Option Values at 12/31/99 - ------------------------------------------------------------------------------------------------------------------- | Shares Number of Securities | Acquired on Value Underlying Unexercised | Value of Unexercised Name Exercise Realized Options | Options * - -------------- -------------- -------- -----------------------------------|------------------------------ | Exercisable Unexercisable | Exercisable Unexercisable ----------- ------------- | ----------- ------------- | TW Rabaut 0 0 50,000 150,000 | $500,000 $1,500,000 | PC Woglom 0 0 30,000 70,000 | $300,000 $ 700,000 | FM Strader 0 0 30,000 70,000 | $300,000 $ 700,000 | F Raborn 0 0 30,000 70,000 | $300,000 $ 700,000 | DV Kolovat 0 0 18,000 42,000 | $180,000 $ 420,000
* The value of the unexercised options is based on an internal valuation prepared by the Company in 1999 of $20 per share. Item 12: Principal Stockholders The following table sets forth certain information regarding the beneficial ownership of the common stock of the Company by each person known by the Company to be the owner of 5% or more of the common stock of the Company, by each person who is a Director or Named Executive Officer of the Company and by all Directors and Executive Officers of the Company as a group: Percentage of All Beneficial Owner/(1)/ Number of Outstanding Shares Shares TCG Holdings, L.L.C. /(2)(3)/ 17,300,000 96% William E. Conway, Jr. (3)(5) 100,000 * Allan M. Holt (3)(5) 25,000 * Peter J. Clare (3)(5) 20,000 * Frank C. Carlucci (3)(5) 20,000 * Robert M. Kimmitt (4 5,000 * J. H. Binford Peay, III (4) 0 * John M. Shalikashvili (4) 0 * Thomas W. Rabaut (4) 10,000 * Francis Raborn (4) 75,000 * David V. Kolovat (4) 31,428 * Arthur L. Roberts (4) 34,000 * Frederick M. Strader (4) 20,000 * Dennis A. Wagner, III (4) 5,000 * Peter C. Woglom (4) 10,000 * All Directors and Executive Officers as a Group (14) 355,428 2% _____________________________ (1) Beneficial ownership is determined in accordance with the rules of the SEC. Except as otherwise indicated, each beneficial owner has the sole power to vote, as applicable, and to dispose of all Units owned by such beneficial owner. (2) Carlyle Partners II, L.P., a Delaware limited partnership, Carlyle Partners III, L.P., a Delaware limited partnership, Carlyle International Partners II, L.P., a Cayman Islands limited partnership, Carlyle International Partners III, L.P., a Cayman Islands limited partnership, and certain additional partnerships formed by Carlyle (collectively, the "Investment Partnerships") and certain investors with respect to which TC Group, L.L.C. or an affiliate exercises investment discretion and management constitute all of the members of Iron Horse. TC Group, L.L.C. is the sole general partner of the Investment Partnerships, and TCG Holdings, L.L.C., a Delaware limited liability company, is the sole managing member of TC Group, L.L.C. William E. Conway, Jr., Daniel A.D'Aniello, and David M. Rubenstein, as the managing members of TCG Holdings, L.L.C. may be deemed to share beneficial ownership of the shares shown as beneficially owned by TCG Holdings, L.L.C. Such persons disclaim such beneficial ownership. (3) The address of such person is c/o The Carlyle Group, 1001 Pennsylvania Avenue, NW, Washington, DC 20004. (4) The address of such person is c/o United Defense Industries, Inc., 1525 Wilson Boulevard, Suite 700, Arlington, Virginia 22209-2411. (5) Individual also owns an interest in Iron Horse through Carlyle - UDLP Partners, L.P. *Denotes less than 1% beneficial ownership. ITEM 13. Certain Transactions Concurrently with the closing of the acquisition, the Company entered into a management agreement (the "Management Agreement") with TCG Holdings, L.L.C. (or another affiliate of Carlyle) for certain management and financial advisory services and oversight to be provided to the Company and its subsidiaries. The Management Agreement provides for the payment to Carlyle of an annual management fee of $2.0 million. ITEM 14. Exhibits and Financial Data Schedule (a) The index of the financial statements has been included with Item 8. (b) Reports on Form 8-K filed in the fourth quarter of 1999 None. (c) Index of Exhibits. See below. (d) Financial Statement Schedules. None required. EXHIBIT INDEX Exhibit Description ----------- Number - ----- +2.1 Purchase Agreement dated as of August 25, 1997 among FMC Corporation, Harsco Corporation, Harsco UDLP Corporation and Iron Horse Acquisition Corp. (a copy of the schedules to this agreement will be furnished supplementally upon request of the Commission). ++2.2 Supplemental Agreement No. 1 to Purchase Agreement dated as of August 25, 1997 among FMC Corporation, Harsco Corporation, Harsco UDLP Corporation and Iron Horse Acquisition Corp. +3.1a Certificate of Incorporation of Iron Horse Acquisition Corp. (n/k/a) United Defense Industries, Inc. +3.1b Certificate of Amendment of Certificate of Incorporation Before Payment of Any Part of the Capital of Iron Horse Acquisition Corp. (n/k/a United Defense Industries, Inc.) +3.1c Certificate of Amendment of the Certificate of Incorporation of United Defense Industries, Inc. ++++3.1d Certificate of Amendment of the Certificate of Incorporation of United Defense Industries, Inc. +3.2 By-laws of United Defense Industries, Inc. +3.3 Certificate of Incorporation of UDLP Holdings Corp. +3.4 By-laws of UDLP Holdings Corp. +3.5 Amended and Restated Agreement of Limited Partnership of United Defense, L.P. +3.6 Certificate of Amendment to Certificate of Limited Partnership of United Defense, L.P. +3.7 Certificate of Formation of Iron Horse Investors, L.L.C. +3.8 Limited Liability Company Agreement of Iron Horse Investors, L.L.C. +4.1 Indenture dated as of October 6, 1997 among United Defense Industries, Inc., United Defense, L.P., UDLP Holdings Corp. and Norwest Bank Minnesota, National Association +4.2 Specimen Certificate of 8 3/4% Senior Subordinated Notes due 2007 (included in Exhibit 4.1 hereto) +4.3 Purchase Agreement dated October 1, 1997 among United Defense Industries, Inc., UDLP Holdings Corp., Iron Horse Investors, L.L.C., United Defense, L.P., Lehman Brothers Inc., BT Alex. Brown Incorporated and Chase Securities Inc. +4.4 Registration Rights Agreement dated as of October 6, 1997 among United Defense Industries, Inc., United Defense, L.P., UDLP Holdings Corp., Iron Horse Investors, L.L.C., Lehman Brothers Inc., BT Alex. Brown Incorporated and Chase Securities Inc. ++4.5 Credit Agreement dated as of October 6, 1997 among Iron Horse Investors, L.L.C., United Defense Industries, Inc., various lending institutions party thereto, Citicorp USA, Inc. and Lehman Commercial Paper Inc. as Documentation Agents, and Bankers Trust Company as Administrative Agent and as Syndication Agent ++++4.7 Form of Stockholders Agreement, by and among Iron Horse Investors, L.L.C., United Defense Industries, Inc. and each other holder of Common Stock. ++++4.8 Stockholders Agreement, dated as of July 22, 1998, by and between Iron Horse Investors, L.L.C., United Defense Industries, Inc., the UDLP Non-Qualified Trust and United Defense, L.P. ++++4.9 UDLP Amended and Restated Supplemental Retirement and Savings Plan. (1) ++++4.10 United Defense Stock Option Plan. (1) ++++4.11 Form of Option Contract. (1) ++++4.12 United Defense Industries, Inc. Equity Purchase Plan. (1) ++10.1 Lease Agreement dated as of June 1, 1994 among Calhoun Economic Development Council and United Defense, L.P. *10.2 Facilities use agreement number M67004-99-C0022 dated April 12, 1999 among United Defense, L.P. and the Marine Corps Logistics Base, Albany, Georgia for the use of the government owned property located at Building 1121, Bay 4 and rail sidings, and associated maintenance service agreement. ++10.3 Sub-Lease Agreement among the Louisville/Jefferson County Development Authority, Inc. and United Defense, L.P., as amended by that certain First Amendment to Sublease of Real and Personal Property Agreement among the Louisville/Jefferson County Development Authority, Inc. and United Defense, L.P. ++10.4 Facilities contract number N00024-93-E-8521, dated November 16, 1992 among United Defense, L.P., Armament Systems Divisions and the U.S. Government Naval Sea Systems Command for the use of the government owned facility located at 4800 East River Road, Minneapolis, MN 55459. ++10.5 Lease Agreement dated January 22, 1996 among Lewis F. Holmes III and United Defense, L.P. ++10.6 Lease Agreement dated November 1, 1993 among Brier Hill Steel Company, Inc. and Harsco Corporation, as amended by that certain Lease Novation Agreement among Harsco Corporation, Brier Hill Steel Company, Inc. and United Defense, L.P. and by that certain Lease Modification dated June 17, 1996 among United Defense, L.P. and Brier Hill Steel Company, Inc. *10.7 Lease Agreements dated April 1999 among ATP Associates L.P. and United Defense L.P. (Buildings A and C). +10.11 Transition Services Agreement dated as of October 6, 1997 among FMC Corporation, United Defense, L.P. and United Defense Industries, Inc. +10.12 Technology and Environmental Services Agreement dated as of October 6, 1997 among FMC Corporation and United Defense Industries, Inc. +10.13 Amended and Restated Lease Agreement dated as of October 6, 1997 among FMC Corporation and United Defense, L.P. +10.14 Amended and Restated Harsco Intellectual Property Agreement dated as of October 6, 1997 among Harsco Corporation and United Defense, L.P. +10.15 Amended and Restated FMC Intellectual Property Agreement dated as of October 6, 1997 among FMC Corporation and United Defense, L.P. +10.16 Management Agreement dated October 6, 1997 among United Defense Industries, Inc., United Defense, L.P. and TC Group Management, L.L.C. +++10.17 Professional Service Agreement with J.H. Binford Peay, III. +++10.18 Professional Service Agreement with John M. Shalikashvili. +++++10.19 Professional Service Agreement with Robert M. Kimmitt. **10.20 Executive Compensation Agreement with Thomas W. Rabaut. **10.22 Executive Compensation Agreement with Frederick M. Strader. **10.23 Executive Compensation Agreement with Peter C. Woglom. **10.24 Executive Compensation Agreement with David V. Kolovat. **10.25 Executive Compensation Agreement with Francis Raborn. **10.26 Executive Compensation Agreement with Dennis A. Wagner, III. *21.1 Subsidiaries of United Defense Industries, Inc. *23.1 Consent of Ernst & Young LLP, Independent Auditors *27.1 Financial Data Schedule * Filed herewith. ** Incorporated by reference to the identical exhibit number in the Company's Report on Form 10-Q for the quarter ended June 30, 1999 + Incorporated by reference to the identical exhibit number in the Company's Registration Statement on Form S-4 (333-43619) filed with the Securities and Exchange Commission on December 22, 1997. ++ Incorporated by reference to the identical exhibit number in the Company's Amendment No. 1 to Form S-4 (333-43619) filed with the Securities and Exchange Commission February 6, 1998. +++ Incorporated by reference to exhibits to the Company's Report on Form 10-Q for the quarter ended June 30, 1998. ++++ Incorporated by reference to the identical exhibit number in the Company's Registration Statement on Form S-8 (333-60207) filed with the Securities and Exchange Commission on July 30, 1998. +++++ Incorporated by reference to the identical exhibit number in the Company's Report on Form 10-K for the year ended December 31, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant and each Co-Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. By: /s/ Francis Raborn ------------------ Francis Raborn Chief Financial Officer and Principal Financial and Accounting Officer of the Registrant and each Co-Registrant Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and each Co-Registrant in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ Thomas W. Rabaut President, Chief Executive February 18, 2000 -------------------- Thomas W. Rabaut Officer and Director of United Defense Industries, Inc. ("UDI") and UDLP Holdings Corp. (for UDLP Holdings Corp. itself and as the corporate general partner of United Defense, L.P.) /s/ Francis Raborn Director of UDI and UDLP February 18, 2000 ------------------- Francis Raborn Holdings Corp. (for UDLP Holdings Corp. itself and as the corporate general partner of United Defense, L.P.) /s/ William E. Conway, Jr. Chairman of the Board of UDI February 18, 2000 -------------------------- William E. Conway, Jr. /s/ Frank C. Carlucci Director of UDI February 18, 2000 ---------------------- Frank C. Carlucci /s/ Peter J. Clare Director of UDI February 18, 2000 ------------------- Peter J. Clare /s/ Allan M. Holt Director of UDI and Chairman February 18, 2000 ------------------ Allan M. Holt of Iron Horse Investors, L.L.C. /s/ Robert M. Kimmitt Director of UDI February 18, 2000 ---------------------- Robert M. Kimmitt
/s/ John M. Shalikashvili Director of UDI February 18, 2000 --------------------------- John M. Shalikashvili /s/ J. H. Binford Peay, III Director of UDI February 18, 2000 --------------------------- J.H. Binford Peay, III /s/ David V. Kolovat Director of UDLP February 18, 2000 -------------------- David V. Kolovat Holdings Corp. (for UDLP Holdings Corp. itself and as the corporate general partner of United Defense, L.P.) /s/ Robert N. Sankovich Director of UDLP February 18, 2000 ----------------------- Robert N. Sankovich Holdings Corp. (for UDLP Holdings Corp. itself and as the corporate general partner of United Defense, L.P.)
EX-10.2(A) 2 FACILITIES USE AGREEMENT Exhibit 10.2(a) FACILITIES USE AGREEMENT This Facilities Use Agreement Number M67004-99-C-0022, (the "Agreement") is made and entered into as of this 12th day of April, 1999 by and between the Marine Corps Logistics Base, Albany, Georgia (the "Government") and United Defense LP (the "Contractor") (hereinafter collectively referred to as the "Parties"). RECITALS WHEREAS, the Government is the owner of certain real property located in the County of Dougherty, State of Georgia, more particularly described in Schedule A, attached hereto and incorporated herein by reference (the "Property"): and WHEREAS, the Government desires to provide the Property to the Contractor, and the Contractor desires to use the Property for the purpose of performing services for the Government in connection with the Amphibious Assault Vehicle (AAV) Reliability, Maintainability, Sustainability/Rebuild to Standard program; and WHEREAS, providing the Property will facilitate the Government's procurement of essential services and promote the national defense; and WHEREAS, providing the Property will support the Government's industrial preparedness programs and is in the public interest, NOW THEREFORE, in consideration of the mutual promises and conditions set forth herein, the Government and the Contractor hereby agree as follows: I. PROVISION OF PROPERTY --------------------- A. Provision. The Government hereby provides the Property to the --------- Contractor and the Contractor hereby agrees to use the Property in accordance with the terms and conditions set forth in this Agreement. B. Use of Property. The Contractor is authorized to occupy and use the --------------- Property in performance of the requirements in Contract M67854-98-C- 2075, which was awarded by the Marine Corps Systems Command (the Contract"), and for such other uses as authorized by the Government. C. Term, Option to Extend, and Termination. Notwithstanding any provision --------------------------------------- to the contrary herein or in the FAR, the term of this Agreement shall be for a period commencing on the date first written above and ending on 31 December 2002. However, the parties hereto may by mutual written agreement, extend the use of the Property under this Agreement beyond 31 December 2002 to permit completion of the contract or subsequent related contracts. Furthermore, notwithstanding the Government's absolute right to terminate this Agreement at any time, the Government will, to the extent practicable, provide the Contractor with 180 days advance written notice prior to terminating this Agreement. D. Rent. As provided in FAR 52.245-9(a), the Contractor shall have no ---- obligation to pay any rent to the Government provided the Contractor only performs work under the Contract. E. Annual Review. The Parties agree that they will periodically review ------------- this Agreement (but not less than annually) to ensure that it continues to meet their respective needs. II. SPECIAL PROVISIONS. ------------------ A. Reasonable Access for Contractor. The Government agrees to permit the -------------------------------- Contractor reasonable access to the Property and to place no unreasonable encumbrance upon the free use and enjoyment of the Property by the contractor's personnel, authorized visitors, or any other individuals having a reasonable need to enter the Property. B. Provision of Utilities and Support Services. The Government shall make ------------------------------------------- available to the Contractor, on a reimbursable basis, the following utilities and services in connection with the Contractor's use of the Property, and the Parties hereto shall enter into a separate agreement concerning the Government's provision of such utilities and services and the Contractor's payment therefor. Water Electricity Sewage Natural Gas Miscellaneous Maintenance Entomology Services Building Maintenance Refuse Collection Emergency Ambulance Service Hazardous Waste Disposal In addition to the foregoing, the Government shall make available to the Contractor, at no cost, the following services in connection with the Contractor's use of the property: Security Fire Protection Safety Intra-base Mail Guard Service (Gate) C. Parking. The Government agrees to provide the Contractor with ten ------- parking spaces adjacent to the Property as indicated in Schedule B. In addition, the Government will provide the Contractor with access to additional parking in close proximity to the Property. D. Installations, Arrangements, Rearrangements, Modifications and -------------------------------------------------------------- Construction. The Contractor may, at its own expense, construct or ------------ install any fixed improvements, structural alterations or modifications, or install such capital equipment on the Property as may be necessary to perform its obligations under the Contract. This shall include, but is not limited to, bringing utilities to the Property and providing for the separate metering thereof, making architectural/ structural, mechanical, electrical, or other renovations or alterations to the Property; and, making improvements (including stabilization and drainage) to any open storage areas. The Parties acknowledge and understand, however, that at the expiration or earlier termination of this Agreement, the Contractor may remove any capital equipment that it provided and installed on the Property to perform its obligations under the Contract. However, if the Contractor removes any such capital equipment then the Contractor agrees to restore that portion of the Property vacated by said equipment to a condition such that the Property may once again be used for its original purpose as a storage warehouse. E. Periodic Inspections. The Government reserves the right to perform -------------------- periodic preventive maintenance, fire protection and other inspections of the Property. This shall include, but not be limited to, the Government's right to perform environmental compliance and explosive safety inspections. F. Contracting Officer's Representative. The Contracting Officer shall ------------------------------------ designate in writing a Contracting Officer's Representative (hereinafter "COR") to insure that the Parties comply with the terms and conditions of this Agreement. G. Condition of Property. The Government makes no warranty, express or --------------------- implied, regarding the condition or fitness for use of the Property. H. Compliance with Laws. -------------------- 1. General. The Contractor, at its own expense, shall conduct its ------- activities on the Property in compliance with all applicable laws, regulations, rules, orders, decrees, permits and agreements, including without limitation those promulgated by the Department of Defense or any division or related agency thereof, and including without limitation those which relate to health, safety, environmental protection, waste disposal, and water and air quality with respect to the use of the Property and the rights granted hereunder (all of which are hereinafter referred to as the "Requirements"). Further, the Contractor shall conduct its activities in compliance with all requirements to which the Government may be subject with respect to the Property. The Parties agree that to the extent existing Requirements are changed or new Requirements are imposed during the term of this Agreement, both parties retain the right to seek an equitable adjustment or other appropriate change under the Contract as may be permitted by law. 2. Cooperation in Obtaining Permits. The Contractor shall, at its -------------------------------- own expense, obtain any and all permits, licenses, and other authorizing documents as may be necessary for the use and possession of the Property, provided the Government cooperates with and gives its best efforts to the Contractor to the extent reasonably necessary for the contractor to obtain such permits, licenses, and other authorizing documents. Hazardous waste may be disposed of under MCLB Albany's Environmental Protection Agency identification number on a reimbursable basis. 3. Government Disapproval of Contractor Actions. If the Government -------------------------------------------- fails to reasonably approve or allow any action that the Contractor has identified as reasonably required to meet its obligations under this section then the Contractor shall be relieved of its obligations pursuant to this section for such action and any resulting conditions arising from the failure to take such action. I. Environmental Investigation and Remediation. ------------------------------------------- 1. Potential for Contamination and Intent to Apportion Liability. ------------------------------------------------------------- The Parties acknowledge that environmental contamination may currently exist on the Property and they hereby express their mutual intent that the purpose of this section is to determine, to the extent possible, the source(s) of any such contamination. Specifically, while the Contractor has agreed herein to comply with all applicable laws, the Parties agree that it is not their intent to require the Contractor to clean up or otherwise remediate any contamination which may exist on or in the vicinity of the Property as of the effective date of this Agreement. 2. Contractor Responsibilities. The Contractor shall be responsible --------------------------- for addressing and correcting (to the extent required by applicable laws and regulations) any environmental pollution, contamination and/or damage to the Property occurring after the effective date of this Agreement and resulting from the Contractor's use and/or possession of the Property on or after the effective date of this Agreement, regardless of whether (a) such pollution, contamination or damage is discovered before or after the expiration or termination of this Agreement, or (b) corrective or response actions continue or are required to begin after the expiration or termination of this Agreement. The Contractor's obligations pursuant to this paragraph do not extend to any acts of the United States or its agents. The Contractor is not an agent of the United States for purposes of this exclusion. 3. Environmental Baseline Surveys (EBS). The Government has, at its ------------------------------------ own expense, conducted an initial EBS that is appended to this Agreement and incorporated herein as Schedule C. The Parties acknowledge that this EBS accurately describes the environmental condition of the Property as of the effective date of this Agreement. At the conclusion of this Agreement, the Governmental shall promptly, but no later than six months, conduct another EBS at its own expense to determine the environmental condition of the Property at the time the Contractor vacates the Property. A copy of this final EBS will be furnished to the Contractor upon completion of the survey. 4. Reservation of Rights. Notwithstanding any other provision of --------------------- this Agreement, the Contractor and the Government hereby reserve any and all rights and defenses available under law or any other contract between the Parties that may apply to any liability to a third party, including without limitation other federal, state or local governmental agencies, relating to or arising from environmental conditions existing on, emanating from, or relating to the Property on the effective date of this Agreement. Nothing in this Agreement shall be construed to abrogate any such rights and defenses. J. Environmental Indemnification. As of the effective date of this ----------------------------- Agreement, the Contractor shall indemnify, defend and hold the Government harmless against any and all claims, demands, judgments, administrative actions, enforcement actions and lawsuits against the Government alleging environmental pollution, contamination, damage to property, personal injury or death and/or violation of any environmental, health or safety law, regulation, permit, order, decree or agreement resulting from, or attributable to, the actions or omissions of the Contractor, its employees, agents, subcontractors and suppliers, during all periods of time that the Contractor has the use or possession of the property. The Contractor's obligation pursuant to this section shall continue regardless of whether such allegations are made before or after the expiration or termination of this Agreement. The Contractor's obligations pursuant to this section do not extend to acts of the United States or its agents. The Contractor is not an agent of the United States for purposes of this exclusion. The contractor shall be relieved of its obligations pursuant to this section for any conditions arising from environmental compliance or remediation activities which the Contractor has proposed to undertake and the Government has unreasonably disapproved or disallowed to be taken on the Property. K. Indemnification for Third Party Non-Environmental Claims. As of the -------------------------------------------------------- effective date of this Agreement, the contractor shall indemnify, defend and hold the Government harmless against all claims for personal injury or death to any and all persons and for damage to property of the Contractor or any and all other persons arising from the Contractor's use or possession of this Property, provided that indemnification for all claims involving environmental pollution or contamination shall be governed by the section of this Agreement titled "Environmental Indemnification." III. MISCELLANEOUS PROVISIONS. ------------------------ A. Headings. The section headings of this Agreement are inserted for -------- reference purposes only and do not affect the terms and provisions hereof. B. Industrial Mobilization. The Property shall not be subject to or be ----------------------- made part of any industrial mobilization requirements planning unless otherwise agreed to in writing by the Parties. C. Notices. Except as otherwise provided in this Agreement, any notice ------- required or permitted to be given hereunder shall be delivered personally or sent by mail with postage prepaid to the following addresses or to such other places as may be designated by the Parties from time to time. For the Contractor: For the Government: Contracting Officer (Code 891) Marine Corps Logistics Bases P.O. Drawer 43019 Albany, Georgia 31704 D. Incorporation by Reference of FAR and DFARS Contract Clauses. This ------------------------------------------------------------ Agreement incorporates the following FAR and DFARS clauses by reference, pursuant to FAR 52.252-03, with the same force and effect as if they were given in full text.
FAR REF NO. CLAUSE TITLE CLAUSE DATE - ----------- ------------ ----------- 52.203-1 Definitions OCT 1995 52.203-3 Gratuities APR 1984 52.203-5 Covenant Against Contingent Fees APR 1984 52.203-7 Anti-Kickback Procedures JUL 1995 52.211-15 Defense Priority and Allocation Requirements SEP 1990 52.215-2 Audit and Records - Negotiations AUG 1996 Alternate I (JAN 1997) 52.215-8 Order of Precedence - Uniform Contract Format OCT 1997 52.217-9 Option to Extend the Term of the Contract MAR 1989 52.222-3 Convict Labor AUG 1996 52-222-17 Labor Standards for Construction Work - FEB 1988 Facilities Contracts
52.288-5 Insurance - Work on a Gov't Installation JAN 1997 Workmen's Compensation - $100,00 Comp. Gen'l Liability - $ 500,000 pers. Injury $1,000,000 prop. Damage Comp. Auto Liability - $200,000 per person $500,000 bodily injury $ 20,000 prop. damage 52.232-21 Limitation of Cost (Facilities) APR 1984 52.233-1 Disputes-Alternate I (DEC 1991) OCT 1995 52.237-2 Protection of Government Buildings, APR 1984 Equipment and Vegetation 52.242-1 Notice of Intent to Disallow Costs APR 1984 52.242-13 Bankruptcy JUL 1995 52.242-16 Stop Work Order - Facilities AUG 1989 52-243-2 Changes - Cost-Reimbursement AUG 1987 Alternative IV (APR 1984) 52.245-1 Property Records APR 1984 52.245-8 Liability for the Facilities JAN 1997 52.245-9 Use and Charges APR 1984 52.245-11 Government Property (Facilities Use) APR 1984 52.246-10 Inspection of Facilities APR 1984 52.249-13 Failure to Perform APR 1984 52-249-1 Termination for Convenience of the APR 1984 Government (Services) 52-249-14 Excusable Delays APR 1984 52.252-2 Clauses Incorporated by Reference FEB 1992
DFARS REF NO. CLAUSE TITLE CLAUSE DATE - ------------- ------------ ----------- 252.301-7000 Contracting Officer's Representative DEC 1991
E. Counterparts. This agreement may be signed in counterparts. ------------ IN WITNESS WHEREOF, the Parties hereto have executed by this Agreement as of the date first set forth above. FOR UNITED DEFENSE LP FOR MARINE CORPS LOGISTICS BASE ALBANY, GEORGIA By /s/ William Tileston By /s/ Larry P. Cole -------------------------- -------------------------- William Tileston LARRY P. COLE Colonel, U.S. Marine Corps Title Division Controller Title Commanding Officer arine Corps Base, Albany, GA By /s/ B. L. Williams, Jr. ------------------------- B. L. WILLIAMS, JR. Colonel, U.S. Marine Corps Title Program Manager, AAV By /s/ Larry F. Pendley ------------------------- LARRY F. PENDLEY Title Contracting Officer (Code 891) Schedule A - Government Furnished Property (As shown on attached map) Building 1121, Bay 4 42,600 Square Feet Rail Siding at Building 1,000 Linear Feet Parking Spaces (10) Adjacent to Building EX-10.2B 3 MEMORANDUM OF AGREEMENT Exhibit 10.2(b) Memorandum of Agreement (MOA) Between United Defense LP and the Marine Corps Logistics Base for Installation Support Services /s/ Gary C. McDonald /s/ L. P. Cole - ------------------------------ ------------------------------ L. P. COLE for United Defense LP Commanding Officer Marine Corps Logistics Base Albany, Georgia I. PURPOSE: This MOA establishes responsibilities of United Defense LP (UDLP) ------- in reimbursing the Marine Corps Logistics Base, Albany, Georgia (Host) for certain installation support services. II. BACKGROUND: On 12 April 1999, the parties entered into Facilities Use ---------- Agreement in conjunction with Contract Number M67004-99-C-0022. Under that agreement, the Government will provide warehouse space onboard the installation for use by UDLP in order to carry out the contract for Amphibious Assault Vehicle (AAV) Reliability, Maintainability, Sustainability/Rebuild. This property is identified as Building 1121, Bay 4 and includes 42,600 square feet of warehouse space. III. CONDITIONS: The following support and services will be provided to UDLP ---------- on a reimbursable basis or as indicated. 1. Communications. The Host shall allow connection to the main telephone line, which services the installation at no expense to UDLP. UDLP will be financially responsible for all costs associated with telephone line installations, connections and/or modifications to existing lines, hardware (telephones, switchboard, modems, etc.), repair, maintenance, monthly service fees and related charges to the commercial provider. 2. Custodial Services. The Host shall contract for janitorial services to be performed in space occupied by UDLP such as administrative areas and restrooms. UDLP will specify services to be performed in connection with the annual custodial contract and will reimburse the installation for the annual contract costs and any additional services requested from time to time. 3. Emergency Ambulance Services. The Host shall provide emergency medical services on an as requested basis. UDLP will reimburse the Host for direct labor and material costs. 4. Pest Control Services. The Host shall provide insect and rodent control including but not limited to routine treatment of space assigned to UDLP. UDLP will reimburse the Host for direct labor and materials costs. 5. Facilities Maintenance. The Host shall provide routine maintenance, alterations and repair as well as all emergency repair services. UDLP will reimburse the Host for direct labor and materials costs. 6. Hazardous Waste Disposal. The Host shall provide disposal of hazardous waste. UDLP will reimburse the Host for labor and materials costs and any other direct costs associated with disposal of hazardous waste. 7. Refuse Collection and Disposal. The Host shall provide services for collection and transportation of refuse to authorized landfill sites. Pick-up services are provided on a weekly basis. Bulk (trailer) refuse will be authorized by telephone and dumped at currently established rates. UDLP will place trash and garbage in designated receptacles and maintain the general appearance of area near receptacle. All refuse collection and disposal services will be reimbursed by UDLP. 8. Utilities. The Host shall provide on a reimbursable basis the following utilities for the UDLP occupied facilities: water, electricity, natural gas, and sewage. IV. RATES: Reimbursements are based on private party rates established ----- annually. The following table provides current rates. UDLP will be given timely notice of any changes.
- ---------------------------------------------------------------------------------------- Description Unit Cost per Unit ----------- ---- ------------- - ---------------------------------------------------------------------------------------- Water KGN $ .80 - ---------------------------------------------------------------------------------------- Electricity KWH $72.40 - ---------------------------------------------------------------------------------------- Natural Gas ACF $ 7.25 - ---------------------------------------------------------------------------------------- Sewage KGAL $ 1.65 - ---------------------------------------------------------------------------------------- Entomology Services Labor/Hour $25.50 Materials Actual Cost - ---------------------------------------------------------------------------------------- Refuse Collection Dumpster $15.00 Cost per dump - ---------------------------------------------------------------------------------------- Building and other Maintenance Labor/Hour $25.50 Materials Actual Cost - ---------------------------------------------------------------------------------------- Emergency Ambulance Service As requested Actual Cost - ---------------------------------------------------------------------------------------- Hazardous Waste Disposal As required Actual Cost - ---------------------------------------------------------------------------------------- Custodial Services Contract $599.52/Month - ---------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------
V. ANNUAL ESTIMATE: Utilities usage (water, electricity, natural gas, and --------------- sewage) have been tracked during the three-month period 12 April 999 to 12 July 1999. Reimbursable utility charges total $2,922.83. If utilities usage remains constant at the rate of $2,922.83 per quarter, reimbursable utility charges would total $11,691.32 per year. UDLP agrees to promptly pay for utilities and all other services listed in this agreement for which it is billed. VI. PAYMENT METHOD: Statements will be mailed to UDLP on a monthly basis -------------- detailing expenses incurred during the preceding month. The Defense Finance and Accounting Services (DFAS) handles all payment matters for the Host. Please follow instructions sent with these monthly statements. VII. CERTIFICATION/COORDINATION: The parties of this MOA may propose amendments -------------------------- to this agreement. When agreed upon, an amendment will be prepared by the originator and approved by the original signatories or their designees. Termination of this MOA can only be accomplished with the consent of all parties of the agreement. The period of performance for this agreement is 12 April 1999 to 31 December 2002. Continued services after 31 December 2002 will be identified, negotiated and contained in a new or modified MOA effective with signatures from both parties. EX-10.7A 4 LEASE Exhibit 10.7(a) LEASE BY AND BETWEEN ATP ASSOCIATES L.P. a Delaware limited partnership, as Landlord and UNITED DEFENSE L.P., a Delaware limited partnership, as Tenant for BUILDING A LEASE (Building A) This Lease, dated April ___,1999 for reference purposes only, is made by and between ATP Associates L.P., a Delaware limited partnership ("Landlord"), and United Defense L.P., a Delaware limited partnership ("Tenant"). Recitals A. The Equitable Life Assurance Society of the United States("Equitable") and FMC Corporation ("FMC") entered into a lease dated June 1, 1989 (the "Original Lease"), for the Premises (as defined below); B. On or about August 11, 1995, Landlord acquired the fee simple interest in certain real property, including the Premises, from Equitable and succeeded to the interest of Equitable as Landlord under the Lease; C. Tenant is now occupying the Premises pursuant to the Original Lease, as if the Original Lease had been assigned by FMC to Tenant; and D. Landlord and Tenant have agreed to enter into this new Lease instead of extending the Old Lease, and Tenant has agreed to assume the obligations under the Original Lease as if the Original Lease had been assigned to Tenant and the term extended. Agreement Now Therefore, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: ARTICLE 1 Definitions 1.1 Commencement Date. The term "Commencement Date" shall mean November 1, 1999. 1.2 Rent Start Date. The term "Rent Start Date" shall mean November 1, 1999 provided, however, that if the Landlord is unable to so deliver possession of the Leased Premises to Tenant in the agreed condition on or before the Commencement Date, rent shall not commence and Landlord shall not be in default under this Lease, nor shall this Lease be void, voidable or cancelable by Tenant until the lapse of ninety (90) days after the Commencement Date. 1.3 Lease Term. The Lease Term shall commence on the Commencement Date and shall continue until the fourth (4th) anniversary of the Rent Start Date (unless the Lease Term is extended pursuant to paragraph 2.4 hereof). 1.4 Property. The term "Property" shall mean that real property shown on the site plan attached hereto as Exhibit "A" and all improvements now or hereafter located thereon, including, without limitation, the five (5) buildings presently located thereon, the aggregate gross leaseable area of which is approximately 295,271 square feet (the "Property Gross Leaseable Area"), allocated among the five buildings as shown on the attached Exhibit "A"; provided, however, that Landlord may change the boundaries and composition of the Property by removing or adding land and/or buildings and thereafter the term "Property" shall refer to such real property so enlarged or reduced and the amount of the "Property Gross Leaseable Area" shall be appropriately adjusted. 1. 1.5 Premises. The term "Premises" shall mean the building structure situated on the Property commonly known as Building A of Airport Technology Park, 2890 De La Cruz Boulevard, Santa Clara, California, containing approximately 68,708 square feet of gross leaseable area (the "Premises Gross Leaseable Area") located as shown on Exhibit "A". Landlord and Tenant agree that (i) all measurements of gross leaseable area contained in this lease are conclusively agreed to be correct and binding upon the parties, even if a subsequent measurement of any one of these areas determines that it is more or less than the amount of area reflected in this Lease; and (ii) any such subsequent determination that the area is more or less than shown in this Lease shall not result in a change in any of the computations of rent, improvement allowances, or other matters described in this Lease where gross leaseable area is a factor. 1.6 Permitted Use. The term "Permitted Use" shall mean the use of the Premises for (i) research and development, production, sales, and general administrative offices and other legal uses incidental thereto, and (ii) any other legal use first approved in writing by Landlord. 1.7 Tenant's Minimum Liability Insurance Coverage. The term "Tenant's Minimum Liability Insurance Coverage" shall mean Two Million Five Hundred Thousand Dollars ($2,500,000). 1.8 Tenant's Allocated Parking Stalls. The term "Tenant's Allocated Parking Stalls" shall mean 267 parking stalls for the non-exclusive use of Tenant. 1.9 Retained Real Estate Brokers. The term "Retained Real Estate Brokers" shall mean Thomas Smith of CB Richard Ellis and Richard Kimball of Colliers Parrish. 1.10 Address for Notices. The term "Address for Notices" shall mean the following: A. In the case of Landlord, such term shall mean c/o Menlo Equities LLC, 525 University Avenue, Suite 100, Palo Alto, California 94301, Attention: Henry D. Bullock/Richard J. Holmstrom. B. In the case of Tenant, such term shall mean the address of the Premises which is 2830 De La Cruz Boulevard, Santa Clara, California 95050. 1.11 Lease. The term "Lease" shall mean this printed lease, Exhibits "A" (site plan), "B" (Approved Plans for Interior Improvements), "C" (Interior Improvement Agreement), "D" (form of subordination agreement), all of which are attached hereto and incorporated herein by this reference. 1.12 Building C Lease. The term "Building C Lease" shall mean that lease dated as of April __, 1999 between Landlord and Tenant, pursuant to which Tenant leases from Landlord that certain building identified as Building C on the site plan attached hereto as Exhibit "A' and which contains approximately 86,785 square feet, the address of which is 2830 De La Cruz Boulevard, Santa Clara, California. 1.13 Tenant's Allocated Share. The term "Tenant's Allocated Share" shall mean one hundred percent (100%). 1.14 Continuing Tenant Default. A "Continuing Tenant Default" shall be deemed to exist when an "Event of Tenant's Default" (as defined in paragraph 13.1) has occurred, and the underlying default or breach by Tenant of its obligations which resulted in such Event of Tenant's Default has not been completely cured. 1.15 Additional Definitions. As used in this Lease or any addendum or amendment thereto, the following terms shall have the meanings set forth in paragraph 15.12: "Agreed Interest Rate", "Common Area", "Law", "Leasehold Improvements", "Lender", "Private Restrictions" and "Trade Fixtures". 2. ARTICLE 2 Demise And Acceptance 2.1 Demise of Premises. Landlord hereby leases to Tenant, and Tenant leases from Landlord, for the Lease Term upon the terms and conditions of this Lease, the Premises together with (i) the non-exclusive right to use no more than the number of Tenant's Allocated Parking Stalls within the Common Area (subject to the limitations set forth in paragraph 4.7), and (ii) the non- exclusive right to use the Common Area for ingress to and egress from the Premises. Tenant's lease of the Premises shall be subject to (i) all Laws, (ii) all Private Restrictions, easements, and other matters of public record, and (iii) the reasonable and non-discriminatory rules and regulations from time to time promulgated by Landlord pursuant to paragraph 4.6. 2.2 Delivery and Acceptance of Possession. Landlord shall deliver to Tenant possession of the Premises on the Commencement Data in their presently existing condition, broom clean. Tenant shall accept possession of the Premises in its presently existing condition, "as-is" (except for latent defects in the structural elements of the Premises), acknowledging that Tenant intends to do renovation work and construct interior improvements pursuant to paragraph 2.3 hereof and the Interior Improvement Agreement attached as Exhibit "C". 2.3 Construction of Interior Improvements. Tenant shall construct certain improvements for Tenant's use in the Premises pursuant to the terms of the Interior Improvement Agreement executed concurrently with this Lease by Landlord and Tenant and attached hereto an Exhibit "C". 2.4 Options to Extend Lease Term. Landlord hereby grants to Tenant one (1) option (the "Option") to extend the Lease Term for a three (3) year period (the "Option Term"), on the following terms and conditions: A. Tenant must give Landlord notice in writing of its exercise of the Option before the later to occur of (i) the two hundred fortieth (240th) day before the date the initial Lease Term would and but for said exercise, or (ii) the seventh (7th) day following the establishment of the fair market rent for the Premises by appraisal pursuant to subparagraph 2.4F if such appraisal process is commenced pursuant to subparagraphs 2.4E and 2.4F. B. Tenant may not exercise the option at any time that either of the following is true: (i) a Continuing Tenant Default exists under this Lease (unless caused by a subtenant of the original Tenant under this Lease and such original Tenant is using reasonable efforts to cause such default to be cured); or (ii) a Continuing Tenant Default exists under the Building C Lease (unless caused by a subtenant or assignee of the original Tenant under this Lease and such original Tenant is using reasonable efforts to cause such default to be cured) and the same person or entity is the owner of record of both the Premises and the real property leased pursuant to the Building C Lease. C. All terms and conditions of this Lease shall apply during the Option Term, except that the Base Monthly Rent for the Option Term shall be determined as provided in subparagraph 2.4D below. D. The Base Monthly Rent for the Option Term with respect to the Premises shall be the ninety-five percent (95%) of the fair market rent for the Premises for the Option Term on the terms contained in this Lease as of the commencement of the Option Term, determined pursuant to subparagraphs 2.4E and 2.4F. For purposes of this Lease, the term "fair market rent for the Premises" shall mean the projected going market rent for the Premises as of the commencement of the Option Term in question, including a provision for periodic increases of such rent during the Option Term (which increases shall be established as part of such fair market rent), taking into account the value of all improvements in the Premises, regardless of whether made by Landlord or Tenant (except for those Leasehold Improvements that Tenant has the right to remove at the expiration of the Lease Term) but in no event shall fair market rent be less than the rent in effect during the immediately prior period. E. Tenant may not exercise the Option in question unless Tenant has delivered to Landlord a written request (a "Rent Quote Request") that Landlord state in writing Landlord's opinion of the fair market rent 3. for the Premises for the upcoming Option Term in question, which Rent Quote Request may only be delivered and shall only be effective if delivered (i) no sooner than fifteen (15) months before the expiration of the Lease Term, and (ii) no later than thirteen (13) months prior to the expiration of the Lease Term. After receipt of a Rent Quote Request and no later than twelve (12) months prior to the expiration of the Lease Term, Landlord shall deliver to Tenant a written statement setting forth Landlord's opinion of the fair market rent for the Premises for the Option Term in question (a "Landlord's Rent Quote"). For a period of thirty (30) days following delivery to Tenant of Landlord's Rent Quote (the "Negotiation Period"), Landlord and Tenant shall confer to attempt to reach agreement upon the fair market rent for the Premises for the Option Term in question. If Landlord and Tenant are unable to reach agreement in writing within the Negotiation Period, for purposes of establishing the Base Monthly Rent for the Option Term in question, the fair market rent for the Premises shall be deemed to be the amount stated in Landlord's Rent Quote unless Tenant delivers to Landlord during the Negotiation Period a written notice which states the following: (i) Tenant requires that the fair market rent for the Premises for the option Term in question be established by the appraisal process described in subparagraph 2.4F; and (ii) the name, address, and qualifications of the appraiser selected by Tenant for purposes of the appraisal process described in subparagraph 2.4F ("Tenant's Appraisal Demand"). If Tenant so timely delivers to Landlord a Tenant's Appraisal Demand, the Base Monthly Rent for the Option Term in question shall be established based on the result of the appraisal process described in subparagraph 2.4F. F. If Tenant delivers to Landlord a Tenant's Appraisal Demand during the Negotiation Period, then the fair market rent for the Premises shall be determined by three (3) real estate appraisers, all of whom shall be members of the American Institute of Real Estate Appraisers with not less than five (5) years experience appraising real property (other than residential or agricultural property) located in Santa Clara County, California, in accordance with the following procedures: (1) One of the appraisers shall be the appraiser identified in Tenant's Appraisal Demand. Within ten (10) days of receipt of Tenant's Appraisal Demand, Landlord shall select its appraiser and notify Tenant, in writing, of the name, address and qualifications of an appraiser selected by it. Failure by Landlord to select a qualified appraiser within said ten (10) day period shall be deemed a waiver of its right to select a second appraiser on its own behalf and Tenant shall select a second appraiser on behalf of Landlord within five (5) days after the expiration of said ten (10) day period. Within ten (10) days from the date the second appraiser shall have been appointed, the two (2) appraisers selected by the parties shall appoint a third appraiser. If the two appraisers fail to select a third qualified appraiser, the third appraiser shall be selected by the American Arbitration Association at the request of either party or, if there is then no American Arbitration Association or if it refuses to perform this function, then at the request of either Landlord or Tenant, the third appraiser shall be appointed by the then Presiding Judge of the Superior Court of the State of California for the County of Santa Clara. (2) The three (3) appraisers so selected shall meet in San Jose, California, not later than twenty (20) days following the selection of the third appraiser. At said meeting the appraisers shall attempt to determine the fair market rent for the Premises for the Option Term in question. (3) If the appraisers are unable to complete their determinations in one meeting, they may continue to consult at such times as they deem necessary for a fifteen (15) day period from the date of their first meeting, in an attempt to have at least two (2) of them agree. If, at the initial meeting or at any time during said fifteen (15) day period, two (2) or more of the appraisers agree on the fair market rent for the Premises, such agreement shall be determinative and binding on the parties hereto, and the agreeing appraisers shall, in simple letter form executed by the agreeing appraisers, forthwith notify both Landlord and Tenant of the amount set by such agreement. (4) If two (2) or more appraisers do not agree within said fifteen (15) day period as set forth above, then each appraiser shall, within five (5) days after the expiration of said fifteen (15) day period, submit his independent appraisal in simple letter form to Landlord and Tenant stating his determination of the fair market rent for the Premises for the Option Term in question. Landlord and Tenant shall then determine the fair market rent for the Premises for the Option Term by determining the average of the fair market rent set by each of the appraisers; provided, however, if the lowest appraisal is less than eighty-five percent (85%) of the middle appraisal then such lowest appraisal shall be disregarded, and/or if the highest appraisal is greater than one hundred 4. fifteen percent (115%) of the middle appraisal then such highest appraisal shall be disregarded. If any appraisal in disregarded, then the average shall be determined by computing the average set by the other appraisals that have not been disregarded. For purposes of determining the relative amount of the appraisals to implement the provisions of this subparagraph requiring that an appraisal be disregarded if it is too high or too low, the amount of an appraisal that calls for periodic rent increases based upon an index (e.g., the Consumer Price Index) shall be determined by assuming that such index will increase at the same average annual rate during the option period in question that such index increased on an average annual basis during the five (5) year period preceding the commencement of the option period in question. (5) Each party shall bear the fees and expenses of the appraisers selected by or for it, and the fees and expenses of the third appraiser shall be borne fifty percent (50%) by Landlord and fifty percent (50%) by Tenant. ARTICLE 3 Rent 3.1 Base Monthly Rent. Commencing on the Rent Start Date and continuing thereafter throughout the initial Lease Term, Tenant shall pay to Landlord a monthly rent (which rent is referred to as the "Base Monthly Rent"), which shall be the following: A. The Base Monthly Rent for the period beginning on the Rent Start Date and ending on the last day of the twelfth (12th) month of the Lease Term is Ninety-Eight Thousand Nine Hundred Forty Dollars ($98,940) (i.e., $1.44 per square foot per month). B. The Base Monthly Rent for the period beginning on the first day of the thirteenth (13th) month of the Lease Term and ending on the last day of the twenty-fourth (24th) month of the Lease Term is One Hundred Two Thousand Three Hundred Seventy-Five Dollars ($102,375) (i.e., $1.49 per square foot per month). C. The Base Monthly Rent for the period beginning an the first day of the twenty-fifth (25th) month of the Lease Term and ending on the last day of the thirty-sixth (36th) month of the Lease Term is One Hundred Five Thousand Eight Hundred Ten Dollars ($105,810) (i.e., $1.54 per square foot per month). D. The Base Monthly Rent for the period beginning on the first day of the thirty-seventh (37th) month of the Lease Term and ending on the last day of the forty-eighth (48th) month of the Lease Term is One Hundred Nine Thousand Dollars Two Hundred Forty-Six Dollars ($109,246) (i.e., $1.59 per square foot per month). E. For purposes of applying the provisions of this paragraph 3.1, the term "month of the Lease Term" shall mean that period which begins on that day of the calendar month in question which corresponds to the Rent Start Date and which continues for thirty (30) or thirty-one (31) days until the day of the next calendar month which precedes the day in that calendar month which corresponds to the Rent Start Date. By way of example only, if it is assumed that the Rent Start Date is November 1, 1999, then for purposes of this paragraph 3.1 (i) the first month of the Lease Term would commence November 1 and end on November 30, 1999. 3.2 Additional Rent. Commencing on the Rent Start Date and continuing thereafter throughout the Lease Term, Tenant shall pay, as additional rent (the "Additional Rent"), (i) Tenant's share of Common Operating Expenses as required by paragraph 6.3, (ii) Tenant's share of Real Property Taxes as required by paragraph 8.2, (iii) Landlord's share of the net consideration received by Tenant upon certain assignments and sublettings as required by paragraph 14.1, (iv) any late charges or interest due Landlord pursuant to paragraph 3.4, (v) Tenant's share of the amortized cost of certain additional improvements as provided in paragraph 5.4, and (vi) any other charges due Landlord pursuant to this Lease. 5. 3.3 Payment of Rent. All rent required to be paid in monthly installments shall be paid in advance on the first day of each calendar month during the Lease Term. All rent shall be paid in lawful money of the United States, without any abatement, deduction or offset whatsoever (except as permitted by paragraphs 11.4 and 12.2), and without any prior demand therefor, to Landlord at its address set forth above or at such other place as Landlord may designate from time to time. Tenant's obligation to pay rent shall be prorated as of the Rent Start Date and at expiration or earlier termination of the Lease Term such that Tenant shall not be required to pay Base Monthly Rent or Additional Rent for any period preceding the Rent Start Date or following the expiration or earlier termination of the Lease Term (except in the case of a termination of this Lease an a result of an Event of Tenant's Default). 3.4 Late Charge and Interest on Rent in Default. Tenant acknowledges that the late payment by Tenant of any monthly installment of Base Monthly Rent or any Additional Rent will cause Landlord to incur certain costs and expenses not contemplated under this Lease, the exact amount of which are extremely difficult or impractical to fix. Such costs and expenses will include, without limitation, administration and collection costs and processing and accounting expenses. Therefore, if any such Base Monthly Rent or Additional Rent is not received by Landlord from Tenant within five (5) days after Landlord delivers written notice to Tenant that such amount is delinquent, Tenant shall immediately pay to Landlord a late charge equal to five percent (5%) of such delinquent rent. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for its loss suffered by Tenant's failure to make timely payment. In no event shall this provision for a late charge be deemed to grant to Tenant a grace period or extension of time within which to pay any rent or prevent Landlord from exercising any right or remedy available to Landlord upon Tenant's failure to pay any rent due under this Lease in a timely fashion, including the right to terminate this Lease. If any rent remains delinquent for a period in excess of thirty (30) days after Landlord delivers written notice to Tenant that such amount is delinquent, in addition to such late charge, Tenant shall pay to Landlord interest on any rent that is not paid when due at the Agreed Interest Rate following the date such amount became due until paid. ARTICLE 4 Use Of Premises 4.1 Limitation on Type. Tenant shall use the Premises solely for the Permitted Use (as described in paragraph 1.6). Tenant shall not do or permit anything to be done in or about the Premises or Common Area which will (i) interfere with the rights of other occupants of the Property, (ii) cause structural damage to the Premises and Tenant fails to promptly commence and diligently pursue to completion the repair of such damage, or (iii) cause damage to any part of the Premises or Property except to the extent reasonably necessary for the installation of Tenant's equipment and trade fixtures and Tenant fails to promptly commence and diligently pursue to completion the repair of such damage. Tenant shall not operate any equipment within the Premises which will (i) injure, vibrate or shake the Premises, (ii) overload existing electrical system or other mechanical equipment servicing the Premises, or (iii) impair the efficient operation of the sprinkler system or the heating, ventilating or air conditioning ("HVAC") equipment servicing the Premises, or (iv) damage, overload or corrode the sanitary sewer system. Tenant shall not attach, hang or suspend anything from the ceiling, roof, walls or columns of the Premises or set any load on the floor in excess of approved structural limits as defined by Landlord's architect. Any dust, fumes, or waste products generated by Tenant's use of the Premises shall be contained and disposed so that they do not (i) create a fire or health hazard, (ii) damage the Premises, or (iii) interfere with the businesses of other tenants of the Property. All noise or odors generated by Tenant's use of the Premises shall be contained or muffled so that they do not interfere with the businesses of other tenants of the Property. Tenant shall not (i) change the exterior of the Premises (subject to Tenant's right to install signs pursuant to paragraph 4.5), or (ii) install any equipment or antennas on or make any penetrations of the exterior or roof of the Premises without the prior written consent of Landlord. Tenant shall not commit nor permit to be committed any waste in or about the Premises, and Tenant shall keep the Premises in a neat, clean, attractive and orderly condition, free of any objectionable noises, odors, dust or nuisances which may disturb the quiet enjoyment of other tenants or occupants of the Property. Notwithstanding the foregoing restrictions, the parties agree as follows: A. Tenant may bring military fighting vehicles onto the first floor of the Premises so long an (i) Tenant puts into place such reinforcing as is reasonably necessary to upgrade the floor load capacity so that it will 6. accept such fighting vehicles; and (ii) Tenant repairs any damage to the Premises caused by the entry of such vehicles. B. Tenant may install antennas, radio "dishes" or other electronic equipment reasonably necessary for the conduct of Tenant's business upon the roof of the Premises so long as (i) such installations are done in compliance with all Laws and Private Restrictions; (ii) such installations are accomplished in a manner which does not compromise the watertight integrity of the roof; (iii) all damage to the Premises caused by such installation is repaired by Tenant; and (iv) any such equipment is properly and effectively screened from view in a manner reasonably acceptable to Landlord. C. In the event Tenant desires to operate equipment within the Premises that will or may overload existing mechanical, electrical, or other systems, Tenant may do so only if it first installs, at its sole cost, all necessary modifications, repairs or upgrades of existing systems so that such equipment may be operated without overloading such systems as so modified by Tenant. 4.2 Compliance with Laws and Private Restrictions. Tenant shall not use or permit any person to use the Premises in any manner which violates any Laws or Private Restrictions. Tenant shall abide by and promptly observe and comply with all Laws and Private Restrictions and shall indemnify and hold Landlord harmless from any liability resulting from Tenant's failure to do so. 4.3 Insurance Requirements. Tenant shall not use or permit any person to use the Premises or Common Area in any manner which will cause a cancellation of any Insurance policy covering the Premises. Tenant shall not sell, or permit to be kept, used, or sold in or about the Premises any article which may be prohibited by the standard form of fire insurance policy; provided, however, that Tenant may bring military fighting vehicles onto the first floor of the Premises as permitted pursuant to subparagraph 4.1A. Tenant shall comply with all reasonable requirements of any insurance company, insurance underwriter, or Board of Fire Underwriters which are necessary to maintain, at reasonable rates, the insurance coverage carried by Landlord pursuant to this Lease. 4.4 Outside Areas. No materials, supplies, storage tanks or containers, equipment, finished products or semi-finished products, raw materials, inoperable vehicles or articles of any nature shall be stored upon or permitted to remain outside of the Premises except in fully fenced and screened areas outside the Premises which have been designed for such purpose and have been approved in writing by Landlord for such use by Tenant; provided, however, that Tenant may bring military fighting vehicles onto the first floor of the Premises as permitted pursuant to subparagraph 4.1A. 4.5 Signs. Tenant shall not place on any portion of the Premises or the Property any sign, placard, lettering in or on windows, banner, displays or other advertising or communicative material which is visible from the exterior of the Premises without the prior written approval of Landlord. All such approved signs shall strictly conform to all Laws and Private Restrictions and shall be installed at the expense of Tenant. If Landlord so elects, Tenant shall, at the expiration or sooner termination of this Lease, remove all signs installed by it and repair any damage caused by such removal. Tenant shall at all times maintain such signs in good condition and repair. Upon Tenant's written request and at Tenant's cost and expense, Landlord shall remove both of the Airport Technology Park monument signs located on De La Cruz Boulevard. Subject to Landlord's prior written approval of Tenant's specific design plan, (i) Tenant shall have the right to install a monument sign at the entrance to the Premises, and at the two entrances to Airport Technology Park, and (ii) Tenant shall have the right to install signs on the exterior of the Premises. Approved signs installed by Tenant may be illuminated in compliance with the provisions of applicable Laws and Private Restriction. 4.6 Rules and Regulations. Landlord may from time to time promulgate reasonable and nondiscriminatory rules and regulations applicable to all occupants of the Property for the care and orderly management of the Property and the safety of its tenants and invitees. Such rules and regulations shall be binding upon Tenant upon delivery of a copy thereof to Tenant, and Tenant agrees to abide by such rules and regulations. If there in a conflict between the rules and regulations and any of the provisions of this Lease, the provisions of this 7. Lease shall prevail. Landlord shall not be responsible for the violation by any other tenant of the Property of any such rules and regulations. 4.7 Parking. Tenant is allocated and shall have the non-exclusive right to use (without charge in addition to the Base Monthly Rent) no more than the number of parking spaces contained within the Property described in paragraph 2.1 for its use and the use of its employees and invitees, the location of which may be designated from time to time by Landlord but shall be on the Property and within reasonable proximity to the Premises. Tenant shall not at any time use or permit its employees or invitees to use more parking spaces than the number so allocated to Tenant or to park or permit the parking of its vehicles or the vehicles of others in any portion of the Property not designated by Landlord as a non-exclusive parking area. Landlord shall not oversubscribe the parking within the Property, and shall assure that the total number of spaces committed to the non-exclusive use of all tenants of the Property shall not exceed the total number of spaces within the Common Area. Of the parking spaces allotted to Tenant pursuant to paragraph 2.1, Tenant shall have the right to designate a reasonable number of such spaces as reserved spaces for its executives, which shall not exceed ten percent (10%) of the total of spaces and which shall be in immediate proximity to the Premises. If Landlord grants to any other tenant the exclusive right to use any particular parking space(s), neither Tenant nor its employees or invitees shall use such spaces. Within ten (10) business days after written request therefor from Landlord, Tenant shall furnish Landlord with a list of its and its employees vehicle license numbers and Tenant shall thereafter notify Landlord of any change in such list within five (5) days after each such change occurs. Tenant shall have the right, at Tenant's option, to provide its employees with stickers or other identification markers or tags to be affixed to or on the employees' automobiles or other vehicles, evidencing the right of such employees to use the parking areas. Such stickers shall be subject to prior review and approval by Landlord, which shall not be unreasonably withheld or delayed. Tenant shall furnish to Landlord a list of identifying numbers for the stickers distributed from time to time by Tenant to its employees. If Tenant elects to use such stickers as provided herein, Tenant shall not be obligated to furnish Landlord with a list of vehicle license numbers for its employees, for as long as Tenant maintains such sticker system of identification. Landlord reserves the right, after having given Tenant reasonable notice, to have any vehicles owned by Tenant or its employees or invitees utilizing parking spaces in excess of the parking spaces allowed for Tenant's use to be towed away at Tenant's cost. All trucks and delivery vehicles shall be (i) parked at the rear of the Premises, (ii) loaded and unloaded in a manner which does not interfere with the businesses of other occupants of the Property, and (iii) permitted to remain on the Property only so long as is reasonably necessary to complete loading and unloading. In the event Landlord elects or is required by any Law to limit or control parking in the Property, whether by validation of parking tickets or any other method of assessment, Tenant agrees to participate in such validation or assessment program under such reasonable rules and regulations as are from time to time established by Landlord, so long as such participation does not result in any increase in costs to Tenant. 4.8 Window Coverings. To the extent Tenant elects to use window coverings visible from the exterior of the Premises, Tenant shall use the same window covering to cover all windows Tenant so elects to cover in the Premises to maintain a consistent and uniform exterior appearance. 4.9 Outside Sales. Tenant shall not conduct or permit to be conducted on any portion of the Common Area any sale of any kind, including (i) any public or private auction, fire sale, going-out-of-business sale, distress sale or other liquidation sale, or (ii) any so-called "flea market", open-air market or any other similar activity. Notwithstanding the foregoing, Tenant shall be allowed to conduct occasional sales outside of the Premises on that part of the Common Area that is in close proximity to the Premises so long as each of the following conditions is satisfied with respect to each such sale: (i) Landlord is given at least two (2) business days prior written notice of the date of any such sale; (ii) such sale does not violate any Laws; (iii) such sale is conducted in a manner that does not interfere with the rights of other occupants of the Property; (iv) Tenant provides all necessary security, cleans up all debris, and repairs any damage caused by such sale; and (v) the purpose of such sale is to permit employees of Tenant to purchase or to receive free of charge property of Tenant. 8. ARTICLE 5 Trade Fixtures And Leasehold Improvements. 5.1 Trade Fixtures. Throughout the Lease Term, Tenant shall provide, install, and maintain in good condition all Trade Fixtures required in the conduct of its business in the Premises. All Trade Fixtures shall remain Tenant's property. 5.2 Leasehold Improvements. The following provisions govern Leasehold Improvements constructed by Tenant: A. Tenant shall not construct any Leasehold Improvements or otherwise alter the Premises without Landlord's prior approval if such action results in the demolition, removal, or material alteration of existing Improvements (including partitions, wall and floor coverings, ceilings, lighting fixtures or other utility installations) and if the cost of such construction or alteration exceeds Fifteen Thousand Dollars ($15,000) per work of improvement or if the cost of Leasehold Improvements done, under construction, or for which approval is sought during any calendar quarter exceeds Twenty-Five Thousand Dollars ($25,000). With respect to any Leasehold Improvements which must be approved by Landlord pursuant to the immediately preceding sentence, Tenant shall not commence construction of such Leasehold Improvements until Landlord shall have first approved the plans and specifications therefor, which approval shall be deemed given if not denied in writing within ten (10) working days after Landlord shall have received Tenant's request for such approval. In no event shall Tenant make any alterations to the Premises which could significantly affect the structural integrity or the exterior design of the Premises without Landlord's prior approval. B. All Leasehold Improvements requiring Landlord's approval shall be installed by Tenant in substantial compliance with the approved plans and specifications therefor. All construction undertaken by Tenant shall be done in accordance with all Laws and in a good and workmanlike manner using materials of good quality. Tenant shall not commence construction of any Leasehold Improvements until (i) all required governmental approvals and permits shall have been obtained, (ii) all requirements regarding insurance imposed by this Lease have been satisfied, and (iii) if reasonably requested by Landlord, Tenant shall have obtained contingent liability and broad form builders risk insurance in an amount reasonably satisfactory to Landlord if there are any perils relating to the proposed construction not covered by insurance carried pursuant to Article 9. If Landlord so requests in writing with respect to Leasehold Improvements requiring Landlord's prior approval, Tenant shall inform Landlord of Tenant's scheduled date for commencement of construction at least five (5) days prior to such date of commencement. C. At all times during the Lease Term, (i) Tenant shall maintain all plans and change orders prepared in connection with the construction of any Leasehold Improvements which required a building permit or other governmental approval, and (ii) Tenant shall provide to Landlord copies of such plans and change orders (and, to the extent Tenant causes such to be prepared for its own use, "As-Built" plans) at any time that Landlord requests copies thereof. D. All Leasehold Improvements shall remain the property of Tenant during the Lease Term. Tenant shall have the right to remove only the following kinds of Leasehold Improvements so long as it repairs all damage caused by the installation thereof and returns the Premises to the condition existing prior to the installation of such Leasehold Improvements: (i) built-in cabinets, file drawers and bookcases; (ii) computer room air conditioning; (iii) canteen equipment; (iv) office cubicle systems; and (v) ornamental statues. At the expiration or sooner termination of the Lease Term, all Leasehold Improvements that Tenant does not remove shall be surrendered to Landlord as a part of the realty and shall then become Landlord's property, and Landlord shall have no obligation to reimburse Tenant for all or any portion of the value or cost thereof. However, if Landlord so requires, at the expiration or earlier termination of the Lease Term, Tenant shall remove any Leasehold Improvements designated for removal by Landlord and shall restore the Premises to the condition existing prior to the installation of such Leasehold Improvements to the extent necessary to return the Premises to substantially the 9. same condition that existed on the completion of the Interior Improvements constructed pursuant to Exhibit "C", ordinary wear and tear excepted. Notwithstanding the foregoing: (1) Tenant shall only be required to remove Leasehold Improvements for which either of the following is true: (i) such Leasehold Improvements were not approved in writing by Landlord; or (ii) at the time approval was given by Landlord, Landlord informed Tenant in writing that Landlord would require that such Leasehold Improvements be removed at the termination of the Lease Term. (2) Tenant my cause interior partitions to be moved, reconfigured, or removed altogether, or cause interior offices to be deleted or added, all without the obligation to restore such partitions or interior offices to any prior condition upon expiration or termination of the Lease. 5.3 Alterations Required by Law. Tenant shall make any alteration, addition or change of any sort, whether structural or otherwise, to the Premises that is required by any Law because of (i) a specific use or change of use made of the Premises by Tenant (which alteration, addition or change is not generally required to be made by owners or tenants of other properties similar to the Premises), (ii) Tenant's application for any permit or governmental approval, or (iii) Tenant's construction or installation of any Leasehold Improvements or Trade Fixtures. 5.4 Landlord's Improvements. All fixtures, improvements or equipment which are installed, constructed on or attached to the Property by Landlord at its expense shall become a part of the realty and belong to Landlord. Tenant shall pay additional rent in the event Landlord, in its sole discretion, elects to make any of the following kinds of capital improvements to the Property: (i) capital improvements required to be constructed in order to comply with any Law not in affect or applicable to the Property as of the Commencement Date; (ii) modification of existing or construction of additional capital improvements or building service equipment for the purpose of reducing the consumption of utility services or Common Operating Expenses of the Property; (iii) replacement of capital improvements or building service equipment existing as of the Commencement Date when required because of normal wear and tear; and (iv) the amount of "deductibles" paid by Landlord for the restoration of any part of the Property that has been damaged to the extent such "deductible" is not included within Common Operating Expenses. With respect to any expenditure in excess of Fifty Thousand Dollars ($50,000) for which Landlord seeks contribution pursuant to this paragraph 5.4 from Tenant, prior to incurring such expense, Landlord shall notify Tenant of the nature and estimated amount of such expenditure and, if Tenant so requests, shall provide Tenant with such information upon which such cost estimate is based for Tenant's approval. The amount of additional rent Tenant is to pay with respect to each such capital improvement shall be determined as follows: A. Tenant shall have the option to pay in cash an amount equal to Tenant's Allocated Share of all costs paid by Landlord to construct the improvements in question fairly allocable to the Premises (including financing costs) in cash within thirty (30) days after the improvement has been substantially completed and Landlord has notified Tenant of the cost of such improvement and the amount of Tenant's required contribution. If Tenant does not exercise such option to pay such amount in cash, then the provisions of subparagraph 5.4B shall apply. B. All costs paid by Landlord to construct such improvement (including financing costs) shall be amortized on a straight line basis over the useful life of such improvement (determined in accordance with generally accepted accounting principles) with interest on the unamortized balance at the then prevailing market rate Landlord would pay if it borrowed funds to construct such improvement from an institutional lender, and Landlord shall inform Tenant of the monthly amortization payment required to so amortize such costs, and shall also provide Tenant with the information upon which such determination is made. As additional rent, Tenant shall pay an amount equal to Tenant's Allocated Share of that portion of such monthly amortization payment fairly allocable to the Promises (as reasonably determined by Landlord) for each month after such improvement is completed until the first to occur of (i) the expiration of the Lease Term (as the same may be extended), or (ii) the end of the term over which such costs were amortized, which amount shall be due at the same time the Base Monthly Rent is due. 10. C. Notwithstanding anything contained in this paragraph 5.4, the additional rent Tenant is to pay with respect to any modification of existing or construction of additional capital improvements or building service equipment for the purpose of reducing the consumption of utility expenses or Common Operating Expenses of the Property shall not for any period exceed the actual amount of savings in Additional Rent realized by Tenant as a result of such modification or construction. 5.5 Liens. Tenant shall keep the Premises and the Property free from any liens and shall pay when due all bills arising out of any work performed, materials furnished, or obligations incurred by Tenant, its agents, employees or contractors relating to the Premises. If any claim of lien is recorded, Tenant shall bond against or discharge the same within thirty (30) days after the same has been recorded against the Premises and/or the Property. Should any lien be filed against the Premises or any action commenced affecting title to the Premises, the party receiving notice of such lien or action shall immediately give the other party written notice thereof. ARTICLE 6 Repair And Maintenance 6.1 Tenant's Obligation to Maintain. Except as otherwise provided in paragraph 6.2 and in Article 11 regarding the restoration of damage caused by fire and other perils, Tenant shall, at all times during the Lease Term, clean, keep, and maintain in good order, condition, and repair the Premises and every part thereof, through regular inspections and servicing, including, but not limited to, (i) all plumbing and sewage facilities (including all sinks, toilets, faucets and drains), and all ducts, pipes, vents or other parts of the HVAC or plumbing system, (ii) all fixtures, interior walls, floors, carpets and ceilings, (iii) all windows, doors, entrances, plate glass, showcases and skylights (including cleaning both interior and exterior surfaces), (iv) all electrical facilities and all HVAC equipment and other mechanical systems (including all lighting fixtures, lamps, bulbs, tubes, fans, vents, exhaust equipment and systems), (v) any automatic fire extinguisher equipment in the Premises, and (vi) the roof membrane (including any necessary resurfacing or patching to preserve the membrane or to repair leaks except that Tenant shall not be required to make any repair to the extent such repair is required because of Landlord's repair or maintenance of the structural roof system). Tenant shall replace any damaged or broken glass in the Premises (including all interior and exterior doors and windows) with glass of the same kind, size and quality. Tenant shall repair any damage to the Premises (including exterior doors and windows) caused by vandalism or any unauthorized entry. Tenant shall maintain continuously throughout the Lease Term a service contract for the maintenance of all HVAC equipment serving the Premises with a licensed HVAC repair and maintenance contractor, which contract provides for the periodic inspection and servicing of the HVAC equipment at least once every sixty (60) days during the Lease Term. Tenant shall also maintain continuously throughout the Lease Term a service contract for the washing of all windows (both interior and exterior surfaces) in the Premises with a contractor, which contract provides for the periodic washing of all such windows on such basis as shall keep the exterior appearance of the Premises in first class condition, but no less frequently than once, every calendar year. If and when Landlord so requests in writing, Tenant shall furnish Landlord with copies of all such service contracts. All repairs and replacements required of Tenant shall be promptly made with materials of good quality. If the work affects the structural parts of the Premises or if the estimated cost of any item of repair or replacement is in excess of Fifteen Thousand Dollars ($15,000), then Tenant shall first obtain Landlord's written approval of the scope of work, plans therefor, and materials to be used, except in the case of emergency in which event Tenant shall within a reasonable period of time after performing the work, notify Landlord of the scope of the work performed and the materials used, and shall furnish Landlord with the plans therefor. 6.2 Landlord's Obligation to Maintain. Landlord, at its cost without right of reimbursement from Tenant, shall be responsible for the maintenance, repair, and replacement of the structural parts of the Premises (i.e., foundation, first and second story floor slab and second story floor deck, load-bearing walls, and structural roof system, but excluding roof membrane) except to the extent that (i) the same is necessitated by the wrongful or negligent act or omission of Tenant, its subtenants, or their respective agents, employees, contractors, or invitees, or (ii) reimbursement is permitted pursuant to paragraph 5.4 hereof. Landlord at its cost without right of reimbursement from Tenant, shall repair damage to interior improvements and Leasehold Improvements that have been approved by Landlord pursuant to the terms hereof, or damage to the roof membrane of the Premises if caused by the maintenance work required to be performed by Landlord pursuant to the provisions of this paragraph. 11. Landlord shall repair, maintain, operate and replace when necessary the Common Area, with such right of reimbursement from Tenant as is specified in paragraphs 5.4 and 6.3. The parties acknowledge that the air-conditioning units located on the roof of the Premises were installed when the Building was constructed and subsequently have not operated. Landlord agrees to make any repairs necessary to put such units in good operating condition, if within the six month period following the Commencement Date, Tenant notifies Landlord in writing of the need for such repairs. Landlord shall not be responsible for repairs required by an accident, fire or other peril except as otherwise required by Article 11, or for damage caused to any part of the Property by any act, negligence or omission of Tenant or its agents, contractors, employees or invitees. Landlord may engage contractors of its choice to perform the obligations required of it by this Article, and the necessity of any expenditure to perform such obligations shall be at the sole discretion of Landlord. 6.3 Tenant's Obligation to Reimburse. As additional rent, commencing on the Rent Start Date and continuing throughout the remainder of the Lease Term, Tenant shall pay Tenant's Allocated Share of all Common Operating Expenses fairly allocable to the Premises including (i) all Common Operating Expenses paid with respect to the maintenance, repair, replacement and use of the Premises and (ii) a proportionate share (based on the Premises Gross Leaseable Area as a percentage of the Property Gross Leaseable Area) of all Common Area Expenses which relate to Property in general and are not fairly allocable to any one building on the Property. Landlord agrees that it shall not recover from all tenants of the Property more than one hundred percent (100%) of the actual Common Operating Expenses incurred by Landlord for the period in question. As provided in paragraph 3.3, Tenant's obligation to pay Tenant's Allocated Share of Common Operating Expenses fairly allocable to the Premises shall be prorated as of the Rent Start Date and at the expiration or earlier termination of the Lease Term, and if Tenant has paid any amount on account of Common Operating Expenses relating to a period that is not within the Lease Term (e.g., prepayment of insurance premiums for one year), such amount shall be reimbursed to Tenant in connection with such proration. Payment shall be made by whichever of the following methods is from time to time designated by Landlord, and Landlord may change the method of payment at any time so long as (i) Landlord gives Tenant at least sixty (60) days prior written notice, and (ii) the method is not changed more than once in any calendar year. Tenant shall pay such share of the actual Common Operating Expenses incurred or paid by Landlord but not theretofore billed to Tenant within thirty (30) days after receipt of a written bill therefor from Landlord, on such periodic basis as Landlord shall designate, but in no event more frequently than once a month. Alternatively, (i) Landlord shall deliver to Tenant Landlord's reasonable estimate of the Common Operating Expenses it anticipates will be paid or incurred for the calendar year in question, (ii) during such calendar year, Tenant shall pay such share of the estimated Common Operating Expenses in advance in monthly installments as required by Landlord due with the installments of Base Monthly Rent, and (iii) within ninety (90) days after the end of each calendar year, Landlord shall furnish to Tenant a statement in reasonable detail of the actual Common Operating Expenses paid or incurred by Landlord during the just ending calendar year and thereupon there shall be an adjustment between Landlord and Tenant, with payment to Landlord or credit by Landlord against the next installment of Base Monthly Rent, as the case may require, within thirty (30) days after delivery by Landlord to Tenant of said statement, so that Landlord shall receive the entire amount of Tenant's share of all Common Operating Expenses for such calendar year and no more. Tenant and its agents (including accountants) shall have the right at its expense, exercisable upon reasonable prior written notice to Landlord, to inspect at Landlord's office during normal business hours Landlord's books and records as they relate to Common Operating Expenses. Such inspection must be made within one hundred eighty (180) days of Tenant's receipt of Landlord's annual statement for the same, and shall be limited to verification of the charges contained in such statement. Tenant may not withhold payment of such bill pending completion of such inspection. 6.4 Common Operating Expenses Defined. The term "Common Operating Expenses" shall mean the sum of the following: A. All costs and expenses paid or incurred by Landlord in doing the following (including payments to independent contractors providing services related to the performance of the following): (i) maintaining, cleaning, and repairing the exterior surfaces (including painting of exterior surfaces of buildings not more than once every 5 years) of all buildings located on the Property; (ii) maintenance of the liability, fire and property damage insurance covering the Property carried by Landlord pursuant to paragraph 9.2 (including the payment of commercially reasonable "deductibles" and the prepayment of premiums for coverage of up to one year); (iii) maintaining, repairing, operating and replacing when necessary HVAC equipment, utility facilities and 12. other building service equipment; (iv) providing utilities to the Common Area (including lighting, trash removal and water for landscaping irrigation); (v) complying with all applicable Laws and Private Restrictions; (vi) operating, maintaining, repairing, cleaning, painting, restriping and resurfacing the Common Area; (vii) replacement or installation of lighting fixtures, directional or other signs and signals, irrigation systems, tress, shrubs, ground cover and other plant materials, and all landscaping in the Common Area; and (viii) depreciation and financing costs on maintenance and operating machinery and equipment (if owned) and rental paid for such machinery and equipment (if rented); B. All additional costs and expenses incurred by Landlord with respect to the operation, protection, maintenance, repair and replacement of the Property which pursuant to generally accepted accounting principles would be considered a current expense and not a capital expenditure; C. That portion of all compensation (including benefits and premium for workers' compensation and other insurance) paid to or on behalf of employees of Landlord but only to the extent they are involved in the performance of the work described by subparagraphs A and B above and that is fairly allocable to the Property; D. An additional amount equal to a commercially reasonable and competitive management fee that would be charged by an independent third party property manager for the management of the Property (except that Tenant's Allocated Share of such management fee for any period shall not exceed two percent (2%)of the Base Monthly Rent and Additional Rent payable by Tenant for the same period); and E. Notwithstanding anything contained herein, the term "Common Operating Expenses" shall not include any of the following: (i) mortgage principle payments; (ii) ground rent and other payments made pursuant to any ground lease affecting the Property; (iii) the cost of refinancing any loan Secured by the Property; (iv) interest and penalties imposed against Landlord for late payments by Landlord; (v) legal fees incurred by Landlord in connection with the negotiation or enforcement of, or litigation in connection with, any lease affecting the Property; (vi) the cost of any paintings, sculptures, or other art objects installed on the Property; (vii) any costs reimbursed to Landlord by insurance or other third party payments that are not reimbursements by tenants for their share of Common Operating Expenses; (viii) brokerage commissions or other costs related to the leasing of space within the Property; (ix) the cost of any tenant improvements installed for the exclusive use of any other tenant of the Property. 6.5 Control of Common Area. Landlord shall at all times have exclusive control of the Common Area. Landlord shall have the right, without the same constituting an actual or constructive eviction and without entitling Tenant to any abatement of rent, to: (i) close any part of the Common Area to the minimum extent reasonably necessary in the reasonable opinion of Landlord's counsel to prevent a dedication thereof or the accrual of any prescriptive rights therein; (ii) temporarily close the Common Area to perform maintenance or for any other reason deemed sufficient by Landlord; (iii) designate other property outside the boundaries of the Property to become part of the Property; (iv) construct multi- deck parking structures in any part of the Common Area; (v) change the shape, size, location, number and extent of improvements on the Common Area; (vi) select a third party to maintain and operate any of the Common Area at any time Landlord determines that the best interests of the Property will be served by having the Common Area maintained and operated by that third party so long as the fees and charges of such third party are reasonable and competitive with the fees of others in the marketplace providing the same services; (vii) make changes to the Common Area including, without limitation, changes in the location of driveways, parking spaces, parking areas, sidewalks or the direction of the flow of traffic and the site of the Common Area; and/or (viii) voluntarily change the address of the Property. Landlord agrees not to change the name of Airport Technology Park without the prior consent of Tenant. The use of the Common Area shall be subject to such reasonable regulation and changes therein as Landlord shall make from time to time. Landlord shall not exercise its rights to control the Common Area in a manner that would materially interfere with Tenant's use of the Premises without first obtaining Tenant's approval. Tenant shall keep the Common Area free and clear of all obstructions created or permitted by Tenant. If in the opinion of Landlord unauthorized persons are using any of the Common Area by reason of the presence of Tenant in the Premises, Tenant, upon demand of Landlord, shall restrain such unauthorized use by appropriate proceedings. Nothing herein shall affect the right of Landlord at any time to remove such unauthorized person from the Common Area nor to prohibit the use of the Common Area by 13. unauthorized persons. In exercising any such rights described in this paragraph 6.5 regarding the Common Area, Landlord shall make a reasonable effort to minimize any disruption to Tenant's business. 6.6 Tenant's Negligence. Anything in this Lease to the contrary notwithstanding, Tenant shall pay for all damage to the Premises or the Property caused by the negligent act or omission of Tenant, its employees, contractors, or invitees, or by the failure of Tenant to discharge promptly its obligations under this Lease, or to comply with the terms of this Lease, but only to the extent such damage is not covered by insurance proceeds actually recovered by Landlord. Tenant shall make payment within thirty (30) days after demand therefor by Landlord. ARTICLE 7 Waste Disposal And Utilities 7.1 Waste Disposal. Tenant shall store its waste either inside the Premises or within outside trash enclosures that are (i) fully fenced and screened in compliance with all Private Restrictions, (ii) designed for such purpose to be used either exclusively by Tenant or in common with other occupants of the Property, as designated by Landlord, and (iii) first approved by Landlord. All entrances to such outside trash enclosures shall be kept closed, and waste shall be stored in such manner as not to be visible from the exterior of such outside enclosures. Tenant shall cause all of its waste to be regularly removed from the Property at Tenant's sole cost. Tenant shall keep all fire corridors and mechanical equipment rooms in the Premises free and clear of all obstructions at all times. 7.2 Hazardous Materials. Landlord and Tenant agree as follows with respect to the existence or use of Hazardous Materials on the Property: A. Landlord hereby makes the following representations to Tenant, each of which is made to the best of Landlord's knowledge as of the Commencement Date: (1) The soil and ground water on or under the Property does not contain Hazardous Materials in amounts which violate any Hazardous Materials Laws to the extent that any governmental entity could require either Landlord or Tenant to take any remedial action or impose any penalties with respect to such Hazardous Materials. (2) During Landlord's period of ownership, no litigation or any administrative proceeding has been brought or threatened, nor any settlements reached with any governmental or private party, concerning the actual or alleged presence of Hazardous Materials on or about the Property or any disposal, release or threatened release of Hazardous Materials in or about the Property. (3) During the time that Landlord has owned the Property, Landlord has received no notice of (i) any violation, or alleged violation, of any Hazardous Material Law that has not been corrected to the satisfaction of the appropriate authority, (ii) any pending claims relating to the presence of Hazardous Material on the Property, or (iii) any pending investigation by any governmental agency concerning the Property relating to Hazardous Materials. (4) The Property does not contain any (i) equipment containing PCBs, or (ii) underground storage tanks. B. Any handling, transportation, storage, treatment, disposal or use of Hazardous Materials by Tenant and Tenant's agents, employees, contractors, invitees or subtenants after the Commencement Date in or about the Property shall strictly comply with all applicable Hazardous Materials Laws. Tenant shall indemnify, defend upon demand with counsel reasonably acceptable to Landlord, and hold harmless Landlord from and against any and all liabilities, losses, claims, damages, interest, penalties, fines, monetary sanctions, attorneys' fees, experts' fees, court costs, remediation costs, investigation costs, and other expenses which result from or arise in any manner whatsoever out of the use, storage, treatment, transportation, release, or disposal of Hazardous Materials on or about 14. the Property by Tenant or Tenant's agents, employees, contractors, invitees or subtenants after the Commencement Date. C. If the presence of Hazardous Materials on the Property caused or permitted by Tenant or Tenant's agents, employees, contractors, invitees or subtenants after the Commencement Date results in contamination or deterioration of water or soil resulting in a level of contamination greater than the levels established, is acceptable by any governmental agency having Jurisdiction over such contamination, then Tenant shall promptly take any and all action necessary to clean up such contamination if required by Law or as a condition to the issuance or continuing effectiveness of any governmental approval which relates to the use of the Property or any part thereof. Tenant shall further be solely responsible for, and shall defend, indemnify and hold Landlord and its agents harmless from and against, all claims, costs and liabilities, including attorneys' fees and costs, arising out of or in connection with any removal, clean-up and restoration work and materials required hereunder to return the Property to its condition existing prior to the appearance of such Hazardous Materials. D. Landlord and Tenant shall each give written notice to the other as soon as reasonably practicable of (i) any communication received from any governmental authority concerning Hazardous Materials which relates to the Property, and (ii) any contamination of the Property by Hazardous Materials which constitutes a violation of any Hazardous Materials Law. Landlord and Tenant each agree to keep such information confidential, except for (i) disclosures that are approved by the other party, (ii) disclosures required by Law or court order, (iii) disclosures to any environmental consultant, lender, purchaser, prospective purchaser, attorneys for either Landlord or Tenant, or brokers for either Landlord or Tenant, so long as an agreement of confidentiality is obtained from a party to whom the disclosure is to be made, and (iv) disclosures in connection with any litigation or administrative proceeding in which either Landlord or Tenant is involved. Tenant and Tenant's agents, employees, contractors, invitees or subtenants shall not bring Hazardous Materials onto the Property without first obtaining the written consent of Landlord; provided, however, Tenant may, without being required to obtain the prior written consent of Landlord, use at the Premises in small quantities office supplies, cleaning materials and other maintenance materials that are customarily used in business offices, even though such supplies and materials may fall within the definition of Hazardous Materials. At any time during the Lease Term, Tenant shall, within five days after written request therefor received from Landlord, disclose in writing all Hazardous Materials that are being used by Tenant on the Property, the nature of such use, and the manner of storage and disposal. E. Landlord may cause testing wells to be installed on the Property, and may cause the ground water to be tested to detect the presence of Hazardous Material by the use of such tests as are then customarily used for such purposes. Any such installation of wells or tests shall be done in a manner which minimizes the interference with Tenant's use of the Premises. If Tenant so requests, Landlord shall supply Tenant with copies of such test results. The cost of such tests and of the installation, maintenance, repair and replacement of such wells shall be paid by Tenant if such tests disclose the existence of facts which give rise to liability of Tenant pursuant to its indemnity given in subparagraph 7.2B or 7.2C, and Tenant's liability is established in a judicial or administrative proceeding, or in an action for declaratory relief brought by Landlord. F. Landlord, at its sole cost, shall comply with all Hazardous Materials Laws affecting the Property (without right of reimbursement from Tenant) to the extent that (i) Landlord is legally obligated to do so by such Laws, and (ii) such compliance (or the cost of such compliance) is not made the responsibility of Tenant pursuant to subparagraph 7.2B or subparagraph 7.2C. Landlord shall indemnify, defend upon demand with competent counsel, and hold harmless Tenant from and against any and all liability for response costs imposed upon Tenant by any governmental agency pursuant to the federal Law known as "CERCLA" (more particularly identified in subparagraph 7.2G) and the comparable California statute (commonly known as the Carpenter-Presley-Tanner Hazardous Substances Account Act, California Health and Safety Code Section 25300 et seq.) that results from the presence of Hazardous Materials on the Property not caused or contributed to by the use, storage, treatment, release or disposal of Hazardous Materials on or about the Property by Tenant, its subtenants, or their respective agents, employees, contractors, or invitees. Notwithstanding the foregoing, the indemnity given by Landlord in the immediately preceding sentence shall not apply with respect to liability caused by any contamination of the Property by a Hazardous Material that is or has been used, stored, treated, released or disposed of on the Property by Tenant, its subtenants, or their respective agents, employees, contractors, or invitees unless Tenant can prove such contamination was not caused or contributed to by any of such parties. 15. G. As used herein, the term "Hazardous Material," means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State of California or the United States Government. The term "Hazardous Material," includes, without limitation, asbestos, PCB's, petroleum and petroleum products, and any material or substance which in (i) listed under Article 9 or defined as hazardous or extremely hazardous pursuant to Article 11 of Title 22 of the California Administrative Code, Division 4, Chapter 20, (ii) defined as a "hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. (S)6901 et seq. (42 U.S.C. (S)6903), or (iii) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. (S)9601 et seq. (42 U.S.C. 19601). As used herein, the term "Hazardous Material Law" shall mean any statute, law, ordinance, or regulation of any governmental body or agency (including the U.S. Environmental Protection Agency, the California Regional Water Quality Control Board, and the California Department of Health Services) which regulates the use, storage, release or disposal of any Hazardous Material. H. The obligations of Landlord and Tenant under this paragraph 7.2 shall survive the expiration or earlier termination of the Lease Term. The rights and obligations of Landlord and Tenant with respect to issues relating to Hazardous Materials are exclusively established by this paragraph 7.2. In the event of any inconsistency between any other part of this Lease and this paragraph 7.2, the terms of this paragraph 7.2 shall control. 7.3 Utilities. Tenant shall promptly pay, as the same become due, all charges for water, gas, electricity, telephone, sewer service, waste pick-up and any other utilities, materials or services furnished directly to or used by Tenant on or about the Premises during the Lease Term, including, without limitation, (i) meter, use and/or connection fees, hook-up fees, standby fees, and (ii) penalties for discontinued or interrupted service. 7.4 Compliance with Governmental Regulations. Landlord and Tenant shall comply with all rules, regulations and requirements promulgated by national, state or local governmental agencies or utility suppliers concerning the use of utility services, including any rationing, limitation or other control. Landlord may voluntarily cooperate in a reasonable manner with the efforts of all governmental agencies or utility suppliers in reducing energy or other resource consumption. Tenant shall not be entitled to terminate this Lease nor to any abatement in rent by reason of such compliance or cooperation. Tenant agrees at all times to cooperate fully with Landlord and to abide by all rules, regulations and requirements which Landlord may prescribe in order to maximize the efficient operation of the HVAC system and all other utility systems. ARTICLE 8 Real Property Taxes 8.1 Real Property Taxes Defined. The term "Real Property Taxes" as used herein shall mean (i) all taxes, assessments, levies, and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any existing or future general or special assessments for public improvements, services or benefits, and any increases resulting from reassessments or resulting from a change in ownership or any other cause), now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed against, or with respect to the value, occupancy or use of, all or any portion of the Property (as now constructed or as may at any time hereafter be constructed, altered, or otherwise changed) or Landlord's interest therein, the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located on the Property, the gross receipts, income, or rentals from the Property, or the use of parking areas, public utilities, or energy within the Property, (ii) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Property (excluding costs and expenses for which Landlord is responsible pursuant to subparagraph 7.2F), and (iii) all costs and fees (including attorneys' fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If at any time during the Lease Term the method of taxation or assessment of the Property prevailing as of the Commencement Date shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use or 16. occupancy of the Property, (ii) on or measured by the gross receipts, income, or rentals from the Property, (iii) on Landlord's business of leasing the Property, or (iv) computed in any manner with respect to the operation of the Property, then any such tax or charge, however designated, shall be included within the meaning of the term "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Property, then only that part of such Real Property Tax that is fairly allocable to the Property shall be included within the meaning of the term "Real Property Taxes". Notwithstanding the foregoing, the term "Real Property Taxes" shall not include estate, inheritance, transfer, gift or franchise taxes of Landlord or the federal or state net income tax imposed on Landlord's income from all sources. 8.2 Tenant's Obligation to Reimburse. As Additional Rent, Tenant shall pay to Landlord Tenant's Allocated Share of all Real Property Taxes which become due after the Rent Start Date and during the Lease Term which are fairly allocable to the Premises, which include (i) all Real Property Taxes assessed with respect to the value, use or occupancy of the Premises and the land beneath it, and (ii) a proportionate share (based on the Premises Gross Leaseable Area as a percentage of the Property Gross Leaseable Area) of all Real Property Taxes assessed with respect to the Common Area or with respect to the Property in general which are not fairly allocable to any one building on the Property. Tenant shall pay its share of Real Property Taxes (i) within thirty (30) days after being billed for the same by Landlord, or (ii) no later than ten (10) days before such Real Property Tax becomes delinquent, whichever last occurs. If requested by Tenant in writing within one year from receipt of a bill for Tenant's Allocated Share of Real Property Taxes, Landlord shall furnish Tenant with such evidence as is reasonably available to Landlord with respect to the amount of any Real Property Tax which is part of such bill. Tenant may not withhold payment of such bill pending receipt and/or review of such evidence. Upon Landlord's election or if any Lender requires Landlord to impound Real Property Taxes on a periodic basis during the Lease Term, then Tenant, on notice from Landlord indicating this requirement, shall pay a sum of money toward its liability under this Article to Landlord on the same periodic basis in accordance with the Lender's requirements (if any). Landlord shall impound the Real Property Tax payments received from Tenant in accordance with the requirements of the Lender (if any). If any assessments are levied against the Property, Landlord may elect either to pay the amount in full or to allow the assessment to go to bond. If Landlord pays the assessment in full, Tenant shall pay to Landlord each time payment of Real Property Taxes is made a sum equal to that which would have been payable (as both principal and interest) had Landlord allowed the assessment to go to bond. Notwithstanding anything to the contrary contained in paragraphs 8.1 and 8.2, if there is an increase in Real Property Taxes resulting from a "change in ownership" (as that term is defined in California Revenue and Taxation Code Section 60 et seq.) which occurs prior to the fourth (4th) anniversary of the Commencement Date, then Tenant shall not be obligated to pay any such increase that results from such "change of ownership". 8.3 Taxes on Tenant's Property. Tenant shall pay before delinquency any and all taxes, assessments, license fees and public charges levied, assessed or imposed against Tenant or Tenant's estate in this Lease or the property of Tenant situated within the Premises which become due during the Lease Term. Tenant shall furnish Landlord with satisfactory evidence of these payments within thirty (30) days after receipt of written request therefor from Landlord. ARTICLE 9 Insurance 9.1 Tenant's Insurance. Tenant shall maintain insurance complying with all of the following: A. Tenant shall procure, pay for and keep in full force and affect the following: (1) Commercial general liability insurance, including property damage, against liability for personal injury, bodily injury, death and damage to property occurring in or about, or resulting from an occurrence in or about, the Premises with combined single limit coverage of not less than the amount of Tenant's Minimum Liability Insurance Coverage set forth in paragraph 1.8, which insurance shall contain a "contractual liability" endorsement insuring Tenant's performance of Tenant's obligation to indemnify Landlord contained in paragraph 10.3; 17. (2) Plate-glass insurance, at actual replacement cost; and (3) Fire and property damage insurance against loss caused by fire, extended coverage perils including steam boiler insurance, sprinkler leakage, if applicable, vandalism, malicious mischief and such other additional perils as now are or hereafter may be included in a standard extended coverage endorsement from time to time in general use in the county in which, the Property is located, insuring Tenant's personal property, inventory, Trade Fixtures and Leasehold Improvements within the Premises for the full actual replacement cost thereof. B. Where applicable and required by Landlord, each policy of insurance required to be carried by Tenant pursuant to this paragraph (i) shall name Landlord and such other parties in interest as Landlord designates as additional insureds; (ii) shall be primary insurance which provides that the insurer shall be liable for the full amount of the loss up to and including the total amount of liability set forth in the declarations without the right of contribution from any other insurance coverage of Landlord; (iii) shall be in a form satisfactory to Landlord; (iv) shall be carried with companies reasonably acceptable to Landlord; (v) shall provide that such policy shall not be subject to cancellation, lapse or change except after at least thirty (30) days prior written notice to Landlord; (vi) shall not have a "deductible" in excess of $500,000 or such greater amount as is approved by Landlord; (vii) shall (to the extent available) contain a waiver by the insurer of any right to subrogation against Landlord, its agents, employees and contractors which might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its agents, employees or contractors; and (viii) shall contain a "severability" clause. If Tenant has in force and affect a blanket policy of liability insurance with the same coverage for the Premises as described above, as well as other coverage of other premises and properties of Tenant, or in which Tenant has some interest, such blanket insurance shall satisfy the requirements hereof. C. A certificate of each paid-up policy evidencing the insurance requited to be carried by Tenant pursuant to this paragraph (appropriately authenticated by the insurer), certifying that such policy has been issued, providing the coverage required by this paragraph, and containing the provisions specified herein, shall be delivered to Landlord prior to the time Tenant or any of its contractors enters the Premises and upon renewal of such policies, but not less than five (5) days prior to the expiration of the term of such coverage. If Landlord's insurance advisor reasonably determines at any time that the amount of coverage required for any policy of insurance Tenant is to obtain pursuant to this paragraph is not adequate, then Tenant shall increase such coverage for such insurance to such amount as Landlord's insurance advisor reasonably deems adequate, not to exceed the level of coverage commonly carried by comparable businesses similarly situated for such insurance; provided, however, that Landlord may not require an adjustment pursuant to this sentence more frequently than once every two (2) years during the Lease Term. 9.2 Landlord's Insurance. Landlord shall have the following obligations and options regarding insurance: A. Landlord shall maintain a policy or policies of fire and property damage insurance in so-called "all risk" form insuring Landlord (and such others as Landlord may designate) against loss of rents for a period of not less than six, (6) months and from physical damage to the Premises with coverage of not less than the full replacement cost of (i) the building of which the Premises are a part, including the structural elements thereof and all electrical, mechanical, plumbing, and other systems, and (ii) all Interior Improvements constructed pursuant to the Interior Improvement Agreement attached as Exhibit "C". Landlord may so insure the Premises separately, or may insure the Premises with other buildings and improvements within the Property and/or other property owned by Landlord which Landlord elects to insure together under the same policy or policies. Such fire and property damage insurance, at Landlord's election, (i) may be endorsed to cover loss caused by such additional perils against which Landlord may elect to insure, including earthquake and/or flood, (ii) shall contain commercially reasonable "deductibles" which, in the case of earthquake and flood insurance, may be up to ten percent (10%) of the replacement value of the property insured or such higher amount as is then commercially reasonable, (iii) may provide coverage for loss of rents for a period of up to twelve (12) months, and (iv) may contain additional endorsements or coverage reasonably required by Landlord or any Lender, including an "agreed amount" endorsement, demolition insurance (covering the cost of demolishing damaged improvements or improvements required by Law to be demolished), and difference in condition coverage. Landlord shall not be required to cause 18. such insurance to cover any Trade Fixtures, Leasehold Improvements or any inventory or other personal property of Tenant. B. Landlord may maintain a policy or policies of commercial general liability insurance insuring Landlord (and such others as are designated by Landlord) against liability for personal injury, bodily injury, death and damage to property occurring or resulting from an occurrence in, on or about the Property, with combined single limit coverage in such amount as Landlord may from time to time determine is reasonably necessary for its protection and with commercially reasonable deductibles. 9.3 Tenant's Obligation to Reimburse. The cost of the insurance carried by Landlord pursuant to paragraph 9.2 (and any commercially reasonable "deductible" amount paid by Landlord in connection with the restoration of any lose and excluded from the coverage of such insurance) shall be a Common Operating Expense and Tenant shall pay its share thereof as provided in paragraph 6.3. However, if Landlord's insurance rates for the Premises are increased at any time during the Lease Term as a result of the nature of Tenant's use of the Premises, Tenant shall reimburse Landlord for the full amount of such increase immediately upon receipt of a bill from Landlord therefor. 9.4 Release and Waiver of Subrogation. The parties hereto release each other, and their respective agents and employees, from any liability for injury to any person or damage to property that is caused by or results from any risk insured against under any valid and collectible insurance policy carried by either of the parties which contains a waiver of subrogation by the insurer and is in force at the time of such injury or damage, subject to the following limitations: (i) the foregoing provisions shall not apply to the commercial general liability insurance described by subparagraph 9.1A and 9.1B; and (ii) such release shall apply to liability resulting from any risk insured against or covered by self-insurance maintained or provided by Tenant to satisfy the requirements of paragraph 9.1. This release shall be in effect only so long as the applicable insurance policy contains a clause to the effect that this release shall not affect the right of the insured to recover under such policy. Each party shall use reasonable efforts to cause each insurance policy obtained by it to provide that the insurer waives all right of recovery by way of subrogation against the other party and its agents and employees in connection with any injury or damage covered by such policy. However, if any insurance policy cannot be obtained with such a waiver of subrogation, or if such waiver of subrogation is only available at additional cost and the party for whose benefit the waiver is to be obtained does not pay such additional cost, then the party obtaining such insurance shall notify the other party of that fact and thereupon shall be relieved of the obligation to obtain such waiver of subrogation rights from the insurer with respect to the particular insurance involved. ARTICLE 10 Limitation On Landlord's Liability And Indemnity 10.1 Limitation on Landlord's Liability. Landlord shall not be liable to Tenant, nor shall Tenant be entitled to terminate this Lease or to any abatement of rent, for any injury to Tenant, its agents, employees, contractors or invitees, damage to Tenant's property, or loss to Tenant's business resulting from any cause, including without limitation any (i) failure, interruption or installation of any HVAC or other utility system or service; (ii) failure to furnish or delay in furnishing any utilities or services when such failure or delay is caused by Acts of God or the elements, labor disturbances of any character, any other accidents or other conditions beyond the reasonable control of Landlord; (iii) limitation, curtailment, rationing or restriction on the use of water or electricity, gas or any other form of energy or any services or utility serving the Premises; (iv) vandalism or forcible entry by unauthorized persons; or (v) penetration of water into or onto any portion of the Premises or the Common Area through roof leaks or otherwise. Notwithstanding the foregoing: A. Subject to paragraph 9.4, Landlord shall be liable for any such injury, damage or loss which is proximately caused by Landlord's gross negligence or willful misconduct, of which Landlord has actual notice and a reasonable opportunity to cure but which it fails to so cure. 19. B. Tenant shall have the option to terminate this Lease upon the occurrence of the following: (i) water, electricity, or other utility service essential to the conduct of Tenant's business in the Premises is interrupted or substantially impaired for a period of more than two hundred seventy (270) consecutive days during which time the Premises are rendered substantially unusable for the conduct of Tenant's business (a "Material Interruption"); and (ii) the Material Interruption is not caused by the act or omission of Tenant, its agents, employees or contractors. 10.2 Limitation on Tenant's Recourse. So long as the Landlord is a corporation, trust, partnership, joint venture, unincorporated association or other form of business entity, (i) the obligations of Landlord shall not constitute personal obligations of the officers, directors, trustees, partners, joint venturers, members, owners, stockholders, or other principals or representatives of such business entity, and (ii) Tenant shall have recourse only to the assets of such business entity for the satisfaction of such obligations and not against the assets of such officers, directors, trustees, partners, joint venturers, members, owners, stockholders, principals or representatives, except to the extent of their interests in the entity that is Landlord. If Landlord is a natural person or persons, Tenant shall have recourse only to the interest of such natural persons in the Property for the satisfaction of the obligations of Landlord and shall not have recourse to any other assets of such natural persons for the satisfaction of such obligations. 10.3 Indemnification of Landlord . Tenant shall hold harmless, indemnify and defend Landlord, and Its employees, agents and contractors, with competent counsel, from all liability, penalties, losses, damages, costs, expenses, causes of action, claims and/or judgments arising by reason of any death, bodily injury, personal injury or property damage (i) resulting from any cause or causes whatsoever (other than the negligence or willful misconduct of Landlord of which Landlord has had notice and a reasonable time to cure, but which Landlord has failed to cure) occurring in or about or resulting from an occurrence in or about the Premises, or (ii) resulting from the negligence or willful misconduct of Tenant, its agents, employees and contractors, wherever the same may occur, or (iii) resulting from an Event of Tenant's Default. The provisions of this paragraph shall survive the expiration or sooner termination of this Lease. ARTICLE 11 Damage To Premises 11.1 Landlord's Duty to Restore. If the Premises are damaged by any peril after the Commencement Date of this Lease, Landlord shall restore the Premises unless the Lease is terminated by Landlord pursuant to paragraph 11.2 or by Tenant pursuant to paragraph 11.3. All insurance proceeds available from the fire and property damage insurance carried by Landlord pursuant to paragraph 9.2 shall be paid to and become the property of Landlord. If this Lease is terminated pursuant to either paragraphs 11.2 or 11.3, then all insurance proceeds available from insurance carried by Tenant which covers loss to property that is Landlord's property or would become Landlord's property on termination of this Lease shall be paid to and become the property of Landlord. If this Lease is not so terminated, then upon receipt of the insurance proceeds (if the loss is covered by insurance) and the issuance of all necessary governmental permits, Landlord shall commence and diligently prosecute to completion the restoration of the Premises, to the extent then allowed by Law, to substantially the same condition in which the Premises were immediately prior to such damage. Landlord's obligation to restore shall be limited to the Premises and interior improvements constructed by Tenant but financed by Landlord pursuant to the Interior Improvement Agreement as such improvements existed upon completion thereof excluding any Leasehold Improvements, Trade Fixtures and/or personal property constructed or installed by Tenant in the Premises. To the extent that insurance proceeds recovered by Landlord from the Insurance carried pursuant to paragraph 9.2A exceed the amount needed by Landlord to discharge its restoration obligation pursuant to the immediately preceding sentence, Landlord shall make such excess insurance proceeds available to Tenant for the purpose of restoring interior improvements that were constructed by Tenant and financed by Tenant pursuant to the Interior Improvement Agreement, so that such improvements may be restored to substantially the same condition existing as of the date such improvements were initially completed. 20. 11.2 Landlord's Right to Terminate. Landlord shall have the right to terminate this Lease in the event any of the following occurs, which right may be exercised only by delivery to Tenant of a written notice of election to terminate within thirty (30) days after the date of such damage: A. Either the Property or the Premises is damaged by an Insured Peril to such an extent that the estimated cost to restore equals or exceeds eighty percent (80%) of the then actual replacement cost thereof and there remains less than three (3) years in the Lease Term; provided, however, that Landlord may not terminate this Lease pursuant to this subparagraph 11.2A if Tenant at the time of such damage has a then valid written option to extend the Lease Term and Tenant exercises such option to extend the Lease Term within fifteen (15) days after Tenant receives Landlord's notice of election to terminate and such action results in there being more than three (3) years remaining in the Lease Term (as it has been extended by the exercise of such option); B. Either the Property or the Premises is damaged by an Uninsured Peril to such an extent that the estimated cost to restore exceeds two percent (2%) of the actual replacement cost thereof; provided, however, that Landlord may not terminate this Lease pursuant to this paragraph 11.2B if one or more tenants of the Property agree in writing to pay the amount by which the cost to restore the damage exceeds such amount and subsequently deposit such amount with Landlord within thirty (30) days after Landlord has notified Tenant of its election to terminate this Lease; C. The Premises are damaged by any peril within twelve (12) months of the last day of the Lease Term to such an extent that the estimated cost to restore equals or exceeds an amount equal to six (6) times the Base Monthly Rent then due; provided, however, that Landlord may not terminate this Lease pursuant to this subparagraph 11.2C if Tenant, at the time of such damage, has a then valid express written option to extend the Lease Term and Tenant exercises such option to extend the Lease Term within fifteen (15) days following the date of such damage; or D. As used herein, the following terms shall have the following meanings: (i) the term "Insured Peril" shall mean a peril actually insured against for which the insurance proceeds paid or made available to Landlord are sufficient (except for any "deductible" amount specified by such insurance) to restore the Property under the then existing building codes to the condition existing immediately prior to the damage; and (ii) the term "Uninsured Peril" shall mean and include any peril not actually insured against, any peril actually insured against but for which the insurance proceeds paid or made available to Landlord are for any reason (except for any "deductible" amount specified by such insurance) insufficient to restore the Property under then existing building codes to the condition existing immediately prior to the damage, and any peril actually insured against but for which the insurance proceeds are not paid or made available to Landlord. 11.3 Tenant's Right to Terminate. If the Premises are damaged by any peril and Landlord does not elect to terminate this Lease or is not entitled to terminate this Lease pursuant to paragraph 11.2, then as soon as reasonably practicable, Landlord shall furnish Tenant with the written opinion of Landlord's architect or construction consultant as to when the restoration work required of Landlord may be completed. Tenant shall have the right to terminate this Lease in the event any of the following occurs, which right may be exercised only by delivery to Landlord of a written notice of election to terminate within thirty (30) days after Tenant receives from Landlord the estimate of the time needed to complete such restoration: A. The Premises are damaged by any peril and, in the reasonable opinion of Landlord's architect or construction consultant, the restoration of the Premises cannot be substantially completed within two hundred seventy (270) days after the date of such damage; or B. The Premises are damaged by any peril within twelve (12) months of the last day of the Lease Term and in the reasonable opinion of Landlord's architect or construction consultant the restoration of the Premises cannot be substantially completed within ninety (90) days after the date of such damage; or C. The Premises are not restored within eighteen (18) months following the date of such damage; provided, however, that if at the time restoration of the "shell" of the building in which the Premises are 21. located is substantially completed (excluding Interior Improvements) Landlord reasonably estimates that Landlord will not be able to complete restoration of the Premises within such eighteen (18) month period, then at that time Landlord may offer in writing to Tenant the option to terminate this Lease, and if Tenant does not exercise such option to terminate the Lease so offered to Tenant by Landlord, then Tenant may not thereafter elect to terminate this Lease pursuant to this subparagraph 11.3C. 11.4 Abatement of Rent. In the event of damage to the Premises which does not result in the termination of this Lease, the Base Monthly Rent and the Additional Rent shall be temporarily abated commencing on the date of damage and continuing through the period of restoration in proportion to the degree to which Tenant's use of the Premises is impaired by such damage. Tenant shall not be entitled to any compensation or damages from Landlord for loss of Tenant's business or property or for any inconvenience or annoyance caused by such damage or restoration. Tenant hereby waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code, and the provisions of any similar law hereinafter enacted. ARTICLE 12 Condemnation 12.1 Tenant's Termination Right. Tenant shall have the right to terminate this Lease if, as a result of any taking by means of the exercise of the power of eminent domain (including any voluntary sale or transfer by Landlord to any condemnor under threat of condemnation), (i) ten percent (10%) or more of the Premises is so taken, or (ii) there is a taking affecting the Common Area and, as a result of such taking, Landlord cannot provide parking spaces within reasonable walking distance of the Premises equal in number to at least ninety percent (90%) of the number of spaces allocated to Tenant by paragraph 2.1, whether by rearrangement of the remaining parking areas in the Common Area (including construction of multi-dock parking structures or restriping for compact cars where permitted by Law) or by alternative parking facilities on other land. Tenant must exercise such right within a reasonable period of time, to be effective on the date that possession of that portion of the Premises or Common Area that is condemned is taken by the condemnor. 12.2 Restoration and Abatement of Rent. If any part of the Premises or the Common Area is taken by condemnation and this Lease is not terminated, then Landlord shall restore the remaining portion of the Premises and Common Area to substantially the same condition in which the Premises and Common Area were immediately prior to such taking, excluding any Leasehold Improvements, Trade Fixtures and/or personal property constructed or installed by Tenant; provided, however, that Landlord shall not be obligated to spend more for such restoration than the amount of any condemnation award recovered by or pursuant to paragraph 12.3. Thereafter, except in the case of a temporary taking, (i) as of the date possession is taken the Base Monthly Rent (but not any Additional Rent) shall be reduced in the same proportion that the floor area of that part of the Premises so taken (less any addition thereto by reason of any reconstruction) bears to the original floor area of the Premises, and (ii) to the extent that Landlord is obligated to undertake any restoration work as a result of such condemnation, the Base Monthly Rent shall be further abated in proportion to the extent to which such restoration work interferes with Tenant's ability to use that part of the Premises which remains after the condemnation. 12.3 Temporary Taking. If any portion of the Premises is temporarily taken for six (6) months or less, this Lease shall remain in effect and Tenant shall be entitled to recover any condemnation award that is made for such taking and shall be responsible for restoring the Premises to the condition existing immediately prior to such temporary taking. If any portion of the Premises is temporarily taken by condemnation for a period which exceeds six (6) months or which extends beyond the natural expiration of the Lease Term, and such taking materially and adversely affects Tenant's ability to use the Premises for the Permitted Use, then Tenant shall have the right to terminate this Lease, effective on the date possession is taken by the condemnor. 12.4 Division of Condemnation Award. Any award made as a result of any condemnation of the Premises or the Common Area shall belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any such award; provided, however, that Tenant shall be entitled to recover out of any condemnation award made for a taking of all or part of the Premises an amount equal to the unamortized cost of all interior improvements paid for by Tenant constructed pursuant to the Interior Improvement Agreement and all 22. Leasehold Improvements constructed by Tenant (amortized on a straight line basis over the initial Lease Term for Interior Improvements, and over the period from completion of construction until expiration of the Lease Term for Leasehold Improvements); and provided further that Tenant shall be entitled to receive any condemnation award that is made directly to Tenant for the following so long as the award made to Landlord is not thereby reduced: (i) for the taking of personal property or Trade Fixtures belonging to Tenant, (ii) for the interruption of Tenant's business or its moving costs, (iii) for loss of Tenant's goodwill, or (iv) for any temporary taking where this Lease is not terminated as a result of such taking. The rights of Landlord and Tenant regarding any condemnation shall be determined as provided in this Article, and each party hereby waives the provisions of Section 1265.130 of the California Code of Civil Procedure and the provisions of any similar law hereinafter enacted allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises. ARTICLE 13 Default And Remedies 13.1 Events of Tenant's Default. Tenant shall be in default of its obligations under this Lease if any of the following events occurs (an "Event of Tenant's Default"): A. Tenant shall have failed to pay Base Monthly Rent or any Additional Rent when due and such failure is not cured within ten (10) days after delivery of written notice from Landlord specifying such failure to pay; or B. Tenant shall have failed to perform any term, covenant, or condition of this Lease except those requiring the payment of Base Monthly Rent or Additional Rent, and Tenant shall have failed to cure such breach within thirty (30) days after written notice from Landlord specifying the nature of such breach, or if such breach could not reasonably be cured within said thirty (30) day period, Tenant shall have failed to commence such cure within said thirty (30) day period and thereafter continue with due diligence to prosecute such cure to completion within such time period as is reasonably needed; or C. Tenant shall have made a general assignment of its assets for the benefit of its creditors; or D. Tenant shall have sublet the Premises or assigned its interest in the Lease in violation of the provisions contained in Article 14, whether voluntarily or by operation of law; Landlord shall have notified Tenant in writing that such Transfer constitutes a violation of the provisions contained in Article 14, and Tenant does not cause such Transfer to be rescinded or terminated and possession of the Premises affected by the Transfer recovered from the Transferee within ninety (90) days after receipt of such notice; or E. Tenant shall have permitted the sequestration or attachment of, or execution on, or the appointment of a custodian or receiver with respect to, all or any substantial part of the property of Tenant or any property essential to the conduct of Tenant's business, and Tenant shall have failed to obtain a return or release of such property within ninety (90) days thereafter or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; or F. A court shall have made or entered any decree or order with respect to Tenant, or Tenant shall have submitted to or sought a decree or order (or a petition or pleading shall have been filed in connection therewith) which: (i) grants or constitutes (or seeks) an order for relief, appointment of a trustee, or confirmation of a reorganization plan under the bankruptcy laws of the United States; (ii) approves as properly filed (or seeks such approval of) a petition seeking liquidation or reorganization under said bankruptcy laws or any other debtor's relief law or statute of the United States or any state thereof; or (iii) otherwise directs (or seeks) the winding up or liquidation of Tenant; and such petition, decree or order shall have continued in effect for a period of ninety (90) or more days; or 23. G. Tenant shall have failed to deliver documents as required of it pursuant to paragraph 15.4 or 15.7 within the time periods specified therein and Tenant shall have failed to cure such default within ten (10) days after Landlord has delivered to Tenant written notice that Tenant is in default of its obligations to deliver such documents pursuant to either paragraph 15.4 or 15.7; or; H. An Event of Tenant's Default has occurred under the Building C Lease (unless caused by a subtenant or assignee of the original Tenant under this Lease and such original Tenant is using reasonable efforts to cause such default to be cured) and, at the time Tenant is so in default, the Premises and the real property leased to Tenant pursuant to the Building C Lease are both owned of record by the same person or entity. 13.2 Landlord's Remedies. If an Event of Tenant's Default occurs, Landlord shall have the following remedies, in addition to all other rights and remedies provided by any Law or otherwise provided in this Lease, to which Landlord may resort cumulatively or in the alternative: A. Landlord may, at Landlord's election, keep this Lease in effect and enforce by an action at law or in equity all of its rights and remedies under this Lease, including (i) the right to recover the rent and other sums as they become due by appropriate legal action, (ii) the right to make payments required of Tenant or perform Tenant's obligations and be reimbursed by Tenant for the cost thereof with interest at the Agreed Interest Rate from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant, and (iii) the remedies of injunctive relief and specific performance to compel Tenant to perform its obligations under this Lease. B. Landlord may, at Landlord's election, terminate this Lease by giving Tenant written notice of termination, in which event this Lease shall terminate on the date set forth for termination in such notice. Any termination under this subparagraph shall not relieve Tenant from its obligation to pay sums then due Landlord or from any claim against Tenant for damages or rent previously accrued or then accruing. In no event shall any one or more of the following actions by Landlord, in the absence of a written election by Landlord to terminate this Lease, constitute a termination of this Lease: (1) Appointment of a receiver or keeper in order to protect Landlord's interest hereunder; (2) Consent to any subletting of the Premises or assignment of this Lease by Tenant, whether pursuant to the provisions hereof or otherwise; or (3) Any other action by Landlord or Landlord's agents intended to mitigate the adverse effects of any breach of this Lease by Tenant, including, without limitation, any action taken to maintain and preserve the Premises or any action taken to relet the Premises or any portions thereof, for the account of Tenant and in the name of Tenant. C. In the event Tenant breaches this Lease and abandons the Premises, this Lease shall not terminate unless Landlord gives Tenant written notice of its election to so terminate this Lease. No act by or on behalf of Landlord intended to mitigate the adverse effect of such breach, including those described by subparagraphs 13.2B(1), (2) and (3) immediately preceding, shall constitute a termination of Tenant's right to possession unless Landlord gives Tenant written notice of termination. Should Landlord not terminate this Lease by giving Tenant written notice, Landlord may enforce all its rights and remedies under this Lease, including the right to recover the rent as it becomes duo under the Lease as provided in California Civil Code Section 1951.4 as in effect on the Commencement Date of this Lease. D. In the event Landlord terminates this Lease, Landlord shall be entitled, at Landlord's election, to damages in an amount as set forth in California Civil Code Section 1951.2 as in effect on the Commencement Date of this Lease. For purposes of computing damages pursuant to Section 1951.2, (i) an interest rate equal to the Agreed Interest Rate shall be used where permitted and (ii) the term "rent" includes Base Monthly Rent and Additional Rent. Such damages shall include without limitation: 24. (1) The worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided, computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%); and (2) Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom, including, without limitation, the following: (i) expenses for cleaning, repairing or restoring the Premises; (ii) expenses for altering, remodeling or otherwise improving the Premises for the purpose of reletting, including installation of leasehold improvements (whether such installation be funded by a reduction of rent, direct payment or allowance to a new tenant, or otherwise); (iii) broker's fees, advertising costs and other expenses of reletting the Premises; (iv) costs of carrying the Premises, such as taxes, insurance premiums, utilities and security precautions; (v) expenses in retaking possession of the Premises; and (vi) attorneys' fees and court costs incurred by Landlord in retaking possession of the Premises and in releasing the Premises or otherwise incurred as a result of Tenant's default. E. Nothing in this paragraph shall limit Landlord's right to indemnification from Tenant as provided in paragraph 7.2 and paragraph 10.3. Any notice given by Landlord in order to satisfy the requirements of subparagraphs 13.1A or B above shall also satisfy the notice requirements of California Code of Civil Procedure Section 1161 regarding unlawful detainer proceedings. 13.3 Waiver by Tenant of Certain Remedies. Tenant waives the provisions of Sections 1932(1), 1941 and 1942 of the California Civil Code and/or any similar or successor law regarding Tenant's right to terminate this Lease or to make repairs and deduct the expenses of such repairs from the rent due under the Lease. 13.4 Waiver. One party's consent to or approval of any act by the other party requiring the first party's consent or approval shall not be deemed to waive or render unnecessary the first party's consent to or approval of any subsequent similar act by the other party. The receipt by Landlord of any rent or payment with or without knowledge of the breach of any other provision hereof shall not be deemed a waiver of any such breach unless such waiver is in writing and signed by Landlord. No delay or omission in the exercise of any right or remedy accruing to either party upon any breach by the other party under this Lease shall impair such right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. The waiver by either party of any breach of any provision of this Lease shall not be deemed to be a waiver of any subsequent breach of the same or of any other provisions herein contained. 13.5 Limitation on Exercise of Rights. At any time that an Event of Tenant's Default has occurred and remains uncured, (i) it shall not be unreasonable for Landlord to deny or withhold any consent or approval requested of it by Tenant which Landlord would otherwise be obligated to give, and (ii) Tenant may not exercise any option to extend, right to terminate this Lease, or other right granted to it by this Lease which would otherwise be available to it. ARTICLE 14 Assignment And Subletting 14.1 By Tenant. The following provisions shall apply to any assignment, subletting or other transfer by Tenant or any subtenant or assignee or other successor in interest of the original Tenant (collectively referred to in this paragraph as "Tenant"): A. Tenant shall not do any of the following (collectively referred to herein as a "Transfer"), whether voluntarily, involuntarily or by operation of laws, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed: (i) sublet all or any part of the Premises or allow it to be sublet, occupied or used by any person or entity other than Tenant; (ii) assign its interest in this Lease; (iii) transfer any right appurtenant to this Lease or the Premises; (iv) mortgage or encumber the Lease (or otherwise use the Lease 25. as a security device) in any manner; or (v) terminate or materially amend or modify an assignment, sublease or other transfer that has been previously approved by Landlord. Any Transfer so approved by Landlord shall not be effective until Tenant has delivered to Landlord an executed counterpart of the document evidencing the Transfer which (i) is in form approved by Landlord, (ii) contains the same terms and conditions as stated in Tenant's notice given to Landlord pursuant to subparagraph 14.1B, and (iii) contains the agreement of the proposed transferee to assume all obligations of Tenant related to the Transfer arising after the effective date of such Transfer and to remain jointly and severally liable therefor with Tenant. Any attempted Transfer without Landlord's consent shall be voidable at Landlord's option. Landlord's consent to any one Transfer shall not constitute a waiver of the provisions of this paragraph 14.1 as to any subsequent Transfer nor a consent to any subsequent Transfer. No Transfer, even with the consent of Landlord, shall relieve Tenant of its personal and primary obligation to pay the rent and to perform all of the other obligations to be performed by Tenant hereunder. The acceptance of rent by Landlord from any person shall not be deemed to be a waiver by Landlord of any provision of this Lease nor to be a consent to any Transfer. B. Tenant shall give Landlord at least fifteen (15) days prior written notice of any desired Transfer and of the proposed terms of such Transfer including but not limited to (i) the name and legal composition of the proposed transferee; (ii) a current financial statement of the transferee, financial statements of the transferee covering the preceding three years if the same exist, and (if available) an audited financial statement of the transferee for a period ending not more than one year prior to the proposed effective date of the Transfer, all of which statements are prepared in accordance with generally accepted accounting principles; (iii) the nature of the proposed transferee's business to be carried on in the Premises; (iv) all consideration to be given on account of the Transfer; (v) a current financial statement of Tenant; and (vi) such other information as may be reasonably requested by Landlord. Tenant's notice shall not be deemed to have been served or given until such time as Tenant has provided Landlord with all information reasonably requested by Landlord pursuant to this subparagraph 14.1B. Tenant shall immediately notify Landlord of any modification to the proposed terms of such Transfer. C. In the event that Tenant seeks to make any Transfer, then Landlord, by giving Tenant written notice of its election within fifteen (15) days after Tenant's notice of intent to Transfer has been deemed given to Landlord, shall have the right to elect (i) to withhold its consent to such Transfer, as permitted pursuant to subparagraph 14.1A, or (ii) to permit Tenant to so assign the Lease or sublease such part of the Premises, in which event Tenant may do so, but without being released of its liability for the performance of all of its obligations under the Lease, and the following shall apply: (1) Subject to subparagraph 14.1C(5), if Tenant assigns its interest in this Lease in accordance with this subparagraph 14.1C, then Tenant shall pay to Landlord fifty percent (50%) of all consideration received by Tenant over and above (i) the assignee's agreement to assume the obligations of Tenant under this Lease and (ii) all Permitted Transfer Costs related to such assignment. (2) Subject to subparagraph 14.1C(5), if Tenant sublets all or part of the Premises, then Tenant shall pay to Landlord fifty percent (50%) of the positive difference, if any, between (i) all rent and other consideration paid by the subtenant to Tenant, less (ii) all rent paid by Tenant to Landlord pursuant to this Lease which is allocable to the area so sublet and all Permitted Transfer Costs related to such sublease. Such amount shall be paid to Landlord on the same basis, whether periodic or in lump sum, that such rent and other consideration is paid to Tenant by its subtenant, within seven (7) days after it is received by Tenant. (3) Tenant's obligations under this subparagraph shall survive any assignment or sublease. At the time Tenant makes any payment to Landlord required by this subparagraph, Tenant shall deliver an itemized statement of the method by which the amount to which Landlord is entitled was calculated, certified by Tenant as true and correct. Landlord shall have the right to inspect Tenant's books and records relating to the payments due pursuant to this subparagraph. Upon request therefor, Tenant shall deliver to Landlord copies of all bills, invoices or other documents upon which its calculations are based. Landlord may condition its approval of any Transfer upon obtaining a certification from both Tenant and the proposed transferee of all amounts that are to be paid to Tenant in connection with such Transfer. 26. (4) As used herein, the term "consideration' shall mean any consideration of any kind received, or to be received, by Tenant as a result of the Transfer, if such sums are related to Tenant's interest in this Lease or in the Premises, including payments (in excess of the fair market value thereof) for Tenant's assets, fixtures, leasehold improvements, inventory, accounts, goodwill, equipment, furniture, general intangibles and any capital stock or other equity ownership interest in Tenant. As used in this subparagraph, the term "Permitted Transfer Costs" shall mean (i) all reasonable leasing commissions paid to third parties not affiliated with Tenant in order to obtain the Transfer in question, (ii) all reasonable attorneys' fees incurred by Tenant with respect to the Transfer in question, (iii) the cost of tenant improvements installed for the use of the subtenant or assignee to the extent required by such party as a condition to the Transfer, and (iv) any payments made by Tenant to the transferee to induce it to enter into the Transfer (e.g., payment of moving expenses). (5) Notwithstanding anything to the contrary contained in the foregoing, Landlord shall not participate in excess consideration received by Tenant from an assignee or subtenant as provided for in subparagraphs 14.1C(1) and 14.1C(2) unless such assignment or sublease occurs during an Option Term or, in the case of a sublease, extends into an Option Term (in which latter event Landlord shall be entitled to its share of the excess consideration paid during the Option Term). D. If Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, or the sale or transfer in the aggregate over the Lease Term of a controlling percentage of the capital stock of Tenant, shall be deemed a voluntary assignment of Tenant's interest in this Lease; provided, however, that the foregoing shall not apply to corporations the capital stock of which is publicly traded. The phrase "controlling percentage" means the ownership of and the right to vote stock possessing more than fifty percent (50%) of the total combined voting power of all classes of Tenant's capital stock issued, outstanding and entitled to vote for the election of directors. If Tenant is a partnership, any withdrawal or substitution (whether voluntary, involuntary or by operation of law, and whether occurring at one time or over a period of time) of any partner(s) owning twenty-five percent (25%) or more (cumulatively) of any interest in the capital or profits of the partnership or the dissolution of the partnership, shall be deemed a voluntary assignment of Tenant's interest in this Lease. E. Notwithstanding anything contained in this paragraph 14.1, so long as Tenant otherwise complies with the provisions of paragraph 14.1 Tenant may enter into any one of the following transfers (a "Permitted Transfer") without Landlord's prior written consent, and Landlord shall not be entitled to receive any part of any excess rentals or other consideration resulting therefrom that would otherwise be due to it pursuant to paragraph 14.C: (1) Tenant may sublease all or part of the Premises or assign its interest in this Lease to any corporation which controls, is controlled by, or is under common control with the original Tenant to this Lease by means of an ownership interest of more than fifty percent (50%); (2) Tenant may assign its interest in the Lease to a corporation which results from a merger, consolidation or other reorganization in which Tenant is not the surviving corporation, so long as (i) Tenant demonstrates to Landlord's reasonable satisfaction that the surviving corporation will have sufficient creditworthiness to provide adequate assurance of future performance of all of Tenant's obligations under this Lease, or (ii) the surviving corporation has a net worth at the time of such assignment that is equal to or greater than the net worth of Tenant immediately prior to such transaction; and (3) Tenant may assign this Lease to a corporation which purchases or otherwise acquires all or substantially all of the assets of Tenant, so long as (i) Tenant demonstrates to Landlord's reasonable satisfaction that the acquiring corporation will have sufficient creditworthiness to provide adequate assurance of future performance of all of Tenant's obligations under this Lease, or (ii) such acquiring corporation has a net worth at the time of such assignment that is equal to or greater than the net worth of Tenant immediately prior to such transaction. 14.2 By Landlord. Landlord and its successors in interest shall have the right to transfer their interest in the Premises and the Property at any time and to any person or entity. In the event of any such transfer, the 27. Landlord originally named herein (and, in the case of any subsequent transfer, the transferor) from the date of such transfer, (i) shall be automatically relieved, without any further act by any person or entity, of all liability for the performance of the obligations of the Landlord hereunder which may accrue after the date of such transfer, and (ii) shall be relieved of all liability for the performance of the obligations of the Landlord hereunder which have accrued before the date of transfer if its transferee agrees to assume and perform all such obligations of the Landlord hereunder. After the date of any such transfer, the term "Landlord" as used herein shall mean the transferee of such interest in the Premises and the Property. ARTICLE 15 General Provisions 15.1 Landlord's Right to Enter. Landlord and its agents may enter the Premises immediately in case of emergency and otherwise only at such time as is approved by Tenant which time of entry shall be within seven (7) days after Landlord delivers written notice to Tenant requesting approval of a time to enter, and Landlord may thereafter continue such entry for such reasonable period of time as is necessary to accomplish Landlord's permitted purpose for such entry. Landlord may so enter the Premises for the following purposes: (i) inspecting the same; (ii) posting notices of non-responsibility, (iii) supplying any service to be provided by Landlord to Tenant, (iv) showing the Premises to prospective purchasers or mortgagees, (v) making necessary alterations, additions or repairs, (vi) performing Tenant's obligations when Tenant has failed to do so after written notice from Landlord, (vii) placing upon the Premises ordinary "for sale" signs, (viii) responding to an emergency, and/or (ix) during the last six (6) months of the Lease Term or at any time when there is a Continuing Tenant Default, showing the Premises to prospective tenants and placing upon the Premises ordinary "for lease" signs. For each of the aforesaid purposes, Landlord may enter the Premises by means of a master key, and Landlord shall have the right to use any and all means Landlord may deem necessary and proper to open the doors of the Premises in an emergency. Any entry into the Premises or portions thereof obtained by Landlord by any of said means or otherwise shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. 15.2 Surrender of the Premises. Immediately prior to the expiration or upon the sooner termination of this Lease, Tenant shall remove all Tenant's Trade Fixtures and other personal property, and shall vacate and surrender the Premises to Landlord in the same condition as existed at the Commencement Date, except for (i) reasonable wear and tear, (ii) damage caused by any peril or condemnation, and (iii) contamination by Hazardous Materials for which Tenant is not responsible pursuant to subparagraphs 7.2B or 7.2C. In this regard reasonable wear and tear shall be construed to mean wear and tear caused to the Premises by the natural aging process which occurs in spite of prudent application of reasonable standards for maintenance, repair and janitorial practices, and does not include items of neglected or deferred maintenance. If Landlord so requests, Tenant shall, prior to the expiration or sooner termination of this Lease, remove any Leasehold Improvements designated by Landlord and repair all damage caused by such removal if such removal is required pursuant to paragraph 5.2. If the Premises are not so surrendered at the termination of this Lease, Tenant shall be liable to Landlord for all costs incurred by Landlord in returning the Premises to the required condition, plus interest on all costs incurred at the Agreed Interest Rate. 15.3 Holding Over. This Lease shall terminate without further notice at the expiration of the Lease Term. Any holding over by Tenant after expiration of the Lease Term shall not constitute a renewal or extension of the Lease or give Tenant any rights in or to the Premises except as expressly provided in this Lease. Any holding over after such expiration with the consent of Landlord shall be construed to be a tenancy from month to month on the same terms and conditions herein specified insofar as applicable except that Base Monthly Rent shall be increased to an amount equal to one hundred twenty-five percent (125%) of the Base Monthly Rent required during the last month of the Lease Term. 15.4 Subordination. The following provisions shall govern the relationship of this Lease to any underlying lease, mortgage or dead of trust which now or hereafter affects the Property, and any renewal, modification, consolidation, replacement or extension thereof (a "Security Instrument"): 28. A. This Lease is subject and subordinate to all Security Instruments existing as of the Commencement Date. However, if any Lender so requires, this Lease shall become prior and superior to any such Security Instrument. B. At Landlord's election, this Lease shall become subject and subordinate to any Security Instrument created after the Commencement Date. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed and the terms of this Lease shall not be modified so long so Tenant in not in default and performs all of its obligations under this Lease, unless this Lease is otherwise terminated pursuant to its terms. C. No subordination of this Lease to a Security Instrument pursuant to subparagraphs 15.4A or 15.4B shall be effective until the holder of a Security Instrument executes a subordination and non-disturbance agreement in favor of Tenant by which the Lender agrees to be bound by the immediately preceding sentence. D. Tenant shall execute any document or instrument required by Landlord or any Lender to make this Lease either prior or subordinate to a Security Instrument, which may include such other matters as the Lender customarily requires in connection with such agreements, including provisions that (i) the Lender not be liable for any defaults on the part of Landlord occurring prior to the time the Lender takes possession of the Premises in connection with the enforcement of its Security Instrument; (ii) the Lender not be liable for the performance of any obligations contained in the Interior Improvement Agreement, for the completion of any improvements under construction or required to be constructed by Landlord; (iii) recourse against the Lender is limited to its interest in the Premises; (iv) any notices given by Tenant to Landlord should also be delivered to the Lender; (v) Tenant shall attorn to any purchaser at a foreclosure sale or a grantee designated in a deed in lieu of foreclosure; (vi) the Lender shall not be bound by any rent which Tenant might have paid in advance to any prior Landlord for a period in excess of one mouth; (vii) the Lender shall not be bound by any agreement or modification of the Lease made without the written consent of the Lender; and (viii) upon request, Tenant shall enter into a new lease with Lender of the Premises upon the same term and conditions as the Lease between Landlord and Tenant, which lease shall cover any unexpired term of the Lease existing prior to a foreclosure, trustee's sale, or conveyance in lieu of foreclosure. Tenant's failure to execute any such document or instrument within ten (10) days after written demand therefor shall constitute a default by Tenant. Tenant approves as reasonable the form of subordination and non-disturbance agreement attached to this Lease as Exhibit "D". 15.5 Tenant shall attorn (i) to any purchaser of the Premises or Property at any foreclosure sale or private sale conducted pursuant to any security instrument encumbering the Premises or the Property; (ii) to any grantee or transferee designated in any deed given in lieu of foreclosure; or (iii) to the lessor under any underlying ground lease should such ground lease be terminated. 15.6 Mortgagee Protection. In the event of any default on the part of the Landlord, Tenant will give notice by registered mail to any Lender or lessor under any underlying ground lease whose name has been provided to Tenant and shall offer such Lender or lessor a reasonable opportunity to cure the default, not to exceed thirty (30) days from the expiration of the time period granted to Landlord to cure such default; provided, however, that if such Lender requires additional time to cure a default on the part of Landlord or to obtain possession of the Premises by power of sale or judicial foreclosure or other appropriate legal proceedings if obtaining possession is necessary to effect a cure, the Lender shall be granted such opportunity, provided that the Lender gives reasonable assurances to Tenant that such default will be cured. 15.7 Estoppel Certificates and Financial Statements. At all times during the Lease Term, Tenant agrees, following any request by Landlord, promptly to execute and deliver to Landlord an estoppel certificate, (i) certifying that this Lease is unmodified and in full force and effect or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect, (ii) stating the date to which the rent and other charges are paid in advance, if any, (iii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder or, if there are uncured defaults, specifying the nature of such defaults and (iv) certifying such other information about the Lease as may be reasonably required by Landlord. Tenant's failure to deliver an estoppel certificate within ten (10) days after delivery of Landlord's request therefor 29. shall be a conclusive admission by Tenant that, as of the date of the request for such statement, (i) this Lease is unmodified except as may be represented by Landlord in said request and is in full force and effect, (ii) there are no uncured defaults in Landlord's performance, and (iii) no rent has been paid in advance. At any time during the Lease Term Tenant shall, upon ten (10) days' prior written notice from Landlord, provide Tenant's most recent financial statement and financial statements covering the twenty-four (24) month period prior to the date of such most recent financial statement to any existing Lender or to any potential Lender or buyer of the Property; provided, however, that if Tenant is a corporation whose stock is publicly traded, Tenant may satisfy the foregoing requirement by delivering to the appropriate parties copies of its most recent annual report prepared to satisfy requirements of the federal securities laws. Such statements shall be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant shall be audited by an independent certified public accountant. 15.8 Force Majeure. Any prevention, delay or stoppage due to strikes, lockouts, inclement weather, labor disputes, inability to obtain labor, materials, fuels or reasonable substitutes therefor, governmental restrictions, regulations, controls, action or inaction, civil commotion, fire or other acts of God, and other causes beyond the reasonable control of the party obligated to perform (except financial inability) shall excuse the performance, for a period equal to the period of any said prevention, delay, or stoppage, of any obligation hereunder except the obligation of Tenant to pay rent or any other sums due hereunder. 15.9 Notices. Any notice required or desired to be given regarding this Lease shall be in writing and may be given by personal delivery, by facsimile telecopy, by courier service, or by mail. A notice shall be deemed to have been given (i) on the third (3rd) business day after mailing if such notice was deposited in the United States mail, certified or registered, postage prepaid, addressed to the party to be served at its address first above set forth, (ii) when delivered if given by personal delivery, and (iii) in all other cases when actually received. Either party may change its address by giving notice of same in accordance with this paragraph. 15.10 Obligation to Act Reasonably. Whenever the consent or approval of a party to this Lease is required to be obtained before the other party to this Lease may take an action, such consent or approval shall not be unreasonably withheld or delayed. 15.11 Corporate Authority. If Tenant is a corporation (or a partnership), each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with the bylaws of said corporation (or partnership in accordance with the partnership agreement of said partnership) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. If Tenant is a corporation, each of the persons executing this Lease on behalf of Tenant does hereby covenant and warrant that Tenant is a duly authorized and existing corporation, that Tenant is qualified to do business in California and that the corporation has full right and authority to enter into this Lease. 15.12 Additional Definitions. Any term that is given a special meaning by a provision in this Lease shall have such meaning when used in this Lease or any addendum or amendment hereto. As used herein, the following terms shall have the following meanings: A. Agreed Interest Rate. The term "Agreed Interest Rate" shall mean that interest rate determined as of the time it is to be applied that is equal to the lessor of (i) two percent (2%) in excess of the "prime rate", "reference rate", or "base rate" established by Bank of America (or if Bank of America shall cease to exist, by the commercial bank with its headquarters in California that has the greatest net worth among commercial banks headquartered in California) as it may be adjusted from time to time, or (ii) the maximum interest rate permitted by law. B. Common Area. The term "Common Area" shall mean all areas and facilities within the Property that are not designated by Landlord for the exclusive use of Tenant or any other lessee or other occupant of the Property, including the parking areas, access and perimeter roads, pedestrian sidewalk, landscaped areas, trash enclosures, recreation areas and the like. 30. C. Law. The term "Law" shall mean any judicial decision, statute, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any municipal, county, state, federal or other government agency or authority having jurisdiction over the parties to this Lease or the Premises, or both, in effect either at the Commencement Date of this Lease or any time during the Lease Term, including, without limitation, any regulation, order or policy of any quasi-official entity or body (e.g., board of fire examiners, public utilities or special district). D. Leasehold Improvements. The term "Leasehold Improvements" shall mean all improvements, additions, alterations and fixtures installed in the Premises by Tenant at its expense which are not Trade Fixtures. E. Lender. The term "Lender" shall mean any beneficiary, mortgagee, secured party, lessor, or other holder of any Security Instrument. F. Private Restrictions. The term "Private Restrictions" shall mean all recorded covenants, conditions and restrictions, reciprocal easement agreements, and any other recorded instruments affecting the use of the Premises as they may exist from time to time. G. Trade Fixtures. The term "Trade Fixtures" shall mean anything affixed to the Premises by Tenant at its expense for purposes of trade, manufacture, ornament or domestic use (except replacement of similar work or material originally installed by Landlord) which can be removed without injury to the Premises unless such thing has, by the manner in which it is affixed, become an integral part of the Premises; provided, however, that all of Tenant's signs shall be Trade Fixtures regardless of how affixed to the Premises. 15.13 Miscellaneous. Should any provision of this Lease prove to be invalid or illegal, such invalidity or illegality shall in no way affect, impair or invalidate any other provision hereof, and such remaining provisions shall remain in full force and effect. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. The captions used in this Lease are for convenience only and shall not be considered in the construction or interpretation of any provision hereof. Any executed copy of this Lease shall be deemed an original for all purposes. This Lease shall, subject to the provisions regarding assignment, apply to and bind the respective heirs, successors, executors, administrators and assigns of Landlord and Tenant. "Party" shall mean Landlord or Tenant, as the context implies. If Tenant consists of more than one person or entity, then all members of Tenant shall be jointly and severally liable hereunder. This Lease shall be construed and enforced in accordance with the laws of the State of California. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning, and not strictly for or against either Landlord or Tenant. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. The terms "shall", "will" and "agree" are mandatory. The term "may" is permissive. When a party is required to do something by this Lease, it shall do so at its sole cost and expense without right of reimbursement from the other party unless specific provision is made therefor. Where Tenant is obligated not to perform any act, Tenant is also obligated to use reasonable efforts to restrain any others within its control from performing said act, including Agents, invitees, contractors, and subcontractors. Landlord shall not become or be deemed a partner nor a joint venturer with Tenant by reason of the provisions of this Lease. 15.14 Termination by Exercise of Right. If this Lease is terminated pursuant to its terms by the proper exercise of a right to terminate specifically granted to Landlord or Tenant by this Lease, then this Lease shall terminate thirty (30) days after the date the right to terminate is properly exercised (unless another date is specified in that part of the Lease creating the right, in which event the date so specified for termination shall prevail), the rent and all other charges due hereunder shall be prorated as of the date of termination, and neither Landlord nor Tenant shall have any further rights or obligations under this Lease except for those that have accrued prior to the date of termination. This paragraph does not apply to a termination of this Lease by Landlord as a result of a default by Tenant. 31. 15.15 Brokerage Commissions. Tenant warrants that is has not had any dealings with any real estate brokers, leasing agents or salesmen, or incurred any obligations for the payment of real estate brokerage commissions or finder's fees which would be earned or due and payable by reason of the execution of this Lease other than to the Retained Real Estate Brokers. Landlord shall be responsible for the payment of any commission owed pursuant to a separate written commission agreement between Landlord and Retained Real Estate Brokers for the payment of the commission as a result of the execution of this Lease. 15.16 Entire Agreement. This Lease constitutes the entire agreement between the parties, and there are no binding agreements or representations between the parties except as expressed herein. Tenant acknowledges that neither Landlord nor Landlord's agent(s) has made any representation or warranty as to (i) whether the Premises may be used for Tenant's intended use under existing Law or (ii) the suitability of the Premises or the Common Area for the conduct of Tenant's business or the condition of any improvements located thereon. Tenant expressly waives all claims for damage by reason of any statement, representation, warranty, promise or other agreement of Landlord or Landlord's agent(a), if any, not contained in this Lease or in any addendum or amendment hereto. No subsequent change or addition to this Lease shall be binding unless in writing and signed by the parties hereto. 15.17 Old Lease; Assumption. In consideration for Landlord's agreement to enter into this Lease with Tenant in substantially the same form as the Original Lease, Tenant hereby assumes FMC's obligations under the Original Lease, including, without limitation, the obligation to restore the Premises pursuant Section 5.6 of the Original Lease. 32. In Witness Whereof, Landlord and Tenant have executed this Lease with the intent to be legally bound thereby, to be effective as of the Commencement Date of this Lease.
LANDLORD: TENANT: ATP Associates, L.P., a Delaware limited partnership United Defense L.P., a Delaware limited partnership By: Menlo Equities Associates III Inc., a Delaware By: UDLP Holdings Corp., a Delaware corporation, its corporation, Its General Partner General Partner By: /s/ Henry D. Bullock By: /s/ Peter C. Woglom -------------------------------- ----------------------------------------------- Its: President Printed -------------------------------- Name: Peter C. Woglom ---------------------------------------------- Title: Vice-President and General Manager, --------------------------------------------- Ground Systems Division-UDLP ----------------------------------------------------
33. Exhibit "A" 1. Exhibit "B" PLANS AND SPECIFICATIONS FOR BUILDING "A" [Intentionally Deleted] 1. Exhibit C INTERIOR IMPROVEMENT AGREEMENT (Building A) This Interior Improvement Agreement is made part of that Lease dated for reference purposes only April __, 1999 (the "Lease"), by and between ATP Associates L.P., a Delaware limited partnership ("Landlord") and United Defense L.P., a Delaware limited partnership ("Tenant") of approximately 68,708 square feet of gross leaseable area located in that building commonly known as Building A of Airport Technology Park, 2890 De La Cruz Boulevard, Santa Clara, California. Landlord and Tenant agree that the following terms are hereby added to the Lease: 1. Definitions. As used herein and in the Lease, the following terms shall have the following meanings: A. Approved Plans. The term "Approved Plans" shall mean those final plans, specifications and working drawings to be approved by Landlord. B. Interior Improvements. The term "Interior Improvements" shall mean those improvements described by the Approved Plans that Tenant has the right to construct in the Premises pursuant to paragraph 2 hereof. C. Interior Improvement Costs. The term "Interior Improvement Costs" shall mean the following: (i) the total amount due pursuant to the construction contract entered into by Tenant pursuant to subparagraph 2B hereof to construct the Interior Improvements; (ii) the cost of all governmental approvals, permits and fees required as a condition to the construction of the Interior Improvements; (iii) all utility connection or use fees; (iv) fees of architects, designers, or engineers for services rendered in connection with the design and construction of the Interior Improvements; (v) Tenant's moving and relocation costs incurred in connection with the consolidation of its employees at the Premises over the twelve (12) months prior to the date hereof ("Tenant's Relocation Costs") and (vi) the cost of payment and performance bonds obtained to assure completion of the Interior Improvements. There shall be excluded from Interior Improvement Costs the following, to the extent not included in the construction contract with the Prime Contractor referred to in subparagraph 2B hereof: (i) any fee for Landlord's review of Tenant's plans for the Interior Improvements; (ii) temporary electricity used during the construction period in connection with the construction of the Interior Improvements; and (iii) any fees charged by Tenant or its agents or employees for supervising/reviewing the construction of the Interior Improvements (excluding overhead and profits of prime contractor). D. Landlord's Interior improvement Allowance. The term "Landlord's Interior Improvement Allowance" shall mean the maximum amount Landlord is required to spend toward the payment of the Interior Improvement Costs, which amount is equal to Three Hundred Ten Thousand Dollars ($310,000). E. Substantially Completed. The Interior Improvements shall be deemed to be "Substantially Completed" when (i) Prime Contractor has issued its written certificate stating that such improvements have been substantially completed in accordance with the Approved Plans therefor, (ii) electrified office partitions are installed, and (iii) the Building Department of the City of Santa Clara has completed its final inspection of such improvements and has "signed off" the building inspection card approving such work as complete. F. Prime Contractor. The term "Prime Contractor" shall mean _______. 2. Construction Of Interior improvements. Tenant shall have the right to construct the Interior Improvements in accordance with the following: 1. A. Tenant warrants that the Interior Improvements shall be constructed in a good and workmanlike manner substantially in accordance with the Approved Plans (as modified by any change orders approved by Landlord and Tenant pursuant to paragraph 3 hereof) and all Laws. All materials and equipment furnished shall be fully paid for and be free of liens, chattel mortgages, and security interests of any kind. B. The Interior Improvements shall be constructed by Prime Contractor pursuant to a construction contract between Tenant and Prime Contractor. Landlord shall have the right to review such form of construction contract before it is executed. Once the construction contract between Prime Contractor and Tenant has been executed, Tenant shall not materially amend, modify or alter the responsibilities of Prime Contractor thereunder without Landlord's written consent, except for change orders approved pursuant to paragraph 3 hereof. In connection with the execution of such construction contract, Tenant shall use reasonable efforts to provide that all construction or equipment warranties or guarantees obtained by Tenant shall, to the extent obtainable, provide that such warranties and guaranties shall also run for the benefit of Landlord. Upon reasonable written advance request of Landlord, Tenant shall inform Landlord of all written construction and equipment warranties existing in favor of Tenant which affect the Interior Improvements. Tenant shall cooperate with Landlord in enforcing such warranties and in bringing any suit that may be necessary to enforce liability with regard to any defects. C. Tenant shall use reasonable efforts to commence construction of the Interior Improvements as soon as reasonably practicable, and shall thereafter continuously prosecute such construction to completion. D. Tenant shall properly obtain, comply with and keep in effect all permits, licenses and other governmental approvals which are required to be obtained from governmental bodies in order to construct the Interior Improvements. Upon reasonable written advance request, Tenant shall promptly deliver copies of all such permits, licenses and approvals to Landlord. E. Tenant shall be solely responsible for all aspects of the construction of the Interior Improvements, including the development and design thereof as set forth in the Approved Plans, the supervision of the work of construction, the qualification, financial condition, and performance of all architects, engineers, contractors, material suppliers, consultants, and the accuracy of all applications for payment and the proper application of all disbursement. Landlord is not obligated to supervise, inspect or inform Tenant or any third party of any aspect of the construction of the Interior Improvements. Any inspection or review by Landlord, is to determine whether Tenant is properly discharging its obligations to Landlord and may not be relied upon by Tenant or any third party. Landlord owes no duty of care to Tenant or any third party to protect against or to inform Tenant or any third party of, any negligence, faulty, inadequate or defective design or construction of the Interior Improvements. 3. Changes to Approved Plans for Interior Improvements. Neither Landlord nor Tenant shall have the right to order extra work or change orders with respect to the Approved Plans or the construction of the Interior Improvements without the prior written consent of the other. All extra work or change orders requested by either Landlord or Tenant shall be made in writing, shall specify the amount of delay or the time saved resulting therefrom, shall specify any added or reduced cost resulting therefrom, and shall become effective and a part of the Approved Plans once approved in writing by both parties. Notwithstanding the foregoing, Tenant's failure to obtain Landlord's consent to an extra work or change order shall not be an Event of Tenant's Default if Landlord would have been required to consent to the change pursuant to the terms hereof. 4. Payment of Interior Improvement Costs. The Interior Improvement Costs shall be paid as follows: A. Landlord shall contribute to the payment of all Interior Improvement Costs up to an amount equal to Landlord's Interior Improvement Allowance. An amount equal to 40% of the Landlord's Interior Improvement Allowance shall be applied to Tenant's Relocation Costs (the "Tenant Relocation Allowance"). If, at the time of completion of all Interior Improvements, (1) Tenant has not used the entire Tenant Relocation Allowance, Tenant shall receive the remainder of the Tenant Relocation Allowance as a credit against Base Monthly Rent for the first month of the Lease Term, or at Tenant's Option, Tenant can use such amount for the Interior Improvement Costs at Building C and (2) Tenant has not used the entire Landlord's Interior Improvement 2. Allowance (other than the amount allocated to the Tenant Relocation Allowance), Tenant can use such amount for the Interior Improvement Costs at Building C. Except as expressly provided in the preceding sentence, if any part of the Landlord's Interior Improvement Allowance is not used by Tenant, or Tenant does not qualify for a disbursement pursuant to the provisions of this paragraph 4 with the result that the entire allowance is not disbursed, there shall nonetheless be no adjustment in the Base Monthly Rent due from Tenant pursuant to the Lease. If the Interior Improvement Costs exceed the maximum amount of Landlord's required contribution, then Tenant shall pay the entire amount of such excess. B. Landlord and Tenant acknowledge that the construction contract Tenant will enter into for the construction of the interior Improvements will provide for progress payments to Prime Contractor in stages as the work is completed. Landlord shall pay the full amount of each such progress payment until all of Landlord's Interior Improvement Allowance is expanded. Thereafter, if the cost of the Interior Improvements exceeds the amount of Landlord's required contribution for such improvements, then Tenant shall pay the rest of the progress payments due to Prime Contractor. Landlord shall pay any progress payment due from Landlord to Prime Contractor within thirty (30) days after satisfaction of all of the conditions precedent to such progress payment by Landlord that has been requested by Tenant which are set forth in subparagraph 4D and 4E hereof. If Landlord fails to pay any such amount when due, then Tenant may (but without the obligation to do so) advance such funds on Landlord's behalf, and Landlord shall be obligated to reimburse Tenant for the amount of funds so advanced on its behalf and all costs incurred by Tenant in so doing, including all interest at the Agreed Interest Rate. C. If Tenant desires to obtain a disbursement from Landlord from the Landlord's Interior Improvement Allowance for the purpose of paying Interior Improvement Costs, Tenant shall submit to Landlord a written itemized statement, signed by Tenant (an "Application for Payment") setting forth the following: (i) a description of the construction work performed, materials supplied, and/or costs incurred or due for which disbursement is requested; and (ii) the total amount incurred, expended and/or due for each requested item less prior disbursements; and (iii) the amount due to be paid by Landlord from Landlord's Interior Improvement Allowance. D. Landlord shall have no obligation to make any disbursement from Landlord's Interior Improvement Allowance at any time that there is a Continuing Tenant Default (as defined in paragraph 1.14 of the Lease), or there has occurred an event, omission or failure of conditions which would constitute an Event of Tenant's Default (as defined in paragraph 13.1 of the Lease) after notice or lapse of time, or both. In addition, Landlord shall have the right to condition any disbursement from Landlord's Interior Improvement Allowance upon Landlord's receipt and approval of the following with respect to each Application for Payment: (1) The form of Application for Payment and the sufficiency of the information contained therein; (2) Bills and invoices and any other documents evidencing the total amount expended, incurred, or due for any requested contribution to Interior Improvement Costs; (3) Evidence of Tenant's use of lien releases acceptable to Landlord for payments or disbursements to any contractor, subcontractor, materialmen, supplier, or lien claimant; (4) Architects, inspectors and/or engineer's periodic certification and the stage of construction that has been completed and its conformance to the Approved Plans based upon any such architects, inspectors and/or engineers periodic, physical inspections of the Premises and Interior Improvements; (5) Waivers and releases of mechanics' lien, stop notice claim, equitable lien claim or other lien claim rights or lien bonds in form and amount reasonably satisfactory to Landlord; (6) Evidence of Tenant's compliance with its obligations pursuant to paragraph 2 hereof; (7) Any other document, requirement, evidence or information that Landlord may reasonably request pursuant to any provision of this Interior Improvement Agreement. 3. E. Tenant agrees that all disbursements made to Tenant by Landlord from Landlord's Interior Improvement Allowance shall be used only for the payment of Interior Improvement Costs and shall be applied as set forth, and for the purposes described in, the relevant Application for Payment based upon which the disbursement is made. 5. Punchlist. Within a reasonable period of time after the Interior Improvements are Substantially Completed, Landlord, Tenant and Tenant's architect shall together walk through and inspect such improvements so completed, using reasonable efforts to discover all uncompleted or defective construction. After such inspection has been completed. Tenant shall use reasonable efforts to complete and/or repair all "punch list" items within thirty (30) days thereafter. 6. Construction Warranty for the Interior Improvements. Tenant warrants that the construction of the Interior Improvements will be performed in accordance with the Approved Plans therefor and all Laws in a good and workmanlike manner, and that all materials and equipment furnished will conform to said plans and shall be new and otherwise of good quality. Tenant shall promptly commence the cure of any breach of such warranty and complete such cure with diligence at Tenant's cost and expense. 7. Ownership of the Interior Improvements. All of the Interior Improvements which are constructed with funds of Landlord shall become the property of Landlord upon installation and shall not be removed or altered by Tenant. Any part of the Interior Improvements which are constructed by Landlord with funds of Tenant shall become the property of Tenant upon installation and Tenant shall have the right to depreciate and claim and collect investment tax credits in such improvements; provided, however, that (i) Tenant shall not remove or alter such improvements during the term of the Lease; (ii) such improvements shall be surrendered to Landlord, and title to such improvements shall vest in Landlord, at the expiration or earlier termination of the Lease Term; and (iii) in no event shall Landlord have any obligation to pay Tenant for the cost or value of such improvements. Notwithstanding the foregoing, Tenant shall have the right to remove only the following kinds of Interior Improvements so long as it repairs all damage caused by the installation thereof and returns the Premises to the condition existing prior to the installation of such Interior Improvements: (i) built-in cabinets, file drawers and bookcases; (ii) computer room air conditioning; (iii) canteen equipment; (iv) office cubicle systems; and (v) ornamental statues. If both Landlord and Tenant contribute to the cost of constructing the Interior Improvements, Landlord and Tenant shall agree in writing which of such improvements are to be constructed using Landlord's funds (and therefore are Landlord's property) and which of them are to be installed with Tenant's funds (and therefore are Tenant's property during the Lease Term). 8. Documents. Within fifteen (15) days after receiving a written request from Landlord, Tenant shall deliver to Landlord the most current version of the following: (i) a complete and correct list showing the name, address and telephone number of each contractor, subcontractor and principal materials supplier engaged in connection with the construction of the Interior Improvements, and the total dollar amount of each contract and subcontract (including any changes) together with the amounts paid through the date of the list; (ii) true and correct copies of all executed contracts and subcontracts identified in the list described in the immediately preceding clause, including any changes; (iii) a construction progress schedule; and (iv) any update to any item described in the preceding clauses which Tenant may have previously delivered to Landlord. Tenant expressly authorizes Landlord to contact any contractor, subcontractor or materials supplier to verify any information disclosed in accordance with this paragraph. Within sixty (60) days after the Interior Improvements have been Substantially Completed, Tenant shall cause the following to be delivered to Landlord: A. Statements from Tenant's architect in form reasonably satisfactory to Landlord certifying that the Interior Improvements have been completed substantially in accordance with the Approved Plans and all Laws; B. A copy of all permanent certificates of occupancy and other governmental approvals which may be received by Tenant with respect to the construction of the Interior Improvements. C. One (1) copy of the Approved Plans, one (1) copy of each extra work or change order, and one (1) copy of any "As-Built" plans and specifications for the Interior Improvements, which Tenant may have elected to cause to be prepared; 4 D. One (1) copy of all warranties, guaranties, and operational manuals relating to the Interior Improvements; E. A copy of a recorded notice of completion relating to the construction of the Interior Improvements. 9. Indemnity. Tenant agrees to indemnify and hold Landlord harmless from and against all liabilities, claims, actions, damages, costs and expenses (including attorneys' fees incurred by Landlord in protecting its interest from the following) arising out of or resulting from construction of the Interior Improvements, including any mechanics' liens, defective workmanship or materials and any claim or cause of action of any kind by any party that Landlord is liable for any act or omission committed or made by Tenant, its agents, employees, or contractors in connection with the construction of the Interior Improvements. 10. Effect of Agreement. In the event of any inconsistency between this Agreement and the Lease, the terms of this Agreement shall prevail.
AS TENANT: AS LANDLORD: United Defense L.P., ATP Associates, L.P., a Delaware limited partnership a Delaware limited partnership By: UDLP Holdings Corp., a Delaware corporation, its By: Menlo Equities Associates III Inc., a Delaware General Partner corporation, Its General Partner By: /s/ Peter C. Woglom By: /s/ Henry D. Bullock --------------------------------------------------- ---------------------------------------- Printed Its: President Name: Peter C. Woglom -------------------------------------- -------------------------------------------- Title: Vice-President and General Manager, Ground ------------------------------------------- Systems Division, UDLP -------------------------------------------
5 Table of Contents
Page ARTICLE 1 DEFINITIONS.............................................. 1 1.1 Commencement Date......................................... 1 1.2 Rent Start Date........................................... 1 1.3 Lease Term................................................ 1 1.4 Property.................................................. 1 1.5 Premises.................................................. 1 1.6 Permitted Use............................................. 1 1.7 Tenant's Minimum Liability Insurance Coverage............. 2 1.8 Tenant's Allocated Parking Stalls......................... 2 1.9 Retained Real Estate Brokers.............................. 2 1.10 Address for Notices....................................... 2 1.11 Lease..................................................... 2 1.12 Building C Lease.......................................... 2 1.13 Tenant's Allocated Share.................................. 2 1.14 Continuing Tenant Default................................. 2 1.15 Additional Definitions.................................... 2 ARTICLE 2 DEMISE AND ACCEPTANCE.................................... 3 2.1 Demise of Premises........................................ 3 2.2 Delivery and Acceptance of Possession..................... 3 2.3 Construction of Interior Improvements..................... 3 2.4 Options to Extend Lease Term.............................. 3 ARTICLE 3 RENT..................................................... 6 3.1 Base Monthly Rent......................................... 6 3.2 Additional Rent........................................... 6 3.4 Late Charge and Interest on Rent in Default............... 7 ARTICLE 4 USE OF PREMISES.......................................... 7 4.1 Limitation on Type........................................ 7 4.2 Compliance with Laws and Private Restrictions............. 8 4.3 Insurance Requirements.................................... 8 4.4 Outside Areas............................................. 9 4.5 Signs..................................................... 9 4.6 Rules and Regulations..................................... 9 4.7 Parking................................................... 9 4.8 Window Coverings.......................................... 10
i Table of Contents (continued)
Page 4.9 Outside Sales............................................. 10 ARTICLE 5 TRADE FIXTURES AND LEASEHOLD IMPROVEMENTS................ 11 5.1 Trade Fixtures............................................ 11 5.2 Leasehold Improvements.................................... 11 5.3 Alterations Required by Law............................... 12 5.4 Landlord's Improvements................................... 12 5.5 Liens..................................................... 13 ARTICLE 6 REPAIR AND MAINTENANCE................................... 14 6.1 Tenant's Obligation to Maintain........................... 14 6.2 Landlord's Obligation to Maintain......................... 14 6.3 Tenant's Obligation to Reimburse.......................... 15 6.4 Common Operating Expenses Defined......................... 16 6.5 Control of Common Area.................................... 17 6.6 Tenant's Negligence....................................... 17 ARTICLE 7 WASTE DISPOSAL AND UTILITIES............................. 18 7.1 Waste Disposal............................................ 18 7.2 Hazardous Materials....................................... 18 7.3 Utilities................................................. 20 7.4 Compliance with Governmental Regulations.................. 21 ARTICLE 8 REAL PROPERTY TAXES...................................... 21 8.1 Real Property Taxes Defined............................... 21 8.2 Tenant's Obligation to Reimburse.......................... 22 8.3 Taxes on Tenant's Property................................ 22 ARTICLE 9 INSURANCE................................................ 22 9.1 Tenant's Insurance........................................ 22 9.2 Landlord's Insurance...................................... 24 9.3 Tenant's Obligation to Reimburse.......................... 24 9.4 Release and Waiver of Subrogation......................... 24 ARTICLE 10 LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY......... 25 10.1 Limitation on Landlord's Liability........................ 25 10.2 Limitation on Tenant's Recourse........................... 26 10.3 Indemnification of Landlord............................... 26 ARTICLE 11 DAMAGE TO PREMISES....................................... 26 11.1 Landlord's Duty to Restore................................ 26
ii Table of Contents (continued)
Page 11.2 Landlord's Right to Terminate............................. 27 11.3 Tenant's Right to Terminate............................... 28 11.4 Abatement of Rent......................................... 28 ARTICLE 12 CONDEMNATION............................................. 28 12.1 Tenant's Termination Right................................ 28 12.2 Restoration and Abatement of Rent......................... 29 12.3 Temporary Taking.......................................... 29 12.4 Division of Condemnation Award............................ 29 ARTICLE 13 DEFAULT AND REMEDIES..................................... 30 13.1 Events of Tenant's Default................................ 30 13.2 Landlord's Remedies....................................... 31 13.3 Waiver by Tenant of Certain Remedies...................... 32 13.4 Waiver.................................................... 33 13.5 Limitation on Exercise of Rights.......................... 33 ARTICLE 14 ASSIGNMENT AND SUBLETTING................................ 33 14.1 By Tenant................................................. 33 14.2 By Landlord............................................... 36 ARTICLE 15 GENERAL PROVISIONS....................................... 36 15.1 Landlord's Right to Enter................................. 36 15.2 Surrender of the Premises................................. 37 15.3 Holding Over.............................................. 37 15.4 Subordination............................................. 37 15.6 Mortgagee Protection...................................... 38 15.7 Estoppel Certificates and Financial Statements............ 38 15.8 Force Majeure............................................. 39 15.9 Notices................................................... 39 15.10 Obligation to Act Reasonably.............................. 39 15.11 Corporate Authority....................................... 39 15.12 Additional Definitions.................................... 39 15.13 Miscellaneous............................................. 40 15.14 Termination by Exercise of Right.......................... 41 15.15 Brokerage Commissions..................................... 41 15.16 Entire Agreement.......................................... 41 15.17 Old Lease; Assumption..................................... 41
An extra section break has been inserted above this paragraph. Do not delete this section break if you plan to add text after the Table of Contents/Authorities. Deleting this break will cause Table of Contents/Authorities headers and footers to appear on any pages following the Table of Contents/Authorities. 1. EX-10.7C 5 LEASE Exhibit 10.7(c) LEASE BY AND BETWEEN ATP ASSOCIATES L.P. a Delaware limited partnership, as Landlord and UNITED DEFENSE L.P. a Delaware limited partnership, as Tenant for BUILDING C LEASE (Building C) This Lease, dated April __, 1999 for reference purposes only, is made by and between ATP Associates L.P., a Delaware limited partnership ("Landlord"), and United Defense L.P., a Delaware limited partnership ("Tenant"). Recitals A. The Equitable Life Assurance Society of the United States ("Equitable") and FMC Corporation ("FMC") entered into a lease dated June 1, 1989 (the "Original Lease"), for the Premises (as defined below); B. On or about August 11, 1995, Landlord acquired the fee simple interest in certain real property, including the Premises, from Equitable and succeeded to the interest of Equitable as Landlord under the Lease; C. Tenant is now occupying the Premises pursuant to the Original Lease, as if the Original Lease had been assigned by FMC to Tenant; and D. Landlord and Tenant have agreed to enter into this new Lease instead of extending the Old Lease, and Tenant has agreed to assume the obligations under the Original Lease as if the Original Lease had been assigned to Tenant and the term extended. Agreement Now Therefore, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: ARTICLE 1 Definitions 1.1 Commencement Date. The term "Commencement Date" shall mean November 1, 1999. 1.2 Rent Start Date. The term "Rent Start Date" shall mean November 1, 1999 provided, however, that if the Landlord is unable to so deliver possession of the Leased Premises to Tenant in the agreed condition on or before the Commencement Date, rent shall not commence and Landlord shall not be in default under this Lease, nor shall this Lease be void, voidable or cancelable by Tenant until the lapse of ninety (90) days after the Commencement Date. 1.3 Lease Term. The Lease Term shall commence on the Commencement Date and shall continue until the second (2nd) anniversary of the Rent Start Date (unless the Lease Term is extended pursuant to paragraph 2.4 hereof). 1.4 Property. The term "Property" shall mean that real property shown on the site plan attached hereto as Exhibit "A" and all improvements now or hereafter located thereon, including, without limitation, the five (5) buildings presently located thereon, the aggregate gross leaseable area of which is approximately 295,271 square feet (the "Property Gross Leaseable Area"), allocated among the five buildings as shown on the attached Exhibit "A"; provided, however, that Landlord may change the boundaries and composition of the Property by removing or adding land and/or buildings and thereafter the term "Property" shall refer to such real property so enlarged or reduced and the amount of the "Property Gross Leaseable Area" shall be appropriately adjusted. 1. 1.5 Premises. The term "Premises" shall mean the building structure situated on the Property commonly known as Building C of Airport Technology Park, 2830 De La Cruz Boulevard, Santa Clara, California, containing approximately 86,785 square feet of gross leaseable area (the "Premises Gross Leaseable Area") located as shown on Exhibit "A". Landlord and Tenant agree that (i) all measurements of gross leaseable area contained in this lease are conclusively agreed to be correct and binding upon the parties, even if a subsequent measurement of any one of these areas determines that it is more or less than the amount of area reflected in this Lease; and (ii) any such subsequent determination that the area is more or less than shown in this Lease shall not result in a change in any of the computations of rent, improvement allowances, or other matters described in this Lease where gross leaseable area is a factor. 1.6 Permitted Use. The term "Permitted Use" shall mean the use of the Premises for (i) research and development, production, sales, and general administrative offices and other legal uses incidental thereto, and (ii) any other legal use first approved in writing by Landlord. 1.7 Tenant's Minimum Liability Insurance Coverage. The term "Tenant's Minimum Liability Insurance Coverage" shall mean Two Million Five Hundred Thousand Dollars ($2,500,000). 1.8 Tenant's Allocated Parking Stalls. The term "Tenant's Allocated Parking Stalls" shall mean 338 parking stalls for the non-exclusive use of Tenant. 1.9 Retained Real Estate Brokers. The term "Retained Real Estate Brokers" shall mean Thomas Smith of CB Richard Ellis and Richard Kimball of Colliers Parrish. 1.10 Address for Notices. The term "Address for Notices" shall mean the following: A. In the case of Landlord, such term shall mean c/o Menlo Equities LLC, 525 University Avenue, Suite 100, Palo Alto, California 94301, Attention: Henry D. Bullock/Richard J. Holmstrom. B. In the case of Tenant, such term shall mean the address of the Premises which is 2830 De La Cruz Boulevard, Santa Clara, California 95050. 1.11 Lease. The term "Lease" shall mean this printed lease, Exhibits "A" (site plan), "B" (Approved Plans for Interior Improvements), "C" (Interior Improvement Agreement), "D" (form of subordination agreement), all of which are attached hereto and incorporated herein by this reference. 1.12 Building A Lease. The term "Building A Lease" shall mean that lease dated as of April __, 1999 between Landlord and Tenant, pursuant to which Tenant leases from Landlord that certain building identified as Building A on the site plan attached hereto as Exhibit "A' and which contains approximately 68,708 square feet, the address of which is 2890 De La Cruz Boulevard, Santa Clara, California. 1.13 Tenant's Allocated Share. The term "Tenant's Allocated Share" shall mean one hundred percent (100%). 1.14 Continuing Tenant Default. A "Continuing Tenant Default" shall be deemed to exist when an "Event of Tenant's Default" (as defined in paragraph 13.1) has occurred, and the underlying default or breach by Tenant of its obligations which resulted in such Event of Tenant's Default has not been completely cured. 1.15 Additional Definitions. As used in this Lease or any addendum or amendment thereto, the following terms shall have the meanings set forth in paragraph 15.12: "Agreed Interest Rate", "Common Area", "Law", "Leasehold Improvements", "Lender", "Private Restrictions" and "Trade Fixtures". 2. ARTICLE 2 Demise And Acceptance 2.1 Demise of Premises. Landlord hereby leases to Tenant, and Tenant leases from Landlord, for the Lease Term upon the terms and conditions of this Lease, the Premises together with (i) the non-exclusive right to use no more than the number of Tenant's Allocated Parking Stalls within the Common Area (subject to the limitations set forth in paragraph 4.7), and (ii) the non- exclusive right to use the Common Area for ingress to and egress from the Premises. Tenant's lease of the Premises shall be subject to (i) all Laws, (ii) all Private Restrictions, easements, and other matters of public record, and (iii) the reasonable and non-discriminatory rules and regulations from time to time promulgated by Landlord pursuant to paragraph 4.6. 2.2 Delivery and Acceptance of Possession. Landlord shall deliver to Tenant possession of the Premises on the Commencement Data in their presently existing condition, broom clean. Tenant shall accept possession of the Premises in its presently existing condition, "as-is" (except for latent defects in the structural elements of the Premises), acknowledging that Tenant intends to do renovation work and construct interior improvements pursuant to paragraph 2.3 hereof and the Interior Improvement Agreement attached as Exhibit "C". 2.3 Construction of Interior Improvements. Tenant shall construct certain improvements for Tenant's use in the Premises pursuant to the terms of the Interior Improvement Agreement executed concurrently with this Lease by Landlord and Tenant and attached hereto an Exhibit "C". 2.4 Options to Extend Lease Term. Landlord hereby grants to Tenant one option to extend the Lease Term for a period of two (2) years and one option to extend the Lease Term for a period of three (3) years thereafter (each right to extend referred to as the "Option" and each period referred to as the "Option Term"), on the following terms and conditions: A. Tenant must give Landlord notice in writing of its exercise of the Option before the later to occur of (i) the two hundred fortieth (240th) day before the date the initial Lease Term (or the then extended Lease Term, as the case may be) would and but for said exercise, or (ii) the seventh (7th) day following the establishment of the fair market rent for the Premises by appraisal pursuant to subparagraph 2.4F if such appraisal process is commenced pursuant to subparagraphs 2.4E and 2.4F. B. Tenant may not exercise the option at any time that either of the following is true: (i) a Continuing Tenant Default exists under this Lease (unless caused by a subtenant of the original Tenant under this Lease and such original Tenant is using reasonable efforts to cause such default to be cured); or (ii) a Continuing Tenant Default exists under the Building A Lease (unless caused by a subtenant or assignee of the original Tenant under this Lease and such original Tenant is using reasonable efforts to cause such default to be cured) and the same person or entity is the owner of record of both the Premises and the real property leased pursuant to the Building A Lease. C. All terms and conditions of this Lease shall apply during the Option Term, except that the Base Monthly Rent for the Option Term shall be determined as provided in subparagraph 2.4D below. D. The Base Monthly Rent for the Option Term with respect to the Premises shall be the ninety-five percent (95%) of the fair market rent for the Premises for the Option Term on the terms contained in this Lease as of the commencement of the Option Term, determined pursuant to subparagraphs 2.4E and 2.4F. For purposes of this Lease, the term "fair market rent for the Premises" shall mean the projected going market rent for the Premises as of the commencement of the Option Term in question, including a provision for periodic increases of such rent during the Option Term (which increases shall be established as part of such fair market rent), taking into account the value of all improvements in the Premises, regardless of whether made by Landlord or Tenant (except for those Leasehold Improvements that Tenant has the right to remove at the expiration of the Lease Term), but in no event shall fair market rent be less than the rent in effect during the immediately prior period. 3. E. Tenant may not exercise the Option in question unless Tenant has delivered to Landlord a written request (a "Rent Quote Request") that Landlord state in writing Landlord's opinion of the fair market rent for the Premises for the upcoming Option Term in question, which Rent Quote Request may only be delivered and shall only be effective if delivered (i) no sooner than fifteen (15) months before the expiration of the Lease Term, and (ii) no later than thirteen (13) months prior to the expiration of the Lease Term. After receipt of a Rent Quote Request and no later than twelve (12) months prior to the expiration of the Lease Term, Landlord shall deliver to Tenant a written statement setting forth Landlord's opinion of the fair market rent for the Premises for the Option Term in question (a "Landlord's Rent Quote"). For a period of thirty (30) days following delivery to Tenant of Landlord's Rent Quote (the "Negotiation Period"), Landlord and Tenant shall confer to attempt to reach agreement upon the fair market rent for the Premises for the Option Term in question. If Landlord and Tenant are unable to reach agreement in writing within the Negotiation Period, for purposes of establishing the Base Monthly Rent for the Option Term in question, the fair market rent for the Premises shall be deemed to be the amount stated in Landlord's Rent Quote unless Tenant delivers to Landlord during the Negotiation Period a written notice which states the following: (i) Tenant requires that the fair market rent for the Premises for the option Term in question be established by the appraisal process described in subparagraph 2.4F; and (ii) the name, address, and qualifications of the appraiser selected by Tenant for purposes of the appraisal process described in subparagraph 2.4F ("Tenant's Appraisal Demand"). If Tenant so timely delivers to Landlord a Tenant's Appraisal Demand, the Base Monthly Rent for the Option Term in question shall be established based on the result of the appraisal process described in subparagraph 2.4F. F. If Tenant delivers to Landlord a Tenant's Appraisal Demand during the Negotiation Period, then the fair market rent for the Premises shall be determined by three (3) real estate appraisers, all of whom shall be members of the American Institute of Real Estate Appraisers with not less than five (5) years experience appraising real property (other than residential or agricultural property) located in Santa Clara County, California, in accordance with the following procedures: (1) One of the appraisers shall be the appraiser identified in Tenant's Appraisal Demand. Within ten (10) days of receipt of Tenant's Appraisal Demand, Landlord shall select its appraiser and notify Tenant, in writing, of the name, address and qualifications of an appraiser selected by it. Failure by Landlord to select a qualified appraiser within said ten (10) day period shall be deemed a waiver of its right to select a second appraiser on its own behalf and Tenant shall select a second appraiser on behalf of Landlord within five (5) days after the expiration of said ten (10) day period. Within ten (10) days from the date the second appraiser shall have been appointed, the two (2) appraisers selected by the parties shall appoint a third appraiser. If the two appraisers fail to select a third qualified appraiser, the third appraiser shall be selected by the American Arbitration Association at the request of either party or, if there is then no American Arbitration Association or if it refuses to perform this function, then at the request of either Landlord or Tenant, the third appraiser shall be appointed by the then Presiding Judge of the Superior Court of the State of California for the County of Santa Clara. (2) The three (3) appraisers so selected shall meet in San Jose, California, not later than twenty (20) days following the selection of the third appraiser. At said meeting the appraisers shall attempt to determine the fair market rent for the Premises for the Option Term in question. (3) If the appraisers are unable to complete their determinations in one meeting, they may continue to consult at such times as they deem necessary for a fifteen (15) day period from the date of their first meeting, in an attempt to have at least two (2) of them agree. If, at the initial meeting or at any time during said fifteen (15) day period, two (2) or more of the appraisers agree on the fair market rent for the Premises, such agreement shall be determinative and binding on the parties hereto, and the agreeing appraisers shall, in simple letter form executed by the agreeing appraisers, forthwith notify both Landlord and Tenant of the amount set by such agreement. (4) If two (2) or more appraisers do not agree within said fifteen (15) day period as set forth above, then each appraiser shall, within five (5) days after the expiration of said fifteen (15) day period, submit his independent appraisal in simple letter form to Landlord and Tenant stating his determination of the fair market rent for the Premises for the Option Term in question. Landlord and Tenant shall then determine the fair market rent for the Premises for the Option Term by determining the average of the fair market rent set by each of 4. the appraisers; provided, however, if the lowest appraisal is less than eighty- five percent (85%) of the middle appraisal then such lowest appraisal shall be disregarded, and/or if the highest appraisal is greater than one hundred fifteen percent (115%) of the middle appraisal then such highest appraisal shall be disregarded. If any appraisal in disregarded, then the average shall be determined by computing the average set by the other appraisals that have not been disregarded. For purposes of determining the relative amount of the appraisals to implement the provisions of this subparagraph requiring that an appraisal be disregarded if it is too high or too low, the amount of an appraisal that calls for periodic rent increases based upon an index (e.g., the Consumer Price Index) shall be determined by assuming that such index will increase at the same average annual rate during the option period in question that such index increased on an average annual basis during the five (5) year period preceding the commencement of the option period in question. (5) Each party shall bear the fees and expenses of the appraisers selected by or for it, and the fees and expenses of the third appraiser shall be borne fifty percent (50%) by Landlord and fifty percent (50%) by Tenant. ARTICLE 3 Rent 3.1 Base Monthly Rent. Commencing on the Rent Start Date and continuing thereafter throughout the initial Lease Term, Tenant shall pay to Landlord a monthly rent (which rent is referred to as the "Base Monthly Rent"), which shall be the following: A. The Base Monthly Rent for the period beginning on the Rent Start Date and ending on the last day of the twelfth (12th) month of the Lease Term is One Hundred Twenty-Four Thousand Nine Hundred Seventy Dollars ($124,970) (i.e., $1.44 per square foot per month). B. The Base Monthly Rent for the period beginning on the first day of the thirteenth (13th) month of the Lease Term and ending on the last day of the twenty-fourth (24th) month of the Lease Term is One Hundred Twenty-Nine Thousand Three Hundred Ten Dollars ($129,310) (i.e., $1.49 per square foot per month). C. Base Monthly Rent payable during the second Option Term (if such Option is exercised by Tenant) shall be payable as follows (1) The Base Monthly Rent for the period beginning an the first day of the twenty-fifth (25th) month of the Lease Term and ending on the last day of the thirty-sixth (36th) month of the Lease Term is One Hundred Thirty-Three Thousand Six Hundred Forty-Nine Dollars ($133,649) (i.e., $1.54 per square foot per month). (2) The Base Monthly Rent for the period beginning on the first day of the thirty-seventh (37th) month of the Lease Term and ending on the last day of the forty-eighth (48th) month of the Lease Term is One Hundred Thirty-Seven Thousand Nine Hundred Eighty-Eight Dollars ($137,988) (i.e., $1.59 per square foot per month). D. For purposes of applying the provisions of this paragraph 3.1, the term "month of the Lease Term" shall mean that period which begins on that day of the calendar month in question which corresponds to the Rent Start Date and which continues for thirty (30) or thirty-one (31) days until the day of the next calendar month which precedes the day in that calendar month which corresponds to the Rent Start Date. By way of example only, if it is assumed that the Rent Start Date is November 1, 1999, then for purposes of this paragraph 3.1 (i) the first month of the Lease Term would commence November 1 and end on November 30, 1999. 3.2 Additional Rent. Commencing on the Rent Start Date and continuing thereafter throughout the Lease Term, Tenant shall pay, as additional rent (the "Additional Rent"), (i) Tenant's share of Common Operating Expenses as required by paragraph 6.3, (ii) Tenant's share of Real Property Taxes as required by paragraph 8.2, 5. (iii) Landlord's share of the net consideration received by Tenant upon certain assignments and sublettings as required by paragraph 14.1, (iv) any late charges or interest due Landlord pursuant to paragraph 3.4, (v) Tenant's share of the amortized cost of certain additional improvements as provided in paragraph 5.4, and (vi) any other charges due Landlord pursuant to this Lease. 3.3 Payment of Rent. All rent required to be paid in monthly installments shall be paid in advance on the first day of each calendar month during the Lease Term. All rent shall be paid in lawful money of the United States, without any abatement, deduction or offset whatsoever (except as permitted by paragraphs 11.4 and 12.2), and without any prior demand therefor, to Landlord at its address set forth above or at such other place as Landlord may designate from time to time. Tenant's obligation to pay rent shall be prorated as of the Rent Start Date and at expiration or earlier termination of the Lease Term such that Tenant shall not be required to pay Base Monthly Rent or Additional Rent for any period preceding the Rent Start Date or following the expiration or earlier termination of the Lease Term (except in the case of a termination of this Lease an a result of an Event of Tenant's Default). 3.4 Late Charge and Interest on Rent in Default. Tenant acknowledges that the late payment by Tenant of any monthly installment of Base Monthly Rent or any Additional Rent will cause Landlord to incur certain costs and expenses not contemplated under this Lease, the exact amount of which are extremely difficult or impractical to fix. Such costs and expenses will include, without limitation, administration and collection costs and processing and accounting expenses. Therefore, if any such Base Monthly Rent or Additional Rent is not received by Landlord from Tenant within five (5) days after Landlord delivers written notice to Tenant that such amount is delinquent, Tenant shall immediately pay to Landlord a late charge equal to five percent (5%) of such delinquent rent. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for its loss suffered by Tenant's failure to make timely payment. In no event shall this provision for a late charge be deemed to grant to Tenant a grace period or extension of time within which to pay any rent or prevent Landlord from exercising any right or remedy available to Landlord upon Tenant's failure to pay any rent due under this Lease in a timely fashion, including the right to terminate this Lease. If any rent remains delinquent for a period in excess of thirty (30) days after Landlord delivers written notice to Tenant that such amount is delinquent, in addition to such late charge, Tenant shall pay to Landlord interest on any rent that is not paid when due at the Agreed Interest Rate following the date such amount became due until paid. ARTICLE 4 Use Of Premises 4.1 Limitation on Type. Tenant shall use the Premises solely for the Permitted Use (as described in paragraph 1.6). Tenant shall not do or permit anything to be done in or about the Premises or Common Area which will (i) interfere with the rights of other occupants of the Property, (ii) cause structural damage to the Premises and Tenant fails to promptly commence and diligently pursue to completion the repair of such damage, or (iii) cause damage to any part of the Premises or Property except to the extent reasonably necessary for the installation of Tenant's equipment and trade fixtures and Tenant fails to promptly commence and diligently pursue to completion the repair of such damage. Tenant shall not operate any equipment within the Premises which will (i) injure, vibrate or shake the Premises, (ii) overload existing electrical system or other mechanical equipment servicing the Premises, or (iii) impair the efficient operation of the sprinkler system or the heating, ventilating or air conditioning ("HVAC") equipment servicing the Premises, or (iv) damage, overload or corrode the sanitary sewer system. Tenant shall not attach, hang or suspend anything from the ceiling, roof, walls or columns of the Premises or set any load on the floor in excess of approved structural limits as defined by Landlord's architect. Any dust, fumes, or waste products generated by Tenant's use of the Premises shall be contained and disposed so that they do not (i) create a fire or health hazard, (ii) damage the Premises, or (iii) interfere with the businesses of other tenants of the Property. All noise or odors generated by Tenant's use of the Premises shall be contained or muffled so that they do not interfere with the businesses of other tenants of the Property. Tenant shall not (i) change the exterior of the Premises (subject to Tenant's right to install signs pursuant to paragraph 4.5), or (ii) install any equipment or antennas on or make any penetrations of the exterior or roof of the Premises without the prior written consent of Landlord. Tenant shall not commit nor permit to be committed any waste in or about the Premises, and Tenant shall keep the Premises in a neat, clean, attractive and orderly condition, free of any objectionable noises, odors, dust or nuisances which may 6. disturb the quiet enjoyment of other tenants or occupants of the Property. Notwithstanding the foregoing restrictions, the parties agree as follows: A. Tenant may bring military fighting vehicles onto the first floor of the Premises so long an (i) Tenant puts into place such reinforcing as is reasonably necessary to upgrade the floor load capacity so that it will accept such fighting vehicles; and (ii) Tenant repairs any damage to the Premises caused by the entry of such vehicles. B. Tenant may install antennas, radio "dishes" or other electronic equipment reasonably necessary for the conduct of Tenant's business upon the roof of the Premises so long as (i) such installations are done in compliance with all Laws and Private Restrictions; (ii) such installations are accomplished in a manner which does not compromise the watertight integrity of the roof; (iii) all damage to the Premises caused by such installation is repaired by Tenant; and (iv) any such equipment is properly and effectively screened from view in a manner reasonably acceptable to Landlord. C. In the event Tenant desires to operate equipment within the Premises that will or may overload existing mechanical, electrical, or other systems, Tenant may do so only if it first installs, at its sole cost, all necessary modifications, repairs or upgrades of existing systems so that such equipment may be operated without overloading such systems as so modified by Tenant. 4.2 Compliance with Laws and Private Restrictions. Tenant shall not use or permit any person to use the Premises in any manner which violates any Laws or Private Restrictions. Tenant shall abide by and promptly observe and comply with all Laws and Private Restrictions and shall indemnify and hold Landlord harmless from any liability resulting from Tenant's failure to do so. 4.3 Insurance Requirements. Tenant shall not use or permit any person to use the Premises or Common Area in any manner which will cause a cancellation of any Insurance policy covering the Premises. Tenant shall not sell, or permit to be kept, used, or sold in or about the Premises any article which may be prohibited by the standard form of fire insurance policy; provided, however, that Tenant may bring military fighting vehicles onto the first floor of the Premises as permitted pursuant to subparagraph 4.1A. Tenant shall comply with all reasonable requirements of any insurance company, insurance underwriter, or Board of Fire Underwriters which are necessary to maintain, at reasonable rates, the insurance coverage carried by Landlord pursuant to this Lease. 4.4 Outside Areas. No materials, supplies, storage tanks or containers, equipment, finished products or semi-finished products, raw materials, inoperable vehicles or articles of any nature shall be stored upon or permitted to remain outside of the Premises except in fully fenced and screened areas outside the Premises which have been designed for such purpose and have been approved in writing by Landlord for such use by Tenant; provided, however, that Tenant may bring military fighting vehicles onto the first floor of the Premises as permitted pursuant to subparagraph 4.1A. 4.5 Signs. Tenant shall not place on any portion of the Premises or the Property any sign, placard, lettering in or on windows, banner, displays or other advertising or communicative material which is visible from the exterior of the Premises without the prior written approval of Landlord. All such approved signs shall strictly conform to all Laws and Private Restrictions and shall be installed at the expense of Tenant. If Landlord so elects, Tenant shall, at the expiration or sooner termination of this Lease, remove all signs installed by it and repair any damage caused by such removal. Tenant shall at all times maintain such signs in good condition and repair. Upon Tenant's written request and at Tenant's cost and expense, Landlord shall remove both of the Airport Technology Park monument signs located on De La Cruz Boulevard. Subject to Landlord's prior written approval of Tenant's specific design plan, (i) Tenant shall have the right to install a monument sign at the entrance to the Premises, and at the two entrances to Airport Technology Park, and (ii) Tenant shall have the right to install signs on the exterior of the Premises. Approved signs installed by Tenant may be illuminated in compliance with the provisions of applicable Laws and Private Restriction. 7. 4.6 Rules and Regulations. Landlord may from time to time promulgate reasonable and nondiscriminatory rules and regulations applicable to all occupants of the Property for the care and orderly management of the Property and the safety of its tenants and invitees. Such rules and regulations shall be binding upon Tenant upon delivery of a copy thereof to Tenant, and Tenant agrees to abide by such rules and regulations. If there in a conflict between the rules and regulations and any of the provisions of this Lease, the provisions of this Lease shall prevail. Landlord shall not be responsible for the violation by any other tenant of the Property of any such rules and regulations. 4.7 Parking. Tenant is allocated and shall have the non-exclusive right to use (without charge in addition to the Base Monthly Rent) no more than the number of parking spaces contained within the Property described in paragraph 2.1 for its use and the use of its employees and invitees, the location of which may be designated from time to time by Landlord but shall be on the Property and within reasonable proximity to the Premises. Tenant shall not at any time use or permit its employees or invitees to use more parking spaces than the number so allocated to Tenant or to park or permit the parking of its vehicles or the vehicles of others in any portion of the Property not designated by Landlord as a non-exclusive parking area. Landlord shall not oversubscribe the parking within the Property, and shall assure that the total number of spaces committed to the non-exclusive use of all tenants of the Property shall not exceed the total number of spaces within the Common Area. Of the parking spaces allotted to Tenant pursuant to paragraph 2.1, Tenant shall have the right to designate a reasonable number of such spaces as reserved spaces for its executives, which shall not exceed ten percent (10%) of the total of spaces and which shall be in immediate proximity to the Premises. If Landlord grants to any other tenant the exclusive right to use any particular parking space(s), neither Tenant nor its employees or invitees shall use such spaces. Within ten (10) business days after written request therefor from Landlord, Tenant shall furnish Landlord with a list of its and its employees vehicle license numbers and Tenant shall thereafter notify Landlord of any change in such list within five (5) days after each such change occurs. Tenant shall have the right, at Tenant's option, to provide its employees with stickers or other identification markers or tags to be affixed to or on the employees' automobiles or other vehicles, evidencing the right of such employees to use the parking areas. Such stickers shall be subject to prior review and approval by Landlord, which shall not be unreasonably withheld or delayed. Tenant shall furnish to Landlord a list of identifying numbers for the stickers distributed from time to time by Tenant to its employees. If Tenant elects to use such stickers as provided herein, Tenant shall not be obligated to furnish Landlord with a list of vehicle license numbers for its employees, for as long as Tenant maintains such sticker system of identification. Landlord reserves the right, after having given Tenant reasonable notice, to have any vehicles owned by Tenant or its employees or invitees utilizing parking spaces in excess of the parking spaces allowed for Tenant's use to be towed away at Tenant's cost. All trucks and delivery vehicles shall be (i) parked at the rear of the Premises, (ii) loaded and unloaded in a manner which does not interfere with the businesses of other occupants of the Property, and (iii) permitted to remain on the Property only so long as is reasonably necessary to complete loading and unloading. In the event Landlord elects or is required by any Law to limit or control parking in the Property, whether by validation of parking tickets or any other method of assessment, Tenant agrees to participate in such validation or assessment program under such reasonable rules and regulations as are from time to time established by Landlord, so long as such participation does not result in any increase in costs to Tenant. 4.8 Window Coverings. To the extent Tenant elects to use window coverings visible from the exterior of the Premises, Tenant shall use the same window covering to cover all windows Tenant so elects to cover in the Premises to maintain a consistent and uniform exterior appearance. 4.9 Outside Sales. Tenant shall not conduct or permit to be conducted on any portion of the Common Area any sale of any kind, including (i) any public or private auction, fire sale, going-out-of-business sale, distress sale or other liquidation sale, or (ii) any so-called "flea market", open-air market or any other similar activity. Notwithstanding the foregoing, Tenant shall be allowed to conduct occasional sales outside of the Premises on that part of the Common Area that is in close proximity to the Premises so long as each of the following conditions is satisfied with respect to each such sale: (i) Landlord is given at least two (2) business days prior written notice of the date of any such sale; (ii) such sale does not violate any Laws; (iii) such sale is conducted in a manner that does not interfere with the rights of other occupants of the Property; (iv) Tenant provides all necessary security, cleans up all debris, and repairs any damage caused by such sale; and (v) the purpose of such sale is to permit employees of Tenant to purchase or to receive free of charge property of Tenant. 8. ARTICLE 5 Trade Fixtures And Leasehold Improvements. 5.1 Trade Fixtures. Throughout the Lease Term, Tenant shall provide, install, and maintain in good condition all Trade Fixtures required in the conduct of its business in the Premises. All Trade Fixtures shall remain Tenant's property. 5.2 Leasehold Improvements. The following provisions govern Leasehold Improvements constructed by Tenant: A. Tenant shall not construct any Leasehold Improvements or otherwise alter the Premises without Landlord's prior approval if such action results in the demolition, removal, or material alteration of existing Improvements (including partitions, wall and floor coverings, ceilings, lighting fixtures or other utility installations) and if the cost of such construction or alteration exceeds Fifteen Thousand Dollars ($15,000) per work of improvement or if the cost of Leasehold Improvements done, under construction, or for which approval is sought during any calendar quarter exceeds Twenty-Five Thousand Dollars ($25,000). With respect to any Leasehold Improvements which must be approved by Landlord pursuant to the immediately preceding sentence, Tenant shall not commence construction of such Leasehold Improvements until Landlord shall have first approved the plans and specifications therefor, which approval shall be deemed given if not denied in writing within ten (10) working days after Landlord shall have received Tenant's request for such approval. In no event shall Tenant make any alterations to the Premises which could significantly affect the structural integrity or the exterior design of the Premises without Landlord's prior approval. B. All Leasehold Improvements requiring Landlord's approval shall be installed by Tenant in substantial compliance with the approved plans and specifications therefor. All construction undertaken by Tenant shall be done in accordance with all Laws and in a good and workmanlike manner using materials of good quality. Tenant shall not commence construction of any Leasehold Improvements until (i) all required governmental approvals and permits shall have been obtained, (ii) all requirements regarding insurance imposed by this Lease have been satisfied, and (iii) if reasonably requested by Landlord, Tenant shall have obtained contingent liability and broad form builders risk insurance in an amount reasonably satisfactory to Landlord if there are any perils relating to the proposed construction not covered by insurance carried pursuant to Article 9. If Landlord so requests in writing with respect to Leasehold Improvements requiring Landlord's prior approval, Tenant shall inform Landlord of Tenant's scheduled date for commencement of construction at least five (5) days prior to such date of commencement. C. At all times during the Lease Term, (i) Tenant shall maintain all plans and change orders prepared in connection with the construction of any Leasehold Improvements which required a building permit or other governmental approval, and (ii) Tenant shall provide to Landlord copies of such plans and change orders (and, to the extent Tenant causes such to be prepared for its own use, "As-Built" plans) at any time that Landlord requests copies thereof. D. All Leasehold Improvements shall remain the property of Tenant during the Lease Term. Tenant shall have the right to remove only the following kinds of Leasehold Improvements so long as it repairs all damage caused by the installation thereof and returns the Premises to the condition existing prior to the installation of such Leasehold Improvements: (i) built-in cabinets, file drawers and bookcases; (ii) computer room air conditioning; (iii) canteen equipment; (iv) office cubicle systems; and (v) ornamental statues. At the expiration or sooner termination of the Lease Term, all Leasehold Improvements that Tenant does not remove shall be surrendered to Landlord as a part of the realty and shall then become Landlord's property, and Landlord shall have no obligation to reimburse Tenant for all or any portion of the value or cost thereof. However, if Landlord so requires, at the expiration or earlier termination of the Lease Term, Tenant shall remove any Leasehold Improvements designated for removal by Landlord and shall restore the Premises to the condition existing prior to the installation of such Leasehold Improvements to the extent necessary to return the Premises to substantially the 9. same condition that existed on the completion of the Interior Improvements constructed pursuant to Exhibit "C", ordinary wear and tear excepted. Notwithstanding the foregoing: (1) Tenant shall only be required to remove Leasehold Improvements for which either of the following is true: (i) such Leasehold Improvements were not approved in writing by Landlord; or (ii) at the time approval was given by Landlord, Landlord informed Tenant in writing that Landlord would require that such Leasehold Improvements be removed at the termination of the Lease Term. (2) Tenant my cause interior partitions to be moved, reconfigured, or removed altogether, or cause interior offices to be deleted or added, all without the obligation to restore such partitions or interior offices to any prior condition upon expiration or termination of the Lease. 5.3 Alterations Required by Law. Tenant shall make any alteration, addition or change of any sort, whether structural or otherwise, to the Premises that is required by any Law because of (i) a specific use or change of use made of the Premises by Tenant (which alteration, addition or change is not generally required to be made by owners or tenants of other properties similar to the Premises), (ii) Tenant's application for any permit or governmental approval, or (iii) Tenant's construction or installation of any Leasehold Improvements or Trade Fixtures. 5.4 Landlord's Improvements. All fixtures, improvements or equipment which are installed, constructed on or attached to the Property by Landlord at its expense shall become a part of the realty and belong to Landlord. Tenant shall pay additional rent in the event Landlord, in its sole discretion, elects to make any of the following kinds of capital improvements to the Property: (i) capital improvements required to be constructed in order to comply with any Law not in affect or applicable to the Property as of the Commencement Date; (ii) modification of existing or construction of additional capital improvements or building service equipment for the purpose of reducing the consumption of utility services or Common Operating Expenses of the Property; (iii) replacement of capital improvements or building service equipment existing as of the Commencement Date when required because of normal wear and tear; and (iv) the amount of "deductibles" paid by Landlord for the restoration of any part of the Property that has been damaged to the extent such "deductible" is not included within Common Operating Expenses. With respect to any expenditure in excess of Fifty Thousand Dollars ($50,000) for which Landlord seeks contribution pursuant to this paragraph 5.4 from Tenant, prior to incurring such expense, Landlord shall notify Tenant of the nature and estimated amount of such expenditure and, if Tenant so requests, shall provide Tenant with such information upon which such cost estimate is based for Tenant's approval. The amount of additional rent Tenant is to pay with respect to each such capital improvement shall be determined as follows: A. Tenant shall have the option to pay in cash an amount equal to Tenant's Allocated Share of all costs paid by Landlord to construct the improvements in question fairly allocable to the Premises (including financing costs) in cash within thirty (30) days after the improvement has been substantially completed and Landlord has notified Tenant of the cost of such improvement and the amount of Tenant's required contribution. If Tenant does not exercise such option to pay such amount in cash, then the provisions of subparagraph 5.4B shall apply. B. All costs paid by Landlord to construct such improvement (including financing costs) shall be amortized on a straight line basis over the useful life of such improvement (determined in accordance with generally accepted accounting principles) with interest on the unamortized balance at the then prevailing market rate Landlord would pay if it borrowed funds to construct such improvement from an institutional lender, and Landlord shall inform Tenant of the monthly amortization payment required to so amortize such costs, and shall also provide Tenant with the information upon which such determination is made. As additional rent, Tenant shall pay an amount equal to Tenant's Allocated Share of that portion of such monthly amortization payment fairly allocable to the Promises (as reasonably determined by Landlord) for each month after such improvement is completed until the first to occur of (i) the expiration of the Lease Term (as the same may be extended), or (ii) the end of the term over which such costs were amortized, which amount shall be due at the same time the Base Monthly Rent is due. 10. C. Notwithstanding anything contained in this paragraph 5.4, the additional rent Tenant is to pay with respect to any modification of existing or construction of additional capital improvements or building service equipment for the purpose of reducing the consumption of utility expenses or Common Operating Expenses of the Property shall not for any period exceed the actual amount of savings in Additional Rent realized by Tenant as a result of such modification or construction. 5.5 Liens. Tenant shall keep the Premises and the Property free from any liens and shall pay when due all bills arising out of any work performed, materials furnished, or obligations incurred by Tenant, its agents, employees or contractors relating to the Premises. If any claim of lien is recorded, Tenant shall bond against or discharge the same within thirty (30) days after the same has been recorded against the Premises and/or the Property. Should any lien be filed against the Premises or any action commenced affecting title to the Premises, the party receiving notice of such lien or action shall immediately give the other party written notice thereof. ARTICLE 6 Repair And Maintenance 6.1 Tenant's Obligation to Maintain. Except as otherwise provided in paragraph 6.2 and in Article 11 regarding the restoration of damage caused by fire and other perils, Tenant shall, at all times during the Lease Term, clean, keep, and maintain in good order, condition, and repair the Premises and every part thereof, through regular inspections and servicing, including, but not limited to, (i) all plumbing and sewage facilities (including all sinks, toilets, faucets and drains), and all ducts, pipes, vents or other parts of the HVAC or plumbing system, (ii) all fixtures, interior walls, floors, carpets and ceilings, (iii) all windows, doors, entrances, plate glass, showcases and skylights (including cleaning both interior and exterior surfaces), (iv) all electrical facilities and all HVAC equipment and other mechanical systems (including all lighting fixtures, lamps, bulbs, tubes, fans, vents, exhaust equipment and systems), (v) any automatic fire extinguisher equipment in the Premises, and (vi) the roof membrane (including any necessary resurfacing or patching to preserve the membrane or to repair leaks except that Tenant shall not be required to make any repair to the extent such repair is required because of Landlord's repair or maintenance of the structural roof system). Tenant shall replace any damaged or broken glass in the Premises (including all interior and exterior doors and windows) with glass of the same kind, size and quality. Tenant shall repair any damage to the Premises (including exterior doors and windows) caused by vandalism or any unauthorized entry. Tenant shall maintain continuously throughout the Lease Term a service contract for the maintenance of all HVAC equipment serving the Premises with a licensed HVAC repair and maintenance contractor, which contract provides for the periodic inspection and servicing of the HVAC equipment at least once every sixty (60) days during the Lease Term. Tenant shall also maintain continuously throughout the Lease Term a service contract for the washing of all windows (both interior and exterior surfaces) in the Premises with a contractor, which contract provides for the periodic washing of all such windows on such basis as shall keep the exterior appearance of the Premises in first class condition, but no less frequently than once, every calendar year. If and when Landlord so requests in writing, Tenant shall furnish Landlord with copies of all such service contracts. All repairs and replacements required of Tenant shall be promptly made with materials of good quality. If the work affects the structural parts of the Premises or if the estimated cost of any item of repair or replacement is in excess of Fifteen Thousand Dollars ($15,000), then Tenant shall first obtain Landlord's written approval of the scope of work, plans therefor, and materials to be used, except in the case of emergency in which event Tenant shall within a reasonable period of time after performing the work, notify Landlord of the scope of the work performed and the materials used, and shall furnish Landlord with the plans therefor. 6.2 Landlord's Obligation to Maintain. Landlord, at its cost without right of reimbursement from Tenant, shall be responsible for the maintenance, repair, and replacement of the structural parts of the Premises (i.e., foundation, first and second story floor slab and second story floor deck, load- bearing walls, and structural roof system, but excluding roof membrane) except to the extent that (i) the same is necessitated by the wrongful or negligent act or omission of Tenant, its subtenants, or their respective agents, employees, contractors, or invitees, or (ii) reimbursement is permitted pursuant to paragraph 5.4 hereof. Landlord at its cost without right of reimbursement from Tenant, shall repair damage to interior improvements and Leasehold Improvements that have been approved by Landlord pursuant to the terms hereof, or damage to the roof membrane of the Premises if caused by the maintenance work required to be performed by Landlord pursuant to the provisions of this paragraph. 11. Landlord shall repair, maintain, operate and replace when necessary the Common Area, with such right of reimbursement from Tenant as is specified in paragraphs 5.4 and 6.3. The parties acknowledge that the air-conditioning units located on the roof of the Premises were installed when the Building was constructed and subsequently have not operated. Landlord agrees to make any repairs necessary to put such units in good operating condition, if within the six month period following the Commencement Date, Tenant notifies Landlord in writing of the need for such repairs. Landlord shall not be responsible for repairs required by an accident, fire or other peril except as otherwise required by Article 11, or for damage caused to any part of the Property by any act, negligence or omission of Tenant or its agents, contractors, employees or invitees. Landlord may engage contractors of its choice to perform the obligations required of it by this Article, and the necessity of any expenditure to perform such obligations shall be at the sole discretion of Landlord. 6.3 Tenant's Obligation to Reimburse. As additional rent, commencing on the Rent Start Date and continuing throughout the remainder of the Lease Term, Tenant shall pay Tenant's Allocated Share of all Common Operating Expenses fairly allocable to the Premises including (i) all Common Operating Expenses paid with respect to the maintenance, repair, replacement and use of the Premises and (ii) a proportionate share (based on the Premises Gross Leaseable Area as a percentage of the Property Gross Leaseable Area) of all Common Area Expenses which relate to Property in general and are not fairly allocable to any one building on the Property. Landlord agrees that it shall not recover from all tenants of the Property more than one hundred percent (100%) of the actual Common Operating Expenses incurred by Landlord for the period in question. As provided in paragraph 3.3, Tenant's obligation to pay Tenant's Allocated Share of Common Operating Expenses fairly allocable to the Premises shall be prorated as of the Rent Start Date and at the expiration or earlier termination of the Lease Term, and if Tenant has paid any amount on account of Common Operating Expenses relating to a period that is not within the Lease Term (e.g., prepayment of insurance premiums for one year), such amount shall be reimbursed to Tenant in connection with such proration. Payment shall be made by whichever of the following methods is from time to time designated by Landlord, and Landlord may change the method of payment at any time so long as (i) Landlord gives Tenant at least sixty (60) days prior written notice, and (ii) the method is not changed more than once in any calendar year. Tenant shall pay such share of the actual Common Operating Expenses incurred or paid by Landlord but not theretofore billed to Tenant within thirty (30) days after receipt of a written bill therefor from Landlord, on such periodic basis as Landlord shall designate, but in no event more frequently than once a month. Alternatively, (i) Landlord shall deliver to Tenant Landlord's reasonable estimate of the Common Operating Expenses it anticipates will be paid or incurred for the calendar year in question, (ii) during such calendar year, Tenant shall pay such share of the estimated Common Operating Expenses in advance in monthly installments as required by Landlord due with the installments of Base Monthly Rent, and (iii) within ninety (90) days after the end of each calendar year, Landlord shall furnish to Tenant a statement in reasonable detail of the actual Common Operating Expenses paid or incurred by Landlord during the just ending calendar year and thereupon there shall be an adjustment between Landlord and Tenant, with payment to Landlord or credit by Landlord against the next installment of Base Monthly Rent, as the case may require, within thirty (30) days after delivery by Landlord to Tenant of said statement, so that Landlord shall receive the entire amount of Tenant's share of all Common Operating Expenses for such calendar year and no more. Tenant and its agents (including accountants) shall have the right at its expense, exercisable upon reasonable prior written notice to Landlord, to inspect at Landlord's office during normal business hours Landlord's books and records as they relate to Common Operating Expenses. Such inspection must be made within one hundred eighty (180) days of Tenant's receipt of Landlord's annual statement for the same, and shall be limited to verification of the charges contained in such statement. Tenant may not withhold payment of such bill pending completion of such inspection. 6.4 Common Operating Expenses Defined. The term "Common Operating Expenses" shall mean the sum of the following: A. All costs and expenses paid or incurred by Landlord in doing the following (including payments to independent contractors providing services related to the performance of the following): (i) maintaining, cleaning, and repairing the exterior surfaces (including painting of exterior surfaces of buildings not more than once every 5 years) of all buildings located on the Property; (ii) maintenance of the liability, fire and property damage insurance covering the Property carried by Landlord pursuant to paragraph 9.2 (including the payment of commercially reasonable "deductibles" and the prepayment of premiums for coverage of up to one year); (iii) maintaining, repairing, operating and replacing when necessary HVAC equipment, utility facilities and 12. other building service equipment; (iv) providing utilities to the Common Area (including lighting, trash removal and water for landscaping irrigation); (v) complying with all applicable Laws and Private Restrictions; (vi) operating, maintaining, repairing, cleaning, painting, restriping and resurfacing the Common Area; (vii) replacement or installation of lighting fixtures, directional or other signs and signals, irrigation systems, tress, shrubs, ground cover and other plant materials, and all landscaping in the Common Area; and (viii) depreciation and financing costs on maintenance and operating machinery and equipment (if owned) and rental paid for such machinery and equipment (if rented); B. All additional costs and expenses incurred by Landlord with respect to the operation, protection, maintenance, repair and replacement of the Property which pursuant to generally accepted accounting principles would be considered a current expense and not a capital expenditure; C. That portion of all compensation (including benefits and premium for workers' compensation and other insurance) paid to or on behalf of employees of Landlord but only to the extent they are involved in the performance of the work described by subparagraphs A and B above and that is fairly allocable to the Property; D. An additional amount equal to a commercially reasonable and competitive management fee that would be charged by an independent third party property manager for the management of the Property (except that Tenant's Allocated Share of such management fee for any period shall not exceed two percent (2%)of the Base Monthly Rent and Additional Rent payable by Tenant for the same period); and E. Notwithstanding anything contained herein, the term "Common Operating Expenses" shall not include any of the following: (i) mortgage principle payments; (ii) ground rent and other payments made pursuant to any ground lease affecting the Property; (iii) the cost of refinancing any loan Secured by the Property; (iv) interest and penalties imposed against Landlord for late payments by Landlord; (v) legal fees incurred by Landlord in connection with the negotiation or enforcement of, or litigation in connection with, any lease affecting the Property; (vi) the cost of any paintings, sculptures, or other art objects installed on the Property; (vii) any costs reimbursed to Landlord by insurance or other third party payments that are not reimbursements by tenants for their share of Common Operating Expenses; (viii) brokerage commissions or other costs related to the leasing of space within the Property; (ix) the cost of any tenant improvements installed for the exclusive use of any other tenant of the Property. 6.5 Control of Common Area. Landlord shall at all times have exclusive control of the Common Area. Landlord shall have the right, without the same constituting an actual or constructive eviction and without entitling Tenant to any abatement of rent, to: (i) close any part of the Common Area to the minimum extent reasonably necessary in the reasonable opinion of Landlord's counsel to prevent a dedication thereof or the accrual of any prescriptive rights therein; (ii) temporarily close the Common Area to perform maintenance or for any other reason deemed sufficient by Landlord; (iii) designate other property outside the boundaries of the Property to become part of the Property; (iv) construct multi-deck parking structures in any part of the Common Area; (v) change the shape, size, location, number and extent of improvements on the Common Area; (vi) select a third party to maintain and operate any of the Common Area at any time Landlord determines that the best interests of the Property will be served by having the Common Area maintained and operated by that third party so long as the fees and charges of such third party are reasonable and competitive with the fees of others in the marketplace providing the same services; (vii) make changes to the Common Area including, without limitation, changes in the location of driveways, parking spaces, parking areas, sidewalks or the direction of the flow of traffic and the site of the Common Area; and/or (viii) voluntarily change the address of the Property. Landlord agrees not to change the name of Airport Technology Park without the prior consent of Tenant. The use of the Common Area shall be subject to such reasonable regulation and changes therein as Landlord shall make from time to time. Landlord shall not exercise its rights to control the Common Area in a manner that would materially interfere with Tenant's use of the Premises without first obtaining Tenant's approval. Tenant shall keep the Common Area free and clear of all obstructions created or permitted by Tenant. If in the opinion of Landlord unauthorized persons are using any of the Common Area by reason of the presence of Tenant in the Premises, Tenant, upon demand of Landlord, shall restrain such unauthorized use by appropriate proceedings. Nothing herein shall affect the right of Landlord at any time to remove such unauthorized person from the Common Area nor to prohibit the use of the Common Area by 13. unauthorized persons. In exercising any such rights described in this paragraph 6.5 regarding the Common Area, Landlord shall make a reasonable effort to minimize any disruption to Tenant's business. 6.6 Tenant's Negligence. Anything in this Lease to the contrary notwithstanding, Tenant shall pay for all damage to the Premises or the Property caused by the negligent act or omission of Tenant, its employees, contractors, or invitees, or by the failure of Tenant to discharge promptly its obligations under this Lease, or to comply with the terms of this Lease, but only to the extent such damage is not covered by insurance proceeds actually recovered by Landlord. Tenant shall make payment within thirty (30) days after demand therefor by Landlord. ARTICLE 7 Waste Disposal And Utilities 7.1 Waste Disposal. Tenant shall store its waste either inside the Premises or within outside trash enclosures that are (i) fully fenced and screened in compliance with all Private Restrictions, (ii) designed for such purpose to be used either exclusively by Tenant or in common with other occupants of the Property, as designated by Landlord, and (iii) first approved by Landlord. All entrances to such outside trash enclosures shall be kept closed, and waste shall be stored in such manner as not to be visible from the exterior of such outside enclosures. Tenant shall cause all of its waste to be regularly removed from the Property at Tenant's sole cost. Tenant shall keep all fire corridors and mechanical equipment rooms in the Premises free and clear of all obstructions at all times. 7.2 Hazardous Materials. Landlord and Tenant agree as follows with respect to the existence or use of Hazardous Materials on the Property: A. Landlord hereby makes the following representations to Tenant each of which is made to the best of Landlord's knowledge as of the Commencement Date: (1) The soil and ground water on or under the Property does not contain Hazardous Materials in amounts which violate any Hazardous Materials Laws to the extent that any governmental entity could require either Landlord or Tenant to take any remedial action or impose any penalties with respect to such Hazardous Materials. (2) During Landlord's period of ownership, no litigation or any administrative proceeding has been brought or threatened, nor any settlements reached with any governmental or private party, concerning the actual or alleged presence of Hazardous Materials on or about the Property or any disposal, release or threatened release of Hazardous Materials in or about the Property. (3) During the time that Landlord has owned the Property, Landlord has received no notice of (i) any violation, or alleged violation, of any Hazardous Material Law that has not been corrected to the satisfaction of the appropriate authority, (ii) any pending claims relating to the presence of Hazardous Material on the Property, or (iii) any pending investigation by any governmental agency concerning the Property relating to Hazardous Materials. (4) The Property does not contain any (i) equipment containing PCBs, or (ii) underground storage tanks. B. Any handling, transportation, storage, treatment, disposal or use of Hazardous Materials by Tenant and Tenant's agents, employees, contractors, invitees or subtenants after the Commencement Date in or about the Property shall strictly comply with all applicable Hazardous Materials Laws. Tenant shall indemnify, defend upon demand with counsel reasonably acceptable to Landlord, and hold harmless Landlord from and against any and all liabilities, losses, claims, damages, interest, penalties, fines, monetary sanctions, attorneys' fees, experts' fees, court costs, remediation costs, investigation costs, and other expenses which result from or arise in any manner whatsoever out of the use, storage, treatment, transportation, release, or disposal of Hazardous Materials on or about 14. the Property by Tenant or Tenant's agents, employees, contractors, invitees or subtenants after the Commencement Date. C. If the presence of Hazardous Materials on the Property caused or permitted by Tenant or Tenant's agents, employees, contractors, invitees or subtenants after the Commencement Date results in contamination or deterioration of water or soil resulting in a level of contamination greater than the levels established, is acceptable by any governmental agency having Jurisdiction over such contamination, then Tenant shall promptly take any and all action necessary to clean up such contamination if required by Law or as a condition to the issuance or continuing effectiveness of any governmental approval which relates to the use of the Property or any part thereof. Tenant shall further be solely responsible for, and shall defend, indemnify and hold Landlord and its agents harmless from and against, all claims, costs and liabilities, including attorneys' fees and costs, arising out of or in connection with any removal, clean-up and restoration work and materials required hereunder to return the Property to its condition existing prior to the appearance of such Hazardous Materials. D. Landlord and Tenant shall each give written notice to the other as soon as reasonably practicable of (i) any communication received from any governmental authority concerning Hazardous Materials which relates to the Property, and (ii) any contamination of the Property by Hazardous Materials which constitutes a violation of any Hazardous Materials Law. Landlord and Tenant each agree to keep such information confidential, except for (i) disclosures that are approved by the other party, (ii) disclosures required by Law or court order, (iii) disclosures to any environmental consultant, lender, purchaser, prospective purchaser, attorneys for either Landlord or Tenant, or brokers for either Landlord or Tenant, so long as an agreement of confidentiality is obtained from a party to whom the disclosure is to be made, and (iv) disclosures in connection with any litigation or administrative proceeding in which either Landlord or Tenant is involved. Tenant and Tenant's agents, employees, contractors, invitees or subtenants shall not bring Hazardous Materials onto the Property without first obtaining the written consent of Landlord; provided, however, Tenant may, without being required to obtain the prior written consent of Landlord, use at the Premises in small quantities office supplies, cleaning materials and other maintenance materials that are customarily used in business offices, even though such supplies and materials may fall within the definition of Hazardous Materials. At any time during the Lease Term, Tenant shall, within five days after written request therefor received from Landlord, disclose in writing all Hazardous Materials that are being used by Tenant on the Property, the nature of such use, and the manner of storage and disposal. E. Landlord may cause testing wells to be installed on the Property, and may cause the ground water to be tested to detect the presence of Hazardous Material by the use of such tests as are then customarily used for such purposes. Any such installation of wells or tests shall be done in a manner which minimizes the interference with Tenant's use of the Premises. If Tenant so requests, Landlord shall supply Tenant with copies of such test results. The cost of such tests and of the installation, maintenance, repair and replacement of such wells shall be paid by Tenant if such tests disclose the existence of facts which give rise to liability of Tenant pursuant to its indemnity given in subparagraph 7.2B or 7.2C, and Tenant's liability is established in a judicial or administrative proceeding, or in an action for declaratory relief brought by Landlord. F. Landlord, at its sole cost, shall comply with all Hazardous Materials Laws affecting the Property (without right of reimbursement from Tenant) to the extent that (i) Landlord is legally obligated to do so by such Laws, and (ii) such compliance (or the cost of such compliance) is not made the responsibility of Tenant pursuant to subparagraph 7.2B or subparagraph 7.2C. Landlord shall indemnify, defend upon demand with competent counsel, and hold harmless Tenant from and against any and all liability for response costs imposed upon Tenant by any governmental agency pursuant to the federal Law known as "CERCLA" (more particularly identified in subparagraph 7.2G) and the comparable California statute (commonly known as the Carpenter-Presley-Tanner Hazardous Substances Account Act, California Health and Safety Code Section 25300 et seq.) that results from the presence of Hazardous Materials on the Property not caused or contributed to by the use, storage, treatment, release or disposal of Hazardous Materials on or about the Property by Tenant, its subtenants, or their respective agents, employees, contractors, or invitees. Notwithstanding the foregoing, the indemnity given by Landlord in the immediately preceding sentence shall not apply with respect to liability caused by any contamination of the Property by a Hazardous Material that is or has been used, stored, treated, released or disposed of on the Property by Tenant, its subtenants, or their respective agents, employees, contractors, or invitees unless Tenant can prove such contamination was not caused or contributed to by any of such parties. 15. G. As used herein, the term "Hazardous Material," means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State of California or the United States Government. The term "Hazardous Material," includes, without limitation, asbestos, PCB's, petroleum and petroleum products, and any material or substance which in (i) listed under Article 9 or defined as hazardous or extremely hazardous pursuant to Article 11 of Title 22 of the California Administrative Code, Division 4, Chapter 20, (ii) defined as a "hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. (S)6901 et seq. (42 U.S.C. (S)6903), or (iii) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. (S)9601 et seq. (42 U.S.C. 19601). As used herein, the term "Hazardous Material Law" shall mean any statute, law, ordinance, or regulation of any governmental body or agency (including the U.S. Environmental Protection Agency, the California Regional Water Quality Control Board, and the California Department of Health Services) which regulates the use, storage, release or disposal of any Hazardous Material. H. The obligations of Landlord and Tenant under this paragraph 7.2 shall survive the expiration or earlier termination of the Lease Term. The rights and obligations of Landlord and Tenant with respect to issues relating to Hazardous Materials are exclusively established by this paragraph 7.2. In the event of any inconsistency between any other part of this Lease and this paragraph 7.2, the terms of this paragraph 7.2 shall control. 7.3 Utilities. Tenant shall promptly pay, as the same become due, all charges for water, gas, electricity, telephone, sewer service, waste pick-up and any other utilities, materials or services furnished directly to or used by Tenant on or about the Premises during the Lease Term, including, without limitation, (i) meter, use and/or connection fees, hook-up fees, standby fees, and (ii) penalties for discontinued or interrupted service. 7.4 Compliance with Governmental Regulations. Landlord and Tenant shall comply with all rules, regulations and requirements promulgated by national, state or local governmental agencies or utility suppliers concerning the use of utility services, including any rationing, limitation or other control. Landlord may voluntarily cooperate in a reasonable manner with the efforts of all governmental agencies or utility suppliers in reducing energy or other resource consumption. Tenant shall not be entitled to terminate this Lease nor to any abatement in rent by reason of such compliance or cooperation. Tenant agrees at all times to cooperate fully with Landlord and to abide by all rules, regulations and requirements which Landlord may prescribe in order to maximize the efficient operation of the HVAC system and all other utility systems. ARTICLE 8 Real Property Taxes 8.1 Real Property Taxes Defined. The term "Real Property Taxes" as used herein shall mean (i) all taxes, assessments, levies, and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any existing or future general or special assessments for public improvements, services or benefits, and any increases resulting from reassessments or resulting from a change in ownership or any other cause), now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed against, or with respect to the value, occupancy or use of, all or any portion of the Property (as now constructed or as may at any time hereafter be constructed, altered, or otherwise changed) or Landlord's interest therein, the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located on the Property, the gross receipts, income, or rentals from the Property, or the use of parking areas, public utilities, or energy within the Property, (ii) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Property (excluding costs and expenses for which Landlord is responsible pursuant to subparagraph 7.2F), and (iii) all costs and fees (including attorneys' fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If at any time during the Lease Term the method of taxation or assessment of the Property prevailing as of the Commencement Date shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use or 16. occupancy of the Property, (ii) on or measured by the gross receipts, income, or rentals from the Property, (iii) on Landlord's business of leasing the Property, or (iv) computed in any manner with respect to the operation of the Property, then any such tax or charge, however designated, shall be included within the meaning of the term "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Property, then only that part of such Real Property Tax that is fairly allocable to the Property shall be included within the meaning of the term "Real Property Taxes". Notwithstanding the foregoing, the term "Real Property Taxes" shall not include estate, inheritance, transfer, gift or franchise taxes of Landlord or the federal or state net income tax imposed on Landlord's income from all sources. 8.2 Tenant's Obligation to Reimburse. As Additional Rent, Tenant shall pay to Landlord Tenant's Allocated Share of all Real Property Taxes which become due after the Rent Start Date and during the Lease Term which are fairly allocable to the Premises, which include (i) all Real Property Taxes assessed with respect to the value, use or occupancy of the Premises and the land beneath it, and (ii) a proportionate share (based on the Premises Gross Leaseable Area as a percentage of the Property Gross Leaseable Area) of all Real Property Taxes assessed with respect to the Common Area or with respect to the Property in general which are not fairly allocable to any one building on the Property. Tenant shall pay its share of Real Property Taxes (i) within thirty (30) days after being billed for the same by Landlord, or (ii) no later than ten (10) days before such Real Property Tax becomes delinquent, whichever last occurs. If requested by Tenant in writing within one year from receipt of a bill for Tenant's Allocated Share of Real Property Taxes, Landlord shall furnish Tenant with such evidence as is reasonably available to Landlord with respect to the amount of any Real Property Tax which is part of such bill. Tenant may not withhold payment of such bill pending receipt and/or review of such evidence. Upon Landlord's election or if any Lender requires Landlord to impound Real Property Taxes on a periodic basis during the Lease Term, then Tenant, on notice from Landlord indicating this requirement, shall pay a sum of money toward its liability under this Article to Landlord on the same periodic basis in accordance with the Lender's requirements (if any). Landlord shall impound the Real Property Tax payments received from Tenant in accordance with the requirements of the Lender (if any). If any assessments are levied against the Property, Landlord may elect either to pay the amount in full or to allow the assessment to go to bond. If Landlord pays the assessment in full, Tenant shall pay to Landlord each time payment of Real Property Taxes is made a sum equal to that which would have been payable (as both principal and interest) had Landlord allowed the assessment to go to bond. Notwithstanding anything to the contrary contained in paragraphs 8.1 and 8.2, if there is an increase in Real Property Taxes resulting from a "change in ownership" (as that term is defined in California Revenue and Taxation Code Section 60 et seq.) which occurs prior to the fourth (4th) anniversary of the Commencement Date, then Tenant shall not be obligated to pay any such increase that results from such "change of ownership". 8.3 Taxes on Tenant's Property. Tenant shall pay before delinquency any and all taxes, assessments, license fees and public charges levied, assessed or imposed against Tenant or Tenant's estate in this Lease or the property of Tenant situated within the Premises which become due during the Lease Term. Tenant shall furnish Landlord with satisfactory evidence of these payments within thirty (30) days after receipt of written request therefor from Landlord. ARTICLE 9 Insurance 9.1 Tenant's Insurance. Tenant shall maintain insurance complying with all of the following: A. Tenant shall procure, pay for and keep in full force and affect the following: (1) Commercial general liability insurance, including property damage, against liability for personal injury, bodily injury, death and damage to property occurring in or about, or resulting from an occurrence in or about, the Premises with combined single limit coverage of not less than the amount of Tenant's Minimum Liability Insurance Coverage set forth in paragraph 1.8, which insurance shall contain a "contractual liability" endorsement insuring Tenant's performance of Tenant's obligation to indemnify Landlord contained in paragraph 10.3; 17. (2) Plate-glass insurance, at actual replacement cost; and (3) Fire and property damage insurance against loss caused by fire, extended coverage perils including steam boiler insurance, sprinkler leakage, if applicable, vandalism, malicious mischief and such other additional perils as now are or hereafter may be included in a standard extended coverage endorsement from time to time in general use in the county in which, the Property is located, insuring Tenant's personal property, inventory, Trade Fixtures and Leasehold Improvements within the Premises for the full actual replacement cost thereof. B. Where applicable and required by Landlord, each policy of insurance required to be carried by Tenant pursuant to this paragraph (i) shall name Landlord and such other parties in interest as Landlord designates as additional insureds; (ii) shall be primary insurance which provides that the insurer shall be liable for the full amount of the loss up to and including the total amount of liability set forth in the declarations without the right of contribution from any other insurance coverage of Landlord; (iii) shall be in a form satisfactory to Landlord; (iv) shall be carried with companies reasonably acceptable to Landlord; (v) shall provide that such policy shall not be subject to cancellation, lapse or change except after at least thirty (30) days prior written notice to Landlord; (vi) shall not have a "deductible" in excess of $500,000 or such greater amount as is approved by Landlord; (vii) shall (to the extent available) contain a waiver by the insurer of any right to subrogation against Landlord, its agents, employees and contractors which might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its agents, employees or contractors; and (viii) shall contain a "severability" clause. If Tenant has in force and affect a blanket policy of liability insurance with the same coverage for the Premises as described above, as well as other coverage of other premises and properties of Tenant, or in which Tenant has some interest, such blanket insurance shall satisfy the requirements hereof. C. A certificate of each paid-up policy evidencing the insurance requited to be carried by Tenant pursuant to this paragraph (appropriately authenticated by the insurer), certifying that such policy has been issued, providing the coverage required by this paragraph, and containing the provisions specified herein, shall be delivered to Landlord prior to the time Tenant or any of its contractors enters the Premises and upon renewal of such policies, but not less than five (5) days prior to the expiration of the term of such coverage. If Landlord's insurance advisor reasonably determines at any time that the amount of coverage required for any policy of insurance Tenant is to obtain pursuant to this paragraph is not adequate, then Tenant shall increase such coverage for such insurance to such amount as Landlord's insurance advisor reasonably deems adequate, not to exceed the level of coverage commonly carried by comparable businesses similarly situated for such insurance; provided, however, that Landlord may not require an adjustment pursuant to this sentence more frequently than once every two (2) years during the Lease Term. 9.2 Landlord's Insurance. Landlord shall have the following obligations and options regarding insurance: A. Landlord shall maintain a policy or policies of fire and property damage insurance in so-called "all risk" form insuring Landlord (and such others as Landlord may designate) against loss of rents for a period of not less than six, (6) months and from physical damage to the Premises with coverage of not less than the full replacement cost of (i) the building of which the Premises are a part, including the structural elements thereof and all electrical, mechanical, plumbing, and other systems, and (ii) all Interior Improvements constructed pursuant to the Interior Improvement Agreement attached as Exhibit "C". Landlord may so insure the Premises separately, or may insure the Premises with other buildings and improvements within the Property and/or other property owned by Landlord which Landlord elects to insure together under the same policy or policies. Such fire and property damage insurance, at Landlord's election, (i) may be endorsed to cover loss caused by such additional perils against which Landlord may elect to insure, including earthquake and/or flood, (ii) shall contain commercially reasonable "deductibles" which, in the case of earthquake and flood insurance, may be up to ten percent (10%) of the replacement value of the property insured or such higher amount as is then commercially reasonable, (iii) may provide coverage for loss of rents for a period of up to twelve (12) months, and (iv) may contain additional endorsements or coverage reasonably required by Landlord or any Lender, including an "agreed amount" endorsement, demolition insurance (covering the cost of demolishing damaged improvements or improvements required by Law to be demolished), and difference in condition coverage. Landlord shall not be required to cause 18. such insurance to cover any Trade Fixtures, Leasehold Improvements or any inventory or other personal property of Tenant. B. Landlord may maintain a policy or policies of commercial general liability insurance insuring Landlord (and such others as are designated by Landlord) against liability for personal injury, bodily injury, death and damage to property occurring or resulting from an occurrence in, on or about the Property, with combined single limit coverage in such amount as Landlord may from time to time determine is reasonably necessary for its protection and with commercially reasonable deductibles. 9.3 Tenant's Obligation to Reimburse. The cost of the insurance carried by Landlord pursuant to paragraph 9.2 (and any commercially reasonable "deductible" amount paid by Landlord in connection with the restoration of any lose and excluded from the coverage of such insurance) shall be a Common Operating Expense and Tenant shall pay its share thereof as provided in paragraph 6.3. However, if Landlord's insurance rates for the Premises are increased at any time during the Lease Term as a result of the nature of Tenant's use of the Premises, Tenant shall reimburse Landlord for the full amount of such increase immediately upon receipt of a bill from Landlord therefor. 9.4 Release and Waiver of Subrogation. The parties hereto release each other, and their respective agents and employees, from any liability for injury to any person or damage to property that is caused by or results from any risk insured against under any valid and collectible insurance policy carried by either of the parties which contains a waiver of subrogation by the insurer and is in force at the time of such injury or damage, subject to the following limitations: (i) the foregoing provisions shall not apply to the commercial general liability insurance described by subparagraph 9.1A and 9.1B; and (ii) such release shall apply to liability resulting from any risk insured against or covered by self-insurance maintained or provided by Tenant to satisfy the requirements of paragraph 9.1. This release shall be in effect only so long as the applicable insurance policy contains a clause to the effect that this release shall not affect the right of the insured to recover under such policy. Each party shall use reasonable efforts to cause each insurance policy obtained by it to provide that the insurer waives all right of recovery by way of subrogation against the other party and its agents and employees in connection with any injury or damage covered by such policy. However, if any insurance policy cannot be obtained with such a waiver of subrogation, or if such waiver of subrogation is only available at additional cost and the party for whose benefit the waiver is to be obtained does not pay such additional cost, then the party obtaining such insurance shall notify the other party of that fact and thereupon shall be relieved of the obligation to obtain such waiver of subrogation rights from the insurer with respect to the particular insurance involved. ARTICLE 10 Limitation On Landlord's Liability And Indemnity 10.1 Limitation on Landlord's Liability. Landlord shall not be liable to Tenant, nor shall Tenant be entitled to terminate this Lease or to any abatement of rent, for any injury to Tenant, its agents, employees, contractors or invitees, damage to Tenant's property, or loss to Tenant's business resulting from any cause, including without limitation any (i) failure, interruption or installation of any HVAC or other utility system or service; (ii) failure to furnish or delay in furnishing any utilities or services when such failure or delay is caused by Acts of God or the elements, labor disturbances of any character, any other accidents or other conditions beyond the reasonable control of Landlord; (iii) limitation, curtailment, rationing or restriction on the use of water or electricity, gas or any other form of energy or any services or utility serving the Premises; (iv) vandalism or forcible entry by unauthorized persons; or (v) penetration of water into or onto any portion of the Premises or the Common Area through roof leaks or otherwise. Notwithstanding the foregoing: A. Subject to paragraph 9.4, Landlord shall be liable for any such injury, damage or loss which is proximately caused by Landlord's gross negligence or willful misconduct, of which Landlord has actual notice and a reasonable opportunity to cure but which it fails to so cure. 19. B. Tenant shall have the option to terminate this Lease upon the occurrence of the following: (i) water, electricity, or other utility service essential to the conduct of Tenant's business in the Premises is interrupted or substantially impaired for a period of more than two hundred seventy (270) consecutive days during which time the Premises are rendered substantially unusable for the conduct of Tenant's business (a "Material Interruption"); and (ii) the Material Interruption is not caused by the act or omission of Tenant, its agents, employees or contractors. 10.2 Limitation on Tenant's Recourse. So long as the Landlord is a corporation, trust, partnership, joint venture, unincorporated association or other form of business entity, (i) the obligations of Landlord shall not constitute personal obligations of the officers, directors, trustees, partners, joint venturers, members, owners, stockholders, or other principals or representatives of such business entity, and (ii) Tenant shall have recourse only to the assets of such business entity for the satisfaction of such obligations and not against the assets of such officers, directors, trustees, partners, joint venturers, members, owners, stockholders, principals or representatives, except to the extent of their interests in the entity that is Landlord. If Landlord is a natural person or persons, Tenant shall have recourse only to the interest of such natural persons in the Property for the satisfaction of the obligations of Landlord and shall not have recourse to any other assets of such natural persons for the satisfaction of such obligations. 10.3 Indemnification of Landlord. Tenant shall hold harmless, indemnify and defend Landlord, and Its employees, agents and contractors, with competent counsel, from all liability, penalties, losses, damages, costs, expenses, causes of action, claims and/or judgments arising by reason of any death, bodily injury, personal injury or property damage (i) resulting from any cause or causes whatsoever (other than the negligence or willful misconduct of Landlord of which Landlord has had notice and a reasonable time to cure, but which Landlord has failed to cure) occurring in or about or resulting from an occurrence in or about the Premises, or (ii) resulting from the negligence or willful misconduct of Tenant, its agents, employees and contractors, wherever the same may occur, or (iii) resulting from an Event of Tenant's Default. The provisions of this paragraph shall survive the expiration or sooner termination of this Lease. ARTICLE 11 Damage To Premises 11.1 Landlord's Duty to Restore. If the Premises are damaged by any peril after the Commencement Date of this Lease, Landlord shall restore the Premises unless the Lease is terminated by Landlord pursuant to paragraph 11.2 or by Tenant pursuant to paragraph 11.3. All insurance proceeds available from the fire and property damage insurance carried by Landlord pursuant to paragraph 9.2 shall be paid to and become the property of Landlord. If this Lease is terminated pursuant to either paragraphs 11.2 or 11.3, then all insurance proceeds available from insurance carried by Tenant which covers loss to property that is Landlord's property or would become Landlord's property on termination of this Lease shall be paid to and become the property of Landlord. If this Lease is not so terminated, then upon receipt of the insurance proceeds (if the loss is covered by insurance) and the issuance of all necessary governmental permits, Landlord shall commence and diligently prosecute to completion the restoration of the Premises, to the extent then allowed by Law, to substantially the same condition in which the Premises were immediately prior to such damage. Landlord's obligation to restore shall be limited to the Premises and interior improvements constructed by Tenant but financed by Landlord pursuant to the Interior Improvement Agreement as such improvements existed upon completion thereof excluding any Leasehold Improvements, Trade Fixtures and/or personal property constructed or installed by Tenant in the Premises. To the extent that insurance proceeds recovered by Landlord from the Insurance carried pursuant to paragraph 9.2A exceed the amount needed by Landlord to discharge its restoration obligation pursuant to the immediately preceding sentence, Landlord shall make such excess insurance proceeds available to Tenant for the purpose of restoring interior improvements that were constructed by Tenant and financed by Tenant pursuant to the Interior Improvement Agreement, so that such improvements may be restored to substantially the same condition existing as of the date such improvements were initially completed. 20. 11.2 Landlord's Right to Terminate. Landlord shall have the right to terminate this Lease in the event any of the following occurs, which right may be exercised only by delivery to Tenant of a written notice of election to terminate within thirty (30) days after the date of such damage: A. Either the Property or the Premises is damaged by an Insured Peril to such an extent that the estimated cost to restore equals or exceeds eighty percent (80%) of the then actual replacement cost thereof and there remains less than three (3) years in the Lease Term; provided, however, that Landlord may not terminate this Lease pursuant to this subparagraph 11.2A if Tenant at the time of such damage has a then valid written option to extend the Lease Term and Tenant exercises such option to extend the Lease Term within fifteen (15) days after Tenant receives Landlord's notice of election to terminate and such action results in there being more than three (3) years remaining in the Lease Term (as it has been extended by the exercise of such option); B. Either the Property or the Premises is damaged by an Uninsured Peril to such an extent that the estimated cost to restore exceeds two percent (2%) of the actual replacement cost thereof; provided, however, that Landlord may not terminate this Lease pursuant to this paragraph 11.2B if one or more tenants of the Property agree in writing to pay the amount by which the cost to restore the damage exceeds such amount and subsequently deposit such amount with Landlord within thirty (30) days after Landlord has notified Tenant of its election to terminate this Lease; C. The Premises are damaged by any peril within twelve (12) months of the last day of the Lease Term to such an extent that the estimated cost to restore equals or exceeds an amount equal to six (6) times the Base Monthly Rent then due; provided, however, that Landlord may not terminate this Lease pursuant to this subparagraph 11.2C if Tenant, at the time of such damage, has a then valid express written option to extend the Lease Term and Tenant exercises such option to extend the Lease Term within fifteen (15) days following the date of such damage; or D. As used herein, the following terms shall have the following meanings: (i) the term "Insured Peril" shall mean a peril actually insured against for which the insurance proceeds paid or made available to Landlord are sufficient (except for any "deductible" amount specified by such insurance) to restore the Property under the then existing building codes to the condition existing immediately prior to the damage; and (ii) the term "Uninsured Peril" shall mean and include any peril not actually insured against, any peril actually insured against but for which the insurance proceeds paid or made available to Landlord are for any reason (except for any "deductible" amount specified by such insurance) insufficient to restore the Property under then existing building codes to the condition existing immediately prior to the damage, and any peril actually insured against but for which the insurance proceeds are not paid or made available to Landlord. 11.3 Tenant's Right to Terminate. If the Premises are damaged by any peril and Landlord does not elect to terminate this Lease or is not entitled to terminate this Lease pursuant to paragraph 11.2, then as soon as reasonably practicable, Landlord shall furnish Tenant with the written opinion of Landlord's architect or construction consultant as to when the restoration work required of Landlord may be completed. Tenant shall have the right to terminate this Lease in the event any of the following occurs, which right may be exercised only by delivery to Landlord of a written notice of election to terminate within thirty (30) days after Tenant receives from Landlord the estimate of the time needed to complete such restoration: A. The Premises are damaged by any peril and, in the reasonable opinion of Landlord's architect or construction consultant, the restoration of the Premises cannot be substantially completed within two hundred seventy (270) days after the date of such damage; or B. The Premises are damaged by any peril within twelve (12) months of the last day of the Lease Term and in the reasonable opinion of Landlord's architect or construction consultant the restoration of the Premises cannot be substantially completed within ninety (90) days after the date of such damage; or C. The Premises are not restored within eighteen (18) months following the date of such damage; provided, however, that if at the time restoration of the "shell" of the building in which the Premises are 21. located is substantially completed (excluding Interior Improvements) Landlord reasonably estimates that Landlord will not be able to complete restoration of the Premises within such eighteen (18) month period, then at that time Landlord may offer in writing to Tenant the option to terminate this Lease, and if Tenant does not exercise such option to terminate the Lease so offered to Tenant by Landlord, then Tenant may not thereafter elect to terminate this Lease pursuant to this subparagraph 11.3C. 11.4 Abatement of Rent. In the event of damage to the Premises which does not result in the termination of this Lease, the Base Monthly Rent and the Additional Rent shall be temporarily abated commencing on the date of damage and continuing through the period of restoration in proportion to the degree to which Tenant's use of the Premises is impaired by such damage. Tenant shall not be entitled to any compensation or damages from Landlord for loss of Tenant's business or property or for any inconvenience or annoyance caused by such damage or restoration. Tenant hereby waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code, and the provisions of any similar law hereinafter enacted. ARTICLE 12 Condemnation 12.1 Tenant's Termination Right. Tenant shall have the right to terminate this Lease if, as a result of any taking by means of the exercise of the power of eminent domain (including any voluntary sale or transfer by Landlord to any condemnor under threat of condemnation), (i) ten percent (10%) or more of the Premises is so taken, or (ii) there is a taking affecting the Common Area and, as a result of such taking, Landlord cannot provide parking spaces within reasonable walking distance of the Premises equal in number to at least ninety percent (90%) of the number of spaces allocated to Tenant by paragraph 2.1, whether by rearrangement of the remaining parking areas in the Common Area (including construction of multi-dock parking structures or restriping for compact cars where permitted by Law) or by alternative parking facilities on other land. Tenant must exercise such right within a reasonable period of time, to be effective on the date that possession of that portion of the Premises or Common Area that is condemned is taken by the condemnor. 12.2 Restoration and Abatement of Rent. If any part of the Premises or the Common Area is taken by condemnation and this Lease is not terminated, then Landlord shall restore the remaining portion of the Premises and Common Area to substantially the same condition in which the Premises and Common Area were immediately prior to such taking, excluding any Leasehold Improvements, Trade Fixtures and/or personal property constructed or installed by Tenant; provided, however, that Landlord shall not be obligated to spend more for such restoration than the amount of any condemnation award recovered by or pursuant to paragraph 12.3. Thereafter, except in the case of a temporary taking, (i) as of the date possession is taken the Base Monthly Rent (but not any Additional Rent) shall be reduced in the same proportion that the floor area of that part of the Premises so taken (less any addition thereto by reason of any reconstruction) bears to the original floor area of the Premises, and (ii) to the extent that Landlord is obligated to undertake any restoration work as a result of such condemnation, the Base Monthly Rent shall be further abated in proportion to the extent to which such restoration work interferes with Tenant's ability to use that part of the Premises which remains after the condemnation. 12.3 Temporary Taking. If any portion of the Premises is temporarily taken for six (6) months or less, this Lease shall remain in effect and Tenant shall be entitled to recover any condemnation award that is made for such taking and shall be responsible for restoring the Premises to the condition existing immediately prior to such temporary taking. If any portion of the Premises is temporarily taken by condemnation for a period which exceeds six (6) months or which extends beyond the natural expiration of the Lease Term, and such taking materially and adversely affects Tenant's ability to use the Premises for the Permitted Use, then Tenant shall have the right to terminate this Lease, effective on the date possession is taken by the condemnor. 12.4 Division of Condemnation Award. Any award made as a result of any condemnation of the Premises or the Common Area shall belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any such award; provided, however, that Tenant shall be entitled to recover out of any condemnation award made for a taking of all or part of the Premises an amount equal to the unamortized cost of all interior improvements paid for by Tenant constructed pursuant to the Interior Improvement Agreement and all 22. Leasehold Improvements constructed by Tenant (amortized on a straight line basis over the initial Lease Term for Interior Improvements, and over the period from completion of construction until expiration of the Lease Term for Leasehold Improvements); and provided further that Tenant shall be entitled to receive any condemnation award that is made directly to Tenant for the following so long as the award made to Landlord is not thereby reduced: (i) for the taking of personal property or Trade Fixtures belonging to Tenant, (ii) for the interruption of Tenant's business or its moving costs, (iii) for loss of Tenant's goodwill, or (iv) for any temporary taking where this Lease is not terminated as a result of such taking. The rights of Landlord and Tenant regarding any condemnation shall be determined as provided in this Article, and each party hereby waives the provisions of Section 1265.130 of the California Code of Civil Procedure and the provisions of any similar law hereinafter enacted allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises. ARTICLE 13 Default And Remedies 13.1 Events of Tenant's Default. Tenant shall be in default of its obligations under this Lease if any of the following events occurs (an "Event of Tenant's Default"): A. Tenant shall have failed to pay Base Monthly Rent or any Additional Rent when due and such failure is not cured within ten (10) days after delivery of written notice from Landlord specifying such failure to pay; or B. Tenant shall have failed to perform any term, covenant, or condition of this Lease except those requiring the payment of Base Monthly Rent or Additional Rent, and Tenant shall have failed to cure such breach within thirty (30) days after written notice from Landlord specifying the nature of such breach, or if such breach could not reasonably be cured within said thirty (30) day period, Tenant shall have failed to commence such cure within said thirty (30) day period and thereafter continue with due diligence to prosecute such cure to completion within such time period as is reasonably needed; or C. Tenant shall have made a general assignment of its assets for the benefit of its creditors; or D. Tenant shall have sublet the Premises or assigned its interest in the Lease in violation of the provisions contained in Article 14, whether voluntarily or by operation of law; Landlord shall have notified Tenant in writing that such Transfer constitutes a violation of the provisions contained in Article 14, and Tenant does not cause such Transfer to be rescinded or terminated and possession of the Premises affected by the Transfer recovered from the Transferee within ninety (90) days after receipt of such notice; or E. Tenant shall have permitted the sequestration or attachment of, or execution on, or the appointment of a custodian or receiver with respect to, all or any substantial part of the property of Tenant or any property essential to the conduct of Tenant's business, and Tenant shall have failed to obtain a return or release of such property within ninety (90) days thereafter or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; or F. A court shall have made or entered any decree or order with respect to Tenant, or Tenant shall have submitted to or sought a decree or order (or a petition or pleading shall have been filed in connection therewith) which: (i) grants or constitutes (or seeks) an order for relief, appointment of a trustee, or confirmation of a reorganization plan under the bankruptcy laws of the United States; (ii) approves as properly filed (or seeks such approval of) a petition seeking liquidation or reorganization under said bankruptcy laws or any other debtor's relief law or statute of the United States or any state thereof; or (iii) otherwise directs (or seeks) the winding up or liquidation of Tenant; and such petition, decree or order shall have continued in effect for a period of ninety (90) or more days; or 23. G. Tenant shall have failed to deliver documents as required of it pursuant to paragraph 15.4 or 15.7 within the time periods specified therein and Tenant shall have failed to cure such default within ten (10) days after Landlord has delivered to Tenant written notice that Tenant is in default of its obligations to deliver such documents pursuant to either paragraph 15.4 or 15.7; or; H. An Event of Tenant's Default has occurred under the Building A Lease (unless caused by a subtenant or assignee of the original Tenant under this Lease and such original Tenant is using reasonable efforts to cause such default to be cured) and, at the time Tenant is so in default, the Premises and the real property leased to Tenant pursuant to the Building A Lease are both owned of record by the same person or entity. 13.2 Landlord's Remedies. If an Event of Tenant's Default occurs, Landlord shall have the following remedies, in addition to all other rights and remedies provided by any Law or otherwise provided in this Lease, to which Landlord may resort cumulatively or in the alternative: A. Landlord may, at Landlord's election, keep this Lease in effect and enforce by an action at law or in equity all of its rights and remedies under this Lease, including (i) the right to recover the rent and other sums as they become due by appropriate legal action, (ii) the right to make payments required of Tenant or perform Tenant's obligations and be reimbursed by Tenant for the cost thereof with interest at the Agreed Interest Rate from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant, and (iii) the remedies of injunctive relief and specific performance to compel Tenant to perform its obligations under this Lease. B. Landlord may, at Landlord's election, terminate this Lease by giving Tenant written notice of termination, in which event this Lease shall terminate on the date set forth for termination in such notice. Any termination under this subparagraph shall not relieve Tenant from its obligation to pay sums then due Landlord or from any claim against Tenant for damages or rent previously accrued or then accruing. In no event shall any one or more of the following actions by Landlord, in the absence of a written election by Landlord to terminate this Lease, constitute a termination of this Lease: (1) Appointment of a receiver or keeper in order to protect Landlord's interest hereunder; (2) Consent to any subletting of the Premises or assignment of this Lease by Tenant, whether pursuant to the provisions hereof or otherwise; or (3) Any other action by Landlord or Landlord's agents intended to mitigate the adverse effects of any breach of this Lease by Tenant, including, without limitation, any action taken to maintain and preserve the Premises or any action taken to relet the Premises or any portions thereof, for the account of Tenant and in the name of Tenant. C. In the event Tenant breaches this Lease and abandons the Premises, this Lease shall not terminate unless Landlord gives Tenant written notice of its election to so terminate this Lease. No act by or on behalf of Landlord intended to mitigate the adverse effect of such breach, including those described by subparagraphs 13.2B(l), (2) and (3) immediately preceding, shall constitute a termination of Tenant's right to possession unless Landlord gives Tenant written notice of termination. Should Landlord not terminate this Lease by giving Tenant written notice, Landlord may enforce all its rights and remedies under this Lease, including the right to recover the rent as it becomes duo under the Lease as provided in California Civil Code Section 1951.4 as in effect on the Commencement Date of this Lease. D. In the event Landlord terminates this Lease, Landlord shall be entitled, at Landlord's election, to damages in an amount as set forth in California Civil Code Section 1951.2 as in effect on the Commencement Date of this Lease. For purposes of computing damages pursuant to Section 1951.2, (i) an interest rate equal to the Agreed Interest Rate shall be used where permitted and (ii) the term "rent" includes Base Monthly Rent and Additional Rent. Such damages shall include without limitation: 24. (1) The worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided, computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%); and (2) Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom, including, without limitation, the following: (i) expenses for cleaning, repairing or restoring the Premises; (ii) expenses for altering, remodeling or otherwise improving the Premises for the purpose of reletting, including installation of leasehold improvements (whether such installation be funded by a reduction of rent, direct payment or allowance to a new tenant, or otherwise); (iii) broker's fees, advertising costs and other expenses of reletting the Premises; (iv) costs of carrying the Premises, such as taxes, insurance premiums, utilities and security precautions; (v) expenses in retaking possession of the Premises; and (vi) attorneys' fees and court costs incurred by Landlord in retaking possession of the Premises and in releasing the Premises or otherwise incurred as a result of Tenant's default. E. Nothing in this paragraph shall limit Landlord's right to indemnification from Tenant as provided in paragraph 7.2 and paragraph 10.3. Any notice given by Landlord in order to satisfy the requirements of subparagraphs 13.1A or B above shall also satisfy the notice requirements of California Code of Civil Procedure Section 1161 regarding unlawful detainer proceedings. 13.3 Waiver by Tenant of Certain Remedies. Tenant waives the provisions of Sections 1932(l), 1941 and 1942 of the California Civil Code and/or any similar or successor law regarding Tenant's right to terminate this Lease or to make repairs and deduct the expenses of such repairs from the rent due under the Lease. 13.4 Waiver. One party's consent to or approval of any act by the other party requiring the first party's consent or approval shall not be deemed to waive or render unnecessary the first party's consent to or approval of any subsequent similar act by the other party. The receipt by Landlord of any rent or payment with or without knowledge of the breach of any other provision hereof shall not be deemed a waiver of any such breach unless such waiver is in writing and signed by Landlord. No delay or omission in the exercise of any right or remedy accruing to either party upon any breach by the other party under this Lease shall impair such right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. The waiver by either party of any breach of any provision of this Lease shall not be deemed to be a waiver of any subsequent breach of the same or of any other provisions herein contained. 13.5 Limitation on Exercise of Rights. At any time that an Event of Tenant's Default has occurred and remains uncured, (i) it shall not be unreasonable for Landlord to deny or withhold any consent or approval requested of it by Tenant which Landlord would otherwise be obligated to give, and (ii) Tenant may not exercise any option to extend, right to terminate this Lease, or other right granted to it by this Lease which would otherwise be available to it. ARTICLE 14 Assignment And Subletting 14.1 By Tenant. The following provisions shall apply to any assignment, subletting or other transfer by Tenant or any subtenant or assignee or other successor in interest of the original Tenant (collectively referred to in this paragraph as "Tenant"): A. Tenant shall not do any of the following (collectively referred to herein as a "Transfer"), whether voluntarily, involuntarily or by operation of laws, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed: (i) sublet all or any part of the Premises or allow it to be sublet, occupied or used by any person or entity other than Tenant; (ii) assign its interest in this Lease; (iii) transfer any right appurtenant to this Lease or the Premises; (iv) mortgage or encumber the Lease (or otherwise use the Lease 25. as a security device) in any manner; or (v) terminate or materially amend or modify an assignment, sublease or other transfer that has been previously approved by Landlord. Any Transfer so approved by Landlord shall not be effective until Tenant has delivered to Landlord an executed counterpart of the document evidencing the Transfer which (i) is in form approved by Landlord, (ii) contains the same terms and conditions as stated in Tenant's notice given to Landlord pursuant to subparagraph 14.1B, and (iii) contains the agreement of the proposed transferee to assume all obligations of Tenant related to the Transfer arising after the effective date of such Transfer and to remain jointly and severally liable therefor with Tenant. Any attempted Transfer without Landlord's consent shall be voidable at Landlord's option. Landlord's consent to any one Transfer shall not constitute a waiver of the provisions of this paragraph 14.1 as to any subsequent Transfer nor a consent to any subsequent Transfer. No Transfer, even with the consent of Landlord, shall relieve Tenant of its personal and primary obligation to pay the rent and to perform all of the other obligations to be performed by Tenant hereunder. The acceptance of rent by Landlord from any person shall not be deemed to be a waiver by Landlord of any provision of this Lease nor to be a consent to any Transfer. B. Tenant shall give Landlord at least fifteen (15) days prior written notice of any desired Transfer and of the proposed terms of such Transfer including but not limited to (i) the name and legal composition of the proposed transferee; (ii) a current financial statement of the transferee, financial statements of the transferee covering the preceding three years if the same exist, and (if available) an audited financial statement of the transferee for a period ending not more than one year prior to the proposed effective date of the Transfer, all of which statements are prepared in accordance with generally accepted accounting principles; (iii) the nature of the proposed transferee's business to be carried on in the Premises; (iv) all consideration to be given on account of the Transfer; (v) a current financial statement of Tenant; and (vi) such other information as may be reasonably requested by Landlord. Tenant's notice shall not be deemed to have been served or given until such time as Tenant has provided Landlord with all information reasonably requested by Landlord pursuant to this subparagraph 14.1B. Tenant shall immediately notify Landlord of any modification to the proposed terms of such Transfer. C. In the event that Tenant seeks to make any Transfer, then Landlord, by giving Tenant written notice of its election within fifteen (15) days after Tenant's notice of intent to Transfer has been deemed given to Landlord, shall have the right to elect (i) to withhold its consent to such Transfer, as permitted pursuant to subparagraph 14.1A, or (ii) to permit Tenant to so assign the Lease or sublease such part of the Premises, in which event Tenant may do so, but without being released of its liability for the performance of all of its obligations under the Lease, and the following shall apply: (1) Subject to subparagraph 14.1C(5), if Tenant assigns its interest in this Lease in accordance with this subparagraph 14.1C, then Tenant shall pay to Landlord fifty percent (50%) of all consideration received by Tenant over and above (i) the assignee's agreement to assume the obligations of Tenant under this Lease and (ii) all Permitted Transfer Costs related to such assignment. (2) Subject to subparagraph 14.1C(5), if Tenant sublets all or part of the Premises, then Tenant shall pay to Landlord fifty percent (50%) of the positive difference, if any, between (i) all rent and other consideration paid by the subtenant to Tenant, less (ii) all rent paid by Tenant to Landlord pursuant to this Lease which is allocable to the area so sublet and all Permitted Transfer Costs related to such sublease. Such amount shall be paid to Landlord on the same basis, whether periodic or in lump sum, that such rent and other consideration is paid to Tenant by its subtenant, within seven (7) days after it is received by Tenant. (3) Tenant's obligations under this subparagraph shall survive any assignment or sublease. At the time Tenant makes any payment to Landlord required by this subparagraph, Tenant shall deliver an itemized statement of the method by which the amount to which Landlord is entitled was calculated, certified by Tenant as true and correct. Landlord shall have the right to inspect Tenant's books and records relating to the payments due pursuant to this subparagraph. Upon request therefor, Tenant shall deliver to Landlord copies of all bills, invoices or other documents upon which its calculations are based. Landlord may condition its approval of any Transfer upon obtaining a certification from both Tenant and the proposed transferee of all amounts that are to be paid to Tenant in connection with such Transfer. 26. (4) As used herein, the term "consideration' shall mean any consideration of any kind received, or to be received, by Tenant as a result of the Transfer, if such sums are related to Tenant's interest in this Lease or in the Premises, including payments (in excess of the fair market value thereof) for Tenant's assets, fixtures, leasehold improvements, inventory, accounts, goodwill, equipment, furniture, general intangibles and any capital stock or other equity ownership interest in Tenant. As used in this subparagraph, the term "Permitted Transfer Costs" shall mean (i) all reasonable leasing commissions paid to third parties not affiliated with Tenant in order to obtain the Transfer in question, (ii) all reasonable attorneys' fees incurred by Tenant with respect to the Transfer in question, (iii) the cost of tenant improvements installed for the use of the subtenant or assignee to the extent required by such party as a condition to the Transfer, and (iv) any payments made by Tenant to the transferee to induce it to enter into the Transfer (e.g., payment of moving expenses). (5) Notwithstanding anything to the contrary contained in the foregoing, Landlord shall not participate in excess consideration received by Tenant from an assignee or subtenant as provided for in subparagraphs 14.1C(l) and l4.1C(2) unless such assignment or sublease occurs during an Option Term or, in the case of a sublease, extends into an Option Term (in which latter event Landlord shall be entitled to its share of the excess consideration paid during the Option Term). D. If Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, or the sale or transfer in the aggregate over the Lease Term of a controlling percentage of the capital stock of Tenant, shall be deemed a voluntary assignment of Tenant's interest in this Lease; provided, however, that the foregoing shall not apply to corporations the capital stock of which is publicly traded. The phrase "controlling percentage" means the ownership of and the right to vote stock possessing more than fifty percent (50%) of the total combined voting power of all classes of Tenant's capital stock issued, outstanding and entitled to vote for the election of directors. If Tenant is a partnership, any withdrawal or substitution (whether voluntary, involuntary or by operation of law, and whether occurring at one time or over a period of time) of any partner(s) owning twenty-five percent (25%) or more (cumulatively) of any interest in the capital or profits of the partnership or the dissolution of the partnership, shall be deemed a voluntary assignment of Tenant's interest in this Lease. E. Notwithstanding anything contained in this paragraph 14.1, so long as Tenant otherwise complies with the provisions of paragraph 14.1 Tenant may enter into any one of the following transfers (a "Permitted Transfer") without Landlord's prior written consent, and Landlord shall not be entitled to receive any part of any excess rentals or other consideration resulting therefrom that would otherwise be due to it pursuant to paragraph 14.C: (1) Tenant may sublease all or part of the Premises or assign its interest in this Lease to any corporation which controls, is controlled by, or is under common control with the original Tenant to this Lease by means of an ownership interest of more than fifty percent (50%); (2) Tenant may assign its interest in the Lease to a corporation which results from a merger, consolidation or other reorganization in which Tenant is not the surviving corporation, so long as (i) Tenant demonstrates to Landlord's reasonable satisfaction that the surviving corporation will have sufficient creditworthiness to provide adequate assurance of future performance of all of Tenant's obligations under this Lease, or (ii) the surviving corporation has a net worth at the time of such assignment that is equal to or greater than the net worth of Tenant immediately prior to such transaction; and (3) Tenant may assign this Lease to a corporation which purchases or otherwise acquires all or substantially all of the assets of Tenant, so long as (i) Tenant demonstrates to Landlord's reasonable satisfaction that the acquiring corporation will have sufficient creditworthiness to provide adequate assurance of future performance of all of Tenant's obligations under this Lease, or (ii) such acquiring corporation has a net worth at the time of such assignment that is equal to or greater than the net worth of Tenant immediately prior to such transaction. 14.2 By Landlord. Landlord and its successors in interest shall have the right to transfer their interest in the Premises and the Property at any time and to any person or entity. In the event of any such transfer, the 27. Landlord originally named herein (and, in the case of any subsequent transfer, the transferor) from the date of such transfer, (i) shall be automatically relieved, without any further act by any person or entity, of all liability for the performance of the obligations of the Landlord hereunder which may accrue after the date of such transfer, and (ii) shall be relieved of all liability for the performance of the obligations of the Landlord hereunder which have accrued before the date of transfer if its transferee agrees to assume and perform all such obligations of the Landlord hereunder. After the date of any such transfer, the term "Landlord" as used herein shall mean the transferee of such interest in the Premises and the Property. ARTICLE 15 General Provisions 15.1 Landlord's Right to Enter. Landlord and its agents may enter the Premises immediately in case of emergency and otherwise only at such time as is approved by Tenant which time of entry shall be within seven (7) days after Landlord delivers written notice to Tenant requesting approval of a time to enter, and Landlord may thereafter continue such entry for such reasonable period of time as is necessary to accomplish Landlord's permitted purpose for such entry. Landlord may so enter the Premises for the following purposes: (i) inspecting the same; (ii) posting notices of non-responsibility, (iii) supplying any service to be provided by Landlord to Tenant, (iv) showing the Premises to prospective purchasers or mortgagees, (v) making necessary alterations, additions or repairs, (vi) performing Tenant's obligations when Tenant has failed to do so after written notice from Landlord, (vii) placing upon the Premises ordinary "for sale" signs, (viii) responding to an emergency, and/or (ix) during the last six (6) months of the Lease Term or at any time when there is a Continuing Tenant Default, showing the Premises to prospective tenants and placing upon the Premises ordinary "for lease" signs. For each of the aforesaid purposes, Landlord may enter the Premises by means of a master key, and Landlord shall have the right to use any and all means Landlord may deem necessary and proper to open the doors of the Premises in an emergency. Any entry into the Premises or portions thereof obtained by Landlord by any of said means or otherwise shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. 15.2 Surrender of the Premises. Immediately prior to the expiration or upon the sooner termination of this Lease, Tenant shall remove all Tenant's Trade Fixtures and other personal property, and shall vacate and surrender the Premises to Landlord in the same condition as existed at the Commencement Date, except for (i) reasonable wear and tear, (ii) damage caused by any peril or condemnation, and (iii) contamination by Hazardous Materials for which Tenant is not responsible pursuant to subparagraphs 7.2B or 7.2C. In this regard reasonable wear and tear shall be construed to mean wear and tear caused to the Premises by the natural aging process which occurs in spite of prudent application of reasonable standards for maintenance, repair and janitorial practices, and does not include items of neglected or deferred maintenance. If Landlord so requests, Tenant shall, prior to the expiration or sooner termination of this Lease, remove any Leasehold Improvements designated by Landlord and repair all damage caused by such removal if such removal is required pursuant to paragraph 5.2. If the Premises are not so surrendered at the termination of this Lease, Tenant shall be liable to Landlord for all costs incurred by Landlord in returning the Premises to the required condition, plus interest on all costs incurred at the Agreed Interest Rate. 15.3 Holding Over. This Lease shall terminate without further notice at the expiration of the Lease Term. Any holding over by Tenant after expiration of the Lease Term shall not constitute a renewal or extension of the Lease or give Tenant any rights in or to the Premises except as expressly provided in this Lease. Any holding over after such expiration with the consent of Landlord shall be construed to be a tenancy from month to month on the same terms and conditions herein specified insofar as applicable except that Base Monthly Rent shall be increased to an amount equal to one hundred twenty-five percent (125%) of the Base Monthly Rent required during the last month of the Lease Term. 15.4 Subordination. The following provisions shall govern the relationship of this Lease to any underlying lease, mortgage or dead of trust which now or hereafter affects the Property, and any renewal, modification, consolidation, replacement or extension thereof (a "Security Instrument"): 28. A. This Lease is subject and subordinate to all Security Instruments existing as of the Commencement Date. However, if any Lender so requires, this Lease shall become prior and superior to any such Security Instrument. B. At Landlord's election, this Lease shall become subject and subordinate to any Security Instrument created after the Commencement Date. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed and the terms of this Lease shall not be modified so long so Tenant in not in default and performs all of its obligations under this Lease, unless this Lease is otherwise terminated pursuant to its terms. C. No subordination of this Lease to a Security Instrument pursuant to subparagraphs 15.4A or 15.4B shall be effective until the holder of a Security Instrument executes a subordination and non-disturbance agreement in favor of Tenant by which the Lender agrees to be bound by the immediately preceding sentence. D. Tenant shall execute any document or instrument required by Landlord or any Lender to make this Lease either prior or subordinate to a Security Instrument, which may include such other matters as the Lender customarily requires in connection with such agreements, including provisions that (i) the Lender not be liable for any defaults on the part of Landlord occurring prior to the time the Lender takes possession of the Premises in connection with the enforcement of its Security Instrument; (ii) the Lender not be liable for the performance of any obligations contained in the Interior Improvement Agreement, for the completion of any improvements under construction or required to be constructed by Landlord; (iii) recourse against the Lender is limited to its interest in the Premises; (iv) any notices given by Tenant to Landlord should also be delivered to the Lender; (v) Tenant shall attorn to any purchaser at a foreclosure sale or a grantee designated in a deed in lieu of foreclosure; (vi) the Lender shall not be bound by any rent which Tenant might have paid in advance to any prior Landlord for a period in excess of one mouth; (vii) the Lender shall not be bound by any agreement or modification of the Lease made without the written consent of the Lender; and (viii) upon request, Tenant shall enter into a new lease with Lender of the Premises upon the same term and conditions as the Lease between Landlord and Tenant, which lease shall cover any unexpired term of the Lease existing prior to a foreclosure, trustee's sale, or conveyance in lieu of foreclosure. Tenant's failure to execute any such document or instrument within ten (10) days after written demand therefor shall constitute a default by Tenant. Tenant approves as reasonable the form of subordination and non-disturbance agreement attached to this Lease as Exhibit "D". 15.5 Tenant shall attorn (i) to any purchaser of the Premises or Property at any foreclosure sale or private sale conducted pursuant to any security instrument encumbering the Premises or the Property; (ii) to any grantee or transferee designated in any deed given in lieu of foreclosure; or (iii) to the lessor under any underlying ground lease should such ground lease be terminated. 15.6 Mortgagee Protection. In the event of any default on the part of the Landlord, Tenant will give notice by registered mail to any Lender or lessor under any underlying ground lease whose name has been provided to Tenant and shall offer such Lender or lessor a reasonable opportunity to cure the default, not to exceed thirty (30) days from the expiration of the time period granted to Landlord to cure such default; provided, however, that if such Lender requires additional time to cure a default on the part of Landlord or to obtain possession of the Premises by power of sale or judicial foreclosure or other appropriate legal proceedings if obtaining possession is necessary to effect a cure, the Lender shall be granted such opportunity, provided that the Lender gives reasonable assurances to Tenant that such default will be cured. 15.7 Estoppel Certificates and Financial Statements. At all times during the Lease Term, Tenant agrees, following any request by Landlord, promptly to execute and deliver to Landlord an estoppel certificate, (i) certifying that this Lease is unmodified and in full force and effect or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect, (ii) stating the date to which the rent and other charges are paid in advance, if any, (iii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder or, if there are uncured defaults, specifying the nature of such defaults and (iv) certifying such other information about the Lease as may be reasonably required by Landlord. Tenant's failure to deliver an estoppel certificate within ten (10) days after delivery of Landlord's request therefor 29. shall be a conclusive admission by Tenant that, as of the date of the request for such statement, (i) this Lease is unmodified except as may be represented by Landlord in said request and is in full force and effect, (ii) there are no uncured defaults in Landlord's performance, and (iii) no rent has been paid in advance. At any time during the Lease Term Tenant shall, upon ten (10) days' prior written notice from Landlord, provide Tenant's most recent financial statement and financial statements covering the twenty-four (24) month period prior to the date of such most recent financial statement to any existing Lender or to any potential Lender or buyer of the Property; provided, however, that if Tenant is a corporation whose stock is publicly traded, Tenant may satisfy the foregoing requirement by delivering to the appropriate parties copies of its most recent annual report prepared to satisfy requirements of the federal securities laws. Such statements shall be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant shall be audited by an independent certified public accountant. 15.8 Force Majeure. Any prevention, delay or stoppage due to strikes, lockouts, inclement weather, labor disputes, inability to obtain labor, materials, fuels or reasonable substitutes therefor, governmental restrictions, regulations, controls, action or inaction, civil commotion, fire or other acts of God, and other causes beyond the reasonable control of the party obligated to perform (except financial inability) shall excuse the performance, for a period equal to the period of any said prevention, delay, or stoppage, of any obligation hereunder except the obligation of Tenant to pay rent or any other sums due hereunder. 15.9 Notices. Any notice required or desired to be given regarding this Lease shall be in writing and may be given by personal delivery, by facsimile telecopy, by courier service, or by mail. A notice shall be deemed to have been given (i) on the third (3rd) business day after mailing if such notice was deposited in the United States mail, certified or registered, postage prepaid, addressed to the party to be served at its address first above set forth, (ii) when delivered if given by personal delivery, and (iii) in all other cases when actually received. Either party may change its address by giving notice of same in accordance with this paragraph. 15.10 Obligation to Act Reasonably. Whenever the consent or approval of a party to this Lease is required to be obtained before the other party to this Lease may take an action, such consent or approval shall not be unreasonably withheld or delayed. 15.11 Corporate Authority. If Tenant is a corporation (or a partnership), each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with the bylaws of said corporation (or partnership in accordance with the partnership agreement of said partnership) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. If Tenant is a corporation, each of the persons executing this Lease on behalf of Tenant does hereby covenant and warrant that Tenant is a duly authorized and existing corporation, that Tenant is qualified to do business in California and that the corporation has full right and authority to enter into this Lease. 15.12 Additional Definitions. Any term that is given a special meaning by a provision in this Lease shall have such meaning when used in this Lease or any addendum or amendment hereto. As used herein, the following terms shall have the following meanings: A. Agreed Interest Rate. The term "Agreed Interest Rate" shall mean that interest rate determined as of the time it is to be applied that is equal to the lessor of (i) two percent (2%) in excess of the "prime rate", "reference rate", or "base rate" established by Bank of America (or if Bank of America shall cease to exist, by the commercial bank with its headquarters in California that has the greatest net worth among commercial banks headquartered in California) as it may be adjusted from time to time, or (ii) the maximum interest rate permitted by law. B. Common Area. The term "Common Area" shall mean all areas and facilities within the Property that are not designated by Landlord for the exclusive use of Tenant or any other lessee or other occupant of the Property, including the parking areas, access and perimeter roads, pedestrian sidewalk, landscaped areas, trash enclosures, recreation areas and the like. 30. C. Law. The term "Law" shall mean any judicial decision, statute, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any municipal, county, state, federal or other government agency or authority having jurisdiction over the parties to this Lease or the Premises, or both, in effect either at the Commencement Date of this Lease or any time during the L ease Term, including, without limitation, any regulation, order or policy of any quasi-official entity or body (e.g., board of fire examiners, public utilities or special district). D. Leasehold Improvements. The term "Leasehold Improvements" shall mean all improvements, additions, alterations and fixtures installed in the Premises by Tenant at its expense which are not Trade Fixtures. E. Lender. The term "Lender" shall mean any beneficiary, mortgagee, secured party, lessor, or other holder of any Security Instrument. F. Private Restrictions. The term "Private Restrictions" shall mean all recorded covenants, conditions and restrictions, reciprocal easement agreements, and any other recorded instruments affecting the use of the Premises as they may exist from time to time. G. Trade Fixtures. The term "Trade Fixtures" shall mean anything affixed to the Premises by Tenant at its expense for purposes of trade, manufacture, ornament or domestic use (except replacement of similar work or material originally installed by Landlord) which can be removed without injury to the Premises unless such thing has, by the manner in which it is affixed, become an integral part of the Premises; provided, however, that all of Tenant's signs shall be Trade Fixtures regardless of how affixed to the Premises. 15.13 Miscellaneous. Should any provision of this Lease prove to be invalid or illegal, such invalidity or illegality shall in no way affect, impair or invalidate any other provision hereof, and such remaining provisions shall remain in full force and effect. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. The captions used in this Lease are for convenience only and shall not be considered in the construction or interpretation of any provision hereof. Any executed copy of this Lease shall be deemed an original for all purposes. This Lease shall, subject to the provisions regarding assignment, apply to and bind the respective heirs, successors, executors, administrators and assigns of Landlord and Tenant. "Party" shall mean Landlord or Tenant, as the context implies. If Tenant consists of more than one person or entity, then all members of Tenant shall be jointly and severally liable hereunder. This Lease shall be construed and enforced in accordance with the laws of the State of California. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning, and not strictly for or against either Landlord or Tenant. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. The terms "shall", "will" and "agree" are mandatory. The term "may" is permissive. When a party is required to do something by this Lease, it shall do so at its sole cost and expense without right of reimbursement from the other party unless specific provision is made therefor. Where Tenant is obligated not to perform any act, Tenant is also obligated to use reasonable efforts to restrain any others within its control from performing said act, including Agents, invitees, contractors, and subcontractors. Landlord shall not become or be deemed a partner nor a joint venturer with Tenant by reason of the provisions of this Lease. 15.14 Termination by Exercise of Right. If this Lease is terminated pursuant to its terms by the proper exercise of a right to terminate specifically granted to Landlord or Tenant by this Lease, then this Lease shall terminate thirty (30) days after the date the right to terminate is properly exercised (unless another date is specified in that part of the Lease creating the right, in which event the date so specified for termination shall prevail), the rent and all other charges due hereunder shall be prorated as of the date of termination, and neither Landlord nor Tenant shall have any further rights or obligations under this Lease except for those that have accrued prior to the date of termination. This paragraph does not apply to a termination of this Lease by Landlord as a result of a default by Tenant. 31. 15.15 Brokerage Commissions. Tenant warrants that is has not had any dealings with any real estate brokers, leasing agents or salesmen, or incurred any obligations for the payment of real estate brokerage commissions or finder's fees which would be earned or due and payable by reason of the execution of this Lease other than to the Retained Real Estate Brokers. Landlord shall be responsible for the payment of any commission owed pursuant to a separate written commission agreement between Landlord and the Retained Real Estate Brokers for the payment of the commission as a result of the execution of this Lease. 15.16 Entire Agreement. This Lease constitutes the entire agreement between the parties, and there are no binding agreements or representations between the parties except as expressed herein. Tenant acknowledges that neither Landlord nor Landlord's agent(s) has made any representation or warranty as to (i) whether the Premises may be used for Tenant's intended use under existing Law or (ii) the suitability of the Premises or the Common Area for the conduct of Tenant's business or the condition of any improvements located thereon. Tenant expressly waives all claims for damage by reason of any statement, representation, warranty, promise or other agreement of Landlord or Landlord's agent(a), if any, not contained in this Lease or in any addendum or amendment hereto. No subsequent change or addition to this Lease shall be binding unless in writing and signed by the parties hereto. 15.17 Old Lease; Assumption. In consideration for Landlord's agreement to enter into this Lease with Tenant in substantially the same form as the Original Lease, Tenant hereby assumes FMC's obligations under the Original Lease, including, without limitation, the obligation to restore the Premises pursuant Section 5.6 of the Original Lease. 32. In Witness Whereof, Landlord and Tenant have executed this Lease with the intent to be legally bound thereby, to be effective as of the Commencement Date of this Lease.
LANDLORD: TENANT: ATP Associates, L.P., a Delaware limited partnership United Defense L.P., a Delaware limited partnership By: Menlo Equities Associates III Inc., a Delaware By: UDLP Holdings Corp., a Delaware corporation, its corporation, Its General Partner General Partner By: /s/ Henry D. Bullock By: /s/ Peter C. Woglom ------------------------------------- ---------------------------------------------- Its: President Printed ------------------------------------ Name: Peter C. Woglom -------------------------------------------- Title: Vice-President and General Manager, Ground ------------------------------------------- Systems Division-UDLP --------------------------------------------------
33. Exhibit "A" 1. Exhibit "B" PLANS AND SPECIFICATIONS FOR BUILDING "C" [Intentionally Deleted] 1. Exhibit C INTERIOR IMPROVEMENT AGREEMENT (Building C) This Interior Improvement Agreement is made part of that Lease dated for reference purposes only April __, 1999 (the "Lease"), by and between ATP Associates L.P., a Delaware limited partnership ("Landlord") and United Defense L.P., a Delaware limited partnership ("Tenant") of approximately 86,785 square feet of gross leaseable area located in that building commonly known as Building C of Airport Technology Park, 2830 De La Cruz Boulevard, Santa Clara, California. Landlord and Tenant agree that the following terms are hereby added to the Lease: 1. Definitions. As used herein and in the Lease, the following terms shall have the following meanings: A. Approved Plans. The term "Approved Plans" shall mean those final plans, specifications and working drawings to be approved by Landlord. B. Interior Improvements. The term "Interior Improvements" shall mean those improvements described by the Approved Plans that Tenant has the right to construct in the Premises pursuant to paragraph 2 hereof. C. Interior Improvement Costs. The term "Interior Improvement Costs" shall mean the following: (i) the total amount due pursuant to the construction contract entered into by Tenant pursuant to subparagraph 2B hereof to construct the Interior Improvements; (ii) the cost of all governmental approvals, permits and fees required as a condition to the construction of the Interior Improvements; (iii) all utility connection or use fees; (iv) fees of architects, designers, or engineers for services rendered in connection with the design and construction of the Interior Improvements; (v) Tenant's moving and relocation costs incurred in connection with the consolidation of its employees at the Premises over the twelve (12) months prior to the date hereof ("Tenant's Relocation Costs") and (vi) the cost of payment and performance bonds obtained to assure completion of the Interior Improvements. There shall be excluded from Interior Improvement Costs the following, to the extent not included in the construction contract with the Prime Contractor referred to in subparagraph 2B hereof: (i) any fee for Landlord's review of Tenant's plans for the Interior Improvements; (ii) temporary electricity used during the construction period in connection with the construction of the Interior Improvements; and (iii) any fees charged by Tenant or its agents or employees for supervising/reviewing the construction of the Interior Improvements (excluding overhead and profits of prime contractor). D. Landlord's Interior improvement Allowance. The term "Landlord's Interior Improvement Allowance" shall mean the maximum amount Landlord is required to spend toward the payment of the Interior Improvement Costs, which amount is equal to One Hundred Ninety Thousand Dollars ($190,000). E. Substantially Completed. The Interior Improvements shall be deemed to be "Substantially Completed" when (i) Prime Contractor has issued its written certificate stating that such improvements have been substantially completed in accordance with the Approved Plans therefor, (ii) electrified office partitions are installed, and (iii) the Building Department of the City of Santa Clara has completed its final inspection of such improvements and has "signed off" the building inspection card approving such work as complete. F. Prime Contractor. The term "Prime Contractor" shall mean ________. 2. Construction Of Interior improvements. Tenant shall have the right to construct the Interior Improvements in accordance with the following: 1. A. Tenant warrants that the Interior Improvements shall be constructed in a good and workmanlike manner substantially in accordance with the Approved Plans (as modified by any change orders approved by Landlord and Tenant pursuant to paragraph 3 hereof) and all Laws. All materials and equipment furnished shall be fully paid for and be free of liens, chattel mortgages, and security interests of any kind. B. The Interior Improvements shall be constructed by Prime Contractor pursuant to a construction contract between Tenant and Prime Contractor. Landlord shall have the right to review such form of construction contract before it is executed. Once the construction contract between Prime Contractor and Tenant has been executed, Tenant shall not materially amend, modify or alter the responsibilities of Prime Contractor thereunder without Landlord's written consent, except for change orders approved pursuant to paragraph 3 hereof. In connection with the execution of such construction contract, Tenant shall use reasonable efforts to provide that all construction or equipment warranties or guarantees obtained by Tenant shall, to the extent obtainable, provide that such warranties and guaranties shall also run for the benefit of Landlord. Upon reasonable written advance request of Landlord, Tenant shall inform Landlord of all written construction and equipment warranties existing in favor of Tenant which affect the Interior Improvements. Tenant shall cooperate with Landlord in enforcing such warranties and in bringing any suit that may be necessary to enforce liability with regard to any defects. C. Tenant shall use reasonable efforts to commence construction of the Interior Improvements as soon as reasonably practicable, and shall thereafter continuously prosecute such construction to completion. D. Tenant shall properly obtain, comply with and keep in effect all permits, licenses and other governmental approvals which are required to be obtained from governmental bodies in order to construct the Interior Improvements. Upon reasonable written advance request, Tenant shall promptly deliver copies of all such permits, licenses and approvals to Landlord. E. Tenant shall be solely responsible for all aspects of the construction of the Interior Improvements, including the development and design thereof as set forth in the Approved Plans, the supervision of the work of construction, the qualification, financial condition, and performance of all architects, engineers, contractors, material suppliers, consultants, and the accuracy of all applications for payment and the proper application of all disbursement. Landlord is not obligated to supervise, inspect or inform Tenant or any third party of any aspect of the construction of the Interior Improvements. Any inspection or review by Landlord, is to determine whether Tenant is properly discharging its obligations to Landlord and may not be relied upon by Tenant or any third party. Landlord owes no duty of care to Tenant or any third party to protect against or to inform Tenant or any third party of, any negligence, faulty, inadequate or defective design or construction of the Interior Improvements. 3. Chances to Approved Plans for Interior Improvements. Neither Landlord nor Tenant shall have the right to order extra work or change orders with respect to the Approved Plans or the construction of the Interior Improvements without the prior written consent of the other. All extra work or change orders requested by either Landlord or Tenant shall be made in writing, shall specify the amount of delay or the time saved resulting therefrom, shall specify any added or reduced cost resulting therefrom, and shall become effective and a part of the Approved Plans once approved in writing by both parties. Notwithstanding the foregoing, Tenant's failure to obtain Landlord's consent to an extra work or change order shall not be an Event of Tenant's Default if Landlord would have been required to consent to the change pursuant to the terms hereof. 4. Payment of Interior Improvement Costs. The Interior Improvement Costs shall be paid as follows: A. Landlord shall contribute to the payment of all Interior Improvement Costs up to an amount equal to Landlord's Interior Improvement Allowance. An amount equal to 40% of the Landlord's Interior Improvement Allowance shall be applied to Tenant's Relocation Costs (the "Tenant Relocation Allowance"). If, at the time of completion of all Interior Improvements, (1) Tenant has not used the entire Tenant Relocation Allowance, Tenant shall receive the remainder of the Tenant Relocation Allowance as a credit against Base Monthly Rent for the first month of the Lease Term, or at Tenant's Option, Tenant can use such amount for the Interior Improvement Costs at Building A and (2) Tenant has not used the entire Landlord's Interior Improvement 2. Allowance (other than the amount allocated to the Tenant Relocation Allowance), Tenant can use such amount for the Interior Improvement Costs at Building A. Except as expressly provided in the preceding sentence,, if any part of the Landlord's Interior Improvement Allowance is not used by Tenant, or Tenant does not qualify for a disbursement pursuant to the provisions of this paragraph 4 with the result that the entire allowance is not disbursed, there shall nonetheless be no adjustment in the Base Monthly Rent due from Tenant pursuant to the Lease. If the Interior Improvement Costs exceed the maximum amount of Landlord's required contribution, then Tenant shall pay the entire amount of such excess. B. Landlord and Tenant acknowledge that the construction contract Tenant will enter into for the construction of the interior Improvements will provide for progress payments to Prime Contractor in stages as the work is completed. Landlord shall pay the full amount of each such progress payment until all of Landlord's Interior Improvement Allowance is expanded. Thereafter, if the cost of the Interior Improvements exceeds the amount of Landlord's required contribution for such improvements, then Tenant shall pay the rest of the progress payments due to Prime Contractor. Landlord shall pay any progress payment due from Landlord to Prime Contractor within thirty (30) days after satisfaction of all of the conditions precedent to such progress payment by Landlord that has been requested by Tenant which are set forth in subparagraph 4D and 4E hereof. If Landlord fails to pay any such amount when due, then Tenant may (but without the obligation to do so) advance such funds on Landlord's behalf, and Landlord shall be obligated to reimburse Tenant for the amount of funds so advanced on its behalf and all costs incurred by Tenant in so doing, including all interest at the Agreed Interest Rate. C. If Tenant desires to obtain a disbursement from Landlord from the Landlord's Interior Improvement Allowance for the purpose of paying Interior Improvement Costs, Tenant shall submit to Landlord a written itemized statement, signed by Tenant (an "Application for Payment") setting forth the following: (i) a description of the construction work performed, materials supplied, and/or costs incurred or due for which disbursement is requested; and (ii) the total amount incurred, expended and/or due for each requested item less prior disbursements; and (iii) the amount due to be paid by Landlord from Landlord's Interior Improvement Allowance. D. Landlord shall have no obligation to make any disbursement from Landlord's Interior Improvement Allowance at any time that there is a Continuing Tenant Default (as defined in paragraph 1.14 of the Lease), or there has occurred an event, omission or failure of conditions which would constitute an Event of Tenant's Default (as defined in paragraph 13.1 of the Lease) after notice or lapse of time, or both. In addition, Landlord shall have the right to condition any disbursement from Landlord's Interior Improvement Allowance upon Landlord's receipt and approval of the following with respect to each Application for Payment: (1) The form of Application for Payment and the sufficiency of the information contained therein; (2) Bills and invoices and any other documents evidencing the total amount expended, incurred, or due for any requested contribution to Interior Improvement Costs; (3) Evidence of Tenant's use of lien releases acceptable to Landlord for payments or disbursements to any contractor, subcontractor, materialmen, supplier, or lien claimant; (4) Architects, inspectors and/or engineer's periodic certification and the stage of construction that has been completed and its conformance to the Approved Plans based upon any such architects, inspectors and/or engineers periodic, physical inspections of the Premises and Interior Improvements; (5) Waivers and releases of mechanics' lien, stop notice claim, equitable lien claim or other lien claim rights or lien bonds in form and amount reasonably satisfactory to Landlord; (6) Evidence of Tenant's compliance with its obligations pursuant to paragraph 2 hereof; (7) Any other document, requirement, evidence or information that Landlord may reasonably request pursuant to any provision of this Interior Improvement Agreement. 3. E. Tenant agrees that all disbursements made to Tenant by Landlord from Landlord's Interior Improvement Allowance shall be used only for the payment of Interior Improvement Costs and shall be applied as set forth, and for the purposes described in, the relevant Application for Payment based upon which the disbursement is made. 5. Punchlist. Within a reasonable period of time after the Interior Improvements are Substantially Completed, Landlord, Tenant and Tenant's architect shall together walk through and inspect such improvements so completed, using reasonable efforts to discover all uncompleted or defective construction. After such inspection has been completed. Tenant shall use reasonable efforts to complete and/or repair all "punch list" items within thirty (30) days thereafter. 6. Construction Warranty for the Interior Improvements. Tenant warrants that the construction of the Interior Improvements will be performed in accordance with the Approved Plans therefor and all Laws in a good and workmanlike manner, and that all materials and equipment furnished will conform to said plans and shall be new and otherwise of good quality. Tenant shall promptly commence the cure of any breach of such warranty and complete such cure with diligence at Tenant's cost and expense. 7. Ownership of the Interior Improvements. All of the Interior Improvements which are constructed with funds of Landlord shall become the property of Landlord upon installation and shall not be removed or altered by Tenant. Any part of the Interior Improvements which are constructed by Landlord with funds of Tenant shall become the property of Tenant upon installation and Tenant shall have the right to depreciate and claim and collect investment tax credits in such improvements; provided, however, that (i) Tenant shall not remove or alter such improvements during the term of the Lease; (ii) such improvements shall be surrendered to Landlord, and title to such improvements shall vest in Landlord, at the expiration or earlier termination of the Lease Term; and (iii) in no event shall Landlord have any obligation to pay Tenant for the cost or value of such improvements. Notwithstanding the foregoing, Tenant shall have the right to remove only the following kinds of Interior Improvements so long as it repairs all damage caused by the installation thereof and returns the Premises to the condition existing prior to the installation of such Interior Improvements: (i) built-in cabinets, file drawers and bookcases; (ii) computer room air conditioning; (iii) canteen equipment; (iv) office cubicle systems; and (v) ornamental statues. If both Landlord and Tenant contribute to the cost of constructing the Interior Improvements, Landlord and Tenant shall agree in writing which of such improvements are to be constructed using Landlord's funds (and therefore are Landlord's property) and which of them are to be installed with Tenant's funds (and therefore are Tenant's property during the Lease Term). 8. Documents. Within fifteen (15) days after receiving a written request from Landlord, Tenant shall deliver to Landlord the most current version of the following: (i) a complete and correct list showing the name, address and telephone number of each contractor, subcontractor and principal materials supplier engaged in connection with the construction of the Interior Improvements, and the total dollar amount of each contract and subcontract (including any changes) together with the amounts paid through the date of the list; (ii) true and correct copies of all executed contracts and subcontracts identified in the list described in the immediately preceding clause, including any changes; (iii) a construction progress schedule; and (iv) any update to any item described in the preceding clauses which Tenant may have previously delivered to Landlord. Tenant expressly authorizes Landlord to contact any contractor, subcontractor or materials supplier to verify any information disclosed in accordance with this paragraph. Within sixty (60) days after the Interior Improvements have been Substantially Completed, Tenant shall cause the following to be delivered to Landlord: A. Statements from Tenant's architect in form reasonably satisfactory to Landlord certifying that the Interior Improvements have been completed substantially in accordance with the Approved Plans and all Laws; B. A copy of all permanent certificates of occupancy and other governmental approvals which may be received by Tenant with respect to the construction of the Interior Improvements. C. One (1) copy of the Approved Plans, one (1) copy of each extra work or change order, and one (1) copy of any "As-Built" plans and specifications for the Interior Improvements, which Tenant may have elected to cause to be prepared; 4. D. One (1) copy of all warranties, guaranties, and operational manuals relating to the Interior Improvements; E. A copy of a recorded notice of completion relating to the construction of the Interior Improvements. 9. Indemnity. Tenant agrees to indemnify and hold Landlord harmless from and against all liabilities, claims, actions, damages, costs and expenses (including attorneys' fees incurred by Landlord in protecting its interest from the following) arising out of or resulting from construction of the Interior Improvements, including any mechanics' liens, defective workmanship or materials and any claim or cause of action of any kind by any party that Landlord is liable for any act or omission committed or made by Tenant, its agents, employees, or contractors in connection with the construction of the Interior Improvements. 10. Effect of Agreement. In the event of any inconsistency between this Agreement and the Lease, the terms of this Agreement shall prevail.
AS TENANT: AS LANDLORD: United Defense L.P., ATP Associates, L.P., a Delaware limited partnership a Delaware limited partnership By: UDLP Holdings Corp., a Delaware corporation, its By: Menlo Equities Associates III Inc., a Delaware General Partner corporation, Its General Partner By: /s/ Peter C. Woglom By: /s/ Henry D. Bullock --------------------------------------------- -------------------------------------- Printed Its: President Name: Peter C. Woglom ------------------------------------- ------------------------------------------- Title: Vice-President and General Manager, Ground ------------------------------------------ Systems Division UDLP - -------------------------------------------------
5. Table of Contents
Page ARTICLE 1 DEFINITIONS............................................... 1 1.1 Commencement Date.......................................... 1 1.2 Rent Start Date............................................ 1 1.3 Lease Term................................................. 1 1.4 Property................................................... 1 1.5 Premises................................................... 1 1.6 Permitted Use.............................................. 1 1.7 Tenant's Minimum Liability Insurance Coverage.............. 2 1.8 Tenant's Allocated Parking Stalls.......................... 2 1.9 Retained Real Estate Brokers............................... 2 1.10 Address for Notices........................................ 2 1.11 Lease...................................................... 2 1.12 Building A Lease........................................... 2 1.13 Tenant's Allocated Share................................... 2 1.14 Continuing Tenant Default.................................. 2 1.15 Additional Definitions..................................... 2 ARTICLE 2 DEMISE AND ACCEPTANCE..................................... 3 2.1 Demise of Premises......................................... 3 2.2 Delivery and Acceptance of Possession...................... 3 2.3 Construction of Interior Improvements...................... 3 2.4 Options to Extend Lease Term............................... 3 ARTICLE 3 RENT...................................................... 6 3.1 Base Monthly Rent.......................................... 6 3.2 Additional Rent............................................ 6 3.4 Late Charge and Interest on Rent in Default................ 7 ARTICLE 4 USE OF PREMISES........................................... 7 4.1 Limitation on Type......................................... 7 4.2 Compliance with Laws and Private Restrictions.............. 8 4.3 Insurance Requirements..................................... 8 4.4 Outside Areas.............................................. 9 4.5 Signs...................................................... 9 4.6 Rules and Regulations...................................... 9 4.7 Parking.................................................... 9 4.8 Window Coverings........................................... 10
i. Table of Contents (continued)
Page 4.9 Outside Sales.............................................. 10 ARTICLE 5 TRADE FIXTURES AND LEASEHOLD IMPROVEMENTS................. 11 5.1 Trade Fixtures............................................. 11 5.2 Leasehold Improvements..................................... 11 5.3 Alterations Required by Law................................ 12 5.4 Landlord's Improvements.................................... 12 5.5 Liens...................................................... 13 ARTICLE 6 REPAIR AND MAINTENANCE.................................... 14 6.1 Tenant's Obligation to Maintain............................ 14 6.2 Landlord's Obligation to Maintain.......................... 14 6.3 Tenant's Obligation to Reimburse........................... 15 6.4 Common Operating Expenses Defined.......................... 16 6.5 Control of Common Area..................................... 17 6.6 Tenant's Negligence........................................ 17 ARTICLE 7 WASTE DISPOSAL AND UTILITIES.............................. 18 7.1 Waste Disposal............................................. 18 7.2 Hazardous Materials........................................ 18 7.3 Utilities.................................................. 20 7.4 Compliance with Governmental Regulations................... 21 ARTICLE 8 REAL PROPERTY TAXES....................................... 21 8.1 Real Property Taxes Defined................................ 21 8.2 Tenant's Obligation to Reimburse........................... 22 8.3 Taxes on Tenant's Property................................. 22 ARTICLE 9 INSURANCE................................................. 22 9.1 Tenant's Insurance......................................... 22 9.2 Landlord's Insurance....................................... 24 9.3 Tenant's Obligation to Reimburse........................... 24 9.4 Release and Waiver of Subrogation.......................... 24 ARTICLE 10 LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY.......... 25 10.1 Limitation on Landlord's Liability......................... 25 10.2 Limitation on Tenant's Recourse............................ 26 10.3 Indemnification of Landlord................................ 26 ARTICLE 11 DAMAGE TO PREMISES........................................ 26 11.1 Landlord's Duty to Restore................................. 26
ii. Table of Contents (continued)
Page 11.2 Landlord's Right to Terminate.............................. 27 11.3 Tenant's Right to Terminate................................ 28 11.4 Abatement of Rent.......................................... 28 ARTICLE 12 CONDEMNATION.............................................. 28 12.1 Tenant's Termination Right................................. 28 12.2 Restoration and Abatement of Rent.......................... 29 12.3 Temporary Taking........................................... 29 12.4 Division of Condemnation Award............................. 29 ARTICLE 13 DEFAULT AND REMEDIES...................................... 30 13.1 Events of Tenant's Default................................. 30 13.2 Landlord's Remedies........................................ 31 13.3 Waiver by Tenant of Certain Remedies....................... 32 13.4 Waiver..................................................... 33 13.5 Limitation on Exercise of Rights........................... 33 ARTICLE 14 ASSIGNMENT AND SUBLETTING................................. 33 14.1 By Tenant.................................................. 33 14.2 By Landlord................................................ 36 ARTICLE 15 GENERAL PROVISIONS........................................ 36 15.1 Landlord's Right to Enter.................................. 36 15.2 Surrender of the Premises.................................. 37 15.3 Holding Over............................................... 37 15.4 Subordination.............................................. 37 15.6 Mortgagee Protection....................................... 38 15.7 Estoppel Certificates and Financial Statements............. 38 15.8 Force Majeure.............................................. 39 15.9 Notices.................................................... 39 15.10 Obligation to Act Reasonably............................... 39 15.11 Corporate Authority........................................ 39 15.12 Additional Definitions..................................... 39 15.13 Miscellaneous.............................................. 40 15.14 Termination by Exercise of Right........................... 41 15.15 Brokerage Commissions...................................... 41 15.16 Entire Agreement........................................... 41 15.17 Old Lease; Assumption...................................... 41
iii. An extra section break has been inserted above this paragraph. Do not delete this section break if you plan to add text after the Table of Contents/Authorities. Deleting this break will cause Table of Contents/Authorities headers and footers to appear on any pages following the Table of Contents/Authorities. 1. EX-21.1 6 SUBSIDIARIES OF UDI EXHIBIT 21.1 SUBSIDIARIES OF UNITED DEFENSE INDUSTRIES, INC. UDLP HOLDINGS CORP., a Delaware corporation UNITED DEFENSE, L. P., a Delaware limited partnership Its Subsidiaries: UDLP International, Inc., a Delaware corporation UD United Defense International Sales Corp., a Barbados corporation UDLP Overseas Limited, a Delaware corporation UDLP Components, Limited, a Bermuda corporation EX-23 7 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-60207) pertaining to the UDLP Amended and Restated Supplemental Retirement and Savings Plan, the United Defense Stock Option Plan, and the United Defense Industries, Inc. Employee Equity Purchase Plan of our report dated January 31, 2000, with respect to the consolidated financial statements of United Defense Industries, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young LLP Washington D.C. February 28, 2000 EX-27 8 FDS - UNITED DEFENSE INDUSTRIES
5 0001051719 UDI 1,000 U.S. DOLLARS 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 94,325 0 57,198 0 254,750 410,329 84,693 0 873,998 482,130 200,000 0 0 0 24,361 873,998 1,213,526 1,213,526 991,907 1,172,566 (1,820) 0 38,835 4,478 2,937 1,541 0 0 0 1,541 0 0
EX-27.1 9 FDS - IRON HORSE INVESTORS
5 0001052971 IHLLC 1,000 U.S. DOLLARS 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 94,325 0 57,198 0 254,750 410,329 84,693 0 875,337 482,130 200,000 0 0 0 21,756 875,337 1,213,526 1,213,526 991,907 1,172,566 (1,820) 0 38,835 4,414 2,937 1,477 0 0 0 1,477 0 0
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