-----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, BhLQWbWAKm7ZxaKVdkwRxYli4M/W/yNyEI2WYfxknyzjGpMDLNJlJc09E5hSzI1i 4bqkaPSN6K1mDYR9MpnY8Q== 0000912057-96-013429.txt : 19960701 0000912057-96-013429.hdr.sgml : 19960701 ACCESSION NUMBER: 0000912057-96-013429 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960628 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANFORD TELECOMMUNICATIONS INC CENTRAL INDEX KEY: 0000725727 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 942207636 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-11473 FILM NUMBER: 96588160 BUSINESS ADDRESS: STREET 1: 1221 CROSSMAN AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087450818 MAIL ADDRESS: STREET 1: 221 CROSSMAN AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94088-3733 10-K405 1 10-K405 - ------------------------------------------------------------------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - ------------------------------------------------------------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended March 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _______ to _______ Commission file number 0-12734 STANFORD TELECOMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) Delaware 94-2207636 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1221 Crossman Avenue 94089 Sunnyvale, California (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (408) 745-0818 Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Common Stock Common Stock Purchase Rights (Title of Class) Indicate by check mark whether the registrant (l) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. As of May 31, 1996, the aggregate market value of voting stock held by non- affiliates of the registrant, based on the closing sale price of such stock on the Nasdaq National Market System, was $161,537,464. Shares of Common Stock held by each officer, director and ten percent stockholder of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of the registrant's Common Stock outstanding on May 31, 1996 was 6,358,661. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Stockholders for the fiscal year ended March 31, 1996 (the "Annual Report to Stockholders") are incorporated in Parts II and IV of this form 10-K. Portions of the definitive proxy statement for the Annual Meeting of Stockholders to be held on June 26, 1996 (the "Proxy Statement"), are incorporated by reference in Part III of this form 10-K. PART I ITEM 1. BUSINESS Stanford Telecommunications, Inc. (the "Company") was incorporated in California in 1973 and reincorporated in Delaware in 1988. The Company designs, manufactures, and markets advanced digital telecommunications products and systems to establish or enhance communications via satellites, terrestrial wireless and cable. The Company also provides communication systems networking solutions and GPS navigation products. Stanford Telecom's expertise encompasses all the technologies required for these systems including radio frequency (RF), spread spectrum, waveform, coding, modem, ASIC, software and system design. The Company maintains a low cost commercial manufacturing capability and offers cost effective engineering services. The Company's principal base business areas and products include: Tri-band Terminals Transportable Milstar Terminal Advanced Communications for Government Agencies Communication Satellite Performance Monitoring Terrestrial Based Wireless Telephony Commercial Telecommunications Chip and Board Level Products Global Positioning System Aircraft Navigation Commercial Electronic Contract Manufacturing The following discussion addresses elements and applications which comprise the significant majority of the Company's base business. BASE BUSINESS DISCUSSION TRI-BAND TERMINALS DEFENSE INFORMATION INFRASTRUCTURE CONTINGENCY SATELLITE COMMUNICATIONS TERMINAL ("DSAT"). During fiscal 1995, the Company received a contract from the Defense Information Systems Agency ("DISA") for tri-band transportable satellite terminals. The DSAT terminals are valued in excess of $1 million each. The Company commenced delivery of the first units in January 1995. These satellite terminals are self-contained trailer-mounted with tri-band capability and can be configured for military, domestic and international satellites operating in C, X or Ku bands. The Company delivered seven DSAT systems through fiscal 1996 and plans to deliver the final two that are presently under contract in fiscal 1997. The existing contract allows DISA to exercise options for additional systems although their is no assurance that they will do so. The Company plans to pursue additional transportable tri-band satellite terminal opportunities for various agencies of the U.S. Government. TRANSPORTABLE MILSTAR TERMINAL AND OTHER MILSTAR ACTIVITIES MILSTAR SATELLITE COMMUNICATIONS. The Company has been involved since 1981 in development of the U.S. Government's Milstar satellite communications program, designed to support stationary and mobile users in the joint military services in the 1990's and beyond. In addition to performing system engineering tasks, the Company has developed special test equipment in support of the Milstar program, including a subcontract for the Milstar EHF Test System to test the Milstar satellites in orbit. Presently, the Company is under contract to upgrade its Milstar Test Terminals to support the Medium Data Rate communication capabilities being added to the Milstar Block II satellites. During fiscal 1997 the Company plans to continue its development activities towards a proprietary low-cost transportable Milstar terminal. The -1- Company has begun a series of demonstrations of this new terminal to the Milstar communications satellite user community. The Company believes that the market for this product maybe significant although there is no assurance that the Company will realize sales of its terminals or that the terminals will ever gain market acceptance. ADVANCED COMMUNICATIONS FOR GOVERNMENT AGENCIES DSCS OPERATIONAL CONTROL SYSTEM ("DOCS"). The Company developed, installed and now assists in the operation of an extensive network of computers and software which performs control and monitoring functions for the Defense Satellite Communication System ("DSCS"). Control of DSCS is complex due to the different types of multiple access techniques used and the need to react quickly to communications requirements and to hostile jamming actions. The task of optimizing and controlling the many thousand of parameters in the DSCS network is a sophisticated computational problem requiring both advanced computers and extensive information processing. In September 1992, the Company was awarded a DOCS Support Services contract with four one-year renewable options for an aggregate of $38 million for operations, hardware, and software support. The Company has received funding to continue work through January 1997. The Company anticipates that within the next year, the Government will issue a request for proposals for a competitive multi-year procurement for a continuation of the effort currently being performed by the Company under the DOCS contract. The Company plans to pursue this multi-year competitive contract and believes it remains in a good position to support this anticipated future requirement. Under a separate contract, the Company is replacing existing Digital VAX equipment with newer minicomputers and operating systems. The upgraded hardware and software is currently being integrated at sixteen facilities worldwide in support of the DSCS Operational Control System. REPLACEMENT SATELLITE CONFIGURATION CONTROL ELEMENT ("RSCCE"). The Company has been awarded a contract from the U.S. Army to provide the configuration control element in support of network management for the U.S. Government's DSCS. Under this contract, the Company will provide the software and hardware necessary to fully configure, test, and deliver this element of the satellite system. The base contract is expected to be completed during fiscal 1997. Production options are expected to extend the contract's period of performance through the year 2000 although there is no assurance that the Government will exercise their options to procure additional production hardware. TDMA GROUND SYSTEMS. Stanford Telecom has developed a thin route, point- to-multipoint TDMA ground system for satellite-based communications which provides efficient use of the satellite transponders and can provide substantial cost and flexibility advantages over conventional "time" or "frequency" division multiple access systems. In a typical SATCOM network, the TDMA system will operate with a hub terminal and up to 32 remote terminals providing "capacity on demand" Demand Assignment Multiple Access services. Under contract with the U.S. Government, the Company developed and manufactured its TDMA system, the STEL 1105A, and has delivered approximately 330 systems to U.S. Government customers. The Company has also developed an advanced version of the TDMA system, the STEL 1105B, which has successfully completed customer field evaluation. The Company is under contract with the U.S. Navy to provide advanced TDMA network systems that can operate over commercial satellites to support voice, data and video communications to the fleet. SINGLE CHANNEL TRANSPONDER INJECTION SUBSYSTEM ("SCTIS"). The Company has employed its spread spectrum technology in the design, production and installation of high performance anti-jam uplink transmission systems for the U.S. Air Force which protect emergency messages being sent through the Defense Satellite Communications System against jamming and interception. Since the program commenced in 1978, the Company has delivered twelve SCTIS -2- systems plus spare parts to the U.S. Air Force. During fiscal 1996, the Company was awarded a contract to upgrade the system to replace obsolete units and enhance performance. Development of this upgrade is currently on-going and a product follow-on is expected to be awarded during fiscal 1997. The Company is currently under contract to deliver an Enhanced Link Simulator in support of SCTIS. Delivery of these units is expected to be completed in fiscal year 1997. The Company believes the U.S. Air Force is considering future enhancements for both the SCTIS and the simulators and the Company remains in a good position to support future requirements. TRACKING AND DATA RELAY SATELLITE SYSTEMS ("TDRSS"). The National Aeronautics and Space Administration (NASA) Tracking and Data Relay Satellites enable NASA to maintain global continuous communications with the space shuttle and NASA satellites even when they are not in direct line-of-sight to tracking stations in the continental United States. The Company has several important roles in this billion dollar satellite system, including study and system engineering support, a major long-term subcontract to support TDRSS network control, prime contracts to develop and assess space/ground segment architectures for upgrading the TDRSS system, and assisting NASA in the deployment of a new TDRSS ground terminal in Guam. The Company has developed a portable S-band, spread spectrum transmitter and companion receiver designed for operation with TDRSS. The Company believes the market may be significant for these products although revenues from these products have not been material to date and there is no assurance that these products will gain market acceptance. COMMUNICATION SATELLITE PERFORMANCE MONITORING COMMUNICATIONS SIGNAL MONITORING. In April 1993, the Company was awarded a $13 million multi-year contract to provide a signal monitoring system for the world's largest communications satellite network, owned and operated by Intelsat, an international consortium of over 100 nations. The contract required the development, assembly, installation and test of multiple systems to be deployed world-wide. During fiscal 1994 and 1995 the Company recognized losses totaling $3.5 million against the completion of this contract. During fiscal 1996 the Company successfully delivered all systems required by the contract and completed all necessary installations and tests. During early fiscal 1997, the Company received final system acceptance from Intelsat. The Company currently has a maintenance contract with Intelsat to support the monitoring systems. In addition, the Company offers its Transponder Access Control System (TACS) to serve the needs of customers with smaller communication satellite networks. Customers including the U.S. Government, Martin Marietta, Hughes, Network Systems, British Telecom, GTE Spacenet and Eutelsat have used TACS to monitor transponder performance including frequency power, bandwidth, interference, and unauthorized use to ensure that the satellite is functioning properly and efficiently. TERRESTRIAL BASED WIRELESS TELEPHONY TERRESTRIAL BASED WIRELESS TELEPHONY. The Company has developed an advanced OCDMA architecture for Wireless Local Loop applications. In June 1995, the Company and DSC Communications signed a joint development agreement in which the Company will provide its radio frequency and modem technology, as well as its ASIC and waveform technology to expand DSC's wireless local loop access system capabilities. The enhanced Wireless Local Loop capabilities are expected to be demonstrated by the Company during fiscal 1997. The Company provides an RF Monitoring Unit ("RFMU") which is located inside PCS base stations. This unit has measurement and monitoring capabilities and is used by PCS system operators to monitor the interference environment such that PCS providers can share frequencies with existing microwave systems. The Company's RFMU products are currently operational in the Washington D. C. area and support the PCS network offered by American Personal Communications. The Company has delivered several hundred units and believes there are opportunities to deliver additional units in fiscal 1997 and beyond. -3- COMMERCIAL TELECOMMUNICATIONS CHIP AND BOARD LEVEL PRODUCTS COMMERCIAL TELECOMMUNICATIONS CHIP AND BOARD LEVEL PRODUCTS. The Company designs, manufactures and markets a wide range of Application Specific Integrated Circuits (ASIC) and board level assemblies for a variety of commercial telecommunication applications. These products provide the digital signal processing required to transmit and receive information. The Company offers products for PSK modulation and demodulation, digital down conversion, the reception and transmission of spread spectrum information, forward error correction, adaptive equalization and direct digital frequency synthesis. Key market areas addressed by the Company include: - Cable/Internet Communications. Stanford Telecom has developed the modulation/demodulation technology required for the "upstream" (from the subscriber set-top box to the cable "headend") transmission of data over hybrid fiber/coax (HFC) networks. Products offered include the STEL-1108, a single-chip complete BPSK/QPSK modulator ASIC, specifically designed for the transmission of data from the subscriber to the headend and the STEL-9244, a Burst Demodulator board level assembly that provides demodulation of burst QPSK signals in the upstream environment. The Company believes that a number of Internet access product manufactures have incorporated Stanford Telecom's products into systems which are currently in field trials at locations throughout the United States. Although revenues from these products have not been material to date, the Company believes that future revenues may be significant if production orders are forthcoming. - Very Small Aperture Terminal (VSAT) Receiver Assemblies. The Company offers board level receiver assemblies for use in VSAT satellite systems. These digital demodulator assembly products are used for rural telephony, background music services and business data transmissions. The STEL-9236 product family can provide signal timing recovery, demodulation, down conversion, carrier tracking and forward error correction functions. Since product introduction, the Company has received orders for approximately 17,000 VSAT receiver assemblies. - Spread Spectrum Wireless Communications. The Company offers products for spread spectrum applications such as wireless telephony, cordless PBX's, wireless LAN's, vehicle tracking and other positioning systems. Stanford Telecom has integrated many complex digital signal processing functions into a single ASIC architecture for its STEL-2000A wireless signal processor. GLOBAL POSITIONING SYSTEM AIRCRAFT NAVIGATION. AIR TRAFFIC CONTROL SYSTEM MODERNIZATION. Since 1984, the Company has been supporting an FAA program to upgrade and modernize the nation's air traffic control and air transport navigation system. The Company's activities include air traffic control (ATC) automation and communications system engineering and support to FAA special projects activities such as the relocation of the Chicago O'Hare ATC Tower Complex. The Company is also supporting the FAA in its acquisition of the new terminal area ATC automation system. The above activities are being conducted under two separate contracts: one to GSA/FEDSIM for communication system engineering and one to DOT for transportation system engineering and R&D support. In addition, the Company was awarded a long term contract in fiscal 1996 to support the FAA's implementation of a Global Positioning System (GPS) Wide Area Augmentation System (WAAS). The FAA's WAAS Program is a central element of the FAA's plans to move toward a satellite based Air Traffic Control System. The WAAS, through supplementing the GPS system, will enable this system to become a sole means navigation source for en route and terminal area aviation navigation purposes. This will greatly enhance aircraft navigation capability and allow the -4- FAA to provide a more cost effective navigation infrastructure for civil aviation in the National Airspace System. The Company has performed a central role in the development of the WAAS concept through support to concept definition, prototyping and field testing. This contract will leverage the Company's substantial in-house expertise in satellite navigation to the provision of technical support services addressing communications, navigation, hardware, software and test issues that surround development of the WAAS. The Company believes that an international need exist for WAAS capabilities and its plans to pursue such opportunities as they arise. GPS INSTRUMENTATION. The Company provides standard off-the-shelf GPS navigation instrumentation products and GPS simulators, which allow laboratories, system integrators and manufactures of receivers to perform an automated test of GPS equipment by simulating a wide range of vehicle motions including aircraft flight, the motion of a ship or the route of a vehicle along a road. Automated testing using GPS simulators avoids time consuming dynamic testing on testbeds such as aircraft and ships. The Company believes that the market for this type of specialized product is currently limited and future revenues in this area are unlikely to be significant. COMMERCIAL ELECTRONIC CONTRACT MANUFACTURING COMMERCIAL ELECTRONIC CONTRACT MANUFACTURING. During fiscal 1993, the Company began to pursue opportunities in commercial contract manufacturing. In addition to producing its own products, the Company offers its contract manufacturing services to commercial customers. Revenues for the Company's contract manufacturing business amounted to approximately 20% of total revenues for fiscal year 1996, an increase from approximately 10% of revenues for fiscal year 1995. The Company's Sunnyvale, California manufacturing facilities received ISO-9001 certification during fiscal year 1996. Approximately 10% of the Company's manufacturing capacity was used in support of the Company's own products. COMMERCIAL STRATEGIC PRODUCT DEVELOPMENT Stanford Telecom has initiated a number of strategic product developments and business arrangements, including those addressed below, to address a growing worldwide market for digital telecommunication products and services. Revenues from these initiates have not been significant to date and there is no assurance that the Company will be successful in the development, marketing, distribution and sales of these products however the Company believes that the market for these product and services is substantial. SATELLITE PERSONAL COMMUNICATIONS. In recent years a number of worldwide satellite-based cellular systems have been proposed, including TRW/Teleglobe's Odyssey, Inmarsat's ICO, Motorola's Iridium and Loral/Qualcomm's Globalstar. The Company has been carrying out research and development on the medium altitude Odyssey system being proposed by TRW/Teleglobe. The Company hopes to play a key role in the ground station terminals that interface with the public switch telephone network. The Company expects Odyssey to use a Stanford Telecom proprietary version of the OCDMA (Orthogonal Code Division Multiple Access) wave form in transmission of voice communications. There has been no decision on whether Odyssey will proceed however a decision is expected this calendar year. The Company is also a member of an international team competing for a regional personal communication system. WIRELESS BROADBAND COMMUNICATIONS (LMDS). Wireless broadband communications, also called Local Multipoint Distribution System (LMDS), or wireless cable", is a new technique for two-way transmission of high speed digital data using terrestrial microwave links to homes and offices. Stanford Telecom and Hewlett Packard have signed a memorandum of understanding to develop a complete LMDS system. These systems operate in the 28-29 GHz microwave frequency spectrum. The Company has begun to conduct technology demonstrations and plans to enhance the -5- capabilities of its system throughout fiscal 1997. It is unlikely that a sizable market will develop for this system until after the FCC completes the auction for utilization of the frequency spectrum and the system has been adequately field demonstrated to potential customers such as Regional Bell Operating Companies, long distance carriers and others. The Company believes that the potential for significant revenues will not occur until fiscal 1998. CABLE/INTERNET COMMUNICATIONS. One of the major new cable markets that can be addressed by the CATV service provider is that of high-speed two-way Internet and worldwide Web access. The full potential of the Internet can be realized when high-resolution images can be quickly transmitted to the user. The use of cable for this application offers the potential to increase the rate of transmission by a factor of approximately 1,000 over typical telephone modem access. In order to realize these increased transmission speeds, the cable system needs to be augmented with both upstream and high speed downstream links. Stanford Telecom has developed and currently offers for sale products which address both upstream and downstream links. The Company plans to develop and offer second generation products to provide improved performance at lower cost. The Company believes it is in a good position to receive initial production orders towards the end of fiscal 1997. INTEGRATED SATCOM/WIRELESS LOCAL LOOP. To address the needs of the developing world for telephony services, the Company plans to develop a low-cost version of the OCDMA wireless local loop which will be integrated with a satellite communication link and small satellite terminals. The Company is currently evaluating market opportunities in the Far East and South America and has begun development work to reduce the cost of system components. The Company believes that providing a low-cost system is critical to a successful product offering and plans to continue to evaluate the market opportunities and the economic model required to assure a profitable business venture. The Company does not expect to recognize revenues in this area during fiscal 1997. OTHER BUSINESS MANUFACTURING. Stanford Telecom's products are generally manufactured from standard components, its proprietary ASICs and other components or subsystems produced to the Company's specifications. Most of the Company's current products contain microprocessors for which proprietary software is designed and tested by the Company's engineers. The Company does not have a semiconductor foundry or fabrication facility. For the production of ASICs, the Company contracts with companies that have foundry capability including Zilog (under a strategic relationship), American Microsystems Inc., Hitachi, and AT&T Microelectronics. In many cases only a single source is available for specific components, and thus there is a risk of delay in delivering finished systems within contractual schedules. The Company attempts to minimize this risk by securing second sources, finding alternate technologies to perform the same function and maintaining adequate inventories of single source components. To date the Company has experienced no material adverse impact due to component unavailability, product returns or contract renegotiations. Many of the Company's products are covered by a 90-day to one-year warranty under which the Company will repair or replace defective parts. To date, warranty expense has not been significant. -6- MARKETING AND CUSTOMERS. The Company markets its products and services to agencies of the U.S. Government, prime contractors to these agencies and an increasing number of commercial customers. The Company's marketing is conducted by its management and technical staff, and in the case of its commercial business, domestic and international sales representatives are also utilized. The Company's marketing efforts for its government business consist of responding to requests for proposals and solicitations for bids from U.S. Government agencies or prime contractors to these agencies and direct marketing of its off-the-shelf, standardized products. The Company markets its ASICs and commercial products primarily through its direct sales personnel consisting of five full-time employees, 24 independent sales representative locations covering the U.S. and Canada and 23 other independent sales representative offices covering other international territories. The Company also places advertisements for commercial products, particularly its ASIC products, in a number of trade magazines and participates in trade shows and industry symposiums. During the fiscal years ended March 31, 1996, 1995 and 1994 approximately 54%, 69%, and 73%, respectively, of the Company's revenues were attributable to contracts with numerous agencies of the U.S. Government. No single contract accounted for more than 10% of revenues during fiscal 1996, 1995 or 1994. Some of the Company's U.S. Government sales are made under letter contracts in which the final contract price is agreed upon after work has begun. To date, the Company has had a small amount of revenue from international customers. Such sales are often subject to U.S. State Department approval and export license requirements. COMPETITION. Competition is intense among providers of digital telecommunications equipment, products and services. In the Company's government business, competitors include major defense contractors, telecommunications equipment and electronics firms, and systems integrators, most of which have significantly greater financial, marketing and operating resources than the Company, as well as broader product lines and technological capabilities. As a result of reduced defense spending by the U.S. and other governments, competition has become more intense in the Company's government business. Although no single competitor competes with the Company in all of its product lines, a number of competitors such as Harris Corporation, Loral-Space, Lockheed-Martin, TRW, BDM, CSC, Texas Instruments, Hitachi, and Rockwell International compete with the Company in various market segments. Certain of the Company's customers have technological capabilities in the Company's product areas and could choose to develop and manufacture certain products themselves rather than purchase from suppliers such as the Company. As the Company continues to transition to more commercial business, it expects to face new and increasing competition with respect to its commercially oriented products and services. The Company believes that, in its highly specialized technical environment, price, performance, reputation, reliability, on-time delivery and customer support are the primary competitive factors among companies having similar technical capabilities. BACKLOG AND BOOKINGS. Funded backlog includes: (i) projects and orders covered by signed contracts for which the government has specifically allocated funding; and (ii) purchase orders from commercial customers. The Company's backlog is largely attributable to agencies of the U.S. Government. In the case of certain long- term contract awards, the U.S. Government typically makes the funds available over the life of the contract as opposed to the time of the contract award. In such cases the Company reports as funded bookings only the amount of the funds specifically allocated and the resultant backlog as funded backlog. The Company does not include unexercised options in backlog. The Company's funded bookings for fiscal years 1996 and 1995 were $155.0 million and $127.8 million, respectively, and the Company's backlog at the end of fiscal years 1996 and -7- 1995 was $82.4 million and $72.5 million, respectively. At March 31, 1996 backlog from the Company's government and commercial businesses were approximately $46.8 million and $35.6 million, respectively. There is no assurance that funded backlog will be completed and booked as revenue. The Company's contracts typically contain contingency provisions permitting termination by the customer at any time. Cancellation of pending contracts or termination or reductions of contracts in progress may have a material adverse effect on the Company's results of operations. RESEARCH AND DEVELOPMENT. The telecommunications industry is characterized by rapid technological change, requiring a continuous effort to enhance existing products and develop new products. The Company believes that its continued success depends in large part on its ability to develop new and enhanced digital telecommunications products. The Company conducts extensive research, development and engineering activities with the objective of developing products and systems that provide for cost-effective, high-quality satellite communications and digital wireless telecommunications. Since its inception, the Company has developed a number of innovative and proprietary digital telecommunications technologies through a combination of customer and internally funded research and development. A significant portion of these expenditures include bid and proposal expenditures which are largely the initial advanced technology development efforts directed toward a specific product or technical task for which the Company must show technical viability. Company-funded expenditures for research and development including bid and proposal activities for fiscal years 1996, 1995, and 1994 were approximately $8.4 million, $7.7 million, and $6.4 million, respectively, which represented 5.8%, 6.8%, and 6.5% of total revenues, respectively. The Company's revenues have historically been derived primarily from performing contract research and development and engaging in limited production contracts with agencies of the U.S. Government and their prime contractors. As a result, a substantial portion of the digital telecommunications research and development performed by the Company since its inception has been funded by its customers and recorded as revenues by the Company. Accordingly, the cost of performing this customer-funded research and development is included in "Costs of Revenues" in the Company's financial statements. The Company is continually seeking to develop new products for commercial applications to leverage its leading digital telecommunications technologies that have been funded through many military and government research and development contracts since the early 1970's. EMPLOYEES. As of March 31, 1996, the Company employed 890 full-time and 24 part-time employees and 30 professional consultants. Of the full-time and part-time employees, 427 are in technical operations, 173 in manufacturing operations, and 314 in management and support for technical and corporate operations. The majority of the Company's employees are highly skilled technical personnel. Several are nationally known leaders in the field of digital telecommunications. Over 490 employees hold advanced degrees, including approximately 30 with doctoral degrees. None of the employees are represented by a labor union and the Company has never had a work stoppage. The Company believes its employee relations to be excellent. Due to the nature of the Company's business, a large number of its technical employees must obtain security clearances from the U.S. Government, which limits the available pool of eligible candidates for such positions to those who can satisfy prerequisites for such clearances. PATENTS AND PROPRIETARY RIGHTS. The success of the Company's business depends in part upon its ability to protect trade secrets, obtain or license patents and operate without infringing on the rights of others. Although the Company has obtained patents covering certain of its technologies, it believes that the -8- ownership of patents has not generally been a significant factor in its government business and that its success depends primarily on innovative skills, technical competence, and the marketing and managerial abilities of its personnel. The Company relies on a combination of trade secrets, copyrights, patents, nondisclosure agreements and technical measures to protect its proprietary rights in its products and technology. Such protection may not preclude competitors from developing products with features similar to the Company's products. The Company believes that patents will play an increasingly important role in its commercial business and during the past two years the Company has received or filed for approximately 50 patents with the U.S. Patent and Trademark Office. The Company expects it will continue to aggressively pursue additional patents to protect its intellectual property. The Company requires its employees to execute proprietary rights and nondisclosure agreements and to maintain the confidentiality of the Company's proprietary information. GOVERNMENT REGULATION. The Company's operations are subject to compliance with regulatory requirements of federal, state and local authorities, including regulations concerning employment obligations and affirmative action, workplace safety and protection of the environment. In addition, many of the Company's products and proposed products are or will be subject to various regulations including regulations promulgated by the Federal Communications Commission, the FAA and the DoD. While compliance with applicable regulations has not adversely affected the Company's operations in the past, there can be no assurance that the Company will continue to be in compliance in the future or that these regulations will not change. In addition, the Company must comply with detailed government procurement and contracting regulations and with U.S. Government security regulations, including those necessary to maintain required facility clearances. Certain of these regulations carry substantial penalty provisions for nonperformance or misrepresentation in the course of negotiations. Failure of the Company to comply with its government procurement, contracting or security obligations could result in penalties or suspension of the Company from government contracting, which would have a material adverse effect on the Company's results of operations. The Company is required to maintain a U.S. Government facility clearance at most of its locations. This clearance could be suspended or revoked if the Company is found not to be in compliance with applicable security regulations. Any such revocation or suspension would delay the Company's delivery of its products to customers. Although the Company has adopted policies designed to assure its compliance with applicable regulations and there have been no suspensions or revocations of any of its facilities, there can be no assurance that the approved status of the Company's facilities will continue without interruption. CAUTIONARY STATEMENTS In the interest of providing the Company's shareholders and potential investors with certain Company information, including management's assessment of the Company's future potential, certain statements set forth herein contain or are based on projections of revenue, income, earnings per share and other financial items or relate to management's future plans and objectives or to the Company's future economic performance. Such statements are "forward-looking statements" within the meaning of Section 27A(i) of the Securities Act of 1933, as amended, and in Section 21E(i) of the Securities Exchange Act of 1934, as amended. Although any forward-looking statements contained herein or otherwise expressed by or on behalf of the Company are to the knowledge and in the judgment of the officers and directors of the Company, expected to prove true and to come to pass, management is not able to predict the future with absolute certainty. Accordingly, shareholders and potential investors are hereby cautioned -9- that certain events or circumstances could cause actual results to differ materially from those projected or predicted herein. In addition, the forward- looking statements herein are based on management's knowledge and judgment as of the date hereof, and the Company does not intend to update any forward-looking statements to reflect events occurring or circumstances existing hereafter. In particular, the Company believes that the following factors could impact forward-looking statements made herein or in future written or oral releases and by hindsight, prove such statements to be overly optimistic and unachievable: 1. Future revenues on government contracts, including contracts in progress, are subject to reduction or cancellation without prior notice at the convenience of the U.S. Government. Budgetary constraints and changes in spending priorities in government agencies such as the Department of Defense, NASA, and the FAA have resulted in sudden program changes, reductions or cancellations in the past and such conditions may be expected to continue. 2. The Company has in the past accepted fixed price development commitments for both government and commercial contracts. Although the Company attempts to bid fixed price development contracts at an amount above the expected costs of development and production, the Company has from time to time experienced significant cost overruns which cannot be recovered from the customer. The Company may in the future experience material cost overruns which could adversely affect operating results over the life of the program. 3. The Company's basic strategy is to employ its technology in wireless telecommunications and digital signal processing in the commercial environment, generally as components or subsystems in the product or service offerings for large telecommunications companies. The transition from a government contracts focus to commercial development will expose the Company to certain business risks not previously encountered. Of greatest significance will be the success of the Company's customers in marketing the products or services for which the Company provides key technology components, or subsystems. A successful product development effort will not produce meaningful long-term revenues or profits for the Company unless its customer obtains market acceptance of its end product or service. Factors such as system price, competitive pressures, consumer demand and the like will impact the customer's and the Company's level of commercial success. In addition, even if a product or service proves to be a commercial success, the Company will experience the continued risk that the customer will develop or obtain lower cost alternatives to the Company's products or technical solutions. 4. The Company's Commercial Manufacturing Division has grown significantly since being established in 1993. The Division provides manufacturing services to producers of electronics and medical products on either an inventory consignment or turnkey basis. The contract manufacturing business is subject to wide swings in demand, is price sensitive and extremely competitive. In addition, to the extent inventory is purchased in anticipation of future contracts, the failure to obtain such contracts can lead to a reduction in the value of such inventory. The Company's Commercial Manufacturing Division does not generally operate with long-term contracts and is often required to bid each new job even for major customers. 5. Many of the components incorporated in the Company's commercial products, including all semiconductor components, are purchased from third party vendors. Certain key components are sole sourced. From time to time, the Company may experience significant delays in component availability which could adversely impact its ability to make timely deliveries to its customers. Such events could cause expected revenues to be delayed and the possible loss of future orders. -10- ITEM 2. PROPERTIES The Company's headquarters and principal engineering and manufacturing facilities are currently located in four adjacent buildings in Sunnyvale, California where it leases approximately 172,000 square feet. The Company's Sunnyvale facility leases will expire in the year 2000. The leases contain options for renewal under terms and conditions to be negotiated at the time of expiration. The Company also leases approximately 84,000, 34,000, 30,900, 15,300, and 11,300 square feet of office space in Reston, Virginia, Colorado Springs, Colorado, Annapolis Junction, Maryland, Lowell, Massachusetts, and Seabrook, Maryland, respectively, which space is used primarily for the performance of study, system engineering and hardware contracts. The Reston facility leases expire in 1997 through 2001. The Colorado Springs, Annapolis Junction, Lowell, and Seabrook leases expire in 1999, 2003, 2001, and 1997, respectively. The Company believes its current facilities are suitable and adequate for the Company's operations over the next fiscal year. ITEM 3. LEGAL PROCEEDINGS. The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect on its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable. PART II ITEM 5. - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. Incorporated by reference from page 28 of the Annual Report to Stockholders. ITEM 6. SELECTED FINANCIAL DATA. Incorporated by reference from page 28 of the Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Incorporated by reference from pages 15 through 18 of the Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Financial statements of Stanford Telecommunications, Inc. as of March 31, 1996 and March 31, 1995 and for each of the three years in the period ended March 31, 1996 and the report of independent public accountants thereon are incorporated by reference from pages 19 through 27 of the Annual Report to Stockholders. See Part IV, Item 14(a). ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Inapplicable. -11 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Set forth below are the names and ages of the executive officers and directors of the Company, their principal occupations at present and for the past five years, certain directorships held by each, and the year in which each became a director or executive officer of the Company. Dr. James J. Spilker, Jr. (age 62), a founder of the Company, is Chairman of the Board. He served as President and Chief Executive Officer of the Company from August 1981 to June 1995. Dr. Val P. Peline (age 65) was elected as a Director of the Company in October 1985. Dr. Peline joined the Company as its President and Chief Executive Officer effective June 5, 1995. Dr. Peline served as President of the Electronic Systems Group, a division of Lockheed Corp., from 1987 until he retired from such position in March 1995. Dr. Peline had been President of the Lockheed Space Division from 1984 to March 1987. Mr. Michael Berberian (age 62), a private investor, was appointed to fill a vacancy on the Board of Directors in December 1989. From 1973 to 1990 he served on the Board of Directors of Lockheed Corporation. Mr. John W. Brownie (age 62), a founder of the Company, served as Executive Vice President of the Company from June 1982 and as General Manager from July 1981 until his retirement in January 1985. He has been a Director and Vice President of the Company since the Company's organization in May 1973. Dr. P. Marshall Fitzgerald (age 63), a founder of the Company, has served as a Director since its organization in May 1973 and served as President of the Company from May 1973 until his retirement in July 1981. Mr. Milton W. Holcombe (age 63) was appointed to fill a vacancy on the Board of Directors in September 1990. Mr. Holcombe served as President of Chrysler Technologies Airborne Systems, Inc. from 1988 until his retirement in 1990. In 1970 he co-founded Electrospace Systems, Inc. where he served as Group Vice President and Assistant Treasurer prior to the acquisition of Electrospace Systems by Chrysler Corporation in 1988. Mr. Leonard Schuchman (age 59) was elected as a Director of the Company in April 1985. Mr. Schuchman joined the Company in January 1976 and became Vice President in February 1977. He is responsible for directing the Company's Communications and Navigation Systems Operation. Dr. C. Jerome Waylan (age 54) was appointed to fill a vacancy on the Board of Directors in May 1994. Dr. Waylan served as President of GTE Spacenet Corporation from 1985 to 1993 and as Executive Vice President of GTE Mobilnet from 1993 until his retirement in April 1996. In June 1996, Dr. Waylan was named Executive Vice President and Member of the Office of the Chairman of NextWave Telecom, Inc. Mr. Ernest L. Dickens, Jr. (age 49) joined the Company in October 1981. From April 1990 to October 1995 he directed the Company's Government Systems Services operation. Mr. Dickens was elected Vice President in November 1995 and currently directs the Company's Satcom Ground Systems operation. -12- Mr. Bronic C. Knarr (age 50) joined the Company in November 1988. From November 1988 to April 1992 Mr. Knarr held various management positions at the Company in support of key programs. From April 1992 to September 1995 Mr. Knarr directed the Company's Satellite Communications operations. In September 1995 Mr. Knarr was appointed director of the Company's Manufacturing and Quality Assurance operation and was elected Vice President in November 1995. Dr. John E. Ohlson (age 56) joined the Company in March 1981 as Director of Telecommunications Programs Operations and became Vice President in January 1982. In February 1991 he was named Director of Military Ground Terminals. Dr. Ohlson directed the Satellite Communications Group from June 1992 to November 1994. Dr. Ohlson was named as the Company's Chief Technical Officer in November 1994 and currently directs the Company's Satellite Personal Communications Operation. Mr. Gary S. Wolf (age 45) joined the Company in May 1978 and was elected Vice President, Chief Financial Officer, Secretary and Treasurer in December 1984. SECTION 16(A) BENEFICIAL OWNERSHIP REPORT COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's Directors and executive officers and holders of more than 10% of the outstanding Common Stock ("insiders") to file with the SEC reports of ownership and changes in ownership of Common Stock and other equity securities of the Company. Insiders also are required to furnish the Company with a copy of all reports that they file with the SEC pursuant to Section 16(a). Based solely on its review of such reports or written representations with respect to Section 16(a) reports by insiders, the Company believes that during fiscal year 1996, each of the insiders complied with all applicable filing requirements under Section 16(a). ITEM 11. EXECUTIVE COMPENSATION. The information set forth under the caption "Executive Compensation" beginning on page 5 of the Company's Proxy Statement is incorporated herein by reference and made a part hereof in response to the information required by this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information set forth under the caption "Stock Ownership" beginning on page 12 of the Company's Proxy Statement is incorporated herein by reference and made a part hereof in response to the information required by this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Inapplicable. -13- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following report, financial statements and other information are incorporated by reference from the Annual Report to stockholders and form a part of this report: REFERENCE PAGE 1996 Annual Report Form 10-K ------- --------- 1. FINANCIAL STATEMENTS. Report of Independent Public Accountants 19 Statements of income for each of the three years in the period ended March 31, 1996 19 Balance sheets at March 31, 1996 and March 31, 1995 20 Statements of shareholders' equity for each of the three years in the period ended March 31, 1996 21 Statements of cash flow for each of the three years in the period ended March 31, 1996 22 Notes to financial statements 23 2. FINANCIAL STATEMENT SCHEDULES II - Valuation and Qualifying Accounts 19 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements or notes thereto. With the exception of such information in the Annual Report to Stockholders incorporated herein by reference, the Annual Report to Stockholders is not deemed "filed" as part of this report. 3. Exhibits. Exhibit Number Description - -------------- ----------- 3.1(2) Certificate of Incorporation, as amended. 3.2(2) Bylaws, as amended. 4.1(6) Rights Agreement dated as of May 9, 1995 between the Company and The First National Bank of Boston. 4.2 Agreement re. Rights of Holders of Long-Term Debt. -14- 10.1(5) Consolidated, Amended and Restated Deed of Lease for the premises located at 1761 Business Center Drive, Reston, Virginia dated October 1, 1993 between the Company and the Variable Annuity Life Insurance Company. 10.2(1)* 1982 Stock Option Plan, as amended, and form of Agreements. 10.3(3)* 1992 Employee Stock Purchase Plan. 10.4(4) Lease dated November 19, 1992 for 480 Java Drive, Sunnyvale, California, 440 Moffett Park Drive, Sunnyvale, California, and 1221 Crossman Avenue, Sunnyvale, California. 10.5(5) Office Lease Agreement for 141 National Business Parkway, Annapolis Junction, Maryland dated March 1, 1993 between the Company and Constellation Real Estate, Inc. 10.6* 1991 Stock Option Plan and form of Agreements. 10.7* Management Incentive Plan. 10.8 Credit Agreement dated December 20, 1995 between the Company and Bank of America National Trust and Savings Association. 13.1(7) Annual Report to Stockholders for the fiscal year ended March 31, 1996. 23.1 Consent of Arthur Andersen LLP, independent public accountants. 24.1 Power of Attorney (included on page 15 hereof). 27.1 Financial Data Schedule - --------------------------- *Compensatory Plan (1) Incorporated by reference from the Company's Annual Report on Form l0-K for the fiscal year ended March 31, 1987. (2) Incorporated by reference from the Company's Annual Report on Form l0-K for the fiscal year ended March 31, 1989. (3) Incorporated by reference from the Company's Annual Report on Form l0-K for the fiscal year ended March 31, 1992. (4) Incorporated by reference from the Company's Annual Report on Form l0-K for the fiscal year ended March 31, 1993. (5) Incorporated by reference from the Company's Registration Statement on Form S-1, No. 33-72720. (6) Incorporated by reference from the Company's Registration Statement on Form 8-A, dated May 24, 1995. (7) Only those portions of the Annual Report to Stockholders that are specifically incorporated by reference in this form 10-K are included in this exhibit. REPORTS OF FORM 8-K No current Reports on Form 8-K were filed by the Company with the Securities and Exchange Commission during the last quarter of the period covered by this Form 10-K. -15- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STANFORD TELECOMMUNICATIONS, INC. Dated: June 24, 1996 /s/ James J. Spilker, Jr. ---------------------------------- James J. Spilker, Jr. Chairman of the Board POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James J. Spilker, Jr. and Gary S. Wolf and both of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in- fact and agents, or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- /s/ James J. Spilker, Jr. Chairman of the Board June 24, 1996 - ------------------------------ James J. Spilker, Jr. /s/ Val P. Peline President (Principal Executive June 24, 1996 - ------------------------------ Officer) and Director Val P. Peline /s/ Gary S. Wolf Vice President, Treasurer and June 24, 1996 - ------------------------------ Secretary, (Principal Financial Gary S. Wolf and Accounting Officer) /s/ Michael Berberian Director June 24, 1996 - ------------------------------ Michael Berberian -16- /s/ John W. Brownie Director June 18, 1996 - ------------------------------ John W. Brownie /s/ P. Marshall Fitzgerald Director June 19, 1996 - ------------------------------ P. Marshall Fitzgerald /s/ Milton W. Holcombe Director June 19, 1996 - ------------------------------ Milton W. Holcombe /s/ Leonard Schuchman Vice President and Director June 24, 1996 - ------------------------------ Leonard Schuchman /s/ C. J. Waylan Director June 17, 1996 - ------------------------------ C. J. Waylan -17- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES To Stanford Telecommunications, Inc.: We have audited in accordance with generally accepted auditing standards, the financial statements included in Stanford Telecommunications, Inc.'s annual report to stockholders incorporated by reference in this Form l0-K, and have issued our report thereon dated April 22, 1996. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed at Item 14(a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Jose, California April 22, 1996 -18- SCHEDULE II STANFORD TELECOMMUNICATIONS, INC. Valuation and Qualifying Accounts Three years ended March 31, 1996 (In Thousands) ALLOWANCE FOR DOUBTFUL ACCOUNTS Bal. at Beg. Charged to Bad Debts Bal. at End Year of period expense Written Off of Period ---- ----------- ------------ ----------- ------------- 1994 $175 $375 $(307) $243 1995 $243 $541 $(134) $650 1996 $650 $468 $(198) $920 -19- EX-4.2 2 EXHIBIT 4.2 EXHIBIT NUMBER 4.2 AGREEMENT RE. RIGHTS OF HOLDERS OF LONG-TERM DEBT The Company hereby agrees to furnish to the Securities and Exchange Commission, upon request, a copy of the instruments which define the rights of holders of long-term debt of the Company. None of such instruments not included as exhibits herein represents long-term debt in excess of 10% of the total assets of the Company. -20- EX-10.6 3 EXHIBIT 10.6 EXHIBIT 10.6 STANFORD TELECOMMUNICATIONS, INC. 1991 STOCK OPTION PLAN (Amended and Restated Effective February 15, 1995) TABLE OF CONTENTS Page 1. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3. Effective Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4. Administration. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (a) Committee Procedures . . . . . . . . . . . . . . . . . . . . . . 4 (b) Committee Responsibilities . . . . . . . . . . . . . . . . . . . 4 (c) Modification, Extension and Renewal of Options . . . . . . . . . 6 5. Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (a) Ten Percent Shareholders . . . . . . . . . . . . . . . . . . . . 7 (b) Stock Ownership. . . . . . . . . . . . . . . . . . . . . . . . . 7 (c) Outstanding Stock. . . . . . . . . . . . . . . . . . . . . . . . 7 6. Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 7. Terms and Conditions of Options . . . . . . . . . . . . . . . . . . . 8 (a) Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . 8 (b) Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . 8 (c) Medium and Time of Payment . . . . . . . . . . . . . . . . . . . 9 (d) Agreement To Serve . . . . . . . . . . . . . . . . . . . . . . . 10 (e) Term and Exercise of Options; Nontransferability of Options. . . 10 (f) Termination of Employment. . . . . . . . . . . . . . . . . . . . 11 (g) Rights as a Stockholder. . . . . . . . . . . . . . . . . . . . . 11 (h) Other Provisions . . . . . . . . . . . . . . . . . . . . . . . . 11 8. Term of the Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9. Adjustment of and Changes in the Shares . . . . . . . . . . . . . . . 12 10. Securities Law Requirements . . . . . . . . . . . . . . . . . . . . . 15 11. Amendment of the Plan . . . . . . . . . . . . . . . . . . . . . . . . 16 12. Deliveries of Certificates and Resale . . . . . . . . . . . . . . . . 16 13. Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 14. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 15. Execution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 -i- STANFORD TELECOMMUNICATIONS, INC. 1991 STOCK OPTION PLAN (Amended and Restated Effective February 15, 1995) 1. PURPOSE. This amended and restated Stock Option Plan of Stanford Telecommunications, Inc., a Delaware corporation (the "Corporation"), and its eligible subsidiaries, is intended to provide incentive to employees of the Corporation or of its subsidiaries, to encourage employee proprietary interest in the Corporation, to encourage employees to remain in the employ of the Corporation or of its subsidiaries and to attract and retain the best available personnel for service as directors of the Corporation. Options granted under the Plan may include both Nonstatutory Options and Incentive Stock Options. This amended and restated Plan (a) increases the number of shares subject to the Plan, (b) permits the grant of options to certain nonemployee directors, (c) adds an individual grant limitation required by Code section 162(m) for option income for certain individuals to be tax deductible by the Corporation, and (d) makes certain additional changes. 2. DEFINITIONS. (a) "Board" shall mean the Board of Directors of the Corporation. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the Common Stock of the Corporation. -1- (d) "Committee" shall mean the Committee, if any, appointed by the Board in accordance with Section 4 of the Plan. (e) "Corporation" shall mean Stanford Telecommunications, Inc., a Delaware corporation. (f) "Employee" shall mean an individual (who may be an officer or a director) employed by the Company (within the meaning of Code section 3401 and the regulations thereunder). (g) "Exercise Price" shall mean the price per Share of Common Stock, determined by the Committee, at which an option may be exercised. (h) "Fair Market Value" shall mean the value of one (1) Share of Common Stock, determined as follows: (i) If the shares are traded on an exchange, the price at which Shares traded at the close of business on the date of valuation; (ii) If the shares are traded over-the-counter on The Nasdaq Stock Market, the mean between the bid and the asked price at the close of business on the date of valuation, or, in the event the shares are traded on The Nasdaq Stock Market, the last price on the date of valuation; and (iii) If neither (i) nor (ii) applies, the Fair Market Value as determined by the Committee in good faith. Such determination shall be conclusive and binding on all persons. (i) "Incentive Stock Option" shall mean an Option described in Code section 422(b). -2- (j) "Nonstatutory Option" shall mean an employee stock option not described in sections 422(b), 423(b) or 424(b) of the Code. (k) "Option" shall mean an Incentive Stock Option or a Nonstatutory Option granted pursuant to the Plan. (l) "Purchase Price" shall mean the Exercise Price times the number of whole Shares with respect to which an Option is exercised. (m) "Optionee" shall mean an Employee or a nonemployee member of the Board who has received an Option. (n) "Plan" shall mean this stock option plan, as amended and restated herein. (o) "Share" shall mean one Share of Common Stock, adjusted in accordance with Section 9 of the Plan (if applicable). (p) "Subsidiary" shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation where each of the corporations in the unbroken chain (other than the last corporation) owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 3. EFFECTIVE DATE. This amended and restated Plan was adopted by the Board effective February 15, 1995; provided, however, that if the Plan, as hereby amended and restated, is not approved by the stockholders of the Corporation within twelve (12) months from the date of its adoption by the Board, the -3- amended and restated Plan shall terminate and all Options granted hereunder shall be cancelled. 4. ADMINISTRATION. (a) COMMITTEE PROCEDURES. The Committee shall be designated by the Board and shall have such membership composition which enables the Plan to qualify under Rule 16b-3 issued under the Securities Exchange Act of 1934 (the "Exchange Act") with regard to the grant of Options to persons who are subject to Section 16 of the Exchange Act. The Committee may hold meetings at such times and places as it shall determine. The acts of a majority of the Committee members present at meetings at which a quorum exists, or acts reduced to or approved in writing by all Committee members, shall be valid acts of the Committee. (b) COMMITTEE RESPONSIBILITIES. Subject to the provisions of the Plan, the Committee shall have full authority and discretion to take the following actions: (i) To interpret the Plan and to apply its provisions; (ii) To adopt, amend or rescind rules, procedures and forms relating to the Plan; (iii) To authorize any person to execute, on behalf of the Corporation, any instrument required to carry out the purposes of the Plan; (iv) To determine when Options are to be granted under the Plan; (v) To select the recipients of Options; -4- (vi) To determine the number of shares to be subject to each Option; (vii) To prescribe the terms and conditions of each Option, including (without limitation) the exercise price, the vesting or duration of the Option (including accelerating the vesting of the Option), to determine whether an Option is to be classified as an incentive stock option or a nonstatutory option, and to specify the provisions of the Option Agreement relating to such Option; (viii) To amend any outstanding Option, subject to applicable legal restrictions and to the consent of the Optionee who entered into such agreement; (ix) To prescribe the consideration for the grant of each Option under the Plan and to determine the sufficiency of such consideration; (x) To determine the disposition of each Option under the Plan in the event of an Employee's divorce or dissolution of marriage; (xi) To determine whether Options will be granted in replacement of other grants under an incentive or other compensation plan of an acquired business; (xii) To correct any defect, supply any omission, or reconcile any inconsistency in the Plan, or any Option; and (xiii) To take any other actions deemed necessary or advisable for the administration of the Plan. -5- Subject to the requirements of applicable law, the Committee may designate persons other than members of the Committee to carry out its responsibilities and may prescribe such conditions and limitations as it may deem appropriate, except that the Committee may not delegate its authority with regard to the selection for participation of or the granting of Options under the Plan to persons subject to Section 16 of the Exchange Act. All decisions, interpretations and other actions of the Committee shall be final and binding on all Optionees, and all persons deriving their rights from an Optionee. No member of the Committee shall be liable for any action that he or she has taken or has failed to take in good faith with respect to the Plan or any Option to acquire Shares under the Plan. (c) MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Within the limitations of the Plan, the Committee may modify, extend or renew outstanding Options or may accept the cancellation of outstanding Options (to the extent not previously exercised) in return for the grant of new Options at the same or a different price or without regard to such grants. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, impair his rights or increase his obligations under such Option. 5. ELIGIBILITY. Optionees shall be such key Employees (who may be officers, whether or not they are directors) of the Corporation or of its Subsidiaries as the Committee shall, in its complete discretion, select, but subject to the terms and conditions set forth below. Optionees may also include any -6- nonemployee member of the Board who is not a member of the Committee at the time of the grant. (a) TEN PERCENT SHAREHOLDERS. An Employee who owns more than ten percent (10%) of the total combined voting power of all classes of outstanding stock of the Corporation, its parent or any of its Subsidiaries shall not be eligible to receive an Incentive Stock Option pursuant to this Plan unless, at the time such Option is granted to him or her, the Exercise Price of the Shares subject to such Option to such Employee is at least one hundred and ten percent (110%) of the Fair Market Value of such Shares, and such Option by its terms is not exercisable after the expiration of five (5) years from the date such Option is granted. (b) STOCK OWNERSHIP. For purposes of this section, in determining stock ownership, an Employee shall be considered as owning the Shares owned, directly or indirectly, by or for his brothers and sisters, spouse, ancestors, and lineal descendants. Shares owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries. Shares with respect to which such Employee holds an option shall not be counted. (c) OUTSTANDING STOCK. For purposes of this section, "Outstanding Stock" shall include all Shares actually issued and outstanding immediately after the grant of the Incentive Stock Option to the Optionee. Outstanding Stock shall not include -7- treasury Shares or Shares authorized for issue under outstanding Options held by the optionee or by any other person. 6. STOCK. The stock subject to Options authorized to be granted under the Plan shall consist of one million (1,000,000) Shares of the Corporation's authorized but unissued or reacquired Common Stock. In the event that any outstanding Option for any reason expires or is terminated, the Shares allocable to the unexercised portion of such Option may again be subject to an Option. The limitations established by this Section 6 shall be subject to adjustment upon the occurrence of the events specified and in the manner provided in Section 9 hereof. 7. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by written agreements in such form as the Committee shall from time to time determine, which agreements shall comply with and be subject to the following terms and conditions: (a) NUMBER OF SHARES. Each Option shall state the number of Shares to which it pertains and shall provide for the adjustment thereof in accordance with the provisions of Section 9 hereof. The Stock Option Agreement shall also specify whether the option is an Incentive Stock Option or a Nonstatutory Option. Notwithstanding the foregoing, no Optionee shall be granted Options pertaining to more than two hundred thousand (200,000) Shares over the life of the Plan. (b) EXERCISE PRICE. Each Option shall state the Exercise Price. The Exercise Price under an Incentive Stock Option shall not be less than the Fair Market Value of a Share on the date of -8- grant, or, in the case of an Option granted to an optionee who is described in Section 5(a) hereof, than one hundred ten percent (110%) of the Fair Market Value of a Share on the date of grant. The Exercise Price under a Nonstatutory Option shall be not less than eighty-five percent (85%) of the Fair Market Value of a Share on the date of grant. (c) MEDIUM AND TIME OF PAYMENT. The Purchase Price shall be payable in full in United States dollars upon the exercise of the Option; provided, however, that, in its discretion, the Committee may permit the Purchase Price to be paid by one of the following the alternative methods: (i) The surrender of Shares in good form for transfer, owned for such period prescribed by the Committee by the person exercising the Option and having a Fair Market Value on the date of exercise equal to the Purchase Price; (ii) In any combination of cash and Shares, so long as the sum of the cash so paid and the Fair Market Value of the Shares so surrendered equals the Purchase Price; (iii) In whole or in part with a full recourse promissory note executed by the Optionee. No Share shall be issued until full payment therefor has been made. (iv) By delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the -9- sale proceeds to the Company in payment of the aggregate exercise price. As a condition to the exercise of an Option, the Optionee shall make such arrangements as the Committee may require for the satisfaction of any federal, state or local tax obligations that may arise in connection with such exercise. The Optionee shall also make such arrangements as the Committee may require for the satisfaction of any federal, state or local tax obligations that may arise in connection with the disposition of Shares acquired by exercising an Option. Such arrangements may include share withholding or the delivery of previously owned Shares in accordance with the Committee's rules. (d) AGREEMENT TO SERVE. Each Optionee shall agree that he or she will remain in the Corporation's or a Subsidiary's employ or service for at least one year from the date of grant. Such provision does not offset the Corporation's right to terminate an Optionee's employ or service at any time and for any reason. (e) TERM AND EXERCISE OF OPTIONS; NONTRANSFERABILITY OF OPTIONS. Each Option shall specify the date when all or any installment of the Option is to become exercisable. The Option shall also specify the term of the Option, but in no event shall the term of an ISO be greater than ten (10) years from the date of grant. Subject to the preceding two sentences, the Committee in its sole discretion shall determine when all or any installment of an Option is to become exercisable and when an Option is to expire. Except to the extent the Option agreement otherwise provides, each Option shall be transferable only by -10- will or the laws of descent and distribution and shall only be exercisable by the Optionee during his or her lifetime. (f) TERMINATION OF EMPLOYMENT. Each Option shall set forth the extent to which the Optionee shall have the right to exercise the Option following termination of employment and/or service with the Corporation or a Subsidiary, and the right to exercise the Option of any executors or administrators of the Optionee's estate or any person who has acquired such Option(s) directly from the Optionee by bequest or inheritance. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of employment and/or service. (g) RIGHTS AS A STOCKHOLDER. An Optionee or a transferee of an Optionee shall have no rights as a stockholder with respect to any Shares covered by his or her Option until the date of the issuance of a stock certificate for such Shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 9. (h) OTHER PROVISIONS. The Option agreements authorized under the Plan shall contain such other provisions not inconsistent with the terms of the Plan, including, without limitation, restrictions upon the exercise of the Option, as the Committee shall deem advisable. -11- 8. TERM OF THE PLAN. Options may be granted until the termination of the Plan on January 26, 2001. 9. ADJUSTMENT OF AND CHANGES IN THE SHARES. In the event the outstanding Shares, as presently constituted, shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation or of another corporation (whether by reason of reorganization, merger, consolidation, recapitalization, reclassification, split-up, combination of shares, or otherwise), or if the number of the outstanding Shares of the Corporation shall be increased through the payment of a stock dividend, the Committee shall substitute for or add to each Share theretofore appropriated or thereafter subject to or which may become subject to an Option, the number and kind of shares of stock or other securities into which each outstanding Share shall be so changed, or for which each Share shall be exchanged, or to which each such Share shall be entitled, as the case may be. In addition, the Committee shall make appropriate adjustment in the number and kind of shares as to which outstanding Options, or portions thereof then unexercised, shall be exercisable, so that any Optionee's proportionate interest in the Corporation by reason of his rights under unexercised portions of such Options shall be maintained as before the occurrence of such event. Such adjustment in outstanding options shall be made without change in the total price to the unexercised portion of the Option and with a corresponding adjustment in the Option price per Share. -12- Notwithstanding the foregoing, in the event of the sale, dissolution or liquidation of the Corporation, a merger or consolidation in which the Corporation is not the surviving or resulting corporation, or a merger or consolidation in which the Corporation becomes the subsidiary of another person or entity, the Committee shall have the power to cause the termination of every Option outstanding hereunder, except that the surviving, resulting or parent corporation may, in its absolute and uncontrolled discretion, tender an option or options to purchase its shares on its terms and conditions, both as to the number of shares and otherwise; provided, however, that in all events, each Optionee shall have the right, immediately prior to such sale, dissolution, liquidation, merger or consolidation, to notification thereof as soon as practicable and, thereafter, to exercise each Option with respect to which a period of at least one (1) year has elapsed from the date of grant of the Option, and purchase Shares subject thereto to the extent of any unexercised portion of such Option, regardless of any vesting provisions hereunder. This right of exercise shall be conditioned upon the execution of a final plan of dissolution or liquidation or a definitive agreement of merger or consolidation and upon the Corporation's receipt of written notice of such exercise at least five (5) days prior to such sale, dissolution, liquidation, merger or consolidation. For purposes of this paragraph, the Corporation shall be deemed to be a "subsidiary" of any person or entity that owns or controls, directly or indirectly, more than fifty percent (50%) of the outstanding shares of the Corporation. -13- In the event of an offer by any person or entity to all shareholders of the Corporation to purchase more than fifty percent (50%) of the Shares outstanding immediately prior to such offer (or shares of stock or other securities which shall be substituted for such Shares or to which such Shares shall be adjusted as provided in this Section 9), any Optionee shall have the right upon the commencement of such offer to exercise each Option with respect to which of a period at least one year has elapsed from the date of grant of the Option, and purchase Shares subject thereto to the extent of any unexercised or unvested portion of such Option, regardless of any vesting provisions hereunder. This right of exercise shall be conditioned upon the consummation of the transaction described in the preceding sentence and upon the Corporation's receipt of written notice of such exercise at least five (5) days prior to the consummation of such transaction. No right to purchase fractional Shares shall result from any adjustment in Options pursuant to this Section 9. In case of any such adjustment, the Shares subject to the Option shall be rounded down to the nearest whole Share. Notice of any adjustment shall be given by the Committee to each Optionee and such adjustment (whether or not such notice is given) shall be effective and binding for all purposes of the Plan. To the extent any adjustments required pursuant to this Section 9 relate to stock or securities of the Corporation, such adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. -14- Except as expressly provided in this Section 9, an Optionee shall have no rights by reason of any of the following events: (i) a subdivision or consolidation of shares of stock of any class; (ii) payment of any stock dividend; (iii) any other increase or decrease in the number of shares of stock of any class; or (iv) any dissolution, liquidation, merger, consolidation or spin-off of assets or stock of another corporation. Any issue by the Corporation of shares of stock of any class, or securities convertible into shares of any class, shall not affect the number or price of Shares subject to the Option, and no adjustment by reason thereof shall be made. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassifications, recapitalizations, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. 10. SECURITIES LAW REQUIREMENTS. No Shares shall be issued upon the exercise of any Option unless and until the Corporation has determined that: (i) it and the Optionee have taken all actions required to register the Shares under the Securities Act of 1933 or perfect an exemption from the registration requirements thereof; (ii) any applicable listing requirement of any stock exchange on which the Common Stock is listed has been satisfied; and (iii) any other applicable provision of state or federal law has been satisfied. -15- 11. AMENDMENT OF THE PLAN. The Board may suspend or discontinue the Plan or revise or amend it in any respect whatsoever, and any such action shall be subject to the approval of the Corporation's stockholders only to the extent required by applicable laws, regulations or rules. 12. DELIVERIES OF CERTIFICATES AND RESALE. Certificates for the Shares acquired through the exercise of an Option shall be delivered to the Optionee involved as soon as possible after such exercise and the receipt by the Corporation of payment for such Shares. Such certificates shall be subject to such legends, stop-transfer instructions, or other conditions as counsel for the Corporation may require in order to ensure the Corporation's compliance with all applicable state and federal laws. There is no assurance that an Optionee may sell the Shares acquired through the exercise of an Option until such Shares have been registered or qualified for such sale with the Securities and Exchange Commission and any appropriate state agencies. The Corporation is not obligated to so register or qualify such Shares. 13. CONSTRUCTION. As used herein, the singular shall include the plural, and vice versa, and the masculine shall include the feminine. 14. GOVERNING LAW. The interpretation and performance of the Plan shall be governed by the laws of the State of Delaware. -16- 15. EXECUTION. To record the adoption of the amended and restated Plan by the Board, the Corporation has caused its duly authorized officer to affix the corporate name and seal hereto. STANFORD TELECOMMUNICATIONS, INC. By ------------------------------------ As its --------------------------------- -17- STANFORD TELECOMMUNICATIONS, INC. 1991 STOCK OPTION PLAN INCENTIVE STOCK OPTION AGREEMENT Stanford Telecommunications, Inc., a Delaware corporation (the "Company"), hereby grants an option to purchase Shares of its common stock to the optionee named below. The terms and conditions of the option are set forth in this cover sheet, in the attachment and in the Company's 1991 Stock Option Plan (the "Plan"). Date of Option Grant: __________ __, 199_ Name of Optionee: __________________________________________________________ Optionee's Social Security Number: ____-___-____ Number of Shares of Common Stock Covered by Option: __________ Exercise Price per Share: $____.___ (must be at least 100% of Fair Market Value on the Date of Option Grant) Vesting Start Date: __________ __, 199_ BY SIGNING THIS COVER SHEET, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THE ATTACHED AGREEMENT AND IN THE PLAN, A COPY OF WHICH IS ALSO ENCLOSED. Optionee: ________________________________________________________________ (Signature) Company: ________________________________________________________________ (Signature) Title: ___________________________________ Attachment -1- STANFORD TELECOMMUNICATIONS, INC. 1991 STOCK OPTION PLAN INCENTIVE STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION This option is intended to be an incentive stock option under section 422 of the Internal Revenue Code and will be interpreted accordingly. VESTING Your right to exercise this option vests as to 25% of the shares covered by this option on each one-year anniversary of the Vesting Start Date, as shown on the cover sheet. The number of Shares which may be purchased under this option by you at the Purchase Price shall be equal to the difference between (i) the product of the number of one-year anniversaries of your continuous employment with the Company (including all days of any approved leaves of absence) from the Vesting Starting Date times the number of Shares covered by this option times .25 minus (ii) the number of Shares purchased pursuant to this Option prior to such exercise. The resulting number of Shares will be rounded to the nearest whole number. No additional Shares will vest after your Company service has terminated for any reason. TERM Your option will expire in any event at the close of business at Company headquarters on the day before the 10th anniversary of the Date of Grant, as shown on the cover sheet. (It will expire earlier if your Company service terminates, as described below.) REGULAR TERMINATION If your service as an employee of the Company (or any subsidiary) terminates for any reason except death or Disability, then your option will expire at the close of business at Company headquarters on the 90th day after your termination date. DEATH If you die as an employee of the Company (or any subsidiary), then your option will expire at the close of business at Company headquarters on the date _____ months after the date of death. During that period, your estate or heirs may exercise the vested portion of your option. DISABILITY If your service as an employee of the Company (or any subsidiary) terminates because of your disability, then your option will expire at the close of business at Company headquarters on the date 12 months after your termination date. "Disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than twelve months. -2- LEAVES OF ABSENCE For purposes of this option, your service does not terminate when you go on a BONA FIDE leave of absence that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. However, for purposes of this Option qualifying as an incentive stock option, your service will be treated as terminating 90 days after you went on leave, unless your right to return to active work is guaranteed by law or by a contract. Your service terminates in any event when the approved leave ends unless you immediately return to active work. The Company determines which leaves count for this purpose, and when your service terminates for all purposes under the Plan. RESTRICTIONS ON EXERCISE The Company will not permit you to exercise this option if the issuance of Shares at that time would violate any law or regulation. NOTICE OF EXERCISE When you wish to exercise this option, you must notify the Company by filing the proper "Notice of Exercise" form at the address given on the form. Your notice must specify how many Shares you wish to purchase. Your notice must also specify how your Shares should be registered (in your name only or in your and your spouse's names as community property or as joint tenants with right of survivorship). The notice will be effective when it is received by the Company. If someone else wants to exercise this option after your death, that person must prove to the Company's satisfaction that he or she is entitled to do so. FORM OF PAYMENT When you submit your notice of exercise, you must include payment of the option price for the Shares you are purchasing. Payment may be made in one (or a combination) of the following forms: - Your personal check, a cashier's check or a money order. - Common Shares which have already been owned by you for more than _________ months and which are surrendered to the Company. The value of the Shares, determined as of the effective date of the option exercise, will be applied to the option price. - By delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price. -3- WITHHOLDING TAXES You will not be allowed to exercise this option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the option exercise or sale of the option shares. RESTRICTIONS ON RESALE By signing this Agreement, you agree not to sell any option Shares at a time when applicable laws, regulations or Company or underwriter trading policies prohibit a sale. TRANSFER OF OPTION Prior to your death, only you may exercise this option. You cannot transfer or assign this option. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid. You may, however, dispose of this option in your will or by beneficiary designation. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your spouse, nor is the Company obligated to recognize your spouse's interest in your option in any other way. RETENTION RIGHTS Your option or this Agreement do not give you the right to be retained by the Company (or any subsidiaries) in any capacity. The Company (and any subsidiaries) reserve the right to terminate your service at any time and for any reason. SHAREHOLDER RIGHTS You, or your estate or heirs, have no rights as a shareholder of the Company until a certificate for your option Shares has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued, except as described in the Plan. ADJUSTMENTS In the event of a stock split, a stock dividend or a similar change in the Company stock, the number of Shares covered by this option and the exercise price per share may be adjusted pursuant to the Plan. Your option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity. APPLICABLE LAW This Agreement will be interpreted and enforced under the laws of the State of Delaware. THE PLAN AND The text of the Plan is incorporated in this OTHER Agreement by reference. Certain capitalized terms AGREEMENTS used in this Agreement are defined in the Plan. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. -4- EX-10.7 4 EXHIBIT 10.7 EXHIBIT 10.7 STANFORD TELECOMMUNICATIONS, INC. MANAGEMENT INCENTIVE PLAN ___________________________________ PURPOSE: This Management Incentive Plan (the "Plan") has been adopted by the Board of Directors of Stanford Telecommunications, Inc. (the "Company") to provide motivation for superior Company and individual performance though the payment of incentive compensation to key management employees who by their ability, ingenuity and industry have a measurable impact on the success of the Company. This Plan provides incentive to eligible employees to promote the success of the Company through their contributions and performance, with the following intent: 1. Achieving profit, cash flow, revenue and bookings objectives. 2. Stimulating attitudes that will result in increased interorganizational cooperation. 3. Generating products and systems that advance the Company's strategic goals. 4. Stimulating attitudes which will result in more effective discharge of assigned responsibilities. Individual compensation awards are based on both overall Company performance as well as individual performance. RESPONSIBILITIES: A. The Board of Directors shall: 1. Establish performance objectives for the Company at the beginning of the Fiscal Year and evaluate the quality of performance at year end to determine the Company's rating. 2. Recommend the annual incentive dollar pool based on performance against Company objectives to the Compensation Committee of the Board of Directors for authorization to pay the incentive compensation. B. The Company will form a Management Incentive Plan Committee to determine those eligible for participation, their tier level and approval of individual performance ratings. The committee shall be appointed by the President. C. No participant shall have any right to require the Board of Directors to make any appropriation to the Plan for any fiscal year, nor shall any participant have any vested interest in any amounts which may be appropriated to the Plan. ELIGIBILITY FOR PARTICIPATION: A. An employee shall be considered eligible for Management Incentive Plan participation only if he/she is selected by the Management Incentive Plan Committee. Selection of employees is to be made annually and no employee shall be eligible for Plan participation merely by having participated in the Plan in any prior year. Employees shall be selected to participate if by execution of the employee's duties and responsibilities, he/she can make a significant and demonstrable effect on the success of the Company measured in terms of efficiency, profitability and future growth. -1- B. In order to receive an award for the Fiscal Year Performance, the employee must be approved as a participant at the beginning of the year or if approved after the beginning of the fiscal year, the participant's incentive award will be determined by multiplying the participant's salary compensation earned while the employee was an approved participant in the Plan by the Company's percentage rating times the participant's tier level performance rating. C. For employees who have been employed by the Company for a minimum of ten (10) years and terminate during the Fiscal Year due to retirement, incentive awards will be determined at the end of the fiscal year in which the employee retired by multiplying the participant's salary compensation earned during that portion of the fiscal year worked by the Company's percentage rating times the participant's tier level performance rating, provided: 1. that the employee actually works to the date of retirement, otherwise payment will be made to the last day worked. 2. that the employee works a minimum of six (6) months during the fiscal year. 3. that the employee's rating is based on performance against objectives as provided by the Plan. D. Employees who voluntarily terminate or are discharged shall be ineligible to receive an incentive payment. ESTABLISHMENT OF OBJECTIVES: A. The Board of Directors shall approve objectives for the Company at the beginning of the Fiscal Year. The Company's objectives shall become the objectives of the President and the Chairman. B. The President shall establish measurable objectives for each business area Vice President and those objectives shall be discussed and mutually agreed upon. C. The Company's and Business area objectives will be based on two factors: 1. Specific financial objectives such as: - Pre-tax earnings - Cash flow management - Revenues - New contract bookings 2. Other objectives such as: - Long-term or short-term financial goals - Production or operating goals - Productization of technology - Human Resources goals such as management development These two factors may be weighted by the Board in determining the funding for the Company. For example, the specific financial objectives may be weighted 75% and all other objectives weighted 25%. D. As soon as practical after the President and the business area Vice President agree to the objectives, the business area Vice President and each eligible employee reporting to the business area Vice President shall also establish and agree to measurable objectives. The objectives should be established such that the expected cumulative results of eligible employee's efforts towards meeting their individual objectives will significantly contribute to the realization -2- of objectives established and agreed to by the President and business area Vice President. Collectively, the realization of objectives established and agreed to by the President and all business area Vice Presidents should meet or exceed those objectives established for the Company and the President by the Board of Directors. INDIVIDUAL RATING: A. The measurable and mutually agreed upon objectives for each participant in this Plan should be listed in the appropriate column of the Individual-Performance Rating Sheet and approved as indicated. At the end of the Fiscal Year, the participant's performance and accomplishments toward these objectives will be determined, recorded and approved on the Rating Sheet and will be the basis for the individual's rating. The participant's performance rating will be based on the following guidelines: Top Contributor: On balance far exceeded high performance expectations Superior Contributor: Exceeded or achieved all objectives, or on balance exceeded or met high performance expectations Very Good Contributor: Met the most significant objectives but may have fallen short of meeting all objectives. Overall very good performance. Satisfactory Contributor: Met some objectives, but overall performance not as high as possible or expected. Non-Qualifying Contributor: Did not achieve sufficient overall performance. COMPANY RATING AND BONUS POOL: At the close of the fiscal year, the Board of Directors will determine Company level funding for the Plan by evaluating the quality of performance in accomplishing established Company objectives based upon the following rating scale: 101% - 125% On balance far exceeded high performance expectations. 100% Achieved all objectives or on balance met high performance expectations. 75% - 99% Met most objectives. Overall performance was good, but not as high as possible or expected. 51% - 74% Met some objectives, but overall performance not as good as possible or expected. 0% Did not achieve sufficient overall performance level. The Bonus Pool dollar amount will be equal to the cumulative total of each participants salary times the percentage factor indicated below for Very Good Contributor in his assigned tier times the percentage determined by the Board of Directors for the Company's rating. -3- CALCULATION OF INDIVIDUAL MANAGERS INCENTIVE PAYMENT: A. Participants will be placed in a tier level based on the level of importance and responsibility of their position in the Company. Tier level assignments will be recommended to the President by the Incentive Plan Committee and approved by the Compensation Committee of the Board of Directors in accordance with the following Tier guidelines: Tier 1: Company Salary Grade 17E Tier 2: Company Salary Grade 16E and 15E Tier 3: Company Salary Grade 15E Tier 4: Company Salary Grade 14E and 13E Tier 5: Company Salary Grade 13E and Less than 13E Salary grades do not ensure participation in the Plan. B. The participant's incentive award will be determined by multiplying the Company's percentage rating times the percentage factor for the participant's tier level performance rating times the participant's fiscal year salary compensation. The applicable percentage factor for the participant's tier level and performance rating will be determined by the following table: Level of Performance Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 - -------------------- ------ ------ ------ ------ ------ Top Contributor 40% 35% 30% 25% 20.0% Superior Contributor 30% 25% 20% 15% 12.5% Very Good Contributor 25% 20% 15% 10% 7.5% Satisfactory Contributor 15% 15% 10% 5% 5.0% Non-Qualifying Contributor 0% 0% 0% 0% 0% The target award for each tier level is at the performance level for a Very Good Contributor. Example: - ---------- - During the fiscal year under evaluation, the Company received a rating of 92% by the Board of Directors. - During the fiscal year under evaluation, a Tier 3 employee earned a Very Good Contributor performance rating (equal to 15%). - The employee's fiscal year salary compensation totaled $120,000. The employee's incentive compensation earned under the term of this plan is computed as follows: Company Rating (CR) x Individual Rating (IR) x Fiscal Year Salary Compensation (SC) = Incentive Earned (IE). CR x IR x SC = IE .92 x .15 x $120,000 = $16,560 D. Payment of individual awards will be made within 60 days after the end of each fiscal year. -4- EFFECTIVE DATE: This Plan shall be effective with the Company's fiscal year 1996 and shall continue in effect until amended or terminated by the Company's Board of Directors. This Plan supersedes and replaces all management level cash incentive or bonus compensation programs. The Board of Directors shall have the right to amend, modify or terminate this Plan at any time. RIGHTS AS AN EMPLOYEE: Nothing in this Plan shall be construed to give any person the right to remain in the employ of the Company or to affect the right of the Company to terminate the employment of any person at any time with or without cause. COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS AUTHORITY: The Compensation Committee of the Board of Directors shall have full authority to interpret and administer this Plan and decide all questions and settle all disputes which may arise. All interpretations, decisions and determinations made by the Compensation Committee of the Board of Directors shall be final and binding on all persons concerned. -5- EX-10.8 5 EXHIBIT 10.8 EXHIBIT 10.8 AMENDED AND RESTATED CREDIT AGREEMENT (MULTICURRENCY) DATED AS OF DECEMBER 20, 1995 BETWEEN STANFORD TELECOMMUNICATIONS, INC., AND BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION TABLE OF CONTENTS Section Page ARTICLE I Definitions and Financial Requirements . . . . . . . . . . 1 1.01 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.02 Financial Requirements . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE II The Credit Facilities. . . . . . . . . . . . 7 2.01 The Revolving Facility . . . . . . . . . . . . . . . . . . . . . . . 7 2.02 Advances Under the Revolving Facility. . . . . . . . . . . . . . . . 8 2.03 Acceptances under the Revolving Facility . . . . . . . . . . . . . . 8 2.04 Commercial Letters of Credit under the Revolving Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.05 Standby Letters of Credit Under the Revolving Facility . . . . . . . 11 2.06 Local Currency Advances. . . . . . . . . . . . . . . . . . . . . . . 12 2.07 Bank Guaranties. . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.08 Mandatory Payment. . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.09 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.10 Default Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.11 Early Termination of Commitment. . . . . . . . . . . . . . . . . . . 14 ARTICLE III Extensions of Credit, Payments and Interest Calculations . . . 15 3.01 Requests for Credit. . . . . . . . . . . . . . . . . . . . . . . . . 15 3.02 Disbursements and Payments . . . . . . . . . . . . . . . . . . . . . 15 3.03 Branch Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.04 Evidence of Indebtedness . . . . . . . . . . . . . . . . . . . . . . 15 3.05 Interest Calculation . . . . . . . . . . . . . . . . . . . . . . . . 15 3.06 Late Payments; Compounding . . . . . . . . . . . . . . . . . . . . . 15 3.07 Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.08 Taxes and Other Charges. . . . . . . . . . . . . . . . . . . . . . . 16 3.09 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.10 Increased Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.11 Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.12 Inability to Determine Rates . . . . . . . . . . . . . . . . . . . . 18 3.13 Certificate of the Bank. . . . . . . . . . . . . . . . . . . . . . . 18 3.14 Debits to Borrower's Account . . . . . . . . . . . . . . . . . . . . 18 3.15 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE IV Conditions to Availability of Credit. . . . . . . . . . . . . 19 4.01 Conditions to First Extension of Credit. . . . . . . . . . . . . . . 19 4.02 Conditions to Each Extension of Credit . . . . . . . . . . . . . . . 20 i ARTICLE V Representations and Warranties . . . . . . . . . . . . . . . 20 5.01 Corporate Existence and Power. . . . . . . . . . . . . . . . . . . . 20 5.02 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.03 Enforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.04 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . 21 5.05 Permits, Franchises. . . . . . . . . . . . . . . . . . . . . . . . . 21 5.06 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.07 No Event of Default. . . . . . . . . . . . . . . . . . . . . . . . . 21 5.08 Other Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.09 Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.10 Information Submitted. . . . . . . . . . . . . . . . . . . . . . . . 22 5.11 No Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . 22 5.12 ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.13 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . 22 5.14 Swap Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE VI Affirmative Covenants. . . . . . . . . . . . . . . . . . 23 6.01 Notices of Certain Events. . . . . . . . . . . . . . . . . . . . . . 23 6.02 Financial and Other Information. . . . . . . . . . . . . . . . . . . 24 6.03 Books, Records, Audits and Inspections . . . . . . . . . . . . . . . 24 6.04 Use of Facility. . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.05 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.06 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . 25 6.07 Change in Name, Structure or Location. . . . . . . . . . . . . . . . 25 6.08 Existence and Properties . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE VII Negative Covenants. . . . . . . . . . . . . 26 7.01 Other Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 26 7.02 Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 7.03 Capital Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.04 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.05 Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.06 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.07 Liquidations and Mergers . . . . . . . . . . . . . . . . . . . . . . 28 7.08 Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.09 Business Activities. . . . . . . . . . . . . . . . . . . . . . . . . 28 7.10 Regulations G, T, U, and X . . . . . . . . . . . . . . . . . . . . . 28 7.11 Use of Proceeds - Ineligible Securities. . . . . . . . . . . . . . . 28 7.12 Compliance with ERISA. . . . . . . . . . . . . . . . . . . . . . . . 29 7.13 Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.14 Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.15 Quick Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.16 Profitability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 -ii- ARTICLE VIII Events of Default. . . . . . . . . . . . . 30 8.01 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . 30 (a) Failure to Pay. . . . . . . . . . . . . . . . . . . . . . . . . 30 (b) Breach of Representation or Warranty. . . . . . . . . . . . . . 30 (c) Specific Defaults . . . . . . . . . . . . . . . . . . . . . . . 30 (d) Other Defaults. . . . . . . . . . . . . . . . . . . . . . . . . 30 (e) Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 (f) Failure to Pay Debts; Voluntary Bankruptcy. . . . . . . . . . . 30 (g) Involuntary Bankruptcy. . . . . . . . . . . . . . . . . . . . . 31 (h) Default of Other Financial Obligations. . . . . . . . . . . . . 31 (i) Default under other Credit Documents. . . . . . . . . . . . . . 31 (j) Default of Other Bank Obligations . . . . . . . . . . . . . . . 31 (k) Material Adverse Effect . . . . . . . . . . . . . . . . . . . . 31 (l) ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 8.02 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ARTICLE IX Miscellaneous. . . . . . . . . . . . . . 33 9.01 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . 33 9.02 Consents and Waivers . . . . . . . . . . . . . . . . . . . . . . . . 33 9.03 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.04 Costs and Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . 33 9.05 Integration; Amendment; Effect of Amendment and Restatement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.06 Borrower's Documents . . . . . . . . . . . . . . . . . . . . . . . . 34 9.07 Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.08 General Indemnification. . . . . . . . . . . . . . . . . . . . . . . 34 9.09 Arbitration; Reference Proceeding. . . . . . . . . . . . . . . . . . 35 9.10 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.11 Headings; Interpretation . . . . . . . . . . . . . . . . . . . . . . 36 9.12 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 9.13 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Exhibit A Form of Compliance Certificate -iii- AMENDED AND RESTATED CREDIT AGREEMENT (MULTICURRENCY) THIS AMENDED AND RESTATED CREDIT AGREEMENT (MULTICURRENCY) (this "AGREEMENT") is entered into as of December 20, 1995, between STANFORD TELECOMMUNICATIONS, INC., a Delaware corporation (the "BORROWER"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "BANK"). WHEREAS, the Borrower and the Bank are parties to a Credit Agreement (Including Overdraft Facility) dated as of July 31, 1993, as amended by a First Amendment to Credit Agreement dated September 19, 1994, by a Second Amendment to Credit Agreement dated September 11, 1995, and by a Third Amendment to Credit Agreement dated as of November 29, 1995, effective as of November 30, 1995 (as so amended, the "Existing Credit Agreement"), pursuant to which the Bank has extended certain credit facilities to the Borrower. WHEREAS, the Borrower and the Bank have agreed to amend, restate and replace the Existing Credit Agreement in its entirety in this Agreement, which completely amends, restates and replaces the Existing Credit Agreement, all upon the terms and provisions and subject to the conditions hereinafter set forth; NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein, the Borrower and the Bank agree as follows: ARTICLE I DEFINITIONS AND FINANCIAL REQUIREMENTS 1.01 DEFINITIONS. The following terms (including plural and singular versions thereof) have the meanings indicated: "ADVANCE": an advance hereunder. "AVAILABILITY PERIOD": the period commencing on the date of this Agreement and ending on the date that is the earlier to occur of (a) December 19, 1996, and (b) the date on which the Bank's commitment to extend credit hereunder terminates. "BANK GUARANTY": a guaranty issued hereunder by an Offshore Credit Provider for the Borrower's account. -1- "BANK GUARANTY OUTSTANDING AMOUNT": at any time, the amount or Equivalent Amount guaranteed pursuant to any Bank Guaranty but not disbursed thereunder at such time, plus all amounts paid under any Bank Guaranty by an Offshore Credit Provider which have not yet been reimbursed, plus any other obligation or liability of the Borrower to any Offshore Credit Provider with respect to any Bank Guaranty. "BUSINESS DAY": any day other than a Saturday, a Sunday, or other day on which commercial banks in San Francisco, California, are authorized or required by law to close and, if the applicable Business Day relates to any Offshore Rate Advance, means such a day on which dealings are carried on in the applicable offshore interbank market. "CLOSING DATE": the date on which all conditions to the initial extension of credit hereunder are satisfied. "CODE": the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder as from time to time in effect. "CREDIT DOCUMENTS": collectively, this Agreement and each other agreement, documents and instrument now or hereafter delivered to the Bank (including any Offshore Credit Provider) in connection with the credits established herein and the transactions contemplated hereby. "CREDIT LIMIT": the amount of $15,000,000 or the Equivalent Amount thereof. "DEFAULT": any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "DOLLARS", "DOLLARS" and "$": each, lawful money of the United States. "DOLLAR ADVANCES": specified in subsection 2.01(b). "ENVIRONMENTAL LAWS": any foreign, federal, state, local, or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any governmental authority, any and all requirements of law and any and all common law requirements, rules, and bases of liability regulating, relating to, or imposing liability or standards of conduct concerning pollution or protection of human health or the environment, as now or may at any time hereafter may be in effect. -2- "EQUIVALENT AMOUNT": (a) whenever this Agreement requires or permits a determination on any date of the equivalent in dollars of an amount expressed in a currency other than dollars, the equivalent amount in dollars of any amount expressed in a currency other than dollars as determined by the Bank on such date on the basis of the Spot Rate for the purchase of dollars with such other currency on the relevant date; or (b) whenever this Agreement requires or permits a determination on any date of the equivalent in a currency other than dollars of an amount expressed in dollars, the equivalent amount in a currency other than dollars of an amount expressed in dollars as determined by the Bank on such date on the basis of the Spot Rate for the purchase of such other currency with dollars on the relevant date. "ERISA": the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder as from time to time in effect. "ERISA AFFILIATE": any trade or business (whether or not incorporated) under common control with the Borrower within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA EVENT": (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Borrower or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Borrower or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Borrower or any ERISA Affiliate. "EVENT OF DEFAULT": any event listed in Article VIII of this Agreement. "FDIC": the Federal Deposit Insurance Corporation, or any entity succeeding to any of its principal functions. -3- "FINAL MATURITY DATE": (a) in respect of any Advances, December 19, 1996; (b) in respect of any commercial letters of credit, June 19, 1997; (c) in respect of any standby letters of credit, December 19, 1997; (d) in respect of any Bank Guaranties, December 19, 1997; and (e) in respect of any acceptances, June 19, 1997. "FRB": the Board of Governors of the Federal Reserve System, or any entity succeeding to any of its principal functions. "HAZARDOUS SUBSTANCE": any hazardous or toxic substance, material, or waste, defined, listed, classified, or regulated as such in or under any Environmental Laws, including asbestos, petroleum, or petroleum products (including gasoline, crude oil, or any fraction thereof), polychlorinated biphenyls, and urea-formaldehyde insulation. "IRS": the Internal Revenue Service or any entity succeeding to any of its principal functions under the Code. "L/C OUTSTANDING AMOUNT": at any time, the undrawn amount or Equivalent Amount at such time of any letter of credit issued hereunder, plus the amount of all drafts or drawings paid or accepted by the Bank or an Offshore Credit Provider which have not yet been reimbursed to the Bank or such Offshore Credit Provider, plus any other obligation or liability of the Borrower to the Bank or an Offshore Credit Provider with respect to any letter of credit issued under this Agreement. "LOCAL CURRENCY": specified in subsection 2.01(b). "LOCAL CURRENCY ADVANCE": specified in subsection 2.01(b). "MATERIAL ADVERSE EFFECT": (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) or prospects of the Borrower or the Borrower and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Borrower to perform under any Credit Document; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability of any Credit Document. "MULTIEMPLOYER PLAN": a "multiemployer plan" (within the meaning of Section 4001(a)(3) of ERISA) and to which the Borrower or any ERISA Affiliate makes, is making, or is obligated to make contributions or has made, or been obligated to make, contributions. "OFFSHORE CREDIT PROVIDER": a foreign office, foreign branch or foreign affiliate of the Bank, acceptable to the Bank. -4- "OFFSHORE RATE": for each Offshore Rate Interest Period, the rate of interest (rounded upward to the next 1/16th of 1%) determined pursuant to the following formula: Offshore Rate = Offered Rate ------------------------------------------ 1.00 - Eurodollar Reserve Percentage Where: "OFFERED RATE" means the rate of interest at which deposits in the applicable currency in the approximate amount of the Offshore Rate Advance to be made and having a maturity comparable to such Offshore Rate Interest Period would be offered by the Bank's London Branch (or such other office as may be designated for such purpose by the Bank) to major banks in the London interbank market upon request of such banks at approximately 11:00 a.m. (London, England time) two Business Days prior to the first day of such Offshore Rate Interest Period. "EURODOLLAR RESERVE PERCENTAGE" means, for any Offshore Rate Interest Period, the maximum reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on the first day of such Offshore Rate Interest Period (whether or not applicable to the Bank) under regulations issued from time to time by the FRB for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities") having a term comparable to such Offshore Rate Interest Period. "OFFSHORE RATE ADVANCE": an Advance for which interest is based on the Offshore Rate. "OFFSHORE RATE INTEREST PERIOD": for each Offshore Rate Advance the period commencing on the date the Offshore Rate Advance begins to bear interest at a rate based on the Offshore Rate and ending one, two, three, or six months thereafter, as requested by the Borrower; provided, however, that the last day of each Offshore Rate Interest Period shall be determined in accordance with the practices of the applicable offshore interbank markets as from time to time in effect, and provided further that no such interest period shall extend beyond the Final Maturity Date. "PBGC": the Pension Benefit Guaranty Corporation or any entity succeeding to any of its principal functions under ERISA. -5- "PENSION PLAN": a pension plan, as defined in Section 3(2) of ERISA, subject to Title IV of ERISA, which the Borrower or any ERISA Affiliate sponsors or maintains, or to which the Borrower or any ERISA Affiliate makes, is making, or is obligated to make contributions, or in the case of a multiple employer plan, as described in Section 4064(a) of ERISA, has made contributions at any time during the immediately preceding five plan years; but excluding in all cases any Multiemployer Plan. "PERMITTED SWAP OBLIGATIONS": all obligations (contingent or otherwise) of the Borrower or any Subsidiary existing or arising under Swap Contracts, provided that each of the following criteria is satisfied: (a) such obligations are (or were) entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with liabilities, commitments or assets held by such Person, or changes in the value of securities issued by such Person in conjunction with a securities repurchase program not otherwise prohibited hereunder, and not for purposes of speculation or taking a "market view;" and (b) such Swap Contracts do not contain (i) any provision ("walk-away" provision) exonerating the non-defaulting party from its obligation to make payments on outstanding transactions to the defaulting party or (ii) any provision creating or permitting the declaration of an event of default, termination event or similar event upon the occurrence of an Event of Default hereunder (other than an Event of Default under subsection 8.01.(a)). "PLAN": an employee benefit plan (as defined in Section 3(3) of ERISA) which the Borrower or any ERISA Affiliate sponsors or maintains or to which the Borrower or any ERISA Affiliate makes or is obligated to make contributions; and includes any Pension Plan or Multiemployer Plan. "REFERENCE RATE": for any day, the rate of interest in effect for such day as publicly announced from time to time by the Bank in San Francisco, California, as its "reference rate." It is a rate set by the Bank based upon various factors including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in the reference rate announced by the Bank shall take effect at the opening of business on the day specified in the public announcement of such change. "REFERENCE RATE ADVANCE": an Advance that bears interest based on the Reference Rate. "REPORTABLE EVENT": any of the events set forth in Section 4043(c) of ERISA or the regulations promulgated thereunder, other -6- than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC. "REVOLVING FACILITY": the line of credit described in Section 2.01. "SPOT RATE": for a currency, the rate quoted by the Bank as the spot rate for the purchase by the Bank of such currency with another currency through its Foreign Exchange Trading Center #5193, San Francisco, California, or such other of the Bank's offices as it may designate from time to time, at approximately 8:00 a.m. (San Francisco time) on the date two Business Days prior to the date as of which the foreign exchange computation is made. "SUBSIDIARY": of the Borrower, any corporation, association, partnership, joint venture, or other business entity of which more than 50% of the voting stock or other equity interests (in the case of entities other than corporations), is owned or controlled directly or indirectly by the Borrower or one or more Subsidiaries of the Borrower or a combination thereof. "SWAP CONTRACT": any agreement, whether or not in writing, relating to any transaction that is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap or option, bond, note or bill option, interest rate option, forward foreign exchange transaction, cap, collar or floor transaction, currency swap, cross-currency rate swap, swaption, currency option or any other, similar transaction (including any option to enter into any of the foregoing) or any combination of the foregoing, and, unless the context otherwise clearly requires, any master agreement relating to or governing any or all of the foregoing. "UNFUNDED PENSION LIABILITY": the excess of a Pension Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. 1.02 FINANCIAL REQUIREMENTS. Unless otherwise specified in this Agreement, all accounting terms used in this Agreement shall be interpreted, all financial computations required under this Agreement shall be made, and all financial information required under this Agreement shall be prepared, in accordance with generally accepted accounting principles in effect from time to time in the United States, consistently applied. -7- ARTICLE II THE CREDIT FACILITIES 2.01 THE REVOLVING FACILITY. (a) From time to time during the Availability Period, subject to the terms and provisions hereof, the Bank, on a revolving basis, will (i) make Advances to the Borrower, (ii) create and discount acceptances for the Borrower's account, and (iii) create and issue commercial and standby letters of credit for the Borrower's account. (b) Advances hereunder may be made in (i) dollars ("DOLLAR ADVANCES"), or (ii) in a lawful currency other than dollars which is available at a branch or affiliate of the Bank located in a country other than the United States and is the legal tender of that country where the branch or affiliate is located (a "LOCAL CURRENCY") ("LOCAL CURRENCY ADVANCES"). (c) The aggregate of (i) all Dollar Advances, (ii) the Equivalent Amount of all Local Currency Advances, (iii) the face amount of all acceptances (whether or not discounted), (iv) the Bank Guaranty Outstanding Amount of all Bank Guaranties and (v) the L/C Outstanding Amount of all letters of credit may not exceed at any one time the Credit Limit. 2.02 ADVANCES UNDER THE REVOLVING FACILITY. (a) Subject to the other provisions of this Section, Dollar Advances under the Revolving Facility shall bear interest at a rate per annum equal to the Reference Rate. The Borrower shall pay interest monthly, on the last day of each month until the Final Maturity Date, on which date all accrued and unpaid interest shall be due and payable. The Borrower shall repay the principal amount of each Reference Rate Advance on the date such advance is converted into an Offshore Rate Advance under subsection (b) below, and on the Final Maturity Date. (b) In lieu of the interest rate described above, the Borrower may elect during the Availability Period to have all or portions of Advances under the Revolving Facility be in dollars and bear interest at the Offshore Rate plus 1.00% per annum during an Offshore Rate Interest Period, subject to the following requirements: (i) Each Offshore Rate Advance shall be for an amount not less than $1,000,000. (ii) The Borrower shall pay interest on each Offshore Rate Advance on the last day of the Offshore Rate Interest Period for such Advance; PROVIDED, HOWEVER, that if any Interest Period for a Offshore Rate Advance exceeds one -8- month, interest shall also be payable on the date which falls one month after the beginning of such Interest Period and on each date which falls one month after any such interest payment date. The Borrower shall repay the principal balance of each Offshore Rate Advance on the last day of the Offshore Rate Interest Period for such Advance, and (if sooner occurring) on the Final Maturity Date. (iii) Any payment of an Offshore Rate Advance prior to the last day of the Offshore Rate Interest Period for such Advance, whether voluntary, by reason of acceleration or otherwise, including any mandatory payments required under this Agreement and applied by the Bank to an Offshore Rate Advance, shall be accompanied by the amount of accrued interest on the amount repaid and by the amount (if any) required by Section 3.11. 2.03 ACCEPTANCES UNDER THE REVOLVING FACILITY. (a) Each acceptance shall be in an amount not less than $250,000 and shall be denominated in dollars. (b) The creation and discount of acceptances shall be pursuant to the terms and conditions hereof and of a Bank standard form agreement for acceptances executed by the Borrower. (c) Each draft related to an acceptance hereunder shall: (i) mature no earlier than 14 and no later than 180 days after the date of such draft but in no event later than the Final Maturity Date; and (ii) be otherwise in form and substance satisfactory to the Bank. (d) The discount and commission for each draft shall be at Bank's "all-in-rate" for acceptances which the Bank advises the Borrower is applicable to acceptances on the date of acceptance and discount plus 1.00%. (e) The Borrower shall pay to the Bank the face amount of each acceptance created hereunder on the maturity date of the draft related to such acceptance. Any sum owed to the Bank with respect to an acceptance created and discounted for the Borrower's account which is not paid when due shall, at the option of the Bank in each instance, be deemed to be an Advance to the Borrower outstanding under the Revolving Facility and shall thereafter bear interest at the Reference Rate. Sums owed to the Bank with respect to an acceptance created and discounted for the Borrower's account, if not paid when due or deemed to be an Advance as provided for in the immediately preceding sentence, shall bear interest, payable on demand, from the date of such drawing or payment, at the per annum rate of the Reference Rate plus 3%. -9- (f) At the expiration of the Availability Period, the Borrower shall provide cash collateral in the amount of any acceptances outstanding under this Agreement (whether or not discounted), and, in addition to any other rights or remedies which Bank may have under this Agreement or otherwise, upon the occurrence of an Event of Default, the Bank may require the Borrower to immediately prepay the amount of any acceptances outstanding under this Agreement (whether or not discounted). (g) The Bank shall have no obligation to issue an acceptance hereunder if the requested acceptance is not in compliance with applicable regulations of the FRB governing bankers' acceptances or is ineligible for discount by Federal Reserve Banks. In the event that any regulatory development or other circumstance relating to the creation of acceptances hereunder or their eligibility for discount shall at any time in the reasonable opinion of the Bank make it unlawful or impracticable for the Bank to create acceptances hereunder or to discount them, no acceptances shall be created hereunder thereafter until and unless the Bank determines that such creation would be lawful and practicable. In the event that any acceptance hereunder is created and is not eligible for discount by Federal Reserve Banks, the Borrower shall indemnify the Bank for all costs and expenses resulting from such determination (including costs under Regulation D of the FRB). 2.04 COMMERCIAL LETTERS OF CREDIT UNDER THE REVOLVING FACILITY. (a) Each commercial letter of credit shall be denominated in dollars or, if agreed to by the Bank in its sole discretion, a Local Currency, and issued pursuant to the terms and conditions hereof and of a Bank standard form Application and Security Agreement for Commercial Letter of Credit (or such other forms and agreements as the Bank or the applicable Offshore Credit Provider may require) executed by the Borrower. (b) Each commercial letter of credit shall: (i) expire on or before 180 days after the date such letter of credit is issued, but in no event later than the Final Maturity Date; (ii) require drafts payable in dollars or, if applicable, the Local Currency, at sight or up to 180 days after sight, but in no event later than the Final Maturity Date; and (iii) be otherwise in form and substance and in favor of beneficiaries and for purposes satisfactory to the Bank and any applicable Offshore Credit Provider. (c) The Borrower shall pay to the Bank and, if applicable, the Offshore Credit Provider, issuance fees, -10- negotiation fees, and other fees at the times and in the amounts the Bank advises the Borrower from time to time as being applicable to the Borrower's commercial letters of credit. (d) Each draft paid by the Bank or an Offshore Credit Provider under a commercial letter of credit issued hereunder shall be reimbursed by the Borrower in the applicable currency to the Bank or the applicable Offshore Credit Provider on the date such draft is paid by the Bank or such Offshore Credit Provider. Any sum owed to the Bank or an Offshore Credit Provider with respect to a commercial letter of credit issued for the Borrower's account which is not paid when due shall, at the option of the Bank in each instance, be deemed to be an Advance to the Borrower outstanding under the Revolving Facility and shall thereafter bear interest at the Reference Rate. Reimbursement obligations in respect of drawings, if not paid when due or deemed to be an Advance as provided for in the immediately preceding sentence, shall bear interest, payable on demand, from the date of such drawing or payment, at the per annum rate of the Reference Rate plus 3% or, in the case of a commercial letter of credit denominated in a Local Currency, at such rate as agreed to by the parties at the time of issuance thereof. (e) At the expiration of the Availability Period, the Borrower shall provide cash collateral in the amount of the L/C Outstanding Amount of any commercial letters of credit outstanding under this Agreement, and, in addition to any other rights or remedies which the Bank may have under this Agreement or otherwise, upon the occurrence of an Event of Default, the Bank may require the Borrower to provide cash collateral in the amount of the L/C Outstanding Amount of any commercial letters of credit outstanding under this Agreement. 2.05 STANDBY LETTERS OF CREDIT UNDER THE REVOLVING FACILITY. (a) Each standby letter of credit shall be denominated in dollars or, if agreed to by the Bank in its sole discretion, a Local Currency, and issued pursuant to the terms and conditions hereof and of a Bank standard form Application and Agreement for Standby Letter of Credit (or such other forms and agreements as the Bank or the applicable Offshore Credit Provider may require) executed by the Borrower. (b) Each standby letter of credit shall: (i) expire on or before one year after the date such letter of credit is issued, but in no event later than the Final Maturity Date; and (ii) be otherwise in form and substance and in favor of beneficiaries and for purposes satisfactory to the Bank and any applicable Offshore Credit Provider. (c) The Borrower shall pay to the Bank a non-refundable fee equal to the amount set forth below: -11- If the face amount (or Equivalent Amount thereof, if applicable) of the letter of credit is: $-0- TO $249,999 $250,000 OVER $1,000,000 TO $1,000,000 1.75% per annum 1.50% per annum 1.00% per annum times the outstanding undrawn amount of each such standby letter of credit, with a minimum fee of $250.00, payable annually in advance, and calculated on the basis of the face amount outstanding on the day the fee is calculated. However, if an Event of Default exists, at the option of the Bank, the amount of the fee shall be increased by an additional 3% per annum, commencing on the day the Bank provides notice of the increase to the Borrower. The Borrower shall also pay such other fees and commissions at the times and in the amounts the Bank advises the Borrower from time to time as being applicable to the Borrower's standby letters of credit. (d) Each draft paid by the Bank or an Offshore Credit Provider under a standby letter of credit issued hereunder shall be reimbursed by the Borrower in the applicable currency to the Bank or the applicable Offshore Credit Provider on the date such draft is paid by the Bank or such Offshore Credit Provider. Any sum owed to the Bank or an Offshore Credit Provider with respect to a standby letter of credit issued for the Borrower's account which is not paid when due shall, at the option of the Bank in each instance, be deemed to be an Advance outstanding under the Revolving Facility and shall thereafter bear interest at the Reference Rate. Reimbursement obligations in respect of drawings, if not paid when due or deemed to be an Advance as provided for in the immediately preceding sentence, shall bear interest, payable on demand, from the date of such drawing or payment, at the per annum rate of the Reference Rate plus 3% or, in the case of a standby letter of credit denominated in a Local Currency, at such rate as agreed to by the parties at the time of issuance thereof. (e) At the expiration of the Availability Period, the Borrower shall provide cash collateral in the amount of the L/C Outstanding Amount of any standby letters of credit outstanding under this Agreement, and, in addition to any other rights or remedies which the Bank may have under this Agreement or otherwise, upon the occurrence of an Event of Default, the Bank may require the Borrower to provide cash collateral in the amount of the L/C Outstanding Amount of any standby letters of credit outstanding under this Agreement. (f) For purposes of determining the Borrower's compliance with subsection 2.01(c), the Equivalent Amount of -12- letters of credit (either standby or commercial) denominated in a Local Currency will be determined, and redetermined by the Bank as of the applicable issuance date in respect of such letter of credit and on the last Business Day of each month. 2.06 LOCAL CURRENCY ADVANCES. (a) From time to time during the Availability Period, the Bank or any Offshore Credit Provider may, in its sole discretion, make Local Currency Advances to the Borrower. (b) Neither the Bank nor any Offshore Credit Provider shall have any obligation to make any Local Currency Advance unless the following conditions are satisfied: (i) the Bank and the Borrower agree, at the time of Borrower's request for a Local Currency Advance, on the currency, the amount, the principal payment date(s), the interest rate and payment date(s), the prepayment and overdue payment terms, and the reserve, tax and other material provisions for such Advance; and (ii) The Borrower shall execute such additional documentation as the Bank or such Offshore Credit Provider may require relating to each Local Currency Advance. (c) For purposes of determining the Borrower's compliance with subsection 2.01(c), the Equivalent Amount of Local Currency Advances will be determined, and redetermined by the Bank as of the applicable borrowing date in respect of such Advance and on the last Business Day of each month. 2.07 BANK GUARANTIES. (a) From time to time during the Availability Period, the Bank may, in its sole discretion, issue Bank Guaranties to the Borrower. Each Bank Guaranty shall be issued by an Offshore Credit Provider and pursuant to the laws of the jurisdiction in which such Offshore Credit Provider is located and subject to any other applicable law. Each Bank Guaranty shall be issued pursuant to the terms and conditions hereof and of a Bank standard form indemnity agreement and any other Bank standard forms for guaranties executed by the Borrower (b) Each Bank Guaranty shall: (i) expire on or before the date which is one year after the date it is issued, but in any event no later than the Final Maturity Date; and (ii) be otherwise in form and substance and in favor of beneficiaries and for purposes satisfactory to the Bank. -13- (c) The Borrower shall pay the Offshore Credit Provider issuance fees and other fees at the times and in the amounts the Bank advises the Borrower from time to time as being applicable to Bank Guaranties issued for the Borrower's account. (d) Each payment by the Offshore Credit Provider under a Bank Guaranty shall be reimbursed by the Borrower in the applicable currency to the Offshore Credit Provider on the date of such payment. Any sum owed to the Offshore Credit Provider with respect to a Bank Guaranty issued under this Section which is not paid when due shall, at the option of the Offshore Credit Provider in each instance, be deemed to be an Advance to the Borrower by the Bank outstanding under the Revolving Facility and shall thereafter bear interest at the Reference Rate. Reimbursement obligations in respect of payments made by an Offshore Credit Provider under a Bank Guaranty, if not paid when due or deemed to be an Advance as provided for in the immediately preceding sentence, shall bear interest, payable on demand, from the date of such payment, at the per annum rate of the Reference Rate plus 3%, or at such rate as agreed to by the parties at the time of issuance thereof. (e) At the expiration of the Availability Period, the Borrower shall provide cash collateral in the amount of the Bank Guaranty Outstanding Amount, and, in addition to any other rights or remedies which the Bank may have under this Agreement or otherwise, upon the occurrence of an Event of Default, the Bank may require the Borrower to provide cash collateral in the amount of the Bank Guaranty Outstanding Amount. (f) For purposes of determining the Borrower's compliance with subsection 2.01(c), the Equivalent Amount of Bank Guaranties will be determined, and redetermined by the Bank as of the applicable borrowing date in respect of such Advance and on the last Business Day of each month. 2.08 MANDATORY PAYMENT. If at any time and for any reason the total amount of credit outstanding under this Agreement exceeds the limitations set forth herein, the Borrower shall pay to the Bank, upon demand, the amount of the excess; provided, that if the foregoing applies due to a change in applicable rates of exchange between Dollars or Local Currencies, the Borrower shall be obligated to pay such amount only if the excess is greater than $100,000 or the Equivalent Amount thereof. Payments under this Section may be applied to the obligations of the Borrower to the Bank in the order and manner as the Bank in its discretion may determine. Payments to be applied to outstanding acceptances, letters of credit and drafts accepted under letters of credit, and Bank Guaranties may, at the Bank's option, be used to prepay, or held as cash collateral to secure, the Borrower's obligations to the Bank or any Offshore Credit Providers with respect thereto. -14- 2.09 COMMITMENT FEE. The Borrower shall pay to the Bank a commitment fee at the rate of 0.25% per annum on the average daily unused portion of the credit provided under this Agreement. For purposes of computing the unused portion, the L/C Outstanding Amount and the Bank Guaranty Outstanding Amount shall be deemed to be usage. The commitment fee shall be computed on a calendar quarter basis, except for the first period which shall commence on the date this Agreement is signed by the Borrower and end on December 31, 1995, and the last period which shall end on the last day of the Availability Period. The commitment fee shall be payable in arrears on December 31, 1995 (on which date commitment fees due under the Existing Credit Agreement for the period ending on the date this Agreement is signed by the Borrower shall also be due and payable hereunder), on the last day of each successive calendar quarter thereafter, and on the last day of the Availability Period. 2.10 DEFAULT RATE. Upon the occurrence and during the continuation of any Event of Default, and without constituting a waiver of any such Event of Default, Advances under the Revolving Facility shall at the option of the Bank bear interest at a rate per annum which is 3% per annum higher than the rate of interest otherwise provided under this Agreement. 2.11 EARLY TERMINATION OF COMMITMENT. The Borrower may upon not less than five Business Days' prior notice to the Bank, permanently reduce the Commitment by an aggregate minimum amount of $1,000,000 or any multiple of $500,000 in excess thereof; provided that no such reduction shall be permitted if, after giving effect thereto, the aggregate of (i) all Dollar Advances, (ii) the Equivalent Amount of all Local Currency Advances, (iii) the face amount of all acceptances (whether or not discounted), (iv) the Bank Guaranty Outstanding Amount of all Bank Guaranties and (v) the L/C Outstanding Amount of all letters of credit would exceed the amount of the Commitment then in effect and, provided further, that once reduced in accordance with this Section, the Commitment may not thereafter be increased. ARTICLE III EXTENSIONS OF CREDIT, PAYMENTS AND INTEREST CALCULATIONS 3.01 REQUESTS FOR CREDIT. Each request for an extension of credit shall be made in writing on a form acceptable to the Bank or in any other manner acceptable to the Bank. 3.02 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each payment by the Borrower under this Agreement shall -15- be made in the funds and at such branch of the Bank as the Bank may from time to time select. 3.03 BRANCH ACCOUNTS. Each extension of credit under this Agreement shall be made for the account of such branch, office, or affiliate of the Bank as the Bank may from time to time select. 3.04 EVIDENCE OF INDEBTEDNESS. Principal, interest, and all other sums due to the Bank (or any Offshore Credit Provider) under this Agreement shall be evidenced by entries in records maintained by the Bank (or such Offshore Credit Provider), and, if required by the Bank, by a promissory note or notes. Each payment on and any other credits with respect to principal, interest, and all other sums due under this Agreement shall be evidenced by entries to records maintained by the Bank or such Offshore Credit Provider. The loan accounts or records maintained by the Bank or any Offshore Credit Provider shall be conclusive absent manifest error of the amount of the credit extended hereunder and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower hereunder or under any other Credit Document to pay any amount owing. 3.05 INTEREST CALCULATION. Interest based on the Reference Rate shall be computed on the basis of a 365/366-day year, actual days elapsed. All other interest and fees payable under this Agreement shall be computed on the basis of a 360 day year and actual days elapsed, which results in more interest or a larger fee than if a 365-366 day year were used. 3.06 LATE PAYMENTS; COMPOUNDING. Any sum payable by the Borrower hereunder (including unpaid interest) if not paid when due shall bear interest (payable on demand) from its due date until payment in full at a rate per annum equal to the Reference Rate plus 3.00% per annum. At the option of the Bank, in each instance, any sum payable hereunder which is not paid when due (including unpaid interest) may be added to principal of the Revolving Facility and shall thereafter bear interest at the rate applicable to principal. 3.07 BUSINESS DAY. Any sum payable by the Borrower hereunder which becomes due on a day which is not a Business Day shall be due on the next Business Day after such due date, unless, in the case of an Offshore Rate Loan, the result of such extension would be to carry such Offshore Rate Interest Period into another calendar month, in which event such Offshore Rate Interest Period shall end on the immediately preceding Business Day. Any payments received by the Bank on a day which is not a -16- Business Day shall be deemed to be received on the next Business Day after such date of receipt. 3.08 TAXES AND OTHER CHARGES. (a) (i) If any taxes (other than taxes on net income (A) imposed by the country or any subdivision of the country in which the Bank's principal office or actual lending office is located and (B) measured by the United States taxable income the Bank would have received if all payments under or in respect of this Agreement and any instrument or agreement required hereunder were exempt from taxes levied by the Borrower's country) are at any time imposed on any payments under or in respect of this Agreement or any instrument or agreement required hereunder including, but not limited to, payments made pursuant to this Section, the Borrower shall pay all such taxes and shall also pay to the Bank, at the time interest is paid, all additional amounts which the Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such taxes had not been imposed. (ii) The additional amounts necessary to preserve the after-tax yield the Bank would have received if such taxes had not been imposed shall be calculated pursuant to the formula: (w)(t)(i) y = ----------- 1-w-t where the terms are defined as follows: y = additional payment to be made to the Bank w = withholding tax rate levied by foreign government t = the Bank's combined Federal and state tax rate i = amount of interest to be paid on Credit (computed by using the base rate plus quoted spread) 1 = one (b) The Borrower will provide the Bank with original tax receipts, notarized copies of tax receipts, or such other documentation as will prove payment of tax in a court of law applying the United States Federal Rules of Evidence, for all taxes paid by the Borrower pursuant to subsection (a) above. The Borrower will deliver receipts to the Bank within 30 days after the due date for the related tax. -17- 3.09 ILLEGALITY. (a) If the Bank determines that (i) the introduction of any law, rule, regulation, treaty, or determination of an arbitrator or court or other governmental authority or any change in or in the interpretation or administration thereof has made it unlawful, or that any central bank or other governmental authority has asserted that it is unlawful, for the Bank (directly or through any Offshore Credit Provider) to make or extend any Advance or other credit under this Agreement, or (ii) any order, judgment, or decree of any governmental authority or arbitrator purports by its terms to enjoin or restrain the Bank (or any Offshore Credit Provider) from making or extending any Advance or other credit hereunder, THEN, on notice thereof by the Bank to the Borrower, the obligation of the Bank to make or extend such Advance or other credit (directly or through any Offshore Credit Provider) shall be suspended until the Bank shall have notified the Borrower that the circumstances giving rise to such determination no longer exist. (b) If the Bank determines that it is unlawful for it or any applicable Offshore Credit Provider to maintain any Offshore Rate Advance or Local Currency Advance hereunder, the Borrower shall prepay in full all Offshore Rate Advances or Local Currency Advances, as the case may be, then outstanding, together with interest accrued thereon, either on the last day of the applicable Offshore Rate Interest Period or the interest period applicable to the Local Currency Advance if the Bank or such Offshore Credit Provider may lawfully continue to maintain such Advances to such day and such loans have an interest period, or immediately, if the Bank may not lawfully continue to maintain such Advances or such loans have no interest period, together with any amounts required to be paid in connection therewith pursuant to Section 3.11. 3.10 INCREASED COSTS. The Borrower shall pay to the Bank, on demand, the Bank's costs or losses arising from any statute or regulation, or any request or requirement of a regulatory agency which is applicable to all national banks or a class of all national banks. The costs and losses will be allocated to this facility in a manner determined by the Bank, using any reasonable method. The costs include the following: (a) any reserve or deposit requirements; and (b) any capital requirements relating to the Bank's assets and commitments for credit. 3.11 FUNDING LOSSES. The Borrower shall reimburse the Bank and hold the Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of the failure of the -18- Borrower to make any payment or prepayment of principal of any Advance hereunder made at a rate of interest related to the Offshore Rate (including payments made after any acceleration thereof), or to borrow at such a rate, or the prepayment of an Advance which bears interest at such a rate on a day which is not the last day of the interest period with respect thereto (including payments made after any acceleration thereof or because the total amount of credit exceeds the limitations set forth herein), or the redenomination and conversion, upon the occurrence of any Event of Default, of an Advance which bears interest at such a rate; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Advances made at a rate related to the Offshore Rate hereunder or from fees payable to terminate any deposits from which such funds were obtained or deemed obtained. 3.12 INABILITY TO DETERMINE RATES. The Bank has no obligation to accept an election for an Offshore Rate Advance if (a) Dollar deposits in the principal amount, and for the period equal to the interest period, for such Advance are not available in the applicable funding market; or (b) the Offshore Rate does not accurately reflect the cost of such Advance. Nothing contained herein shall, however, obligate the Bank to obtain the funds for any Advance in any particular manner. 3.13 CERTIFICATE OF THE BANK. If the Bank claims any reimbursement or compensation pursuant to Section 3.10 or Section 3.11 hereof, then the Bank shall deliver to the Borrower a certificate setting forth in reasonable detail the amount payable to the Bank thereunder and such certificate shall be conclusive and binding on the Borrower in the absence of manifest error. 3.14 DEBITS TO BORROWER'S ACCOUNT. The Borrower hereby authorizes the Bank to debit the Borrower's deposit account number 1486100284 at the Global Payments Operations, Concord, CA office of the Bank in the amount of principal, interest, fees, or any other amount due under this Agreement or under any instrument or agreement required under this Agreement. The Bank may, at its option, debit the account on the date such amounts become due, or, if such due date is not a Business Day, on the next Business Day after such due date. If there are insufficient funds in the account to cover the amount debited to the accounts in accordance with this Section, such debit may be reversed in whole or in part, at the option of the Bank in its sole discretion, and the amount not debited shall be deemed to remain unpaid. 3.15 SURVIVAL. The agreements and obligations of the Borrower under Sections 3.08 through 3.11 hereof shall survive the payment of all other obligations of the Borrower hereunder. -19- ARTICLE IV CONDITIONS TO AVAILABILITY OF CREDIT. The Bank's obligation to extend credit under this Agreement is subject to the Bank's receipt of the following, each in form and substance satisfactory to the Bank: 4.01 CONDITIONS TO FIRST EXTENSION OF CREDIT. Before the first extension of credit: (a) This Agreement, executed by the Borrower; (b) Satisfactory evidence of due authorization of the execution, delivery, and performance by the Borrower of this Agreement and any other Credit Documents, including certified resolutions, incumbency certificate, articles of incorporation and bylaws; (c) An opinion of counsel for the Borrower (which counsel must be satisfactory to the Bank) with respect to such legal matters relating hereto as the Bank may request; (d) Certificates of state officials showing that the Borrower is in good standing or qualified to conduct business under the laws of the state of its organization and, if requested by the Bank, in any other state in which the Borrower is required to be so qualified; (e) Payment of any fee or expense required hereunder prior to the first extension of credit; (f) Such other approvals, opinions, documents or instruments as the Bank may request; PROVIDED, however, that if the conditions set forth in subsections (a), (b), (e) and (f) of this Section 4.01 are satisfied, the Borrower shall have until January 31, 1996 to deliver the items required in subsections (c) and (d) of this Section 4.01 and the Borrower hereby covenants and agrees to deliver such items on or before such date. 4.02 CONDITIONS TO EACH EXTENSION OF CREDIT. Before each extension or renewal of credit (including pursuant to any election under Section 2.02(b)), including the first: (a) The representations and warranties of the Borrower contained in this Agreement shall be true on and as of the date of each extension of credit; -20- (b) Immediately prior to and immediately after giving effect to such extension of credit, no Default or Event of Default shall exist; (c) Executed originals of all Credit Documents required under Article II shall have been delivered to the Bank. Each request for an extension of credit hereunder shall constitute a representation and warranty by the Borrower, as of the date of each such request and as of the date of each extension of credit, that the conditions in this Section are satisfied. ARTICLE V REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: 5.01 CORPORATE EXISTENCE AND POWER. The Borrower and each of its Subsidiaries: (a) is a corporation duly organized and existing under the laws of the state of its organization; (b) has the power and authority and all governmental licenses, authorizations, consents, and approvals to own its assets, carry on its business, and, in the case of the Borrower, to execute, deliver, and perform its obligations under, the Credit Documents; and (c) is duly qualified and properly licensed and in good standing under the laws of each jurisdiction where its ownership, lease, or operation of property or the conduct of its business requires such license or qualification. 5.02 AUTHORIZATION. The execution, delivery, and performance by the Borrower of this Agreement and any other Credit Document have been duly authorized by all necessary corporate action, and do not and will not: (a) contravene the terms of any organizational or charter documents; (b) conflict with or result in any breach or contravention of, or the creation of any lien, security interest, or charge under, any agreement, contract, indenture, document, or instrument to which the Borrower or any Subsidiary is a party or by which any property is bound, or any order, injunction, writ, or decree of any governmental authority to which the Borrower or any Subsidiary or any of their respective properties is subject; or (c) violate any law, rule, regulation, or determination of an arbitrator or of a court or other governmental authority, in each case applicable to or binding -21- upon the Borrower or any Subsidiary or any of their respective properties. 5.03 ENFORCEABILITY. This Agreement is a legal, valid, and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms, and the other Credit Documents and any other instrument or agreement required under this Agreement, when executed and delivered, will be legal, valid, binding, and enforceable in accordance with its terms against the Borrower. 5.04 COMPLIANCE WITH LAWS. The Borrower and its Subsidiaries are in compliance with all foreign, federal, state and local laws, rules, regulations and determinations of arbitrators, courts and other governmental authorities materially affecting the business, operations or property of the Borrower (including Environmental Laws). 5.05 PERMITS, FRANCHISES. The Borrower or its Subsidiaries possess all permits, memberships, franchises, contracts, and licenses required and all trademark rights, trade name rights, patent rights, and fictitious name rights necessary to enable the Borrower and its Subsidiaries to conduct the businesses in which they are now engaged. 5.06 LITIGATION. There is no litigation, tax claim, proceeding, governmental or administrative action, arbitration proceeding or dispute pending, or, to the knowledge of the Borrower, threatened, against or affecting the Borrower or any of its Subsidiaries or any of their properties, the adverse determination of which would result in a Material Adverse Effect. 5.07 NO EVENT OF DEFAULT. There exists no Default or Event of Default. 5.08 OTHER OBLIGATIONS. Neither the Borrower nor any of its Subsidiaries is in default under any other agreement involving the borrowing of money, the extension of credit, or the lease of real or personal property, to which the Borrower or such Subsidiary is a party as borrower, guarantor, installment purchaser, or lessee, except as disclosed in writing to the Bank prior to the Closing Date. 5.09 TAX RETURNS. The Borrower has no knowledge of any material pending assessments or adjustments with respect to its income tax liabilities for any year, except as disclosed in writing to the Bank prior to the Closing Date. 5.10 INFORMATION SUBMITTED. All financial and other information that has been submitted by the Borrower to the Bank, including the Borrower's financial statement delivered to the -22- Bank most recently prior to the Closing Date: (a) in the case of financial statements, is prepared in accordance with generally accepted accounting principles consistently applied; and (b) is true and correct in all material respects and is complete insofar as may be necessary to give the Bank true and accurate knowledge of the subject matter thereof. 5.11 NO MATERIAL ADVERSE EFFECT. Since March 31, 1995, there has been no Material Adverse Effect. 5.12 ERISA COMPLIANCE. (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law. Each Plan which is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS and to the best knowledge of the Borrower, nothing has occurred which would cause the loss of such qualification. The Borrower and each ERISA Affiliate has made all required contributions to any Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. (b) There are no pending or, to the best knowledge of Borrower, threatened claims, actions or lawsuits, or action by any governmental authority, with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither the Borrower nor any ERISA Affiliate has incurred, nor reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither the Borrower nor any ERISA Affiliate has incurred, nor reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the Borrower nor any ERISA Affiliate has engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. 5.13 ENVIRONMENTAL MATTERS. (a) (i) The properties of the Borrower and its Subsidiaries do not contain and have not previously contained (at, under, or about any such property) any Hazardous Substances or other contamination (A) in amounts or concentrations that constitute or constituted a violation of, or -23- could give rise to liability under, any Environmental Laws, (B) which could interfere with the continued operation of such property, or (C) which could impair the fair market value thereof; and (ii) there has been no transportation or disposal of Hazardous Substances from, nor any release or threatened release of Hazardous Substances at or from, any property of the Borrower or any of its Subsidiaries in violation of or in any manner which could give rise to liability under any Environmental Laws. (b) Neither the Borrower nor any of its Subsidiaries has received or is aware of any material claim or notice of material violation, alleged material violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to the properties or operations of the Borrower or any of its Subsidiaries, nor does the Borrower have knowledge or reason to believe that any such action is being contemplated, considered, or threatened. 5.14 SWAP OBLIGATIONS. Neither the Borrower nor any of its Subsidiaries has incurred any outstanding obligations under any Swap Contracts, other than Permitted Swap Obligations. ARTICLE VI AFFIRMATIVE COVENANTS So long as credit is available under this Agreement and until full and final payment of all of the Borrower's obligations under this Agreement and any other Credit Document: 6.01 NOTICES OF CERTAIN EVENTS. The Borrower shall promptly give written notice to the Bank of: (a) all litigation, proceedings or actions affecting the Borrower or its Subsidiaries where the amount claimed is $2,000,000 or more; (b) any substantial dispute which may exist between the Borrower or its Subsidiaries and any governmental regulatory body or law enforcement authority; (c) any Default or Event of Default; (d) of the occurrence of any of the following events affecting the Borrower or any ERISA Affiliate (but in no event more than 10 days after such event), and deliver to the Bank a copy of any notice with respect to such event that is filed with a governmental authority and any notice delivered by a governmental authority to the Borrower or any ERISA Affiliate with respect to such event: (i) an ERISA Event; (ii) a material -24- increase in the Unfunded Pension Liability of any Pension Plan; (iii) the adoption of, or the commencement of contributions to, any Plan subject to Section 412 of the Code by the Borrower or any ERISA Affiliate; or (iv) the adoption of any amendment to a Plan subject to Section 412 of the Code, if such amendment results in a material increase in contributions or Unfunded Pension Liability; and (e) any other matter which has resulted or could reasonably be expected to result in a Material Adverse Effect. 6.02 FINANCIAL AND OTHER INFORMATION. The Borrower shall deliver to the Bank in form and detail satisfactory to the Bank, and in such number of copies as the Bank may request: (a) Within 90 days after the end of each fiscal year, the Borrower's consolidated financial statements for such year audited by an independent certified public accountant together with an unqualified opinion of such certified public accountant and including, at a minimum, the Borrower's balance sheet and statements of income, retained earnings, and cash flow; (b) Within 45 days after the end of each fiscal quarter, the Borrower's consolidated financial statements for such period prepared by the Borrower and including, at a minimum, the Borrower's balance sheet and statements of income, retained earnings, and cash flow; (c) Concurrently with the delivery of the financial statements referred to in subsections 6.01(a) and (b) above, a certificate of a Responsible Officer in the form attached hereto as EXHIBIT A. (d) Promptly after the date of filing with the Securities and Exchange Commission, copies of any of the Borrower's Form 10-K Annual Reports, Form 10-Q Quarterly Reports and Form 8-K Current Reports and any other filing made by Borrower or any of its Subsidiaries with the Securities and Exchange Commission; and (e) Promptly upon request, such other materials and information relating to the Borrower or its Subsidiaries as the Bank may request. 6.03 BOOKS, RECORDS, AUDITS AND INSPECTIONS. The Borrower shall, and shall cause its Subsidiaries to, maintain adequate books, accounts and records, and prepare all financial statements required hereunder in accordance with generally accepted accounting principles consistently applied, and in compliance with the regulations of any governmental regulatory body having jurisdiction over the Borrower or its Subsidiaries, or the Borrower's or its Subsidiaries' businesses, and permit employees -25- or agents of the Bank at any reasonable time to inspect the Borrower's and its Subsidiaries' properties, and to examine or audit the Borrower's and its Subsidiaries' books, accounts, and records and make copies and memoranda thereof. 6.04 USE OF FACILITY. The Borrower shall use the credit facility provided herein solely for working capital and trade finance purposes not in contravention of any requirement of law or of any Credit Document. 6.05 INSURANCE. The Borrower shall, and shall cause its Subsidiaries to, maintain and keep in force insurance of the types and in amounts customarily carried in lines of businesses similar to those of the Borrower, including fire, extended coverage, public liability (including coverage for contractual liability), property damage (including use and occupance), business interruption, and workers' compensation, all carried by insurers and in amounts satisfactory to the Bank, with loss payable endorsements on such types of insurance as the Bank may request, and deliver to the Bank from time to time, at the Bank's request, a copy of each insurance policy, or if permitted by the Bank, a certificate of insurance setting forth all insurance then in effect. 6.06 COMPLIANCE WITH LAWS. The Borrower shall at all times comply with, and cause its Subsidiaries to comply with, all laws, statutes (including any fictitious name statute), rules, regulations, orders, and directions of any governmental authority having jurisdiction over the Borrower or any of its Subsidiaries or the business of the Borrower or any of its Subsidiaries (including all Environmental Laws). 6.07 CHANGE IN NAME, STRUCTURE OR LOCATION. The Borrower shall notify the Bank in writing prior to any change in (a) the Borrower's name, (b) the Borrower's business or legal structure, or (c) the Borrower's place of business or chief executive office if the Borrower has more than one place of business. 6.08 EXISTENCE AND PROPERTIES. The Borrower and each of its Subsidiaries shall maintain and preserve its existence and all rights, privileges, and franchises now enjoyed, conduct its business in an orderly, efficient, and customary manner, keep all of its properties in good working order and condition, and from time to time make all needed repairs, renewals, or replacements thereto and thereof so that the efficiency of such property shall be fully maintained and preserved. -26- ARTICLE VII NEGATIVE COVENANTS So long as credit is available under this Agreement and until full and final payment of all of the Borrower's obligations under this Agreement and any other Credit Document: 7.01 OTHER INDEBTEDNESS. The Borrower shall not, and shall not suffer or permit any Subsidiary to, create, incur, assume, or permit to exist any indebtedness or liabilities for or resulting from borrowed money, loans, or advances, or for the deferred purchase price of property under capital leases, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, or any other contingent obligation (including in respect of Swap Contracts) or become liable as a surety, guarantor, accommodation endorser, or otherwise for or upon the obligation of any other person, firm, or corporation; provided, however, that this Section shall not prohibit: (a) the acquisition of goods, supplies, or merchandise on normal trade credit; (b) the execution of bonds or undertakings in the ordinary course of its business as presently conducted; (c) the endorsement of negotiable instruments received in the ordinary course of its business as presently conducted; (d) indebtedness in favor of the Bank or any of its affiliates; (e) indebtedness or other obligations to other creditors which is subordinated on terms and conditions satisfactory to the Bank in its sole discretion to all of Borrower's and its Subsidiaries' indebtedness or other obligations to the Bank or any affiliate of the Bank (including any Offshore Credit Provider) whether now existing or hereafter arising, and is otherwise on terms and conditions satisfactory to the Bank in its sole discretion; (f) indebtedness secured by liens permitted under subsection 7.02(f); (g) subject to Section 7.03, capital lease obligations not to exceed $5,000,000 outstanding at any one time for the acquisition of fixed or capital assets; and (h) Permitted Swap Obligations. 7.02 LIENS. The Borrower shall not, and shall not suffer or permit any of its Subsidiaries to, create, assume, or suffer -27- to exist any security interest, deed of trust, mortgage, lien (including the lien of an attachment, judgment, or execution), or encumbrance, securing a charge or obligation, on or of any of its or their property, real or personal, whether now owned or hereafter acquired, except: (a) security interests and deeds of trust in favor of the Bank; (b) liens, security interests, and encumbrances in existence as of the date of this Agreement and disclosed to the Bank in writing prior to the Closing Date; (c) liens for current taxes, assessments, or other governmental charges which are not delinquent or remain payable without any penalty; (d) liens (other than those imposed by ERISA) in connection with workers' compensation, unemployment insurance, or other social security obligations; (e) mechanics', worker's, materialmen's, landlords', carriers', or other like liens arising in the ordinary and normal course of business with respect to obligations which are not due; (f) purchase money security interests in personal property hereafter acquired in the ordinary course of business when the security interest does not extend beyond the property purchased; and (g) liens in connection with capital lease obligations permitted under subsection 7.01(g). 7.03 CAPITAL ASSETS. The Borrower on a consolidated basis shall not, in any of its fiscal years, expend or incur obligations (including obligations incurred under any capital leases) of more than $10,000,000 for the acquisition of fixed or capital assets. 7.04 ACQUISITIONS. The Borrower and its Subsidiaries shall not acquire or purchase control of, or the assets or business of, any other person, firm, or corporation. 7.05 DIVIDENDS. Neither the Borrower nor any of its Subsidiaries that is not wholly-owned by the Borrower shall declare or pay any dividends or distributions on any of its shares now or hereafter existing, or purchase, redeem or otherwise acquire for value any of its shares, or create any sinking fund in relation thereto, except dividends payable solely in its capital stock. 7.06 LOANS. Neither the Borrower nor any of its Subsidiaries shall make any loans, advances, or other extensions of credit to any of the Borrower's or such Subsidiary's executives, officers, or directors or shareholders (or any relatives of any of the foregoing) other than in the ordinary course of business in the aggregate principal amount outstanding at any one time not to exceed $1,000,000; or make loans, advances or other extensions of credit to or invest in any other person, firm, corporation, or other entity, other than, in each case, in the ordinary course of business, (a) investments in cash equivalents and short-term marketable investments; (b) extensions of credit in the nature of accounts receivable or notes -28- receivable arising from the sale or lease of goods or services in the ordinary course of business; (c) extensions of credit by the Borrower to any of its wholly-owned Subsidiaries or by any of its wholly-owned Subsidiaries to another of its wholly-owned Subsidiaries; and (d) investments constituting Permitted Swap Obligations or payments or advances under Swap Contracts relating to Permitted Swap Obligations. 7.07 LIQUIDATIONS AND MERGERS. The Borrower shall not, and shall not suffer or permit any Subsidiary to, liquidate or dissolve or enter into any consolidation, merger, partnership, joint venture, or other combination, except that a Subsidiary may Subsidiary may merge with the Borrower, provided that the Borrower shall be the continuing or surviving corporation, or with any one or more Subsidiaries, provided that if any transaction shall be between a Subsidiary and a wholly-owned Subsidiary, the wholly-owned Subsidiary shall be the continuing or surviving corporation. 7.08 SALE OF ASSETS. Neither the Borrower nor any of its Subsidiaries shall (a) sell, lease, or otherwise dispose of its business or assets as a whole or such as in the opinion of the Bank constitutes a substantial portion of its business or assets; (b) sell or otherwise dispose of any of its accounts receivable except in connection with the collection of same in the ordinary course of business; (c) sell or otherwise dispose of any of its assets except for full, fair and reasonable consideration; or (d) enter into any sale and leaseback agreement covering any of its fixed or capital assets. 7.09 BUSINESS ACTIVITIES. The Borrower shall not, and shall not suffer or permit any Subsidiary to, engage in any business activities or operations substantially different from or unrelated to its present business activities and operations. 7.10 REGULATIONS G, T, U, AND X. The Borrower shall not, and shall not permit any of its Subsidiaries to, use any portion of the proceeds of any Advances or extensions of credit hereunder, directly or indirectly, (i) to purchase or carry margin stock (within the meanings of Regulations G, T, U, and X of the FRB), (ii) to repay or otherwise refinance indebtedness of the Borrower or others incurred to purchase or carry any such margin stock, (iii) to extend credit for the purpose of purchasing or carrying any such margin stock, or (iv) to acquire any security in any transaction that is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. 7.11 USE OF PROCEEDS - INELIGIBLE SECURITIES. The Borrower shall not, directly or indirectly, use any portion of the proceeds of any Advances or extensions of credit hereunder (i) knowingly to purchase Ineligible Securities from BASI during any period in -29- which BASI makes a market in such Ineligible Securities, (ii) knowingly to purchase during the underwriting or placement period Ineligible Securities being underwritten or privately placed by BASI, or (iii) to make payments of principal or interest on Ineligible Securities underwritten or privately placed by BASI and issued by or for the benefit of the Borrower or any affiliate of the Borrower. As used in this Section, "BASI" means BA Securities, Inc., a wholly- owned subsidiary of BankAmerica Corporation. BASI is a registered broker-dealer and permitted to underwrite and deal in certain Ineligible Securities; and "INELIGIBLE SECURITIES" means securities which may not be underwritten or dealt in by member banks of the Federal Reserve System under Section 16 of the Banking Act of 1933 (12 U.S.C. Section 24, Seventh), as amended. 7.12 COMPLIANCE WITH ERISA. The Borrower shall not, and shall not suffer or permit any of its ERISA Affiliates to: (a) engage in a prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably expected to result in liability of the Borrower in an aggregate amount in excess of $500,000; or (b) engage in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. 7.13 TANGIBLE NET WORTH. The Borrower shall not permit its Tangible Net Worth on a consolidated basis at any time to be less than $58,000,000 PLUS 75% of the Borrower's consolidated net income (but not less any net losses for any period) earned in each fiscal quarter commencing after September 30, 1995 PLUS the value of all Net Issuance Proceeds (whether in cash, other property or in kind) of equity securities issued by the Borrower from and after September 30, 1995. For purposes of this Section and Section 7.14, "Tangible Net Worth" means, as of any date of determination, (i) total assets (exclusive of goodwill, patents, trademarks, trade names, organization expense, treasury shares, unamortized debt discount and premium, deferred charges and other like intangibles) LESS (ii) all reserves applicable thereto and all liabilities (including accrued and deferred income taxes and subordinated liabilities). For purposes of this Section, "Net Issuance Proceeds" means, in respect of any issuance of common or preferred equity, proceeds (whether in cash, other property, or in kind) received in connection therewith, net of out-of-pocket costs and expenses paid or incurred in connection therewith in favor of any person not an affiliate of the Borrower and not to exceed 5% of the gross proceeds thereof. 7.14 LEVERAGE RATIO. The Borrower shall not at any time permit the ratio of its (a) total liabilities, on a consolidated basis, to (b) its consolidated Tangible Net Worth, to exceed 1.00 to 1.00. -30- 7.15 QUICK RATIO. The Borrower shall not suffer or permit, at any time,on a consolidated basis, the ratio of (a) the sum of its cash, cash equivalents, short-term marketable investments and current, invoiced account receivables net of bad debt reserves, to (b) its current liabilities (which shall include all Advances outstanding hereunder and the face amount of all letters of credit, Bank Guaranties and acceptances issued hereunder, whether drawn or undrawn, and whether or not discounted, as applicable, to be less than 1.00 to 1.00. 7.16 PROFITABILITY. The Borrower shall not incur, on a consolidated basis, (a) any quarterly net or operating loss in any two consecutive fiscal quarters or (b) any quarterly net or operating loss in excess of $3,000,000. ARTICLE VIII EVENTS OF DEFAULT 8.01 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an "EVENT OF DEFAULT" under this Agreement: (a) FAILURE TO PAY. The Borrower fails to pay, when due, any installment of principal, or within three Business Days after the date when due any interest, fee or any other sum due under this Agreement or any other Credit Document in accordance with the terms hereof or thereof. (b) BREACH OF REPRESENTATION OR WARRANTY. Any representation or warranty herein or in any other Credit Document proves to have been false or misleading in any material respect when made. (c) SPECIFIC DEFAULTS. The Borrower fails to perform or observe any term, covenant or agreement contained in Section 6.01, 6.02 or 6.03 or Article VII hereof. (d) OTHER DEFAULTS. The Borrower fails to perform or observe any other term or covenant contained in this Agreement or any Credit Document, and such default shall continue unremedied for a period of 20 days after the earlier of (i) the date upon which the chief executive or chief financial officer of the Borrower knew or should have known of such failure or (ii) the date upon which written notice thereof is given to the Borrower by the Bank. (e) JUDGMENTS. One or more judgments or arbitration awards are entered against the Borrower or any of its Subsidiaries, or the Borrower enters into any settlement agreement -31- with respect to any litigation or arbitration, in the aggregate amount of $5,000,000 or more on a claim or claims not covered by insurance. (f) FAILURE TO PAY DEBTS; VOLUNTARY BANKRUPTCY. The Borrower or any Subsidiary (i) fails to pay the Borrower's or such Subsidiary's debts generally as they come due, or (ii) files any petition, proceeding, case, or action for relief under any bankruptcy, reorganization, insolvency, or moratorium law, or any other law or laws for the relief of, or relating to, debtors. (g) INVOLUNTARY BANKRUPTCY. An involuntary petition is filed under any bankruptcy or similar statute against the Borrower or any Subsidiary, or a receiver, trustee, liquidator, assignee, custodian, sequestrator, or other similar official is appointed to take possession of the properties of the Borrower or any Subsidiary; provided, however, that such Event of Default shall be deemed cured if such petition or appointment is set aside or withdrawn or ceases to be in effect within 60 days from the date of said filing or appointment. (h) DEFAULT OF OTHER FINANCIAL OBLIGATIONS. Any default occurs under any other agreement involving the borrowing of money or the extension of credit to which the Borrower or any Subsidiary may be a party as borrower, guarantor, or installment purchaser, if such default consists of the failure to pay any obligation when due or if such default gives to the holder of the obligation concerned the right to accelerate the obligation, or there occurs under any Swap Contract an Early Termination Date resulting from (1) any event of default under such Swap Contract as to which the Borrower or any Subsidiary is the Defaulting Party or (2) any Termination Event as to which the Borrower or any Subsidiary is an Affected Party (for purposes of this subsection, the terms "Early Termination Date", "Defaulting Party", "Termination Event", and "Affected Party" shall have the meanings assigned to them in the relevant Swap Contract, it being understood that such definitions contemplate Swap Contracts documented on International Swaps and Derivatives Association ("ISDA") standard forms; if such Swap Contract is not documented on an ISDA standard form, such terms shall be given similar or analogous meanings as used in such non-ISDA standard agreements). (i) DEFAULT UNDER OTHER CREDIT DOCUMENTS. Any Credit Document (other than this Agreement), guaranty, subordination agreement, or other agreement or instrument required hereunder or executed in connection herewith is breached or becomes ineffective or any default occurs under any such agreement or instrument or any guarantor or subordinated creditor disavows its obligations under its guaranty or subordination agreement. -32- (j) DEFAULT OF OTHER BANK OBLIGATIONS. Any default occurs under any other obligation of the Borrower or any Subsidiary to the Bank or to any subsidiary or affiliate of the Bank. (k) MATERIAL ADVERSE EFFECT. There occurs a Material Adverse Effect. (l) ERISA. An ERISA Event shall occur with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably expected to result in liability of the Borrower under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of $500,000; (ii) the aggregate amount of Unfunded Pension Liability among all Pension Plans at any time exceeds $500,000; or (iii) the Borrower or any ERISA Affiliate shall fail to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of $500,000. 8.02 REMEDIES. If any Event of Default occurs, (a) any indebtedness of the Borrower under any of the Credit Documents, any term thereof to the contrary notwithstanding, shall at the Bank's option (but automatically upon the occurrence of an Event of Default described in subsection 8.01(f)(ii) or subsection 8.01(g)) and without notice become immediately due and payable without presentment, demand, protest, or notice of dishonor, or any other notice, all of which are hereby expressly waived by the Borrower to the full extent permitted by law, and the Bank may declare an amount equal to the maximum aggregate amount that is or at any time thereafter may become available for drawing under any then-outstanding letters of credit (whether or not any beneficiary shall have presented, or be entitled at such time to present, the drafts or other documents required to draw under such letters of credit), any acceptances outstanding hereunder and the Bank Guaranty Outstanding Amount to be immediately due and payable; (b) the obligation, if any, of the Bank (including through any Offshore Credit Provider) to make further loans or extensions of credit hereunder shall immediately cease and terminate; and (c) the Bank and each Offshore Credit Provider shall have all rights, powers, and remedies available under each of the Credit Documents, or accorded by law, including the right to resort to any or all security for any credit accommodation described herein, and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. -33- All rights, powers, and remedies of the Bank and each Offshore Credit Provider may be exercised at any time by the Bank or such Offshore Credit Provider and from time to time after the occurrence of an Event of Default. All rights, powers, and remedies of the Bank and any Offshore Credit Provider in connection with each of the Credit Documents are cumulative and not exclusive and shall be in addition to any other rights, powers, or remedies provided by law or equity. ARTICLE IX MISCELLANEOUS 9.01 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that the Borrower shall not assign this Agreement or any other Credit Document or any of the rights, duties or obligations of the Borrower hereunder without the prior written consent of the Bank. 9.02 CONSENTS AND WAIVERS. No failure to exercise and no delay in exercising, on the part of the Bank or any Offshore Credit Provider, any right, remedy, power, or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power, or privilege. No consent or waiver under this Agreement shall be effective unless in writing. No waiver of any breach or default shall be deemed a waiver of any breach or default thereafter occurring. 9.03 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California. 9.04 COSTS AND ATTORNEYS' FEES. The Borrower shall, whether or not the transactions contemplated hereby shall be consummated, pay or reimburse the Bank on demand for all costs and expenses incurred by the Bank in connection with the development, preparation, delivery, administration, and execution of, and any amendment, supplement, waiver or modification to, this Agreement and any other Credit Document and the consummation of the transactions contemplated hereby and thereby, including reasonable attorney fees and disbursements and the allocated cost of internal counsel and disbursements, incurred by the Bank with respect thereto; and in connection with the enforcement, attempted enforcement or preservation of any rights or remedies hereunder or under any Credit Document, including any "workout" or restructuring under this Agreement, including attorney fees and -34- disbursements and the allocated cost of internal counsel and disbursements. 9.05 INTEGRATION; AMENDMENT; EFFECT OF AMENDMENT AND RESTATEMENT. This Agreement, together with the other Credit Documents, embodies the entire agreement and understanding between the Borrower and the Bank. This Agreement may be amended or modified only in writing, signed by the Borrower and the Bank. This Agreement is intended to completely amend, restate and replace the Existing Credit Agreement, without novation. The Borrower hereby acknowledges and agrees that its obligation to repay any advances or other extensions of credit (including outstanding letters of credit and acceptances) made as of the date hereof under the Existing Credit Agreement shall continue under and be governed by the terms and conditions of this Agreement and shall constitute utilization of the Credit Limit, that all documents related to such advances and extensions of credit shall be Credit Document hereunder, and that all such advances shall be deemed Advances hereunder, or letters of credit or acceptances issued or created hereunder, as applicable, subject to the terms and provisions of this Agreement. 9.06 BORROWER'S DOCUMENTS. The Bank shall be under no obligation to return any schedules, invoices, statements, budgets, forecasts, reports or other papers delivered by the Borrower and shall destroy or otherwise dispose of same at such time as the Bank, in its discretion, deems appropriate. 9.07 PARTICIPATIONS. The Bank may at any time sell, assign, grant participations in, or otherwise transfer to any other person, firm, corporation or other entity (a "PARTICIPANT") all or part of the obligations of the Borrower under this Agreement and any other Credit Document. The Borrower authorizes the Bank and each Participant, upon the occurrence of an Event of Default, to proceed directly by right of setoff, banker's lien, or otherwise, against any assets of the Borrower which may be in the hands of the Bank or such Participant, respectively. The Borrower authorizes the Bank to disclose to any prospective Participant and any Participant any and all information in the Bank's possession concerning the Borrower and its Subsidiaries, this Agreement or any other Credit Document; provided, however, that any such prospective Participant or Participant shall agree to keep any such information confidential. 9.08 GENERAL INDEMNIFICATION. The Borrower shall pay and indemnify the Bank, the Offshore Credit Providers, the Bank's parent company, and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "INDEMNIFIED PERSON") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses, or disbursements -35- (including attorneys' fees and disbursements and the allocated costs of internal counsel) of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Credit Documents, or the transactions contemplated hereby and thereby, and with respect to any investigation, litigation, or proceeding related to this Agreement, any violation of any Environmental Law by the Borrower or its Subsidiaries, any release of a Hazardous Substance at or from any property of the Borrower or any of its Subsidiaries, or the loans and other extensions of credit hereunder or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "INDEMNIFIED LIABILITIES"); PROVIDED, that the Borrower shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other obligations of the Borrower hereunder or under the other Credit Documents. 9.09 ARBITRATION; REFERENCE PROCEEDING. (a) Any controversy or claim between or among the parties, including but not limited to those arising out of or relating to this Agreement or any other Credit Document or other agreements or instruments relating hereto or delivered in connection herewith and any claim based on or arising from an alleged tort, shall at the request of any party be determined by arbitration. The arbitration shall be conducted in accordance with the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Agreement, and under the Commercial Rules of the American Arbitration Association ("AAA"). The arbitration shall be conducted within the following California county or counties: San Francisco and Santa Clara. The arbitrator(s) shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator(s). Judgment upon the arbitration award may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (b) Notwithstanding the provisions of subsection (a) of this Section, no controversy or claim shall be submitted to arbitration without the consent of all parties if, at the time of the proposed submission, such controversy or claim arises from or relates to an obligation to the Bank which is secured by real property collateral located in California. If all parties do not consent to submission of such a controversy or claim to arbitration, the controversy or claim shall be determined as provided in subsection (c) of this Section. -36- (c) A controversy or claim which is not submitted to arbitration as provided and limited in subsections (a) and (b) of this Section shall, at the request of any party, be determined by a reference in accordance with California Code of Civil Procedure Sections 638 et seq. If such an election is made, the parties shall designate to the court a referee or referees selected under the auspices of the AAA in the same manner as arbitrators are selected in AAA-sponsored proceedings. The presiding referee of the panel, or the referee if there is a single referee, shall be an active attorney or retired judge. Judgment upon the award rendered by such referee or referees shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (d) No provision of this paragraph shall limit the right of any party to this Agreement to exercise self-help remedies such as setoff, to foreclose against or sell any real or personal property collateral or security, or to obtain provisional or ancillary remedies from a court of competent jurisdiction before, after, or during the pendency of any arbitration or other proceeding. The exercise of a remedy does not waive the right of either party to resort to arbitration or reference. At the Bank's option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage or by judicial foreclosure. 9.10 NOTICES. (a) All notices, requests and other communications provided for hereunder shall be in writing and mailed or delivered to a party at its address specified on the signature pages hereof, or to such other address as shall be designated by such party in a written notice to the other parties. (b) All such notices and communications shall, when transmitted by overnight delivery, be effective when delivered for overnight delivery, or if personally delivered, upon such personal delivery, except that notices pursuant to Article II shall not be effective until actually received by the Bank. (c) The Borrower acknowledges and agrees that any agreement of the Bank pursuant to Article II hereof to receive notices by telephone or facsimile is solely for the convenience and at the request of the Borrower. Telephone requests may be made by any individual identified in writing to the Bank on a form acceptable to the Bank as being authorized to make such requests. The Bank shall be entitled to rely upon any written or telephone request from persons it reasonably believes to be authorized by the Borrower to make such requests without making independent inquiry. The Borrower assumes the full risk of, and the Bank shall not be responsible for, any delays or errors in transmission, and the obligation of the Borrower to repay the loans and other extensions of credit hereunder shall not be -37- affected in any way or to any extent by any failure by the Bank to receive written confirmation of any telephonic or facsimile notice or the receipt by the Bank of a confirmation which is at variance with the terms understood by the Bank to be contained in the telephonic or facsimile notice. 9.11 HEADINGS; INTERPRETATION. Article, section, and paragraph headings are for reference only and shall not affect the interpretation or meaning of any provisions of this Agreement. The meaning of defined terms shall be equally applicable to the singular and plural forms of the defined terms. The words "hereof", "herein", "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, section, schedule and exhibit references are to this Agreement unless otherwise specified. The term "including" is not limiting and means "including without limitation." In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." 9.12 SEVERABILITY. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 9.13 COUNTERPARTS. This Agreement may be executed in as many counterparts as may be deemed necessary or convenient, and by the different parties hereto on separate counterparts each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same agreement. -38- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. STANFORD TELECOMMUNICATIONS, INC. By: ------------------------------- Typed Name: ----------------------- Title: Address where notices to Borrower are to be sent: Stanford Telecommunications, Inc. 1221 Crossman Avenue. Sunnyvale, CA 94089 Attn: Mr. Chris Smallman, Corporate Controller Telecopier: (408) 745-1429 Telephone: (408) 745-0818 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: ------------------------------ Typed Name: ---------------------- Title: Address where notices to Bank are to be sent: Bank of America National Trust and Savings Association The Mid-Cap Technology Group #5974 530 Lytton Avenue, 2nd Floor Palo Alto, CA 94301 Attn: Christopher Gernhard, Vice President Telecopier: (415) 853-4476 Telephone: (415) 853-4458 EX-13.1 6 EXHIBIT 13.1 EXHIBIT 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDIDTION AND RESULTS OF OPERATION OVERVIEW Since the Company's inception in 1973, revenues have been generated primarily from sales to agencies of the U.S. Government, including the DoD, the U.S. Air Force, Army and Navy, NASA and the FAA, or their prime contractors. Such revenues are generated from many contracts including programs requiring multi- year hardware and software development and limited production of products and systems. The Company's contracts often require the design, production, operation and maintenance of sophisticated equipment and systems and provision of system integration services in the digital telecommunications and satellite communications fields. A substantial portion of the digital telecommunications and satellite communications research and development performed by the Company since its inception has been funded by its customers and recorded as revenues by the Company. Accordingly, the cost of performing this customer-funded research and development is included in "Cost of Revenues" in the Company's financial statements. The Company's government contracts are generally cost-reimbursement plus profit or fixed-price contracts. The Company generally recognizes revenues from its long-term government contracts on a percentage-of-completion basis. Commencing in the late 1980's, the Company began to pursue commercial opportunities utilizing its digital telecommunications technology developed and enhanced by the Company since its inception. Commercial revenues have risen from less than 6% of total revenues in fiscal year 1989 to approximately 46% of total revenues in fiscal year 1996. During fiscal year 1996, commercial revenues which amounted to approximately $66.3 million included: (i) contract manufacturing revenues from the Company's electronics assembly business ($29.1 million); (ii) sales of ASICs, circuit boards and subsystems to the telecommunications industry ($13.3 million); (iii) development programs for INTELSAT and DSC Communications Corporation ($14.7 million); (iv) sales of off-the-shelf products for secure voice transmissions and GPS instrumentation ($3.3 million); and (v) other commercial systems and product business ($5.9 million). The Company includes in commercial revenues sales of standardized or off-the-shelf products such as the digital interfaces for secure voice transmissions or GPS simulators to any customers, including government customers. The Company's operating results have from time to time been adversely affected by non-recoverable cost overruns on certain fixed-price contracts, primarily fixed-price development contracts which have included significant software and hardware development. The Company's net income in fiscal year 1994 and 1995 was adversely affected due to losses on a number of fixed-price development contracts. The Company has instituted additional management controls to more closely monitor its bidding process and costs incurred on fixed-price development contracts, however, no assurance can be given that the Company will not incur losses on future fixed-price contracts or additional losses on existing contracts. The Company believes that development contracts are an important element in maintaining its technological leadership position in digital telecommunications. The Company plans to selectively bid on programs where it would be the sole provider or its technology leadership provides a competitive advantage. In addition, in order to position itself in the commercial marketplace, the Company may selectively enter into contracts with customers to deliver products where the Company will be funding a portion of the development costs. As a result, the Company may incur losses on certain fixed- price contracts. Such losses will be charged against results of operations in the period when they first become known, typically near the initiation of the contract and may have a material adverse effect on the Company's results of operations. RESULTS OF OPERATIONS The following tables set forth, for the periods indicated, certain items from the Company's Statements of Income expressed as a percentage of the Company's total revenues: Year Ended March 31 ------------------- 1994 1995 1996 ---- ---- ---- Revenues . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% Cost of revenues . . . . . . . . . . . . . . . . .82.0 83.6 80.0 ---- ---- ---- Gross profit . . . . . . . . . . . . . . . . . .18.0 16.4 20.0 ---- ---- ---- Research and development . . . . . . . . . . . . . 6.5 6.8 5.8 Marketing and administrative . . . . . . . . . . . 6.9 8.2 8.4 ---- ---- ---- Total expenses . . . . . . . . . . . . . . . . .13.4 15.0 14.2 Operating income . . . . . . . . . . . . . . . . . 4.6 1.4 5.8 Interest income (expense), net . . . . . . . . . .(0.1) 0.6 0.6 Arbitration settlement charge. . . . . . . . . . . - (1.8) - ---- ---- ---- Income before provision for income taxes and change in accounting method. . . . . . . . . . . . 4.5 0.2 6.4 Provision for income taxes . . . . . . . . . . . .(1.6) (0.1) (2.1) ----- ----- ----- Income before change in accounting method. . . . . 2.9 0.1 4.3 Cumulative effect of change in accounting method . 0.7 ---- ---- ---- Net income . . . . . . . . . . . . . . . . . . . 3.6% 0.1% 4.3% ---- ---- ---- CAUTIONARY STATEMENTS In the interest of providing the Company's shareholders and potential investors with certain Company information, including management's assessment of the Company's future potential, certain statements set forth herein contain or are based on projections of revenue, income, earnings per share and other financial items or relate to management's future plans and objectives or to the Company's future economic performance. Such statements are "forward-looking statements" within the meaning of Section 27A(i) of the Securities Act of 1933, as amended, and in Section 21E(i) of the Securities Exchange Act of 1934, as amended. Although any forward-looking statements contained herein or otherwise expressed by or on behalf of the Company are to the knowledge and in the judgment of the officers and directors of the Company, expected to prove true and to come to pass, management is not able to predict the future with absolute certainty. Accordingly, shareholders and potential investors are hereby cautioned that certain events or circumstances could cause actual results to differ materially from those projected or predicted herein. In addition, the forward-looking statements herein are based on management's knowledge and judgment as of the date hereof, and the Company does not intend to update any forward-looking statements to reflect events occurring or circumstances existing hereafter. For further information on the foregoing, reference is made to the Company's Securities and Exchange Commission reports including its recent reports on Forms 10-Q and 10-K. COMPARISON OF FISCAL YEARS 1994, 1995 AND 1996 REVENUES. Revenues were $98.1 million, $114.4 million and $145.1 million in fiscal year 1994, 1995 and 1996, respectively, representing year-to-year increases of 17% in fiscal year 1995 and 27% in fiscal year 1996. The increase in revenues from fiscal year 1994 to fiscal year 1995 was attributable to increases in the Company's commercial operations, including its commercial telecommunication products and services and its commercial manufacturing services as well as increases in its government business sector. During fiscal year 1996, revenues of approximately $79 million generated by its government business sector remained relatively unchanged from fiscal year 1995. Revenues generated from commercial telecommunications product and services were $21.1 million, $23.3 million and $37.1 million in fiscal year 1994, 1995 and 1996, respectively. Revenues generated from commercial manufacturing services were $5.4 million, $12.1 million and $29.1 million in fiscal year 1994, 1995 and 1996, respectively. Although the Company experienced an increase in its government business revenues during fiscal year 1995 and the level of government business during fiscal year 1996 remained relatively unchanged from fiscal year 1995, the Company expects that budgetary pressures will continue to affect Department of Defense and NASA budgets. The Company anticipates that its revenues from these government customers may remain flat and could decline in future periods. All contracts with the government are cancelable at any time for the convenience of the government. The Company is not aware of the cancellation or proposed cancellation of any of its current contracts. The Company plans to continue to selectively pursue government business where it has a competitive advantage, can be the sole provider or can be a prime contractor rather than a subcontractor. Over the past several years the percentage of the Company's commercial revenues has increased. The Company's commercial business represented approximately 27% of total revenues in fiscal year 1994, 31% in fiscal year 1995 and 46% in fiscal year 1996. During this period, commercial activities of the Company included the expansion of its contract manufacturing operations which followed the acquisition of a small electronics assembly facility in fiscal year 1993, the organization of a separate division in fiscal year 1991 to pursue opportunities for selling ASICs, circuit boards and subsystems to the telecommunications industry, the sale of off-the-shelf products and development programs for INTELSAT, NYNEX Assurance Services and DSC Communications. The Company is currently pursuing commercial opportunities in satellite, wireless and cable communication products. The Company expects that the percentage of its overall business represented by commercial sales will increase if it successfully develops, markets and sells those products currently under development. COST OF REVENUES. Cost of revenues were $80.4 million, $95.7 million and $116.0 million in fiscal year 1994, 1995 and 1996, respectively, representing 82.0%, 83.6% and 80.0% of revenues in fiscal year 1994, 1995 and 1996, respectively. The increase in cost of revenues as a percentage of revenues in fiscal year 1995 relative to fiscal year 1994 is attributable primarily to an increase in reserves and non-recoverable cost overruns on certain fixed-price contracts. For fiscal year 1995, the company announced a reserve of $2.8 million against the completion of a development contract with Intelsat and incurred losses on several other development contracts totaling $1.4 million. The decrease in cost of revenues as a percentage of revenues in fiscal year 1996 relative to fiscal year 1995 is attributable primarily to the avoidance of material cost overruns on its contracts and increased margins on its commercial catalog products. During fiscal year 1996 the Company recognized revenues on the Intelsat contract and a U.S. Army satellite terminal contract totaling $16.2 million in which the cost of revenues approximated the revenues recognized. In fiscal year 1994, 1995 and 1996, the Company experienced losses totaling $2.4 million, $4.2 million and $.2 million, respectively on a number of fixed-price development contracts. GROSS PROFIT. Gross profit was $17.6 million, $18.7 million and $29.1 million in fiscal year 1994, 1995 and 1996, respectively. Gross profit as a percentage of revenues decreased in fiscal year 1995 relative to 1994 as a result of the need to increase reserves and non-recoverable cost overruns on certain fixed-price contracts. Gross profit increased during fiscal year 1996 as a percentage of revenues relative to fiscal year 1995 as the Company experienced operational efficiencies as a result of its expanding business base, the avoidance of material cost overruns on its contracts and increased margins on its commercial catalog products. RESEARCH AND DEVELOPMENT. The Company's research and development expenses include bid and proposal expenses associated with government contracts and certain large commercial programs. Bid and proposal expenditures are largely the initial advanced technology development efforts directed toward a specific product or technical task for which the Company must show technical viability. Bid and proposal expenses have decreased since fiscal year 1994 as the Company has focused its available research and development funds on the development of commercial products. Research and development expenses, including bid and proposal expenses were $6.4 million, $7.7 million and $8.4 million in fiscal year 1994, 1995 and 1996, respectively. Excluding bid and proposal expenses, the Company's research and development expenses applied to the development of its products were $2.9 million, $4.4 million and $5.7 million in fiscal year 1994, 1995 and 1996 respectively. The Company expects research and development expenses to increase in the future as it pursues additional commercial activities. MARKETING AND ADMINISTRATIVE. Marketing and administrative expenses were $6.8 million, $9.4 million and $12.2 million in fiscal year 1994, 1995, and 1996, respectively, representing year-to-year increases of 38% in fiscal year 1995 and 30% in fiscal year 1996. These increases were primarily a result of hiring additional technical marketing personnel and increased marketing expenses in pursuit of commercial opportunities. In addition, the Company has expanded its patent activities and has experienced increased legal costs associated with the prosecution of its patent activities. OPERATING INCOME. Operating income was $4.5 million, $1.6 million and $8.4 million for fiscal year 1994, 1995 and 1996, respectively, representing a year- to-year decrease of 64% in fiscal year 1995 and a increase of 425% in fiscal year 1996. The decrease in fiscal year 1995 was primarily attributable to an increase in reserves and non-recoverable cost overruns on certain fixed-price contracts and the recognition of revenues on certain large system level contracts at zero or minimal operating margins. The increase in fiscal year 1996 was primarily attributable to operational efficiencies experienced as the Company expanded its business base, the avoidance of material cost overruns on its contracts and increased margins on its commercial catalog products. The Company has entered into and may continue to enter into certain fixed-price development contracts which it believes are essential to maintain and strengthen its competitive market position. INTEREST INCOME (EXPENSE), NET. Interest expense, net was $.1 million and interest income, net was $.7 million, and $.8 million in fiscal year 1994, 1995 and 1996, respectively. The increase in interest income, net from fiscal year 1994 to 1995 reflects interest earned from proceeds generated from the Company's secondary public offering of its common stock in January 1994. During fiscal year 1996 the Company increased the amount of cash available for investment by generating positive cash from its operations which it invested in interest bearing short-term investments. In addition, the Company received interest from the U.S. Government associated with overpayment of estimated taxes in prior years and from the Government's delay in payments on certain U.S. Government contracts. ARBITRATION SETTLEMENT EXPENSES. During the third quarter of fiscal year 1995, the Company received an unfavorable decision in an arbitration hearing involving an alleged default under a 1990 joint product development agreement. A charge of $1.6 million associated with the award to the prevailing party and other direct arbitration costs of $.5 million were recognized. PROVISION FOR INCOME TAXES. Provision for income taxes was $1.5 million, $.1 million and $3.1 million in fiscal year 1994, 1995 and 1996, respectively. This represents an effective tax rate of 35.0% for fiscal year 1994 and 1995 and 33.5% tax rate for fiscal year 1996. The decrease in the effective tax rate during fiscal year 1996 compared to fiscal year 1994 and 1995 results primarily from increased Research and Development (R&D) tax credits and other state income tax credits. The Company anticipates that its effective tax rate in future fiscal year years will fall within the range of rates experienced over the past three years assuming continued extension of the federal R&D tax credit. ACCOUNTING CHANGE. Effective April 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The cumulative effect of this change in accounting principle was an increase in net income of $.7 million in the first quarter of fiscal year 1994. This item is non-recurring and does not affect any prior or later periods. BOOKINGS AND BACKLOG. Funded bookings were $106.6 million, $127.8 million and $155.0 million in fiscal year 1994, 1995 and 1996, respectively, representing year-to-year increases of 20% in fiscal year 1995 and 21% in fiscal year 1996. Government contract bookings were $61.9 million, $87.3 million and $79.7 million during fiscal year 1994, 1995 and 1996, respectively. Commercial contract bookings were $44.7 million, $40.5 million and $75.3 million during fiscal year 1994, 1995 and 1996, respectively. The increase in bookings has resulted in the Company's backlog increasing from $59.1 million at the end of fiscal year 1994 to $72.5 million at the end of fiscal year 1995, an increase of 23% and a further increase to $82.4 million at the end of fiscal year 1996, an increase of 14% from fiscal year 1995 ending backlog. QUARTERLY RESULTS The following table presents the Company's financial results by quarter for fiscal year 1994, 1995 and 1996. These quarterly financial results are unaudited. In the opinion of management, however, they have been prepared on the same basis as the audited financial information and include all adjustments necessary for a fair presentation of the information set forth therein. The operating results for any quarter are not necessarily indicative of the results that may be expected for any future period. STATEMENTS OF OPERATIONS DATA: QUARTER ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal year 1994 Fiscal year 1995 Fiscal year 1996 ---------------- ---------------- ---------------- June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 ------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- ------- Revenues $24,322 $25,260 $23,445 $25,028 $24,645 $28,319 $26,499 $34,921 $35,952 $35,597 $36,384 $37,168 Costs of revenues 19,607 20,983 19,575 20,277 19,244 22,633 24,689 29,113 28,876 28,215 28,922 29,001 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Gross profit 4,715 4,277 3,870 4,751 5,401 5,686 1,810 5,808 6,076 7,382 7,462 8,167 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Expenses: Research and development 2,102 1,202 1,120 1,931 2,032 2,302 1,345 2,044 1,793 2,050 2,046 2,541 Marketing and administrative 1,411 1,793 1,631 1,925 2,000 2,423 2,166 2,773 2,659 3,239 3,104 3,211 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total expenses 3,513 2,995 2,751 3,856 4,032 4,725 3,511 4,817 4,452 5,289 5,150 5,752 Operating income (loss) 1,202 1,282 1,119 895 1,369 961 (1,701) 991 1,624 2,093 2,312 2,415 Interest income (expense), net (70) (88) (77) 100 180 156 191 130 178 152 164 345 Arbitration settlement expenses -- -- -- -- -- -- (2,075) -- -- -- -- -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) before (provision) credit for income taxes and accounting change 1,132 1,194 1,042 995 1,549 1,117 (3,585) 1,121 1,802 2,245 2,476 2,760 (Provision) credit for income taxes (442) (404) (378) (303) (557) (403) 1,282 (393) (676) (842) (863) (729) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) before change in accounting method $690 $790 $664 $692 $992 $714 $(2,303) $728 $1,126 $1,403 $1,613 $2,031 Cumulative effect of change in accounting method 700 -- -- -- -- -- -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Net income (loss) $1,390 $790 $644 $692 $992 $714 $(2,303) $728 $1,126 $1,403 $1,613 $2,031 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Net income (loss) per share $0.28 $0.16 $0.13 $0.12 $0.16 $0.11 $(0.37) $0.12 $0.18 $0.22 $0.25 $0.32 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Weighted average common shares and equivalents 4,900 4,976 5,058 5,867 6,211 6,244 6,256 6,252 6,272 6,346 6,361 6,409
The Company's revenues and results of operations are subject to fluctuation from period to period. Factors that could cause the Company's revenues and operating results to vary from period to period include: underestimating costs on fixed- price contracts particularly for software and hardware development; timing, bidding activity and delivery of significant contracts and orders; termination of contracts; mix of products and systems sold, and services provided; historically reduced levels of operation during the holidays which occur primarily in the Company's third fiscal year quarter; disruptions in delivery of components or subsystems; regulatory developments; and general economic conditions. Revenues have generally increased on a quarterly basis since fiscal year 1994 as a result of increasing commercial activities during the past three years and increased government related activities experienced during fiscal year 1995. Revenues are generally lower during the third fiscal year quarter ending December 31 because the Company reduces operations during the holiday period, and it expects to continue to reduce activities in future holiday periods. The Company's results of operation are adversely affected by losses on fixed-price development contracts. Direct and indirect costs were adversely affected throughout fiscal year 1994 and 1995 by cost overruns on certain fixed-price development contracts. Research and development expenses include both research and development costs as well as bid and proposal expenses. Bid and proposal expenses vary significantly from period to period based on the number of proposals being prepared at any time. These requests for proposals are not received evenly during the year or in any predictable pattern. LIQUIDITY AND CAPITAL RESOURCES Working capital decreased from $48.7 million to $48.0 million at March 31, 1994 and 1995, respectively, and increased to $56.5 million at March 31, 1996. The decrease in working capital at March 31, 1995 was primarily attributable to a cash award paid to the prevailing party in an arbitration dispute and the need to fund certain contact losses. The increase in working capital at March 31, 1996 was primarily attributable to cash generated from net income from operations. Net cash provided by operating activities for the years ended March 31, 1994, 1995 and 1996 was $9.8 million, $1.2 million and $8.7 million, respectively. The decrease in net cash provided by operating activities from fiscal year 1994 to 1995 was largely attributable to an increase in receivables, an increase in inventories associated with commercial contracts and a decrease in net income. The increase in cash provided by operating activities from fiscal year 1995 to fiscal year 1996 was largely attributable to an increase in net income and a decrease in billed and unbilled receivables. The Company utilized its cash for the purchase of property and equipment totaling $5.8 million, $6.2 million and $4.5 million in fiscal year 1994, 1995 and 1996, respectively. Capital expenditures in recent years are attributable to increased investments in the Company's commercial activities and leasehold improvements in the Company's facilities in order to support its growth. During fiscal year 1994, 1995 and 1996, $12.5 million, $.5 million and $1.1 million, respectively, of net cash was provided by financing activities. During fiscal year 1994, the Company received proceeds from the sale of common stock of $18.0 million. Payments on notes payable exceeded the proceeds from term notes by $7.1 million. During fiscal year 1995 the Company received proceeds of $.6 million from transactions under stock plans and made payments of $.1 million on capital lease obligations. During fiscal year 1996 the Company received proceeds of $1.3 million from transactions under the stock plans and made payments of $.2 million on capital lease obligations. The Company has a bank credit commitment of $15.0 million which it has utilized to augment cash flow needs and to secure term loans or standby letters of credit. Available borrowings under this line at March 31, 1996, were $15.0 million. Under this credit line the Company must maintain certain financial covenants, including a covenant prohibiting the Company from incurring a quarterly net operating loss in any two consecutive quarters. The Company was in compliance with all covenants throughout fiscal year 1996. At March 31, 1996, the Company's long-term obligations (including current maturities) and capital lease obligations totaled approximately $.2 million. At March 31, 1996, cash and cash equivalents of $4.4 million were held in money market accounts and short- term investments of $14.1 million were held in U.S. Government Treasury instruments. The Company believes that its current cash position, funds generated from operations and funds available from its existing bank credit agreement, will be adequate to meet the Company's requirements for working capital, capital expenditures and debt service for the next several fiscal year quarters. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The Company is not required to adopt the provisions of this statement until its fiscal year 1997. The provisions of this statement must be made on a prospective basis. The Company plans to adopt the disclosure provisions of this statement in its fiscal year 1997, and believes the effect on its financial position and results of operation, upon adoption, will not be significant. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Stanford Telecommunications, Inc.: We have audited the accompanying balance sheets of Stanford Telecommunications, Inc. (a Delaware Corporation) as of March 31, 1996 and 1995, and the related statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stanford Telecommunications, Inc. as of March 31, 1996 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 6 of the notes to financial statements, effective April 1, 1993, the Company changed its method of accounting for income taxes. ARTHUR ANDERSEN LLP San Jose, California April 22, 1996 STATEMENTS OF INCOME (in thousands, except for per share amounts)
Year Ended March 31 ------------------- 1996 1995 1994 ---- ---- ---- Revenues $145,100 $114,384 $ 98,055 Costs of revenues 116,014 95,679 80,442 ------- ------ ------ Gross profit 29,086 18, 705 17,613 ------ ------- ------ Research and development 8,429 7,723 6,355 Marketing and administrative 12,213 9,362 6,760 ------- ------ ------ Total expenses 20, 642 17,085 13,115 ------- ------ ------ Operating income 8,444 1,620 4,498 Interest income (expense), net 839 657 (135) Arbitration settlement charge -- (2,075) -- ------- ------ ------ Income before provision for income taxes and change in accounting method 9,283 202 4,363 Provision for income taxes (3,110) (71) (1,527) ------- ------ ------ Income before change in accounting method 6,173 131 2,836 Cumulative effect of change in accounting method -- -- 700 ------- ------ ------ Net income $ 6,173 $ 131 $ 3,536 ------- ------ ------ Earnings per share: Income before change in accounting method $ .97 $ .02 $ .54 Cumulative effect of change in accounting method -- -- .14 ------- ------ ------ Net income $ .97 $ .02 $ .68 ------- ------ ------ ------- ------ ------ Weighted average number of common and common equivalent shares outstanding 6,351 6,242 5,197 ------- ------ ------ ------- ------ ------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. BALANCE SHEETS (in thousands, except for per share amounts)
March 31 -------- 1996 1995 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 4,409 $ 2,910 Short-term investments 14,127 9,907 Accounts receivable 22,018 22,930 Unbilled receivables 11,993 16,891 Inventories, net of related progress billings 18,702 15,798 Prepaid expenses and other 4,903 3,558 ------ ------ Total current assets 76,152 71,994 ------ ------ Property and equipment at cost: Electronic test equipment 39,541 38,108 Furniture and fixtures 2,967 2,889 Leasehold improvements 3,657 3,052 ------ ------ 46,165 44,049 Less: Accumulated depreciation and amortization (31,665) (28,441) ------ ------ Net property and equipment 14,500 15,608 ------ ------ Other assets 296 403 ------ ------ $ 90,948 $ 88,005 ------ ------ ------ ------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations $ 80 $ 158 Accounts payable 6,097 11,268 Advance payments from customers 515 963 Accrued liabilities 10,044 10,183 Accrued and current deferred income taxes 2,921 1,463 ------ ------ Total current liabilities 19,657 24,035 ------ ------ Long-term obligations, less current maturities 85 161 ------ ------ Other long-term liabilities 986 927 ------ ------ Deferred income taxes 631 785 ------ ------ Commitments and contingencies (Notes 3 and 8) Shareholders' equity: Common stock - par value $.01; 15,000 shares authorized; 6,328 and 6,234 shares issued and outstanding in 1996 and 1995, respectively 63 62 Paid-in capital 38,369 37,051 Retained earnings 31,157 24,984 ------ ------ Total shareholders' equity 69,589 62,097 ------ ------ $ 90,948 $ 88,005 ------ ------ ------ ------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
Common Stock Total ------------ Paid-In Retained Shareholders' Shares Amount Capital Earnings Equity ------ ------ ------- -------- ------ BALANCE, MARCH 31, 1993 4,864 $ 48 $ 16,206 $ 21,317 $ 37,571 Sale of common stock, net of issuance costs 1,150 12 17,985 -- 17,997 Sale of common stock under Employee Stock Purchase Plan 8 -- 182 -- 182 Sale of common stock under Employee Stock Option Plan, net of shares exchanged 155 2 1,582 -- 1,584 Issuance of common stock as awards to employees 4 -- 50 -- 50 Tax benefits from employee stock transactions -- -- 447 -- 447 Net income -- -- -- 3,536 3,536 ----- ---- -------- -------- -------- BALANCE, MARCH 31, 1994 6,181 $ 62 $ 36,452 $ 24,853 $ 61,367 Sale of common stock under Employee Stock Purchase Plan 36 -- 430 -- 430 Sale of common stock under Employee Stock Option Plan, net of shares exchanged 14 -- 86 -- 86 Issuance of common stock as awards to employees 3 -- 42 -- 42 Tax benefits from employee stock transactions -- -- 41 -- 41 Net income -- -- -- 131 131 ----- ---- -------- -------- -------- BALANCE, MARCH 31, 1995 6,234 $ 62 $ 37,051 $ 24,984 $ 62,097 Sale of common stock under Employee Stock Purchase Plan 35 -- 540 -- 540 Sale of common stock under Employee Stock Option Plan 55 1 479 -- 480 Issuance of common stock as awards to employees 4 -- 74 -- 74 Tax benefits from employee stock transactions -- -- 225 -- 225 Net income -- -- -- 6,173 6,173 ----- ---- -------- -------- -------- BALANCE, MARCH 31, 1996 6,328 $ 63 $ 38,369 $ 31,157 $ 69,589 ----- ---- -------- -------- -------- ----- ---- -------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. STATEMENTS OF CASH FLOWS (in thousands)
Year Ended March 31 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income $ 6,173 $ 131 $ 3,536 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,009 4,330 3,960 Issuances of stock to employees under bonus and award plans 74 42 50 Change in provision for losses on receivables, contracts and inventories 857 3,073 202 Loss on retirements of property and equipment 143 210 159 Change in accounting method -- -- (700) (Increase) decrease in assets: Receivables billed and unbilled 5,634 (8,355) 5,251 Inventories (3,492) (6,888) (3,467) Prepaid expenses and other assets (1,238) (2,018) (84) Increase (decrease) in liabilities: Accounts payable, advance payments and accrued expenses (5,851) 9,484 (488) Other long-term liabilities 59 301 601 Accrued and deferred income taxes 1,304 874 798 -------- ------- -------- Net cash provided by operating activities 8,672 1,184 9,818 -------- ------- -------- Cash used in investing activities: Purchase of short-term investments (17,058) (9,907) (11,466) Proceeds from maturities of short-term investments 12,838 11,466 -- Purchase of property and equipment (4,482) (6,210) (5,846) Proceeds from sale of property and equipment 438 67 -- -------- ------- -------- Net cash used in investing activities (8,264) (4,584) (17,312) -------- ------- -------- Cash flows from financing activities: Payments on capital lease obligations (154) (87) (176) Payments on notes payable to bank -- -- (14,925) Proceeds from term notes -- -- 7,800 Proceeds from transactions under stock plans 1,245 557 1,766 Proceeds from sale of common stock -- -- 17,997 Net cash provided by financing activities 1,091 470 12,462 -------- ------- -------- Net increase (decrease) in cash and cash equivalents 1,499 (2,930) 4,968 Cash and cash equivalents at beginning of year 2,910 5,840 872 -------- ------- -------- Cash and cash equivalents at end of year $ 4,409 $ 2,910 $ 5,840 -------- ------- -------- -------- ------- -------- SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS) Cash paid for interest and income taxes 1996 1995 1994 ---- ---- ---- Interest $ 12 $ 51 $ 264 Income taxes $ 3,987 $ 769 $ 1,353
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. NOTES TO FINANCIAL STATEMENTS March 31, 1996 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY. Stanford Telecommunications Inc. (the Company), incorporated in Delaware, designs, manufactures and markets advanced digital telecommunication products and systems to establish or enhance communications via satellites, terrestrial wireless and cable. The Company also produces communication systems networking solutions and GPS navigation products. The Company's government revenues are generated from U.S. government contracts where the Company may be either the prime contractor or a subcontractor. The Company's commercial revenues include contract manufacturing revenues, sales of integrated circuits, circuit boards and subsystems, and development programs. In addition to the U.S. government, the principle markets for the Company's products include telecommunications and electronics markets primarily located in the U.S. FISCAL YEAR. The Company's fiscal year is composed of four 13-week quarters, each of which ends on the Thursday closest to the corresponding calendar quarter end. For convenience, the Company has presented its fiscal year as ending on March 31. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The Company prepares and evaluates ongoing cost to complete estimates in order to monitor its project costs. These estimates form the basis for calculating revenues and gross margins for each project under the percentage-of-completion method of accounting. Due to uncertainties inherent in the estimation process, estimated total costs are subject to revision on an on-going basis as additional information becomes available. The estimates are subject to change and actual results could be materially different from these estimates. CASH EQUIVALENTS. The Company considers all highly liquid securities with original maturities of 90 days or less to be cash equivalents. SHORT-TERM INVESTMENTS. Effective April 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." The Adoption of SFAS 115 did not have a material impact on the Company's financial statements. At March 31, 1996, the Company's short-term investments consisted of U.S Treasury securities totalling $14,127,000 at cost with unrealized gains of $109,000. At March 31, 1995 the Company's short-term investments consisted of U.S. Treasury securities totalling $9,907,000 at cost with unrealized gains of $183,000. The securities mature at various dates within one year. RECEIVABLES. The Company provides a reserve for doubtful accounts where circumstances indicate that one is necessary. As of March 31, 1996 and 1995, the Company's reserve for doubtful accounts was $920,000 and $650,000, respectively. UNBILLED RECEIVABLES. Unbilled receivables represent differences between billings and revenues recognized on government contracts. On fixed price contracts, the unbilled amounts represent revenues recognized under the percentage-of-completion method of accounting which exceed the amounts that are billable according to contract terms. In general, the Company is authorized to bill between 75% to 100% of the costs expended on a contract. The remaining portion (if any) is billable as contract deliverables are accepted by the customer. On cost plus contracts, the unbilled amounts mainly represent (a) a portion (generally 15%) of the negotiated contract fees which are not billable until the completion of the contract and (b) differences between actual indirect rates and government approved billing rates which are not billable until approval of final indirect rates by the respective governmental agencies. As of March 31, 1996, the Company has received final indirect rate approval for charges through fiscal 1988. INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out) or market. Cost includes materials, labor and related indirect expenses. General and administrative costs are only included in inventory for government contracts, as such costs are reimbursed by the government. Work-in-process mainly represents costs incurred on short-term contracts. The components of inventory are as follows (in thousands):
March 31 -------- 1996 1995 ------- -------- Raw materials and supplies $ 158 $ 175 Work-in-process 18,615 13,027 Finished goods 1,850 1,820 Allocated general and administrative costs 808 938 Less progress billings (2,729) (162) ------- ------- $18,702 $15,798 ------- ------- ------- -------
The Company purchases certain inventories that have long purchase lead times and may be single sourced. Although there are a limited number of manufacturers of these particular inventory items, management believes that other suppliers could provide similar inventory on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would affect operating results adversely. CAPITALIZED COMPUTER SOFTWARE. Capitalization of computer software development costs begins upon the establishment of technological feasibility of the product. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross product revenues, estimated economic life and changes in software and hardware technology. The Company capitalizes direct costs incurred in connection with the software development subsequent to the establishment of technological feasibility for the products. Capitalized software development costs amounted to $71,000 and $367,000 in 1996 and 1995, respectively with cumulative costs of $438,000 as of March 31, 1996 and are included in property and equipment in the accompanying balance sheet. Amortization of capitalizated software begins upon initial product shipment and extends over the estimated economic life of the product. As of March 31, 1996 and 1995, $110,000 and $30,000 has been amortized and the net value is $328,000 and $337,000 respectively. DEPRECIATION AND AMORTIZATION. Depreciation and amortization are provided over the estimated useful lives of the assets (5 to 7 years or the term of the lease), using the straight-line method for financial reporting purposes and accelerated methods for certain depreciable assets for tax purposes. ACCRUED LIABILITIES. Accrued liabilities consist of the following (in thousands):
March 31 -------- 1996 1995 -------- -------- Compensation and employee benefits $ 7,221 $ 5,710 Accrued contract cost 2,125 3,595 Other 698 878 -------- -------- $ 10,044 $ 10,183 -------- -------- -------- --------
REVENUE RECOGNITION. The Company principally uses the percentage-of-completion method of accounting for contract revenues. The percentage-of-completion method is based on total costs incurred to date compared with estimated total costs upon completion of contracts. Revenues for fixed price contracts, which do not have progress payment clauses, are recognized at the time of delivery of the finished product. Certain contracts provide for milestone billings which are recorded as revenues when the defined milestones are met. The Company recognizes revenues for standard, off the shelf products and certain commercial products upon shipment to the customer. The Company charges all losses on contracts to cost of sales in the period when the loss is known. The principle government agencies to which the Company sells are the Department of Defense (DoD), NASA and the FAA. The DoD accounted for 31%, 44%, and 47% of total revenues in 1996, 1995, and 1994, respectively. CONCENTRATION OF CREDIT RISK. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, short-term investments, and trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to a balanced mix of receivables due from the U.S. government and other customers which are dispersed across different industries and geographic regions. CLASSIFICATION. Consistent with industry practice, assets and liabilities relating to government long-term contracts are classified as current although a portion of these amounts is not expected to be realized within one year. STOCK BASED COMPENSATION. In October 1995, the Financial Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The Company is not required to adopt this statement until its fiscal year 1997. The provisions of this statement must be made on a prospective basis. The Company plans to adopt the disclosure provisions of this statement in its fiscal year 1997, and believes the effect on its financial position and results of operation, upon adoption, will not be significant. 2. LINE OF CREDIT On December 20, 1995, the Company amended and restated its bank line agreement extending expiration until December 1996. The Company has $15,000,000 in credit under this line, all of which is available at March 31, 1996. Under this line of credit the Company must maintain certain financial covenants, including a minimum debt coverage for two consecutive fiscal quarters. As of March 31, 1996, the Company was in compliance with all such covenants. 3. COMMITMENTS The Company leases its buildings and other equipment under noncancellable operating lease agreements that expire at various dates through 2003. The Company also leases certain office equipment under capital leases which expire during 2000. The terms of several of the Company's leases provide for deferral of cash rental payments over various periods. Rental expense under these agreements is recognized on a straight-line basis. As of March 31, 1996 the Company has accrued approximately $912,000 in related expense which is included in other long-term liabilities in the accompanying balance sheet. Approximate future minimum lease payments under these leases are as follows (in thousands):
Year Ending March 31 -------------------- Operating Leases Capital Leases ---------------- -------------- 1997.............................. $ 3,433 $ 86 1998.............................. 3,343 70 1999.............................. 3,204 23 2000.............................. 2,730 7 2001.............................. 1,823 -- Thereafter........................ 1,262 -- -------- ----- Total minimum lease payments...... $ 15,795 186 -------- ----- Less: interest............................... (21) ----- 165 ----- Less current portion......................... (80) ----- $ 85 ----- -----
Rental expenses charged to operations totaled approximately $4,272,000, $3,432,000, and $3,387,000 for the years ended March 31, 1996, 1995 and 1994, respectively. During 1996, 1995, and 1994 the Company acquired equipment under capital leases in the amounts of $8,000, $81,000, and $52,000, respectively. 4. EARNINGS PER SHARE Earnings per share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the reporting periods. Common stock equivalents consist of the dilutive effect of outstanding options to purchase common stock. Fully diluted earnings per share is substantially the same as reported earnings per share. 5. RETIREMENT PLAN The Company maintains a defined contribution plan covering substantially all employees. Amounts contributed are based on a percentage of eligible employees annual compensation. Percentages contributed equaled 4% in 1996 and 3% in each of 1995 and 1994. The Company's contributions totaled approximately $1,425,000 in 1996, $1,037,000 in 1995, and $1,006,000 in 1994. The Plan also permits eligible employees to make voluntary before-tax salary deferral contributions. 6. INCOME TAXES Effective April 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." This statement provides for a liability approach under which deferred income taxes are provided based on enacted tax laws and rates applicable to the periods in which the taxes become payable. SFAS 109 was adopted on a prospective basis and amounts presented for prior years have not been restated. The cumulative effect of this change in accounting method increased earnings in fiscal 1994 by $700,000 or $0.14 per share. The provision for income taxes charged to operations were comprised of the following (in thousands):
Year Ending March 31 -------------------- 1996 1995 1994 ---- ---- ---- Provision for (benefit from) income taxes: Current Federal................................. $ 4,422 $ 1,870 $ 984 State................................... 233 503 212 Deferred, net Federal................................. (1,470) (1,817) 210 State................................... (75) (485) 121 -------- -------- ------- Net tax provision............................ $ 3,110 $ 71 $ 1,527 -------- -------- ------- -------- -------- -------
The provision for income taxes for the three years ended March 31, 1996 differs from the U.S. statutory rate principally as follows:
Year Ending March 31 -------------------- 1996 1995 1994 ---- ---- ---- Statutory Federal income tax rate.................. 34.0% 34.0% 34.0% State income taxes, net of Federal benefit......... 1.7 5.3 5.3 Research and development credits................... (1.0) (5.0) -- Other.............................................. 1.0 0.7 2.4 Change in valuation allowance...................... (2.2) -- (6.7) ----- ----- ----- Effective income tax rate.......................... 33.5% 35.0% 35.0% ----- ----- -----
The major components of deferred tax assets and liabilities as computed under SFAS 109 consisted of the following (in thousands):
March 31 -------- 1996 1995 ---- ---- Deferred tax asset: Reserves and accruals not currently deductible for tax purposes........................ $ 4,232 $ 3,489 Tax credits.......................................... 395 256 ------- -------- Total deferred tax asset.......................... 4,627 3,745 Valuation allowance -- (206) ------- -------- Deferred tax asset net of allowance............... 4,627 3,539 ------- -------- Deferred tax liability: Accelerated depreciation............................. (631) (785) Percentage of completion contract accounting......... (116) (419) ------- -------- Total deferred tax liability...................... (747) (1,204) ------- -------- Net deferred tax asset............................... $ 3,880 $ 2,335 ------- -------- ------- --------
The $3,880,000 net deferred tax asset as of March 31, 1996 was allocated on the accompanying balance sheet with $631,000 included in long term liabilities, and the remaining $4,511,000 included in prepaid expenses and other. 7. COMMON STOCK On June 28, 1995, the Company's stockholders approved an amendment to Article 4 of the Company's Certificate of Incorporation, increasing the number of authorized shares of common stock with a par value $.01 per share ("common stock"), from 10,000,000 to 15,000,000. The Amendment also eliminated provisions authorizing the Board of Directors to issue the common stock in series and eliminated the Company's series B common stock. On May 9, 1995, the Board of Directors adopted a Stockholder's Rights Plan and declared a dividend of one Common Share Purchase Right (the "Right") for each share of the Company's common stock outstanding on May 25, 1995. Each Right entitles the holder thereof to purchase one share of the Company's common stock for $60. The Rights will be exercisable if a person or group acquires 15% or more of the Company's common stock. Upon such acquisition, each Right (other than those held by the acquiring person or group) will be exercisable for the number of shares of the Company's common stock having a market value at that time of twice the exercise price of the Right. If the Company subsequently enters into certain business combinations, each Right (other than those held by the acquiring person or group) will be exercisable for that number of shares of common stock of the other party to the business combination having a market value of two times the exercise price of the Right. The Rights are subject to redemption at the option of the Board of Directors at a price of $.01 per Right. The Rights expire on May 9, 2005. In January 1994, the Company issued an additional 1,150,000 shares of common stock at a price of $17.00 per share through a secondary public offering, resulting in net proceeds of approximately $18 million. In August 1990, the Board of Directors authorized the purchase of up to $2,500,000 of the Company's common stock on the open market. During 1996 and 1995 no shares were repurchased. Since August 1990, the Company has repurchased 272,500 shares at an average price of $5.51 per share. The 1982 Stock Option Plan expired on January 26, 1991 precluding the issuance of option grants under that plan. However, existing and non-expired options may be exercised in accordance with the terms of the option agreement. In June, 1995, the Company's stockholders passed a resolution to amend and restate the Company's 1991 Stock Option Plan. The amended and restated plan increases the number of shares subject to the plan and available for future issuance to employees from 500,000 to 1,000,000, permits the grant of options to certain non-employee directors, adds individual grant limitations required under Internal Revenue Code section 162(m), allowing option income for certain individuals to be tax deductible by the Corporation and make other administrative changes. The 1991 Plan provides for the issuance of either incentive or non-qualified options. Incentive options can be granted at an exercise price not less than fair market value of the stock on the date of grant. Non-qualified options can be granted at an exercise price not less than 85% of the fair market value of the stock on the date of the grant. Options granted under the 1991 Plan become exercisable over such periods as determined by the Board of Directors. The 1991 Plan will expire in the year 2001. Information with respect to these plans is as follows:
1982 Stock Option Plan 1991 Stock Option Plan ---------------------- ---------------------- Available Outstanding Option Prices for Grant Outstanding Option Prices ----------- ------------- --------- ----------- ------------- BALANCE AT MARCH 31, 1993 226,545 $ 4.50 - $13.80 425,250 74,750 $ 5.00 - $10.00 Granted -- -- (107,684) 107,684 $ 9.25 - $21.25 Exercised (136,743) $ 4.50 - $13.80 -- (24,062) $ 5.00 - $10.00 Terminated (50,302) $ 9.25 - $11.60 4,936 (4,936) $ 9.25 - $ 9.50 BALANCE AT MARCH 31, 1994 39,500 $ 4.50 - $12.00 322,502 153,436 $ 5.00 - $21.25 Granted -- -- (128,167) 128,167 $12.50 - $19.75 Exercised (15,750) $ 4.75 - $11.30 -- (4,661) $ 5.50 - $11.25 Terminated -- -- 2,400 (2,400) $ 9.25 - $17.38 BALANCE AT MARCH 31, 1995 23,750 $ 4.50 - $12.00 196,735 274,542 $ 5.00 - $21.25 Additional Authorized -- -- 500,000 -- -- Granted -- -- (182,721) 182,721 $14.50 - $20.00 Exercised (3,750) $ 4.50 - $7.63 -- (50,679) $ 5.00 - $19.75 Terminated -- -- 57,901 (57,901) $ 5.50 - $21.25 BALANCE AT MARCH 31, 1996 20,000 $11.00 - $12.00 571,915 348,683 $ 5.00 - $20.00
Options to purchase 20,000 and 23,750 shares were exercisable on March 31, 1996 and March 31, 1995, respectively, under the 1982 Stock Option Plan. Under the 1991 Stock Option Plan, options to purchase 51,858 and 39,420 shares were exercisable on March 31, 1996 and March 31, 1995, respectively. Under the 1992 Employee Stock Purchase Plan (the "1992 Purchase Plan"), a total of 200,000 shares of common stock has been reserved for issuance. The Company makes offerings at such time and of such duration as its Board determines. As of March 31, 1996, 116,172 shares remained available for purchase. 8. LITIGATION AND CONTINGENCIES The Company is contingently liable with respect to lawsuits and other matters which arise in the normal course of business. The Company must comply with detailed government procurement and contracting regulations and periodically receives letters requesting proof of support for costs. The Company has prepared and presented documentation and support to the U.S. Government addressing post- award audit recommendations made by the Defense Contract Audit Agency. Management believes that the outcome of such contingencies will not have a material adverse effect on the Company's financial position or results of operations. SELECTED FINANCIAL DATA (in thousands, except for per share data)
Year Ended March 31 ------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- SUMMARY OF OPERATIONS FOR THE FISCAL YEAR Revenues $145,100 $114,384 $ 98,055 $ 92,821 $ 94,908 Operating income 8,444 1,620 4,498 2,319 5,601 Income before change in accounting method 6,173 131 2,836 1,159 3,105 Cumulative effect of change in accounting method -- -- 700 -- -- Net income 6,173 131 3,536 1,159 3,105 Income per share before change in accounting method .97 .02 .54 .24 .63 Cumulative effect of change in accounting method -- -- .14 -- -- Weighted average shares 6,351 6,242 5,197 4,865 4,913 Net income as a percent of revenues 4.3% .1% 3.6% 1.3% 3.3% FINANCIAL POSITION AT END OF FISCAL YEAR Current assets $ 76,152 $ 71,994 $ 60,125 $ 45,007 $ 42,791 Current liabilities 19,657 24,035 11,466 18,792 16,716 Working capital 56,495 47,959 48,659 26,215 26,075 Current ratio 3.9 3.0 5.2 2.4 2.6 Property and equipment, net $ 14,500 $ 15,608 $ 14,005 $ 12,226 $ 11,038 Total assets 90,948 88,005 74,503 57,492 54,088 Long-term debt 85 161 235 358 246 Shareholders' equity 69,589 62,097 61,367 37,571 36,500 Common stock outstanding 6,328 6,234 6,181 4,864 4,870 Book value per share $ 11.00 $ 9.96 $ 9.93 $ 7.72 $ 7.50
SELECTED COMMON STOCK DATA Stanford Telecommunications, Inc. Common Stock was offered to the public on October 6, 1983, and since that date has been traded on the Nasdaq stock market under the symbol STII. During January 1994, the Company completed a secondary offering of its common stock. The price per share reflected in the table represents the closing prices in the Nasdaq National Market System. The quotations represent inter-dealer quotations, without retail markups, markdowns or commissions, and may not necessarily represent actual transactions. The Company has not paid dividends on its Common Stock since its incorporation and anticipates that for the foreseeable future it will continue to retain its earnings for use in its business. A covenant under the current Line of Credit would require prior approval of any dividend by the Bank. On March 31, 1996, there were approximately 1,494 holders of record of the Company's Common Stock.
High Low ---- --- Fiscal 1996 First Quarter 17 1/2 13 Second Quarter 25 3/4 14 Third Quarter 23 3/8 16 Fourth Quarter 31 1/4 16 1/4 Fiscal 1995 First Quarter 18 3/4 11 Second Quarter 20 1/4 12 1/2 Third Quarter 20 13 1/8 Fourth Quarter 15 1/2 12 1/2
NASDAQ TRADING VOLUME Fiscal 1996 - 6,327,091 shares / Fiscal 1995 - 6,160,978 shares NASDAQ MARKET MAKERS Montgomery Securities Inc . - William K. Woodruff & Co., Inc. - Volpe Welty & Company - Oppenheimer & Co Dain, Bosworth, Inc. - Mayer & Schweitzer - John G. Kinnard & Co., Inc. - Herzog, Heine, Geduld, Inc. EX-23.1 7 EXHIBIT 23.1 EXHIBIT NUMBER 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Forms S-8 (file nos. 2-88852, 2-88853, 33-00714, 33-11743, 33-22956, 33-36977, 33-45090 and 33-68534). /s/ Arthur Andersen LLP San Jose, California June 24, 1996 EX-27 8 FINANCIAL DATA SCHEDULE
5 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 4,409 14,127 34,011 0 18,702 76,152 46,165 31,665 90,948 19,657 0 0 0 63 69,526 90,948 145,100 145,100 116,014 136,656 0 0 0 9,283 3,110 6,173 0 0 0 6,173 0 .97
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