<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 000-26952
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SYNC RESEARCH, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0676350
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12 MORGAN
IRVINE, CA 92618
(Address of principal executive offices)
Registrant's telephone number, including area code: (949) 588-2070
-----------------------------
Indicate by check (x) whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of October 30, 1999, 3,477,871 shares of the Registrant's Common Stock were
issued and outstanding.
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<PAGE>
SYNC RESEARCH, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information.......................................................................... 3
Item 1. a) Condensed consolidated balance sheets at September 30, 1999 (unaudited) and December
31, 1998............................................................................... 3
b) Condensed consolidated statements of operations (unaudited) for the three and nine
months ended September 30, 1999 and 1998............................................... 4
c) Condensed consolidated statements of cash flows (unaudited) for the nine months ended
September 30, 1999 and 1998............................................................ 5
d) Notes to condensed consolidated financial statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 21
Part II. Other Information.............................................................................. 22
Item 1. Legal Proceedings.............................................................................. 22
Item 2. Changes in Securities and Use of Proceeds...................................................... 22
Item 3. Defaults upon Senior Securities................................................................ 22
Item 4 Submission of Matters to a Vote of Security Holders............................................ 22
Item 5. Other Information.............................................................................. 22
Item 6. Exhibits and Reports on Form 8-K............................................................... 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNC RESEARCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................ $9,266 $14,135
Accounts and other receivables, net...................................................... 3,266 2,443
Inventories.............................................................................. 5,030 6,111
Prepaid expenses and other current assets................................................ 357 808
---------------- ----------------
Total current assets........................................................................ 17,919 23,497
Furniture, fixtures and equipment, net...................................................... 1,770 3,247
Other assets................................................................................ 91 47
---------------- ----------------
Total assets................................................................................ $19,780 $26,791
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 2,219 $ 3,138
Accrued compensation and related costs.................................................. 800 956
Accrued severance and restructuring costs................................................ 410 1,976
Deferred revenue and customer deposits................................................... 2,125 2,063
Other accrued liabilities................................................................ 326 975
Current maturities of capitalized lease obligations...................................... 54 52
---------------- ----------------
Total current liabilities................................................................... 5,934 9,160
Capitalized lease obligations, less current maturities...................................... 18 60
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares-2,000
Issued and outstanding shares-none.................................................... - -
Common stock, $.005 par value:
Authorized shares-10,000
Issued and outstanding shares- 3,479 at September 30, 1999
and 3,491 at December 31, 1998........................................................ 18 17
Additional paid-in capital............................................................... 71,929 71,958
Deferred compensation.................................................................... - (7)
Accumulated deficit...................................................................... (58,119) (54,397)
---------------- ----------------
Total stockholders' equity.................................................................. 13,828 17,571
---------------- ----------------
Total liabilities and stockholders' equity.................................................. $19,780 $26,791
================ ================
</TABLE>
See accompanying notes.
3
<PAGE>
SYNC RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
--------------------------------------- ----------------- ----------------
1999 1998 1999 1998
------------------ ------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net revenues $ 4,422 $ 7,541 $ 13,933 $ 20,227
Cost of sales 2,327 4,612 7,663 12,870
------------------ ------------------- ----------------- ----------------
Gross profit 2,095 2,929 6,270 7,357
Operating expenses:
Research and development 1,263 1,869 4,289 5,428
Sales and marketing 1,051 3,018 4,203 8,962
General and administrative 571 889 1,832 2,207
Non-recurring charges _ _ _ 267
------------------ ------------------- ----------------- ----------------
Total operating expenses 2,885 5,776 10,324 16,864
------------------ ------------------- ----------------- ----------------
Operating loss (790) (2,847) (4,054) (9,507)
Interest income, net 95 223 335 697
------------------ ------------------- ----------------- ----------------
Loss before income taxes (695) (2,624) (3,719) (8,810)
Provision for income taxes _ _ 2 2
------------------ ------------------- ----------------- ----------------
Net loss $ (695) $ (2,624) $ (3,721) $ (8,812)
================== =================== ================= ================
Basic and diluted net loss per share $ (0.20) $ (0.75) $ (1.07) $ (2.55)
================== =================== ================= ================
Shares used in computing net loss per share 3,468 3,479 3,483 3,474
================== =================== ================= ================
</TABLE>
See accompanying notes.
4
<PAGE>
SYNC RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................................................. $ (3,721) $(8,812)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................................... 1,054 1,381
Provision for losses on accounts receivable............................................ 151 17
Deferred compensation expense.......................................................... 7 21
Changes in operating assets and liabilities, net:
Accounts and other receivables......................................................... (974) 1,876
Inventories............................................................................ 1,081 987
Prepaid expenses and other current assets.............................................. 451 (247)
Accounts payable and accrued liabilities............................................... (1,568) 742
Accrued severance and restructuring.................................................... (1,116) -
Accrued compensation and related costs................................................. (156) 38
Deferred revenue....................................................................... 62 (582)
Other................................................................................ (44) -
------------- -------------
Net cash used in operating activities........................................................ (4,773) (4,579)
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment, net....................................... (28) (1,222)
FINANCING ACTIVITIES
Repurchase of common stock................................................................ (136) -
Payments on capitalized lease obligations................................................. (40) (43)
Proceeds from common stock options exercised and employee stock 108 178
purchase plan........................................................................
------------- -------------
Net cash provided by (used in) financing activities.......................................... (68) 135
------------- -------------
Net decrease in cash and cash equivalents.................................................... (4,869) (5,666)
Cash and cash equivalents at beginning of period............................................. 14,135 21,734
------------- -------------
Cash and cash equivalents at end of period................................................... $9,266 $16,068
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................................................. $ 6 $ 39
============= =============
Income taxes paid......................................................................... $ 14 $ 16
============= =============
</TABLE>
See accompanying notes.
5
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30, 1999, the
condensed consolidated statements of operations for the three and nine months
ended September 30, 1999 and 1998 and the condensed consolidated statements of
cash flows for the nine months ended September 30, 1999 and 1998 have been
prepared without audit. In the opinion of management, the unaudited financial
statements include all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the Company's financial position at September 30,
1999, the results of its operations for the three and nine months ended
September 30, 1999 and 1998 and its cash flows for the nine months ended
September 30, 1999 and 1998. The condensed consolidated financial statements
should be read in conjunction with the audited financial statements of Sync
Research, Inc. and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998. The results of operations for the
three and nine months ended September 30, 1999 are not necessarily indicative of
the operating results to be expected for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying financial
statements. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
2. CASH AND CASH EQUIVALENTS
The Company invests its excess cash in money market funds and
short-term debt instruments of U.S. corporations with strong credit ratings. The
Company has established guidelines with respect to the diversification and
maturities that maintain safety and liquidity. The Company considers all highly
liquid investments with an original maturity of three months or less and money
market funds to be cash equivalents.
3. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are recorded at cost and consist of
the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Equipment acquired under capital leases................................... $ 275 $ 275
Furniture and fixtures.................................................... 558 848
Computer equipment and software........................................... 7,385 7,462
Leasehold improvements.................................................... 167 1,109
--------------- ---------------
8,385 9,694
Accumulated depreciation and amortization................................. (6,615) (6,447)
--------------- ---------------
$ 1,770 $ 3,247
=============== ===============
</TABLE>
6
<PAGE>
SYNC RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
4. INVENTORIES
Inventories consist primarily of computer hardware and components and
are stated at the lower of cost (first-in, first-out) or market, as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Raw materials............................................................. $ 2,971 $ 2,983
Work in process........................................................... 264 752
Finished goods............................................................ 1,795 2,376
---------------- ----------------
$ 5,030 $ 6,111
================ ================
</TABLE>
5. PER SHARE INFORMATION
Net loss per common share is computed using the weighted average number
of common shares and common share equivalents outstanding during the periods
presented. Common share equivalents result from the dilutive effect, if any, of
outstanding options and warrants to purchase common stock. All share amounts
have been adjusted to reflect the implementation of the Company's one for five
reverse stock split on June 28, 1999.
6. CREDIT AGREEMENT
In April 1999, the Company entered into a new $3,000,000 credit
agreement with a bank. Outstanding borrowings under this credit agreement are
secured by substantially all of the Company's assets and are subject to an
interest rate equal to the Bank's prime rate plus one half percent. The
agreement expires in April 2000. There were no borrowings outstanding as of
September 30, 1999.
7. LITIGATION
On November 5, 1997, an action entitled Dalarne Partners, Ltd. Vs Sync
Research, Inc., et al., No. SACV97-877 AHS (Eex) was filed against the Company
and certain of its directors and officers. The action was filed in the U.S.
District Court for the Central Division of California, Southern Division. The
action purported to be a class action lawsuit brought on behalf of purchasers of
the Company's common stock during the period from November 18, 1996 through
March 20, 1997. The complaint asserted claims for violation of the Securities
Exchange Act of 1934. On February 17, 1999, the U.S. District Court issued an
order granting the Company's motion to dismiss the first amended complaint,
granting leave to amend. The plaintiffs filed a second amended complaint on
March 22, 1999. The Company and the other defendants have moved to dismiss the
second amended complaint. The Court has taken defendants' motion under
submission and no hearing date is set. The complaint seeks to recover damages in
an unspecified amount. The Company intends to defend this lawsuit vigorously.
8. LEASE COMMITMENTS
In July 1999, the Company executed an agreement to terminate its
existing headquarters facility lease
7
<PAGE>
and enter into a new five year lease on another facility. In addition, the
Company extended a portion of its Norton facility lease for a period of three
years. As a result, the future minimum operating lease commitments as of
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
YEARLY TOTALS
<S> <C> <C>
10/99 - 12/99 $ 76,354
2000 311,263
2001 316,694
2002 288,514
2003 238,639
Thereafter $ 153,075
</TABLE>
9. STOCKHOLDERS' EQUITY
On June 28, 1999, the Company implemented a one-for-five reverse stock
split of common stock. All common stock amounts and per share information have
been restated to reflect the reverse stock split for all periods presented.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto included
in Part I-Item 1 of this Quarterly Report. Except for the historical information
contained herein, the matters discussed in this document are forward-looking
statements. The Company wishes to alert readers that the factors set forth in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998,
and in the section of this Item 2 titled "Additional Factors That May Affect
Future Results," as well as other factors that could in the future affect, and
in the past have affected, the Company's results. The Company's actual results
for future periods could differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company. Readers are
cautioned not to place undue reliance on these forward-looking statements which
reflect management's analysis only as of the date hereof. The Company assumes no
obligation to update these forward-looking statements to reflect actual results
or changes in factors or assumptions affecting such forward-looking statements.
OVERVIEW
Sync develops and sells frame relay access devices (FRADs), circuit
management probe products, digital transmission devices and supporting software.
The Company follows a sales strategy relying primarily on a direct sales force
and leveraging resellers, distributors, and carriers as delivery channels for
its products. Current partners include Sprint, MCI, Intermedia Communications,
Electronic Data Systems, and Diebold.
In 1998 and 1997, the Company implemented various expense reduction
programs with the goal of enabling the Company to achieve profitability at lower
revenue levels. However, there can be no assurance that its efforts to implement
expense reductions will enable it to become profitable at lower revenue levels,
if at all. Also, there can be no assurance that the Company's products will
achieve significant market penetration, either through its channel partners and
other resellers or its direct sales force, or that the Company will successfully
introduce new and enhanced products or compete effectively in its market.
RESULTS OF OPERATIONS
NET REVENUES
The Company derives its revenues primarily from sales of advanced
wide-area networking products. Product revenues are recognized upon shipment.
The Company generally does not have any significant remaining obligations upon
shipment of its products. Product returns and sales allowances are provided for
at the date of sale. Service revenues from customer maintenance fees for ongoing
customer support and product updates are recognized ratably over the term of the
maintenance period, which is typically 12 months.
Net revenues for the third quarter of 1999 were $4.4 million, compared
to net revenues of $7.5 million for the quarter ended September 30, 1998. Net
revenues for the nine months ended September 30, 1999 were $13.9 million,
compared to $20.2 million for the comparable period in 1998. The decrease in net
revenues in the three and nine months ended September 30, 1999 compared to the
three and nine months ended September 30, 1998 was due primarily to decreased
sales of frame relay access and circuit management products resulting from the
completion in 1998 of one large project through IBM and several other large
projects. This decrease was partially offset by an increase in service revenues.
Sales to IBM and one large end user customer decreased significantly to 1.2% and
11.1% of the Company's total revenue for the three months ended September 30,
1999, respectively, as compared to 13.4% and 15.2%, respectively, for the three
months ended September 30, 1998. For the nine months ended September 30, 1999
sales to IBM and one large end user customer were 1.5% and 8.8%, respectively,
as compared to 16.4% and 21.0% for the nine months ended September 30, 1998.
Sales to three customers accounted for 17.9%, 15.7% and 11.1% of
revenues for the quarter ended September 30, 1999. Sales to two customers
aggregated 15.2% and 13.4% of revenues for the quarter ended September 30, 1998.
For the nine months ended September 30, 1999, one customer represented 11.0% and
for the comparable prior year period two customers represented 21.0% and 16.4%
of the Company's net sales.
9
<PAGE>
Net revenues by product group for the three months ended September 30, 1999 and
1998 were as follows ($ in thousands):
<TABLE>
<CAPTION>
1999 % 1998 %
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Frame relay access products................................... $1,491 34% $3,288 44%
Circuit management products................................... 1,031 23% 2,252 30%
Transmission products......................................... 272 6% 571 7%
Other (including service revenue)............................. 1,628 37% 1,430 19%
---------- --------- ---------- ---------
$4,422 100% $7,541 100%
========== ========= ========== =========
</TABLE>
Net revenues by product group for the nine months ended September 30, 1999 and
1998 were as follows ($ in thousands):
<TABLE>
<CAPTION>
1999 % 1998 %
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Frame relay access products................................... $5,720 41% $10,894 54%
Circuit management products................................... 2,386 17% 4,207 21%
Transmission products......................................... 869 6% 1,432 7%
Other (including service revenue)............................. 4,958 36% 3,694 18%
---------- --------- ---------- ---------
$13,933 100% $20,227 100%
========== ========= ========== =========
</TABLE>
The percentage of net revenues represented by sales through channel
partners and other resellers was 41.5% and 48.4% for the three and nine months
ended September 30, 1999, respectively, as compared to 45.6% and 50.1%,
respectively, for the corresponding periods in 1998. The sales mix of channel
partners and other resellers may change from period to period.
International sales represented 7.3% and 15.6% of the Company's total
sales during the three and nine months ended September 30, 1999, respectively,
as compared to 6.8% and 6.6% during the three and nine months ended September
30, 1998, respectively. The increase was due primarily to the timing of
shipments to the European operations of one large U.S. based multinational
customer representing 2.3% and 6.8% of the Company's total revenues for the
three and nine months ended September 30, 1999, respectively. Domestic sales
represented 92.7% and 84.4% of the Company's total sales during the three and
nine months ended September 30, 1999, respectively, as compared to 93.5% and
93.4% for the three and nine month periods ended September 30, 1998,
respectively. The decrease in both the three and nine month periods of 1999 was
due primarily to export sales to the large multinational customer and lower
sales to IBM.
GROSS PROFIT
Cost of sales primarily consists of purchased materials used in the
assembly of the Company's products, fees paid to third party subcontractors for
installation and maintenance services, and compensation paid to the Company's
manufacturing and service employees.
Gross profit decreased to $2.1 and $6.3 million for the three and nine
months ended September 30, 1999, respectively, from $2.9 and $7.4 million in the
corresponding prior year periods. The lower gross profit for the three and nine
month periods ended September 30, 1999 was primarily due to lower sales revenue.
Gross profit as a percentage of net revenues increased to 47.4% and 45.0% for
the three and nine months ended September 30, 1999, respectively, as compared to
38.8% and 36.4% for the three and nine months
10
<PAGE>
ended September 30, 1998. The increase in margins during the three and nine
months ended September 30, 1999 compared to the same period of 1998 was
primarily due to lower manufacturing and service overhead costs realized from
the Company's expense reduction initiatives.
OPERATING EXPENSES
Research and development expenses primarily consist of compensation
paid to personnel, including consultants, engaged in research and development
activities, amounts paid for outside development services and costs of materials
utilized in the development of hardware products, including product prototypes
and the depreciation and amortization of equipment and tools utilized in the
development process. It is the Company's policy to expense all research and
development costs as incurred and to capitalize certain software development
costs subsequent to the establishment of technological feasibility in accordance
with Financial Accounting Standard No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. To date, $455,000 of
externally acquired software has been capitalized. As a result of its cost
reduction efforts, the Company recorded a reduction to the net book value of its
capitalized software costs of $405,000 to reflect the decline in net realizable
value of the assets. Research and development expenses decreased to $1.3 million
and $4.3 million for the three and nine months ended September 30, 1999,
respectively, as compared to $1.9 and $5.4 million for the comparable periods in
1998. The decreased expenditures for both the three and nine month periods ended
September 30, 1999 were due primarily to reduced headcount and lower utilization
of outside consultants resulting from the Company's expense reduction programs.
Selling and marketing expenses consist primarily of base and incentive
compensation paid to sales and marketing personnel, travel and related expenses,
and costs associated with promotional and marketing activities. Selling and
marketing expenses decreased to $1.1 and $4.2 million for the three and nine
months ended September 30, 1999, respectively, as compared to $3.0 and $9.0
million for the comparable periods in 1998. The decrease in selling and
marketing expenses for both the three and nine month periods resulted primarily
from headcount reductions, changes in the mix of personnel utilized, reductions
in advertising and certain other marketing expenditures and other cost reduction
measures.
General and administrative expenses consist primarily of compensation
paid to corporate and administrative personnel, payments to consultants and
professional service providers, and public company related costs. General and
administrative expenditures decreased to $571,000 for the quarter ended
September 30, 1999, as compared to $889,000 for the quarter ended September 30,
1998, and decreased to $1.8 million for the nine months ended September 30, 1999
from $2.2 million for the nine months ended September 30, 1998. The reductions
were generally due to the Company's cost reduction efforts.
During the fourth quarter of fiscal 1998, the Company implemented
expense reduction programs to reduce its overall cost structure and, as a
result, recognized a $2.9 million non-recurring charge consisting of severance
and related headcount reduction costs, idle and excess facility charges and
write-offs of assets no longer in use due to the reduction efforts. The
components of the activity during the first, second and third quarters of 1999
were as follows (in thousands):
<TABLE>
<CAPTION>
DESCRIPTION ACCRUAL ACCRUAL
AT 12/31/98 ACTIVITY ADJUSTMENTS AT 9/30/99
-------------- ----------- --------------
<S> <C> <C> <C> <C>
Severance and related expenses............... $ 854 $(906) $100 $ 48
Idle and excess facility charges
and write-off of assets................... 1,110 (675) (100) 335
Other non-recurring charge................... 12 15 27
============== =========== ==============
Total........................................ $1,976 $(1,566) $ - $ 410
============== =========== ==============
</TABLE>
11
<PAGE>
The Company expects all 1998 expense reduction program activities will
be substantially completed during fiscal 1999. The Company will continue to
evaluate and may adjust its organization and cost structure.
Net interest income was $95,000 and $335,000 for the three and nine
months ended September 30, 1999, respectively, as compared to $223,000 and
$697,000 for the three and nine months ended September 30, 1998, respectively.
The decrease in net interest income was primarily due to the Company's lower
cash balances resulting from the utilization of cash to fund the Company's
operating activities.
INCOME TAXES
The provisions for income taxes in 1998 and 1999 represent minimum
state taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company's principal sources of liquidity
consisted of $9.3 million of cash and cash equivalents and a $3.0 million
secured bank line of credit which expires in April 2000. There were no
borrowings outstanding as of September 30, 1999.
During the nine months ended September 30, 1999, cash utilized by
operating activities was $4.8 million, compared to $4.6 million in the
corresponding period in 1998. The increased cash utilization resulted primarily
from increases in accounts receivable of $974,000 and decreases in accounts
payable of $1,568,000 and accrued severance and restructuring of $1,565,000
partially offset by lower inventories of $1,081,000, and prepaid expenses of
$451,000. At September 30, 1999 the Company had no material commitments for
capital expenditures.
The Company believes that its available cash and cash equivalents will
be sufficient to meet its working capital requirements at least through 1999.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Specifically, the
Company wishes to alert readers that, except for the historical information
contained therein, the previous discussion under "Results of Operations" and
"Liquidity and Capital Resources" constitutes forward-looking statements that
are dependent on certain risks and uncertainties which may cause actual results
to differ materially from those expressed in any forward-looking statements made
by or on behalf of the Company. The following is a description of certain major
risks and uncertainties.
HISTORY OF LOSSES; SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS; UNCERTAIN
PROFITABILITY
The Company has experienced operating losses since inception, with, in
recent years, operating losses of, $11.6 million in 1996, $18.0 million in 1997
and $16.3 million in 1998 and $4.1 million for the nine months ended September
30, 1999. As of September 30, 1999, the Company had an accumulated deficit of
approximately $58.1 million. The Company has experienced, and may in the future
experience, significant fluctuations in revenues and operating results from
quarter to quarter and from year to year due to a combination of factors.
Factors that have in the past caused, or may in the future cause, the Company's
revenues and operating results to vary significantly from period to period
include: the timing of significant orders; the relatively long length of the
sales cycles for certain of the Company's products; the market conditions in the
networking industry; the timing of capital expenditures by the Company's target
market customers; competition and pricing in the industry; the Company's success
in developing, introducing and shipping new products; new product introductions
by the Company's competitors; the rate of migration of IBM customers to frame
relay; production or quality problems; changes in material costs; impact of Year
2000 compliance problems on the networking industry and the Company's customers,
disruption in sources of supply; changes in foreign currency exchange rates; and
general economic conditions. In addition, revenues and gross margins may
fluctuate due to the mix of distribution channels employed and the mix of
products sold. For example, the Company generally realizes a higher gross margin
on direct sales than on sales through its
12
<PAGE>
channel partners and other resellers. Accordingly, if channel partners and other
resellers account for a large percentage of the Company's net revenues, gross
profit as a percentage of net revenues may decline.
The Company's future revenues are difficult to predict. Revenues and
operating results in any quarter depend on the volume and timing of, and the
ability to fulfill, orders received within the quarter. Sales of the Company's
products typically involve a sales cycle of several months or over a year from
the point of initial customer contact until receipt of the first system order,
and, in addition, the Company has in the past encountered, and may in the future
encounter, delays between initial orders and network-wide deployment. There can
be no assurance that average sales cycles will not increase in future periods.
During the past year, the Company has shifted its efforts from a focus utilizing
channel partners to one focused more on a direct sales model while utilizing
channel partners for strategic opportunities and fulfillment. Accordingly, the
Company's revenues in any period are highly dependent upon the sales efforts and
success of the Company's direct sales force and those channel partners upon
which it relies. There can be no assurance that the Company's channel partners
and other resellers will give a high priority to the marketing of the Company's
products as compared to competitive products or alternative networking solutions
or that the Company's channel partners and other resellers will continue to
offer the Company's products. In addition, the Company has shifted its focus
from large corporate Fortune 100 enterprises to the middle market enterprise;
those companies with 50 to 500 remote locations. There can be no assurance that
the middle market enterprise prospect customers will select the Company's
products as compared to alternative product offerings provided by other vendors.
A significant portion of the Company's expenses are relatively fixed in advance,
based in large part on the Company's forecasts of future sales. If sales are
below expectations in any given period, the adverse effect of a shortfall in
sales on the Company's operating results may be magnified by the Company's
inability to adjust spending to compensate for such shortfall. The Company has
in the past and may in the future reduce prices or increase spending to respond
to competition or to pursue new product or market opportunities. Accordingly,
there can be no assurance that the Company will be able to attain or sustain
profitability on a quarterly or an annual basis. In addition, if the Company's
operating results fall below the expectations of public market analysts and
investors, the price of the Company's common stock would likely be materially
and adversely affected.
DEPENDENCE ON THE IBM CUSTOMER BASE
The Company's frame relay access products are targeted at the large
installed base of IBM customers utilizing SNA networks. Thus, the Company faces
the risks associated with a relatively concentrated customer base, including the
possibility that larger IBM customers may migrate to frame relay at a
slower-than-expected rate, if at all, and the possibility that IBM customers may
purchase IBM-sponsored frame relay products other than Sync products or other
suppliers' products. IBM has sold, in the past, the Company's FrameNode(R)
product family under the name IBM Nways 2218. The agreement between IBM and the
Company expired in March 1999. Sales to IBM accounted for 1.5%, 14.1%, 16.5% and
4.9% ,respectively of the Company's net revenues for the nine months ended
September 30, 1999 and fiscal years 1998, 1997 and 1996, respectively. On August
31, 1999, IBM announced its intention to discontinue support for many of its
wide area network products and in lieu of such support entered into an
arrangement with Cisco Systems to transition its customers and prospects towards
solutions provided by Cisco. The Company has relied on IBM products, in certain
circumstances, to provided support for Sync products at the customer's data
center. Due to the IBM announcement, the Company will need to enhance its
product capability to include interoperability with products provided by vendors
other than IBM. There can be no assurance that IBM will continue to support
frame relay, that IBM will not develop or promote SNA-over-frame relay products
competitive with the Company's products, that the IBM/ Cisco relationship will
not adversely impact the Company's ability to sell its products, or that the
Company will be able to sufficiently provide for interoperability between its
products and products provided by vendors other that IBM. Any of these events
could have a material adverse effect on the Company's business, operating
results and financial condition.
UNCERTAIN MARKET ACCEPTANCE OF FRAME RELAY FOR MISSION-CRITICAL APPLICATIONS
During the nine months ended September 30, 1999 and for the fiscal year
1998, sales of frame relay access products, which enable systems network
architecture (SNA) and client/server internet-working over frame relay,
represented approximately 41% and 49%, respectively, of the Company's net
revenues. The market for SNA-over-frame relay products is maturing. The success
of the Company and its channel partners in generating
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significant sales of frame relay access products will depend in part on their
ability to educate end users about the benefits of the Company's technology and
convince end users to switch their mission-critical applications to frame relay
rather than remaining on leased line networks or selecting newer and/or
alternative technologies. In addition, broad acceptance of frame relay services
will also depend upon the tariffs for such services, which are determined by
carriers. If the tariff structure for dedicated leased lines becomes more
favorable relative to tariffs for a comparable network utilizing frame relay,
the market for frame relay networking products could be adversely affected.
There can be no assurance that the market will adopt frame relay for
mission-critical applications to any significant extent. The failure of such
adoption to occur could have a material adverse effect on the Company's
business, operating results and financial condition.
UNCERTAIN MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS; PRODUCT CONCENTRATION
The Company currently derives substantially all of its revenues from
its frame relay access, circuit management, transmission and other products and
expects that revenues from these products will continue to account for
substantially all of its revenues for the foreseeable future. Broad market
acceptance of, and continuing demand for, these products, is, therefore,
critical to the Company's future success. Factors that may affect the market
acceptance of the Company's products include the extent to which frame relay is
adopted for mission-critical applications, the availability and price of
competing products and technologies, announcements by IBM relating to products,
services or pricing relevant to the Company, the success of the sales efforts of
the Company and its resellers and tariff rates for carrier services. Moreover,
the Company's operating history in the WAN internetworking market and its
resources are limited relative to certain of its current and potential
competitors. The Company's future performance will also depend in part on the
successful development, introduction and market acceptance of new and enhanced
products. Failure of the Company's products to achieve market acceptance could
have a material adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE ON CHANNEL PARTNERS AND OTHER RESELLERS
The Company's channel partners and other resellers account, and are
expected to continue to account, for a significant percentage of the Company's
net revenues, including most of its sales outside of the United States. Sales
through channel partners and other resellers accounted for 48.4%, 62.5%, 67.0%
and 85.7% of net revenues of the Company for the nine months ended September 30,
1999 and fiscal years 1998, 1997 and 1996, respectively. Current partners
include Sprint, MCI, Intermedia Communications, Electronic Data Systems, and
Diebold. The Company has also sold its products through OEM relationships with
IBM and 3Com among others. The agreement between IBM and Sync expired in March
1999 and was not renewed. Sales to IBM accounted for 1.5%, 14.1%, 16.5% and 4.9%
of the Company's net revenues for the first nine months of 1999 and for the
fiscal years 1998, 1997 and 1996, respectively.
The Company's agreements with its channel partners and other resellers
do not restrict the sale of products that compete with those of the Company.
Each of the Company's channel partners or other resellers can cease marketing
the Company's products at the reseller's option, under certain conditions, with
limited notice and with little or no penalty. In addition, these agreements
generally provide for discounts based on expected or actual volumes of products
purchased or resold by the reseller in a given period, do not require minimum
purchases, prohibit distribution of certain products by the Company through
certain categories of third parties under certain conditions and provide for
manufacturing rights and access to source code upon the occurrence of specified
conditions or defaults.
Certain of the Company's channel partners offer alternative solutions,
designed by themselves or third parties, for SNA internetworking or have
pre-existing relationships with current or potential competitors of the Company.
Certain of the Company's channel partners have in the past developed competitive
products and terminated their relationships with the Company, and such
developments could occur in the future. Many of the Company's resellers offer
competitive products manufactured either by third parties or by themselves.
The Company generally realizes a higher gross margin on direct sales
than on sales through its channel partners and other resellers. Accordingly, as
channel partners and other resellers continue to account for a
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significant portion of the Company's net revenues, gross profit as a percentage
of net revenues may decline.
There can be no assurance that the Company will retain its current
channel partners or other resellers or that it will be able to recruit
additional or replacement channel partners. The loss of one or more of the
Company's channel partners or other resellers could have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, there can be no assurance that the Company's channel partners and
other resellers will give priority to the marketing of the Company's products as
compared to competitive products or alternative networking solutions or that the
Company's channel partners and other resellers will continue to offer the
Company's products. Any reduction or delay in sales of the Company's products by
its channel partners and other resellers could have a material adverse effect on
the Company's business, operating results and financial condition.
YEAR 2000 COMPLIANCE
Many currently installed computer and telecommunications systems and
software products were not designed to consider the impact of moving into the
21st century. As a result, errors or system failures could result if these
systems and applications are not corrected or replaced prior to the year 2000.
The Company continues to evaluate the impact of the "Year 2000" issue upon its
products, support systems and overall business.
The Company has defined Year 2000 compliance using the British
Standards Institute (BSI) definition. The BSI DISC PD2000-1 definition provides
that Year 2000 compliance shall mean that neither product performance nor
functionality is affected by dates prior to, during and after the year 2000. The
Company has either internally or in collaboration with certain of its suppliers
and customers evaluated, tested and verified the Year 2000 compliance of its
latest product offerings. The Company believes that several of its discontinued
or earlier versions of its conversion and frame relay products are not Year 2000
compliant and the Company currently does not plan to update these products.
However, the Company offers for sale upgrade programs to its customers of most
of these non-compliant discontinued products. Certain of the Company's products
rely on date information from other devices resident in the networks in which
they operate. Thus, any Year 2000 problems within these third party networking
products could cause the Company's products not to work accurately or cause
disruption in their operation.
The Company relies on a number of computer systems and applications to
operate and monitor all major aspects of its business. The Company has evaluated
all of its business critical systems, internal information and non-information
systems, and most of its non-critical systems through inquiries with the
respective manufacturers and testing or the completion of other verification
procedures. Substantially all of the Company's critical systems have been
verified to meet the Company's Year 2000 requirements and the Company's
non-critical systems which require compliance are expected to be made fully
compliant by December 31, 1999.
The Company relies on third party suppliers for the management and
control of fabrication, assembly and testing of substantially all of the
Company's products. The Company is continuing to make inquiries and evaluate the
Year 2000 compliance of all of its significant vendors and service providers
upon which it relies. All of the Company's key vendors have represented to the
Company the achievement of substantial compliance and the expectation that the
Year 2000 will not materially impact product delivery. As a result, the Company
has determined that contingency plans to provide for alternative sources are not
required at this time. Even where assurances have been received, the Company
remains subject to the risk that Year 2000 matters could negatively affect such
companies and, therefore, could cause delays in timely delivery of products and
services to the Company and have a material adverse effect on the Company.
The Company has not incurred substantial costs to date to address the
Year 2000 issue and is unable to estimate the additional cost, if any, that may
arise from actions taken by the Company, if any, to address the Year 2000 issue
or from the interaction of the Company's products with other companies'
networking devices and systems. In addition, the Company is unable to assess the
potential risks and exposures associated with changes in generally accepted
definitions of Year 2000 compliance that may impact the compliance of its
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products. Any failure by the Company to make its products Year 2000 compliant
could result in a decrease in sales of the Company's products, diversion of
development resources, damage to the Company's reputation, increased service and
warranty costs and/or possible claims against the Company by customers as a
result of Year 2000 problems caused by the Company's products, any of which
could have a material adverse effect on the Company, its business, operating
results and financial condition.
Many of the Company's customers and prospective customers are expected
to devote a substantial portion of their information systems budgets to the Year
2000 problem, and, as a result, spending may be diverted from wide area
networking solutions. In addition, the Company's customers, which consists
primarily of mid size to large enterprises operating business critical
applications over the wide area networks that are supported by the Company's
products, may be less willing to purchase wide area networking products or
otherwise implement new network solutions during the second half of 1999 in
anticipation of the Year 2000. The Company relies on a large variety of business
enterprises such as customers, suppliers, creditors, financial organizations,
and domestic and international governmental entities, for the accurate exchange
of data. Any disruption in the computer systems of any of these third parties
could materially and adversely affect the Company. Due to the Company's focus on
the wide area networking market, which is vulnerable to technological issues
involving the Year 2000, substantially all of the Company's revenues may be at
risk.
Despite the Company's efforts to address the Year 2000 impact on its
products, internal systems and business operations, the Year 2000 issue may
result in a material disruption of its business or have a material adverse
effect on the Company's business, financial condition or results of operations.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent new product
introductions. The Company's success will depend to a substantial degree upon
its ability to develop and introduce in a timely fashion enhancements to its
existing products and new products that meet changing customer requirements and
emerging industry standards. The development of new, technologically advanced
products is a complex and uncertain process requiring high levels of innovation,
as well as the accurate anticipation of technological and market trends. There
can be no assurance that the Company will be able to identify, develop,
manufacture, market or support new products successfully, that such new products
will gain market acceptance or that the Company will be able to respond
effectively to technological changes, emerging industry standards or product
announcements by competitors. In addition, the Company has on occasion
experienced delays in the introduction of product enhancements and new products.
There can be no assurance that in the future the Company will be able to
introduce product enhancements or new products on a timely basis. Further, from
time to time, the Company may announce new products, capabilities or
technologies that have the potential to replace or shorten the life cycle of the
Company's existing product offerings. There can be no assurance that
announcements of product enhancements or new product offerings will not cause
customers to defer purchasing existing Company products or cause resellers to
return products to the Company. Failure to introduce new products or product
enhancements effectively and on a timely basis, customer delays in purchasing
products in anticipation of new product introductions and any inability of the
Company to respond effectively to technological changes, emerging industry
standards or product announcements by competitors could have a material adverse
effect on the Company's business, operating results and financial condition.
PRODUCT ERRORS
Products as complex as those offered by the Company may contain
undetected software or hardware errors when first introduced or as new versions
are released. Such errors have occurred in the past, and there can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in new or enhanced products after
commencement of commercial shipments. Moreover, there can be no assurance that
once detected, such errors can be corrected in a timely manner, if at all.
Software errors may take several months to correct, if they can be corrected at
all, and hardware errors may take even longer to rectify. The occurrence of such
software or hardware errors, as well as any delay in correcting them, could
result in the delay or loss of market acceptance of the Company's products,
additional warranty expense, diversion of engineering and other resources from
the Company's product development efforts or the loss of credibility with the
Company's
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channel partners and other resellers, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
INTENSE COMPETITION
The market for communications products is intensely competitive and
subject to rapid technological change and emerging industry standards. The
Company's current competitors include internetworking companies, such as Cisco
and Nortel; FRAD providers, such as Hypercom, Motorola ISG and Cabletron; and
circuit management and digital transmission providers such as Visual Networks,
Netscout, Digital Link, Racal, AT&T Paradyne and Adtran, among others. Potential
competitors include other internetworking and WAN access and transmission
companies, frame relay switch providers, IBM and the Company's other channel
partners. Many of the Company's current and potential competitors have longer
operating histories and greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base, than
does the Company. As a result, they may be able to respond more quickly to new
or emerging technologies and changes in customer requirements or may be able to
devote greater resources to the development, promotion, sale and support of
their products than the Company. Many also have long-standing customer
relationships with mid-sized and large enterprises that are part of the
Company's target market, and these relationships may make it more difficult to
complete sales of the Company's products to these enterprises. Further, certain
of the Company's channel partners have in the past developed competitive
products and terminated their relationships with the Company, and such
developments could occur in the future. As a consequence of all these factors,
the Company expects increased competition. Increased competition could result in
significant price competition, reduced profit margins or loss of market share,
any of which could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be able to compete successfully in the future.
DEPENDENCE ON CONTRACT MANUFACTURERS
The Company's manufacturing operations consist primarily of materials
planning and procurement, light assembly, system integration, testing and
quality assurance. The Company has entered into arrangements with contract
manufacturers to outsource substantial portions of its procurement, assembly and
system integration operations. There can be no assurance that these independent
contract manufacturers will be able to meet the Company's future requirements
for manufactured products or that such independent contract manufacturers will
not experience quality problems in manufacturing the Company's products. The
inability of the Company's contract manufacturers to provide the Company with
adequate supplies of high quality products could have a material adverse effect
upon the Company's business, operating results and financial condition. The loss
of any of the Company's contract manufacturers could cause a delay in the
Company's ability to fulfill orders while the Company identifies a replacement
manufacturer. Such an event could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's manufacturing procedures may in certain instances create
a risk of excess or inadequate inventory if orders do not match forecasts. Any
manufacturing delays, excess manufacturing capacity or inventories or inability
to increase manufacturing capacity, if required, could have a material adverse
effect on the Company's business, operating results and financial condition.
DEPENDENCE ON SUPPLIERS
Certain key components used in the manufacture of the Company's
products are currently purchased only from single or limited sources. At
present, single-sourced components include programmable integrated circuits,
selected other integrated circuits and cables, custom-molded plastics and
custom-tooled sheet metal, and limited-sourced components include flash
memories, DRAMs, printed circuit boards and selected integrated circuits. The
Company generally relies upon contract manufacturers to buy component parts that
are incorporated into board assemblies. The Company buys directly final assembly
parts, such as plastics and metal covers, cables and other parts used in final
configurations. The Company generally does not have long-term agreements with
any of these single or limited sources of supply. Any loss in a supplier,
increase in required lead times, increase in price of component parts,
interruption in the supply of any of these components, or the inability of the
Company to procure these components from alternate sources at acceptable prices
and within a reasonable time, could have a material adverse effect upon the
Company's business, operating results and financial condition. If
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orders do not match forecasts, the Company may have excess or inadequate
inventory of certain materials and components, and suppliers may demand longer
lead times, higher prices or termination of contracts. From time to time the
Company has experienced shortages of certain components and has paid
above-market prices to acquire such components on an accelerated basis or has
experienced delays in fulfilling orders while waiting to obtain the necessary
components. Such shortages may occur in the future and could have a material
adverse effect on the Company's business, operating results and financial
condition.
DEPENDENCE ON AND RISKS ASSOCIATED WITH INTERNATIONAL SALES
Sales to customers outside of the United States accounted for
approximately 15.6%, 6.9%, 19.1% and 12.7% of the Company's net revenues for the
nine months ended September 30, 1999 and fiscal years 1998, 1997 and 1996,
respectively. The increase in international sales in 1999 resulted primarily
from sales related to the European operations of one large U.S. based
multinational customer and sales to its reseller partner in South Korea. The
Company expects that international sales may represent an important percentage
of net revenues in future periods. Sales levels to customers in the Pacific Rim
countries, which represented approximately 4.7% of the Company's net revenues
for the first nine months of 1999 and 3.7% of the Company's net revenues in
1998, remain uncertain.
Historically, the Company's international sales have been conducted
primarily through independent distributors. The Company intends to continue to
market its products in foreign countries in the future through its channel
partners. Failure of these resellers to market the Company's products
internationally or the loss of any of these resellers could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, the Company's ability to increase sales of its products
to international end users may be limited if the carrier services, such as frame
relay, or protocols supported by the Company's products are not widely adopted
internationally. A number of additional risks are inherent in international
transactions. The Company's international sales currently are U.S.
dollar-denominated. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies, as has occurred recently in several Asian
markets, could make the Company's products less competitive in international
markets. International sales may also be limited or disrupted by the imposition
of governmental controls, export license requirements, restrictions on the
export of critical technology, currency exchange fluctuations, political
instability, trade restrictions and changes in tariffs. In addition, sales in
Europe and certain other parts of the world typically are adversely affected in
the third quarter of each year as many customers and end users reduce their
business activities during the summer months. These international factors could
have a material adverse effect on future sales of the Company's products to
international end users and, consequently, the Company's business, operating
results and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's future success depends, in part, upon its proprietary
technology. The Company does not hold any patents and currently relies on a
combination of contractual rights, trade secrets and copyright laws to establish
and protect its proprietary rights in its products. There can be no assurance
that the steps taken by the Company to protect its intellectual property will be
adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. In the event that protective
measures are not successful, the Company's business, operating results and
financial condition could be materially and adversely affected. In addition, the
laws of some foreign countries do not protect the Company's proprietary rights
to the same extent as do the laws of the United States. The Company is also
subject to the risk of adverse claims and litigation alleging infringement of
intellectual property rights of others. There can be no assurance that third
parties will not assert infringement claims in the future with respect to the
Company's current or future products or that any such claims will not require
the Company to enter into license arrangements or result in litigation,
regardless of the merits of such claims. No assurance can be given that any
necessary licenses will be available or that, if available, such licenses can be
obtained on commercially reasonable terms. Should litigation with respect to any
such claims commence, such litigation could be extremely expensive and
time-consuming and could have a material adverse effect on the Company's
business, operating results and financial condition regardless of the outcome of
such litigation.
TARIFF AND REGULATORY MATTERS
Rates for public telecommunications services, including features and
capacity of such services, are
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governed by tariffs determined by carriers and subject to regulatory approval.
Future changes in these tariffs could have a material effect on the Company's
business. For example, should tariffs for frame relay services increase in the
future relative to tariffs for dedicated leased lines, the cost-effectiveness of
the Company's products could be reduced, which could have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, the Company's products must meet industry standards and receive
certification for connection to certain public telecommunications networks prior
to their sale. In the United States, the Company's products must comply with
various regulations defined by the Federal Communications Commission and
Underwriters Laboratories. Internationally, the Company's products must comply
with standards established by telecommunications authorities in various
countries as well as with recommendations of the Consultative Committee on
International Telegraph and Telephony. In addition, carriers require that
equipment connected to their networks comply with their own standards, which in
part reflect their currently installed equipment. Some public carriers have
installed equipment that does not fully comply with current industry standards,
and this noncompliance must be addressed in the design of the Company's
products. Any future inability to obtain on a timely basis or retain domestic or
foreign regulatory approvals or certifications or to comply with existing or
evolving industry standards could have a material adverse effect on the
Company's business, operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends, to a significant degree, upon the
continued contributions of its key management, sales, marketing, research and
development and manufacturing personnel. The Company believes its future success
will also depend in large part upon its ability to attract and retain highly
skilled engineering, managerial, sales and marketing personnel, and development
engineers. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. During 1999, the Company has undergone moderate personnel turnover in
research and development, sales, and other functional areas. During 1998 and
1999, the Company also experienced significant turnover in the composition of
its executive officers. Two of the current three executive officers, including
the President and Chief Executive Officer, have been officers of the Company for
less than a year. The loss of the services of any of the Company's key personnel
or the failure to attract or retain qualified personnel in the future could have
a material adverse effect on the Company's business, operating results or
financial condition.
GENERAL ECONOMIC CONDITIONS
Demand for the Company's products depends in large part on the overall
demand for communications and networking products, which has in the past and may
in the future fluctuate significantly based on numerous factors, including
capital spending levels and general economic conditions. There can be no
assurance that the Company will not experience a decline in demand for its
products due to general economic conditions. Any such decline could have a
material adverse effect on the Company's business, operating results and
financial condition.
VOLATILITY OF STOCK PRICE
Factors such as announcements of technological innovations or the
introduction of new products by the Company or its competitors, as well as
market conditions in the technology sector, may have a significant effect on the
market price of the Company's common stock. Further, the stock market has
experienced volatility which has particularly affected the market prices of
equity securities of many high technology companies and which often has been
unrelated to the operating performance of such companies. These market
fluctuations may have an adverse effect on the price of the Company's common
stock.
NASDAQ STOCK LISTING
The Company's common stock is listed and traded on the Nasdaq National
Market. On January 4, 1999, the Company received a letter from Nasdaq notifying
the Company that it has failed to maintain a closing bid price of greater than
$1.00 in accordance with the Nasdaq listing requirements. In order to comply
with the Nasdaq listing requirements, on June 28, 1999 the Company implemented a
1 for 5 reverse stock split that was approved by the Company's stockholders at
the Annual Meeting on June 11, 1999. As a result of the reverse stock split, the
Company has maintained its stock price above the $1 per share minimum level, and
accordingly, has been informed by Nasdaq that it currently meets the
requirements for continued listing. However, there can be no
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assurance that the Company will meet the minimum closing bid price or any other
NASDAQ listing requirements on an ongoing basis.
ANTI-TAKEOVER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In addition, certain provisions
of the Company's charter documents, including provisions eliminating cumulative
voting, eliminating the ability of stockholders to call meetings or to take
actions by written consent and limiting the ability of stockholders to raise
matters at a meeting of stockholders without giving advance notice, may have the
effect of delaying or preventing a change in control or management of the
Company, which could have an adverse effect on the market price of the Company's
common stock. Certain of the Company's stock option and purchase plans and
agreements provide for assumption of such plans, or, alternatively, immediate
vesting upon a change of control or similar event. In addition, the Company has
entered into severance agreements with its officers, pursuant to which they are
entitled to defined severance payments if they are actually or constructively
terminated within specified time periods following a change of control of the
Company. The Board of Directors has authority to issue up to 2,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of these shares without any further vote or action by
the stockholders. The rights of the holders of the common stock will be subject
to, and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such preferred stock may have other rights, including
economic rights senior to the common stock, and as a result, the issuance of
such preferred stock could have a material adverse effect on the market value of
the common stock. The Company has no present plan to issue shares of preferred
stock.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS ASSOCIATED WITH FOREIGN EXCHANGE
In the first nine months of 1999, approximately 15.6% of the Company's
net revenues were derived from sales to international customers, primarily in
Europe and the Pacific Rim. As a result, the Company is exposed to market risk
from changes in foreign exchange rates and international economic conditions,
which could affect its results of operations and financial condition. In order
to reduce the risk from fluctuation in foreign exchange rates, the Company's
sales are denominated in U.S.
dollars. The Company has not entered into any currency hedging activities.
INTEREST RATE RISKS
The Company invests its excess cash in high quality government and
corporate debt instruments. However, the Company may be exposed to fluctuation
in rates on these investments. Increases or decreases in interest rates
generally translate into increases or decreases in the fair value of these
investments. Such changes to these investments have historically not been
material due to the short-term nature of the Company's investment. In addition,
the credit worthiness of the issuer, the relative values of alternative
investments, the liquidity of the instruments and other general market
conditions may affect the fair value of interest rate sensitive instruments. In
order to reduce the risk from fluctuation in rates, the Company invests in money
market funds and short-term debt instruments of U.S. corporations with strong
credit ratings and the federal government with contractual maturities of less
than three months. At September 30, 1999, investments were as follows ($ in
millions):
<TABLE>
<CAPTION>
AVERAGE
AVERAGE INTEREST FAIR
BALANCE MATURITY RATE VALUE
------- -------- -------- -----
<S> <C> <C> <C> <C>
Short-term debt instruments and money market funds $8.6 2 months 5% $8.6
</TABLE>
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SYNC RESEARCH, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 5, 1997, an action entitled Dalarne Partners, Ltd. Vs. Sync
Research, Inc., et al., No. On November 5, 1997, an action entitled Dalarne
Partners, Ltd. Vs Sync Research, Inc., et al., No. SACV97-877 AHS (Eex) was
filed against the Company and certain of its directors and officers. The action
was filed in the U.S. District Court for the Central Division of California,
Southern Division. The action purported to be a class action lawsuit brought on
behalf of purchasers of the Company's common stock during the period from
November 18, 1996 through March 20, 1997. The complaint asserted claims for
violation of the Securities Exchange Act of 1934. On February 17, 1999, the U.S.
District Court issued an order granting the Company's motion to dismiss the
first amended complaint, granting leave to amend. The plaintiffs filed a second
amended complaint on March 22, 1999. The Company and the other defendants have
moved to dismiss the second amended complaint. The Court has taken defendants'
motion under submission and no hearing date is set. The complaint seeks to
recover damages in an unspecified amount. The Company intends to defend this
lawsuit vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)EXHIBITS
*10.15 Amendment to Loan and Security Agreement between the Company and
Silicon Valley Bank dated April 14, 1999
10.41 Third Amendment to Lease for 10c Commerce Way, Norton, MA dated
July 28, 1999
10.42 Standard Industrial Lease for 12 Morgan, Irvine, CA dated July
19, 1999
27.1 Financial Data Schedule.
* Re-filed in order to include certain material excluded from previous
filing.
(b)REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter ended September 30,
1999.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SYNC RESEARCH, INC.
By: /s/ William K. Guerry
---------------------------------------
William K. Guerry
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED SIGNATORY AND PRINCIPAL
Date: November 15, 1999 FINANCIAL AND ACCOUNTING OFFICER)
23
<PAGE>
1476-10Q-0999
<PAGE>
SILICON VALLEY BANK
AMENDMENT TO LOAN AND SECURITY
AGREEMENT
BORROWER: SYNC RESEARCH, INC.
ADDRESS: 40 PARKER
IRVINE, CALIFORNIA 92618
DATED: APRIL 14, 1999
THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY
BANK ("Silicon") and the borrower named above (the "Borrower").
The Parties agree to amend the Loan and Security Agreement between them,
dated September 18, 1991, as amended by that Extension Agreement dated August
3, 1992, by that Amendment to Loan Agreement dated October 20, 1992, by that
Amendment to Loan Agreement dated August 23, 1993, by that Amendment to Loan
Agreement dated February 10, 1994, by that Amendment to Loan Agreement dated
July 18, 1994, by that Amendment to Loan Agreement dated September 20, 1994,
by that Amendment to Loan and Security Agreement dated August 31, 1995, by
that Amendment to Loan and Security Agreement (the "October 1995 Amendment")
dated October 5, 1995, by that Amendment to Loan Agreement dated July 3,
1996, by that Amendment to Loan and Security Agreement dated October 6, 1996,
by that Amendment to Loan and Security Agreement dated June 10, 1997 and by
that Amendment to Loan and Security Agreement dated as of December 3, 1997
(the "Loan Agreement"), as follows. (Capitalized terms used but not defined
in this Agreement, shall have the meanings set forth in the Loan Agreement.)
1. REVISED SCHEDULE. The Schedule to Loan Agreement is hereby
replaced in its entirety with the Schedule to Loan Agreement as attached
hereto.
2. MODIFICATION TO SECTIONS 2.2 AND 2.2A. Section 2.2 and Section
2.2A of the Loan Agreement are hereby replaced in their entirety with the
following Section 2.2 and Section 2.2A:
"2.2 GRANT OF SECURITY INTEREST IN COLLATERAL. The Borrower grants
Silicon a continuing security interest in all of the Borrower's interest in
the Collateral (as defined below in Section 2.2A) as security for all
Obligations.
2.2A COLLATERAL. The term 'Collateral' as used herein shall mean all of
the Borrower's interest in the types of property described below, whether
now owned or hereafter acquired, and wherever located: (a) All accounts,
contract rights, chattel paper, letters of credit, documents, securities,
money, and instruments, and all other obligations now or in the future
owing to the Borrower; (b) All inventory, goods, merchandise, materials,
raw materials, work in process, finished goods, farm products, advertising,
packaging and shipping materials, supplies, and all other tangible personal
property which is held for sale or lease or furnished under contracts
-1-
<PAGE>
of service or consumed in the Borrower's business, and all warehouse
receipts and other documents; and (c) All equipment, including without
limitation all machinery, fixtures, trade fixtures, vehicles, furnishings,
furniture, materials, tools, machine tools, office equipment, computers and
peripheral devices, appliances, apparatus, parts, dies, and jigs; (d) All
general intangibles including, but not limited to, deposit accounts,
goodwill, names, trade names, trademarks and the goodwill of the business
symbolized thereby, trade secrets, drawings, blueprints, customer lists,
patents, patent applications, copyrights, security deposits, loan
commitment fees, federal, state and local tax refunds and claims, all
rights in all litigation presently or hereafter pending for any cause or
claim (whether in contract, tort or otherwise), and all judgments now or
hereafter arising therefrom, all claims of Borrower against Silicon, all
rights to purchase or sell real or personal property, all rights as a
licensor or licensee of any kind, all royalties, licenses, processes,
telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including without limitation credit,
liability, property and other insurance), and all other rights, privileges
and franchises of every kind; (e) All books and records, whether stored on
computers or otherwise maintained; and (f) All substitutions, additions and
accessions to any of the foregoing, and all products, proceeds and
insurance proceeds of the foregoing, and all guaranties of and security
for the foregoing; and all books and records relating to any of the
foregoing. Silicon's security interest in any present or future technology
(including patents, trade secrets, and other technology) shall be subject
to any licenses or rights now or in the future granted by the Borrower to
any third parties in the ordinary course of Borrower's business; provided
that if the Borrower proposes to sell, license or grant any other rights
with respect to any technology in a transaction that, in substance, conveys
a major part of the economic value of that technology, Silicon shall first
be requested to release its security interest in the same, and Silicon may
withhold such release in its discretion."
3. MODIFICATION TO SECTION 3.7. Section 3.7 of the Loan Agreement is
hereby amended in its entirety to read as follows:
"3.7 FINANCIAL CONDITION AND STATEMENTS. All financial statements now or
in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and accurately reflect the financial condition of
the Borrower, at the times and for the periods therein stated. Since the
last date covered by any such statement, there has been no material adverse
change in the financial condition or business of the Borrower. The
Borrower is now and will continue to be solvent. The Borrower will provide
Silicon: (i) within 30 days after the end of each month, a monthly
financial statement prepared by the Borrower, and a Compliance Certificate
in such form as Silicon shall reasonably specify, signed by the Chief
Financial Officer of the Borrower, certifying that as of the end of such
month the Borrower was in full compliance with all of the terms and
conditions of this Agreement, and setting forth calculations showing
compliance with the financial covenants set forth on the Schedule and such
other information as Silicon shall reasonably request #; and (ii) within
120 days following the end of the Borrower's fiscal year, complete annual
financial statements, certified by independent certified public accountants
acceptable to Silicon and accompanied by the unqualified report thereon by
said independent certified public accountants. *
# (AND SUCH INFORMATION SHALL INCLUDE WITHOUT LIMITATION BANK AND BROKERAGE
STATEMENTS OR OTHER EVIDENCE SATISFACTORY TO SILICON REGARDING THE
LIQUIDITY FINANCIAL COVENANT SET FORTH IN THE SCHEDULE TO THIS AGREEMENT)
-2-
<PAGE>
* BORROWER SHALL ALSO SUPPLY TO SILICON (i) WITHIN 5 DAYS AFTER THE EARLIER
OF THE DATE THE REPORT 10-Q IS FILED OR IS REQUIRED TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO BORROWER, SUCH 10-Q
REPORT; AND (ii) WITHIN 5 DAYS AFTER THE EARLIER OF THE DATE THE REPORT
10-K IS FILED OR IS REQUIRED TO BE FILED WITH THE SECURITIES EXCHANGE
COMMISSION WITH RESPECT TO BORROWER, SUCH 10-K REPORT."
4. MODIFICATION TO SECTION 4.5. Section 4.5 of the Loan Agreement is
hereby deleted in its entirety and replaced with the following:
"4.5 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At all reasonable times,
and upon one business day notice, Silicon, or its agents, shall have the
right to inspect the Collateral, and the right to audit and copy the
Borrower's accounting books and records and Borrower's books and records
relating to the Collateral. Silicon shall take reasonable steps to keep
confidential all information obtained in any such inspection or audit, but
Silicon shall have the right to disclose any such information to its
auditors, regulatory agencies, and attorneys, and pursuant to any subpoena
or other legal process. The foregoing audits shall be at Silicon's
expense, except that the Borrower shall reimburse Silicon for its
reasonable out of pocket costs for semi-annual accounts receivable audits
by third parties retained by Silicon, and Silicon may debit Borrower's
deposit accounts with Silicon for the cost of such semi-annual accounts
receivable audits (in which event Silicon shall send notification thereof
to the Borrower). Notwithstanding the foregoing, after the occurrence of
an Event of Default all audits shall be at the Borrower's expense."
5. FEE. Borrower shall pay to Silicon a facility fee in the amount
of $15,000 concurrently, which shall be in addition to all interest and all
other amounts payable under the Loan Agreement, and which shall not be
refundable.
6. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon
that all representations and warranties set forth in the Loan Agreement, as
amended hereby, are true and correct.
7. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior
written amendments to the Loan Agreement signed by Silicon and the Borrower,
and the other written documents and agreements between Silicon and the
Borrower set forth in full all of the representations and agreements of the
parties with respect to the subject matter hereof and supersede all prior
discussions, representations, agreements and understandings between the
parties with respect to the subject hereof. Except as herein expressly
amended, all of the terms and provisions of the Loan Agreement, as so
amended, and all other documents and agreements between Silicon and the
Borrower shall continue in full force and effect and the same are hereby
ratified and confirmed.
BORROWER: SILICON:
SYNC RESEARCH, INC. SILICON VALLEY BANK
BY /S/ RICHARD MARTIN BY /S/ MARLA JOHNSON
----------------------------- -----------------------------
PRESIDENT OR VICE PRESIDENT TITLE VICE PRESIDENT
BY /S/ WILLIAM K. GUERRY
-----------------------------
SECRETARY OR ASS'T SECRETARY
-3-
<PAGE>
SILICON VALLEY BANK
AMENDED SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: SYNC RESEARCH, INC.
ADDRESS: 40 PARKER
IRVINE, CALIFORNIA 92618
DATED: APRIL 14, 1999
CREDIT LIMIT
(Section 1.1): An amount not to exceed (i) $3,000,000 at any one
time outstanding or (ii) 80% of the Net Amount of
Borrower's accounts, which Silicon in its discretion
deems eligible for borrowing.
"Net Amount" of an account means the gross amount
of the account, minus all applicable sales, use,
excise and other similar taxes and minus all
discounts, credits and allowances of any nature
granted or claimed.
Without limiting the fact that the determination
of which accounts are eligible for borrowing is a
matter of Silicon's discretion, the following will
not be deemed eligible for borrowing: accounts
outstanding for more than 90 days from the invoice
date, accounts subject to any contingencies,
accounts owing from any government agency (unless
Borrower completes such assignment of claims
documentation and other documentation that Silicon
determines is necessary or desirable to perfect
and protect the interest of Silicon therein),
accounts owing from an account debtor outside the
United States (unless pre-approved by Silicon in
its discretion, or backed by a letter of credit
satisfactory to Silicon, or FCIA insured
satisfactory to Silicon), accounts owing from one
account debtor to the extent they exceed 25% of
the total eligible accounts outstanding, accounts
owing from an affiliate of Borrower, and accounts
owing from an account debtor to whom Borrower is
or may be liable for goods purchased from such
account debtor or otherwise. In addition, if more
than 50% of the accounts owing from an account
debtor are outstanding more than 90 days from the
invoice date or are otherwise not eligible
accounts, then all accounts owing from that
account debtor will be deemed ineligible for
borrowing.
INTEREST RATE
(Section 1.2): A rate equal to the "Prime Rate" in effect from time
to time plus .50%, per annum, calculated on the basis
of a 360-day year for the actual number of days
elapsed. "Prime Rate" means the rate announced from
time to time by Silicon as its "prime rate;" it is a
base rate upon which other rates charged by Silicon
are based, and it is not necessarily the best rate
available at Silicon. The interest rate applicable to
the Obligations shall change on each date there is a
change in the Prime Rate.
-1-
<PAGE>
FACILITY FEE
(Section 1.3): As per the Amendment to Loan Agreement of even date
herewith.
MATURITY DATE
(Section 5.1): APRIL 14, 2000
PRIOR NAMES OF BORROWER
(Section 3.2): TYLINK CORPORATION
TRADE NAMES OF BORROWER
(Section 3.2): NONE
OTHER LOCATIONS AND
ADDRESSES (Section 3.3): 10C COMMERCE WAY, NORTON, MA 02766
MATERIAL ADVERSE
LITIGATION (Section 3.10): AS SET FORTH IN THE BORROWER'S DECEMBER 31, 1998 10-K
REPORT
NEGATIVE COVENANTS-
EXCEPTIONS (Section 4.6): Without Silicon's prior written consent, Borrower may
do the following, provided that, after giving effect
thereto, no Event of Default has occurred and no
event has occurred which, with notice or passage of
time or both, would constitute an Event of Default,
and provided that the following are done in
compliance with all applicable laws, rules and
regulations: (i) repurchase shares of Borrower's
stock pursuant to employee stock option plans or
other similar plans in an amount not to exceed
$75,000 during any fiscal year of the Borrower and
(ii) repurchase up to 500,000 shares of the
Borrower's stock during the term of this Agreement in
accordance with previously announced Borrower plans
as disclosed to Silicon.
FINANCIAL COVENANTS
(Section 4.1): Borrower shall comply with all of the following
covenants. Compliance shall be determined as of the
end of each month, except as otherwise specifically
provided below:
LIQUIDITY COVENANT Borrower shall maintain cash on hand, cash
equivalents and marketable securities in an amount
not less than $9,000,000, with the understanding that
at least $3,000,000 thereof shall be on deposit with
Silicon at all times.
DEBT TO TANGIBLE
NET WORTH RATIO: Borrower shall maintain a ratio of total liabilities
to tangible net worth of not more than 1.00 to 1.
PROFITABILITY: Borrower shall not incur a loss (after taxes) for the
fiscal quarter ending March 31, 1999 in excess of
$3,000,000; Borrower shall not incur a loss (after
taxes) for the fiscal quarter ending June 30, 1999 in
excess of $1,500,000; Borrower shall not incur a loss
(after taxes) for the fiscal quarter ending September
30, 1999 in excess of $500,000; and, thereafter,
Borrower shall not incur a loss (after taxes) in any
-2-
<PAGE>
fiscal quarter. It is understood and agreed that net
losses through the quarter end period of September
30, 1999 may be cumulative.
DEFINITIONS: "Current assets," and "current liabilities" shall
have the meanings ascribed to them in accordance with
generally accepted accounting principles.
"Tangible net worth" means the excess of total assets
over total liabilities, determined in accordance with
generally accepted accounting principles, excluding
however all assets which would be classified as
intangible assets under generally accepted accounting
principles, including without limitation goodwill,
licenses, patents, trademarks, trade names,
copyrights, and franchises.
"Quick Assets" means cash on hand or on deposit in
banks, readily marketable securities issued by the
United States, readily marketable commercial paper
rated "A-1" by Standard & Poor's Corporation (or a
similar rating by a similar rating organization),
certificates of deposit and banker's acceptances, and
accounts receivable (net of allowance for doubtful
accounts).
SUBORDINATED DEBT: "Liabilities" for purposes of the foregoing covenants
do not include indebtedness which is subordinated to
the indebtedness to Silicon under a subordination
agreement in form specified by Silicon or by language
in the instrument evidencing the indebtedness which
is acceptable to Silicon.
OTHER COVENANTS
(Section 4.1): Borrower shall at all times comply with all of the
following additional covenants:
1. BANKING RELATIONSHIP. Borrower shall at all times
maintain its primary banking relationship with
Silicon.
2. MONTHLY BORROWING BASE CERTIFICATE AND LISTING.
Borrower shall provide Silicon with a Borrowing Base
Certificate in such form as Silicon shall specify,
and an aged listing of Borrower's accounts receivable
and accounts payable.
3. INDEBTEDNESS. Without limiting any of the
foregoing terms or provisions of this Agreement,
Borrower shall not in the future incur indebtedness
for borrowed money, except for (i) indebtedness to
Silicon, and (ii) indebtedness incurred in the future
for the purchase price of or lease of equipment in an
aggregate amount not exceeding $250,000 at any time
outstanding.
4. MATERIAL ADVERSE CHANGE EVENT OF DEFAULT. Without
limitation of the terms and conditions of the Loan
Agreement, the occurrence of a material adverse
change in the business, operations, or condition
(financial or otherwise) of the Borrower, or (ii) a
material impairment of the prospect of repayment of
any portion of the Obligations or (iii) a material
impairment of the value or priority of Silicon's
security interests in the Collateral shall constitute
an Event of Default under this Agreement.
-3-
<PAGE>
BORROWER:
SYNC RESEARCH, INC.
BY /s/ RICHARD MARTIN
-------------------------------
President or Vice President
BY /s/ WILLIAM K. GUERRY
-------------------------------
Secretary or Ass't Secretary
SILICON:
SILICON VALLEY BANK
BY /s/ MARLA JOHNSON
-------------------------------
TITLE Vice President
----------------------------
-4-
<PAGE>
10.41 Third Amendment to Lease for 10c Commerce Way, Norton, MA dated
July 28, 1999
THIRD AMENDMENT TO LEASE
This Agreement made this 28th day of July, 1999, by and between Gregory D.
Stoyle and John J. Flatley, Trustees of the 1993 Flatley Family Trust
successor-in-interest-to Thomas J. Flatley d/b/a The Flatley Company
(hereinafter referred to as LANDLORD), and TyLink Corp.(hereinafter referred to
as TENANT),
WITNESSETH:
WHEREAS, by a certain Lease Agreement May 14, 1991, as amended by a First
Amendment to Lease dated September 12, 1991, and a Second Amendment to Lease
dated May 30, 1996 (hereinafter collectively referred to as the "Lease"),
LANDLORD leased to TENANT, a certain premises described as Norton Commerce
Center, 10 Commerce Way, Norton, MA 02766, consisting of approximately 25,220
square feet of space, more particularly described therein as ("Premises"), and,
NOW, THEREFORE, for valuable consideration, the receipt of which is hereby
acknowledged each to the other, the above named parties do hereby agree to amend
said Lease as follows:
1. Effective on the Third Amendment to Lease Commencement Date (as
hereinafter defined), LANDLORD agrees to reduce the size of TENANT'S
Premises by taking back a portion of same namely 13,919 square feet of
space as delineated on Exhibit "A-3", attached hereto and made a part
hereof (hereinafter referred to as the "Reduction Premises").
Accordingly, the description of TENANT'S Premises as set forth in
Section 1 of the Lease, Incorporation of Basic Data, namely Premises,
shall be amended, in part, as follows:
...shall mean 11,301 square feet, which shall include at least 9,400
square feet of office space, being the approximate size of the
Premises...
2. The Third Amendment to Lease Commencement Date shall be the date
immediately following the date TENANT fully vacates the Reduction
Premises.
3. The term of this Third Amendment to Lease, which expired April 30,
1999, is hereby extended for a period of approximately three (3) years
and three (3) months, commencing May 1, 1999 and expiring July 31,
2002 (hereinafter referred to as the "Third Extended Term").
4. Effective May 1, 1999, Section 1 of the Lease, Incorporation of Basic
Data, namely Annual Rent, shall be deleted in its entirety and
replaced with the following:
shall mean the annual sum of Two Hundred Fourteen Thousand Three
Hundred Seventy and 00/100 ($214,370.00) Dollars, payable in equal
monthly installments of Seventeen Thousand Eight Hundred Sixty-Four
and 17/100 ($17,864.17) Dollars, commencing May 1, 1999 continuing
through and including to the date immediately prior to the date of the
Third Amendment to Lease Commencement Date; and
Ninety-Six Thousand Fifty-Eight and 50/100 ($96,058.50) Dollars,
payable in equal monthly installments of Eight Thousand Four and
88/100 ($8,004.88) Dollars, commencing upon the Third Amendment to
Lease Commencement Date continuing through and including July 31,
2002,
<PAGE>
payable in accordance with Paragraph 5 of this Lease plus all other
charges, amounts, reimbursements or other sums (collectively
"Additional Rent") to be paid by TENANT to LANDLORD in accordance with
Paragraph 6 and any other terms of this Lease calling for the payment
of money by TENANT to LANDLORD.
5. It is hereby understood and agreed by both parties, that TENANT will
be responsible for any and all cost associated with the downsizing of
TENANT'S space as stated herein and TENANT shall perform, including
but not limited to, the following work as delineated on Exhibit "B-3",
attached hereto and made a part hereof, as it relates to the Reduction
Premises.
6. Except where this Third Amendment to Lease specifically changes same,
all other terms, conditions and covenants of the original Lease
Agreement and any Amendments made thereto shall remain the same, where
applicable, and are hereby reaffirmed.
7. The submission of this document for examination and negotiation does
not constitute an offer, and this document shall become effective and
binding only upon the execution thereof by both LANDLORD and TENANT,
regardless of any written or verbal representation of any agent,
manager or other employee of LANDLORD to the contrary. All
negotiations, consideration, representations and understandings
between LANDLORD and TENANT are incorporated herein and the Lease and
this Amendment expressly supersede any proposals or other written
documents relating hereto. The Lease and this Amendment may be
modified or altered only by written agreement between LANDLORD and
TENANT, and no act or omission of any employee or agent of LANDLORD
shall alter, change or modify any of the provisions thereof.
IN WITNESS WHEREOF, the LANDLORD and TENANT have hereunto set their hands
and common seals this 28th day of July, 1999.
LANDLORD: Gregory D. Stoyle and John J.
Flatley, Trustees of the 1993
Flatley Family Trust
successor-in-interest-to Thomas
J. Flatley d/b/a The Flatley
Company
/S/ Gregory D. Stoyle
- ---------------------- ---------------------
WITNESS By: Gregory D. Stoyle
Its: Trustee
/S/ John J. Flatley
- ---------------------- -------------------
WITNESS By: John J. Flatley
Its: Trustee
TENANT: TyLink Corp.
/S/ William K. Guerry
- ---------------------- ---------------------
WITNESS By: William K. Guerry
Its: VP, Chief Financial Officer
Duly Authorized
<PAGE>
COMMONWEALTH OF MASSACHUSETTS )
) SS.
COUNTY OF NORFOLK )
July 28, 1999.
Then personally appeared Gregory D. Stoyle to me known to be the individual
who acknowledged himself to be the Trustee of the 1993 Flatley Family Trust,
LESSOR, and that he, as such, being authorized to do so, executed the foregoing
instrument and acknowledged the execution thereof to be his free act and deed
for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal at Norfolk
County, Braintree, Massachusetts, this 28th day of July, l999.
/S/ Francesca Austin
--------------------------
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS )
) SS.
COUNTY OF NORFOLK )
July 28, 1999.
Then personally appeared John J. Flatley to me known to be the individual
who acknowledged himself to be the Trustee of the 1993 Flatley Family Trust,
LESSOR, and that he, as such, being authorized to do so, executed the foregoing
instrument and acknowledged the execution thereof to be his free act and deed
for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal at Norfolk
County, Braintree, Massachusetts, this 28th day of July, l999.
/S/ Francesca Austin
--------------------
Notary Public
My commission expires:
STATE OF_____________________ )
) SS.
COUNTY OF____________________ )
________________, 1999.
Then personally appeared to me known to be the individual who
acknowledged himself/herself to be the of Tylink Corp., LESSEE,
and that he/she, as such, being authorized to do so, executed the foregoing
instrument and acknowledged the execution thereof to be his/her free act and
deed for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal at
_____________ County, ___________, ________________, this _____ day of
_________________, l999.
Notary Public
My commission expires:
<PAGE>
EXHIBIT "A-3"
Site Plan of the Reduction Premises
<PAGE>
EXHIBIT "B-3"
Description of TENANT'S Work for the Reduction Premises
Tylink Corporation
10 Commerce Way
Norton, MA 02766
Description of Tenants responsibilities:
1. Tenant is responsible for removal of all wiring IE:Electrical, teldata,
etc.
2. Tenant is responsible for any electrical, gas, plumbing, or construction
needed to demise or downsize of space.
3. Tenant is responsible for leaving warehouse area completely free of all
rubbish, racking, and any equipment or fixtures of tenants.
4. Tenant is responsible for removal of all bolts from floor used to anchor
cages and racks. All holes to be filled and made to match the existing
floor.
<PAGE>
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. BASIC PROVISIONS ("BASIC PROVISIONS"),
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes
only, July 6, 1999, is made by and between The Burnett Family Trust dated
October 13, 1983 ("LESSOR") and Sync Research, Inc., a Delaware corporation
("LESSEE"), (collectively the "PARTIES," or individually a "PARTY").
1.2 PREMISES: That certain real property, including all
improvements therein or to be provided by Lessor under the terms of this
Lease, and commonly known as 12 Morgan, Irvine, located in the County of
Orange, State of California, and generally described as (describe briefly the
nature of the property and, if applicable, the "PROJECT", if the property is
located within a Project) an approximate 23,262 square foot industrial
building (AP #591-023-07) ("PREMISES"). (See also Paragraph 2)
1.3 TERM: 5 years and -0- months ("ORIGINAL TERM") commencing
August 15, 1999 ("COMMENCEMENT DATE") and ending August 14, 2004
("EXPIRATION DATE"). (See also Paragraph 3)
1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). (See also
Paragraphs 3.2 and 3.3)
1.5 BASE RENT: $17,446.50 per month ("BASE RENT"), payable on the
fifteenth (15th) day of each month commencing August 15, 1999. (See also
Paragraph 4)
/ / If this box is checked, there are provisions in this Lease
for the Base Rent to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $17,446.50 as Base Rent for
the period.
1.7 SECURITY DEPOSIT: $20,409.94 ("SECURITY DEPOSIT"). (See also
Paragraph 5)
1.8 AGREED USE: Office, warehousing and light manufacturing,
repairs, sales, research and development (See also Paragraph 6)
1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise
stated herein. (See also Paragraph 8)
1.10 REAL ESTATE BROKERS: (See also Paragraph 15)
(a) REPRESENTATION: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction (check applicable boxes):
/X/ Voit Commercial Brokerage represents Lessor exclusively
("LESSOR'S BROKER");
/X/ Cushman & Wakefield of California, Inc. represents Lessee exclusively
("LESSEE'S BROKER"); or
/ /____________________ represents both Lessor and Lessee ("DUAL AGENCY").
(b) PAYMENT TO BROKERS: Upon execution and delivery of this
Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in
their separate written agreement (or if there is no such agreement, the sum
of as per separate agreement % of the total Base Rent for the brokerage
services rendered by said Broker).
1.11 GUARANTOR. The obligations of the Lessee under this Lease are
to be guaranteed by N/A ("GUARANTOR"). (See also Paragraph 37)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or
Addenda consisting of Paragraphs 50 through 61 and Exhibits A, all of which
constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon all
of the terms, covenants and conditions set forth in this Lease. Unless
otherwise provided herein, any statement of size set forth in this Lease, or
that may have been used in calculating rental, is an approximation which the
Parties agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual size is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom
clean and free of debris on the Commencement Date or the Early Possession
Date, whichever first occurs ("START DATE"), and, so long as the required
service contracts described in Paragraph 7.1(b) below are obtained by Lessee
within thirty (30) days following the Start Date, warrants that the existing
electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading doors, if any, and all other such
elements in the Premises, other than those constructed by Lessee, shall be in
good operating condition on said date and that the structural elements of the
roof, bearing walls and foundation of any buildings on the Premises (the
"BUILDING") shall be free of material defects. If a non-compliance with said
warranty exists as of the Start Date, Lessor shall, as Lessor's sole
obligation with respect to such matter, except as otherwise provided in this
Lease, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify same
at Lessor's expense. If, after the Start Date, Lessee does not give Lessor
written notice of any non-compliance with this warranty within: (i) one year
as to the surface of the roof, (ii) one (1) year as to the HVAC systems, and
the remaining systems and other elements of the Building, correction of such
non-compliance shall be the obligation of Lessee at Lessee's sole cost and
expense.
2.3 COMPLIANCE. Lessor warrants that the improvements on the
Premises comply with all applicable laws, covenants or restrictions of
record, building codes, regulations and ordinances ("APPLICABLE
REQUIREMENTS") in effect on the Start Date. Said warranty does not apply to
the use to which Lessee will put the Premises or to any Alterations or
Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by
Lessee. NOTE: Lessee is responsible for determining whether or not the zoning
is appropriate for Lessee's intended use, and acknowledges that past uses of
the Premises may no longer be allowed. If the Premises do not comply with
said warranty, Lessor shall, except as otherwise provided, promptly after
receipt of written notice from Lessee setting forth with specificity the
nature and extent of such non-compliance, rectify the same at Lessor's
expense. If Lessee does not give Lessor written notice of a non-compliance
with this warranty within six (6) months following the Start Date, correction
of that non-compliance shall be the obligation of Lessee at Lessee's sole
cost and expense. If the Applicable Requirements are hereafter changed (as
opposed to being in existence at the Start Date, which is addressed in
Paragraph 6.2(e) below) so as to require during the term of this Lease the
construction of an addition to or an alteration of the Building, the
remediation of any Hazardous Substance, or the reinforcement or other
physical modification of the Building ("CAPITAL EXPENDITURE"), Lessor and
Lessee shall allocate the cost of such work as follows:
(a) Subject to Paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
Premises by Lessee as compared with uses by tenants in general, Lessee shall
be fully responsible for the cost thereof, provided, however that if such
Capital Expenditure is
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required during the last two (2) years of this Lease and the cost thereof
exceeds six (6) months' Base Rent, Lessee may instead terminate this Lease
unless Lessor notifies Lessee, in writing, within ten (10) days after receipt
of Lessee's termination notice that Lessor has elected to pay the difference
between the actual cost thereof and the amount equal to six (6) months' Base
Rent. If Lessee elects termination, Lessee shall immediately cease the use of
the Premises which requires such Capital Expenditure and deliver to Lessor
written notice specifying a termination date at least ninety (90) days
thereafter. Such termination date shall, however, in no event be earlier than
the last day that Lessee could legally utilize the Premises without commencing
such Capital Expenditure.
(b) If such Capital Expenditure is not the result of the
specific and unique use of the Premises by Lessee (such as, governmentally
mandated seismic modifications), then Lessor and Lessee shall allocate the
obligation to pay for such costs pursuant to the provisions of Paragraph
7.1(c); provided, however, that if such Capital Expenditure is required
during the last two years of this Lease or if Lessor reasonably determines
that it is not economically feasible to pay its share thereof, Lessor shall
have the option to terminate this Lease upon ninety (90) days prior written
notice to Lessee unless Lessee notifies Lessor, in writing, within ten (10)
days after receipt of Lessor's termination notice that Lessee will pay for
such Capital Expenditure. If Lessor does not elect to terminate, and fails to
tender its share of any such Capital Expenditure, Lessee may advance such
funds and deduct same, with interest, from Rent until Lessor's share of such
costs have been fully paid. If Lessee is unable to finance Lessor's share, or
if the balance of the Rent due and payable for the remainder of this Lease is
not sufficient to fully reimburse Lessee on an offset basis, Lessee shall
have the right to terminate this Lease upon thirty (30) days written notice
to Lessor.
(c) Notwithstanding the above, the provisions concerning
Capital Expenditures are intended to apply only to non-voluntary, unexpected,
and new Applicable Requirements. If the Capital Expenditures are instead
triggered by Lessee as a result of an actual or proposed change in use,
change in intensity of use, or modification to the Premises then, and in that
event, Lessee shall be fully responsible for the cost thereof, and Lessee
shall not have any right to terminate this Lease.
2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been
advised by Lessor and/or Brokers to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical, HVAC
and fire sprinkler systems, security, environmental aspects, and compliance
with Applicable Requirements), and their suitability for Lessee's intended
use; (b) Lessee has made such investigation as it deems necessary with
reference to such matters and assumes all responsibility therefor as the same
relate to its occupancy of the Premises; and (c) neither Lessor, Lessor's
agents, nor any Broker has made any oral or written representations or
warranties with respect to said matters other than as set forth in this
Lease. In addition, Lessor acknowledges that: (a) Broker has made no
representations, promises or warranties concerning Lessee's ability to honor
the Lease or suitability to occupy the Premises; and (b) it is Lessor's sole
responsibility to investigate the financial capability and/or suitability of
all proposed tenants.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor
in Paragraph 2 shall be of no force or effect if immediately prior to the
Start Date Lessee was the owner or occupant of the Premises. In such event,
Lessee shall be responsible for any necessary corrective work.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent
shall be abated for the period of such early possession. All other terms of
this Lease (including, but not limited to, the obligations to pay Real
Property Taxes and insurance premiums and to maintain the Premises) shall,
however, be in effect during such period. Any such early possession shall not
affect the Expiration Date.
3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor,
nor shall such failure affect the validity of this Lease. Lessee shall not,
however, be obligated to pay Rent or perform its other obligations until it
receives possession of the Premises. If possession is not delivered within
thirty (30) days after the Commencement Date, Lessee may, at its option, by
notice in writing within ten (10) days after the end of such thirty (30) day
period, cancel this Lease, in which event the Parties shall be discharged
from all obligations hereunder. If such written notice is not received by
Lessor within said ten (10) day period, Lessee's right to cancel shall
terminate. Except as otherwise provided, if possession is not tendered to
Lessee by the Start Date and Lessee does not terminate this Lease, as
aforesaid, any period of rent abatement that Lessee would otherwise have
enjoyed shall run from the date of delivery of possession and continue for a
period equal to what Lessee would otherwise have enjoyed under the terms
hereof, but minus any days of delay caused by the acts or omissions of
Lessee. If possession of the Premises is not delivered within four (4) months
after the Commencement Date, this Lease shall terminate unless other
agreements are reached between Lessor and Lessee, in writing.
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its
obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery
of such evidence, Lessee shall be required to perform all of its obligations
under this Lease from and after the Start Date, including the payment of
Rent, notwithstanding Lessor's election to withhold possession pending
receipt of such evidence of insurance. Further, if Lessee is required to
perform any other conditions prior to or concurrent with the Start Date, the
Start Date shall occur but Lessor may elect to withhold possession until such
conditions are satisfied.
4. RENT.
4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor
under the terms of this Lease (except for the Security Deposit) are deemed to
be rent ("RENT").
4.2 PAYMENT. Lessee shall cause payment of Rent to be received by
Lessor in lawful money of the United States, without offset or deduction
(except as specifically permitted in this Lease), on or before the day on
which it is due. Rent for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual
number of days of said month. Payment of Rent shall be made to Lessor at its
address stated herein or to such other persons or place as Lessor may from
time to time designate in writing. Acceptance of a payment which is less than
the amount then due shall not be a waiver of Lessor's rights to the balance
of such Rent, regardless of Lessor's endorsement of any check so stating.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof the Security Deposit as security for Lessee's faithful performance of
its obligations under this Lease. If Lessee fails to pay Rent, or otherwise
Defaults under this Lease, Lessor may use, apply or retain all or any portion
of said Security Deposit for the payment of any amount due Lessor or to
reimburse or compensate Lessor for any liability, expense, loss or damage
which Lessor may suffer or incur by reason thereof. If Lessor uses or applies
all or any portion of said Security Deposit, Lessee shall within ten (10)
days after written request therefor deposit monies with Lessor sufficient to
restore said Security Deposit to the full amount required by this Lease.
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within fourteen (14) days after the expiration or
termination of this Lease, if Lessor elects to apply the Security Deposit
only to unpaid Rent, and otherwise within thirty (30) days after the Premises
have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return
that portion of the Security Deposit not used or applied by Lessor. No part
of the Security Deposit shall be considered to be held in trust, to bear
interest or to be prepayment for any monies to be paid by Lessee under this
Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the
Agreed Use, or any other legal use which is reasonably comparable thereto,
and for no other purpose. Lessee shall not use or permit the use of the
Premises in a manner that is unlawful, creates damage, waste or a nuisance,
or that disturbs owners and/or occupants of, or causes damage to neighboring
properties. Lessor shall not unreasonably withhold or delay its consent to
any written request for a modification of the Agreed Use, so long as the same
will not impair the structural integrity of the improvements on the Premises
or the mechanical or electrical systems therein, is not significantly more
burdensome to the Premises. If Lessor elects to withhold consent, Lessor
shall within five (5) business days after such request give written
notification of same, which notice shall include an explanation of Lessor's
objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, or waste
whose presence, use, manufacture, disposal, transportation, or release,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety
or welfare, the environment or the Premises, (ii) regulated or monitored by
any governmental authority, or (iii) a basis for potential liability of
Lessor to any governmental agency or third party under any applicable statute
or common law theory. Hazardous Substances shall include, but not be limited
to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products,
by-products or fractions thereof. Lessee shall not engage in any activity in
or on the Premises which constitutes a Reportable Use of Hazardous
Substances without the express prior written consent of Lessor
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and timely compliance (at Lessee's expense) with all Applicable Requirements.
"REPORTABLE USE" shall mean (i) the installation or use of any above or below
ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business
plan is required to be filed with, any governmental authority, and/or (iii)
the presence at the Premises of a Hazardous Substance with respect to which
any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long as such
use is in compliance with all Applicable Requirements, is not a Reportable
Use, and does not expose the Premises or neighboring property to any
meaningful risk of contamination or damage or expose Lessor to any liability
thereof. In addition, Lessor may condition its consent to any Reportable Use
upon receiving such additional assurances as Lessor reasonably deems
necessary to protect itself, the public, the Premises and/or the environment
against damage, contamination, injury and/or liability, including, but not
limited to, the installation (and removal on or before Lessee expiration or
termination) of protective modifications (such as concrete encasements)
and/or increasing the Security Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises, other than as previously consented to by Lessor,
Lessee shall immediately give written notice of such fact to Lessor, and
provide Lessor with a copy of any report, notice, claim or other
documentation which it has concerning the presence of such Hazardous
Substance.
(c) LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any
Hazardous Substance brought onto the Premises during the term of this Lease,
by or for Lessee, or any third party.
(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and
hold Lessor, its agents, employees, lenders and group lessor, if any,
harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, claims, expenses, penalties, and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee, or any third party (provided, however,
that Lessee shall have no liability under this Lease with respect to
underground migration of any Hazardous Substance under the Premises from
adjacent properties). Lessee's obligations shall include, but not be limited
to, the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation,
removal, remediation, restoration and/or abatement, and shall survive the
expiration or termination of this Lease. NO TERMINATION, CANCELLATION OR
RELEASE AGREEMENT ENTERED INTO BY LESSOR AND LESSEE SHALL RELEASE LESSEE FROM
ITS OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS
SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE TIME OF SUCH AGREEMENT.
(e) LESSOR INDEMNIFICATION. Lessor and its successors and
assigns shall indemnify, defend, reimburse and hold Lessee, its employees and
lenders, harmless from any against any and all environmental damages,
including the cost of remediation, which existed as a result of Hazardous
Substances on the Premises prior to the Start Date or which are caused by the
gross negligence or willful misconduct of Lessor, its agents or employees.
Lessor's obligations, as and when required by the Applicable Requirements,
shall include, but not be limited to, the cost of investigation, removal,
remediation, restoration and/or abatement, and shall survive the expiration
or termination of this Lease.
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures
required by governmental entities having jurisdiction with respect to the
existence of Hazardous Substances on the Premises prior to the Start Date,
unless such remediation measure is required as a result of Lessee's use
(including "Alterations", as defined in Paragraph 7.3(a) below) of the
Premises, in which event Lessee shall be responsible for such payment. Lessee
shall cooperate fully in any such activities at the request of Lessor,
including allowing Lessor and Lessor's agents to have reasonable access to
the Premises at reasonable times in order to carry out Lessor's investigative
and remedial responsibilities.
(g) LESSOR TERMINATION OPTION. If a Hazardous Substance
Condition occurs during the term of this Lease, unless Lessee is legally
responsible therefor (in which case Lessee shall make the investigation and
remediation thereof required by the Applicable Requirements and this Lease
shall continue in full force and effect, but subject to Lessor's rights under
Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either
(i) investigate and remediate such Hazardous Substance Condition, if
required, as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) if the estimated
cost to remediate such condition exceeds twelve (12) times the then monthly
Base Rent or $100,000, whichever is greater, give written notice to Lessee,
within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such Hazardous Substance Condition, of Lessor's desire to
terminate this Lease as of the date ninety (90) days following the date of
such notice. In the event Lessor elects to give a termination notice, Lessee
may, within ten (10) days thereafter, give written notice to Lessor of
Lessee's commitment to pay the amount by which the cost of the remediation of
such Hazardous Substance Condition exceeds an amount equal to twelve (12)
times the then monthly Base Rent or $100,000, or whichever is greater. Lessee
shall provide Lessor with said funds or satisfactory assurance thereof within
thirty (30) days following such commitment. In such event, this Lease shall
continue in full force and effect, and Lessor shall proceed to make such
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds
or assurance thereof within the time provided, this Lease shall terminate as
of the date specified in Lessor's notice of termination.
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as
otherwise provided in this Lease, Lessee shall, at Lessee's sole expense,
fully, diligently and in a timely manner, materially comply with all
Applicable Requirements, the requirements of any applicable fire insurance
underwriter or rating bureau, and the recommendations of Lessor's engineers
and/or consultants which relate in any manner to the Premises, without regard
to whether said requirements are now in effect or become effective after the
Start Date. Lessee shall, within ten (10) days after receipt of Lessor's
written request, provide Lessor with copies of all permits and other
documents, and other information evidencing Lessee's compliance with any
Applicable Requirements specified by Lessor, and shall immediately upon
receipt, notify Lessor in writing (with copies of any documents involved) of
any threatened or actual claim, notice, citation, warning, complaint or
report pertaining to or involving the failure of Lessee or the Premises to
comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined
in Paragraph 30 below) and consultants shall have the right to enter into
Premises at any time, in the case of an emergency, and otherwise at reasonable
times, for the purpose of inspecting the condition of the Premises and for
verifying compliance by Lessee with this Lease. The cost of any such
inspections shall be paid by Lessor, unless a violation of Applicable
Requirements, or a contamination is found to exist or be imminent, or the
inspection is requested or ordered by a governmental authority. In such case,
Lessee shall upon request reimburse Lessor for the cost of such inspections,
so long as such inspection is reasonably related to the violation or
contamination.
7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lease shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair
(whether or not the portion of the Premises requiring repairs, or the means
of repairing the same, are reasonably or readily accessible to Lessee, and
whether or not the need for such repairs occurs as a result of Lessee's use,
any prior use, the elements or the age of such portion of the Premises),
including, but not limited to, all equipment or facilities, such as plumbing,
heating, ventilating, air-conditioning, electrical, lighting facilities,
boilers, pressure vessels, fire protection system, fixtures, walls (interior
and exterior), ceilings, roofs, floors, windows, doors, plate glass,
skylights, landscaping, driveways, parking lots, fences, retaining walls,
signs, sidewalks and parkways located in, on, or adjacent to the Premises.
Lessee, in keeping the Premises in good order, condition and repair, shall
exercise and perform good maintenance practices, specifically including the
procurement and maintenance of the service contracts required by Paragraph
7.1(b) below. Lessee's obligations shall include restorations, replacements
or renewals when necessary to keep the Premises and all improvements thereon
or a part thereof in good order, condition and state of repair. Lessee shall,
during the term of this Lease, keep the exterior appearance of the Building
and landscaping in a first-class condition consistent with the exterior
appearance and landscaping of other similar facilities of comparable age and
size in the vicinity, including, when necessary, the exterior repainting of
the Building.
(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (vi) driveways and
parking lots, (vii) clarifiers, (viii) basic utility feed to the perimeter
of the Building, and (ix) any other equipment, if reasonably required by
Lessor.
(c) REPLACEMENT. Subject to Lessee's indemnification of Lessor
as se forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if the Basic Elements described in Paragraph 7.1(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of
replacing such Basic Elements, then such Basic Elements shall be replaced by
Lessor, and the cost thereof shall be prorated between the Parties and Lessee
shall only be obligated to pay, each month during the remainder of the term
of this Lease, on the date on which
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Base Rent is due, an amount equal to the product of multiplying the cost of
such replacement by a fraction, the numerator of which is one, and the
denominator of which is the number of months of the useful life of such
replacement as such useful life is specified pursuant to Federal income tax
regulations or guidelines for depreciation thereof (including interest on the
unamortized balance as is then commercially reasonable in the judgment of
Lessor's accountants), with Lessee reserving the right to prepay its
obligation at any time.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14
(Condemnation), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, or
the equipment therein, all of which obligations are intended to be that of
the Lessee. It is the intention of the Parties that the terms of this Lease
govern the respective obligations of the Parties as to maintenance and repair
of the Premises, and they expressly waive the benefit of any statute now or
hereafter in effect to the extent it is inconsistent with the terms of this
Lease.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" refers to all floor and window coverings, air lines, power
panels, electrical distribution, security and fire protection systems,
communication systems, lighting fixtures, HVAC equipment, plumbing, and
fencing in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's
machinery and equipment that can be removed without doing material damage to
the Premises. The term "ALTERATIONS" shall mean any modification of the
Improvements, other than Utility Installations or Trade Fixtures, whether by
addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS"
are defined as Alterations and/or Utility Installations made by Lessee that
are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not
make any Alterations or Utility Installations to the Premises without
Lessor's prior written consent. Lessee may, however, make non-structural
Utility Installations to the interior of the Premises (excluding the roof)
without such consent but upon notice to Lessor, as long as they are not
visible from the outside, do not involve puncturing, relocating or removing
the roof or any existing walls, and the cumulative cost thereof during this
Lease as extended does not exceed $50,000 in the aggregate or $10,000 in any
one year.
(B) CONSENT. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall
be presented to Lessor in written form with detailed plans. Consent shall be
deemed conditioned upon Lessee's: (i) acquiring all applicable governmental
permits, (ii) furnishing Lessor with copies of both the permits and the plans
and specifications prior to commencement of the work, and (iii) compliance
with all conditions of said permits and other Applicable Requirements in a
prompt and expeditious manner. Any Alterations or Utility Installations shall
be performed in a workmanlike manner with good and sufficient materials.
Lessee shall promptly upon completion furnish Lessor with as-built plans and
specifications. For work which costs an amount equal to the greater of one
month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee
providing a lien and completion bond in an amount equal to one and one-half
times the estimated cost of such Alteration or Utility Installation and/or
upon Lessee's posting an additional Security Deposit with Lessor.
(C) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by
any mechanics or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in, on or about the Premises, and Lessor
shall have the right to post notices of non-responsibility. If Lessee shall
contest the validity of any such lien, claim or demand, then Lessee shall, at
its sole expense defend and protect itself, Lessor and the Premises against
the same and shall pay and satisfy any such adverse judgment that may be
rendered thereon before the enforcement thereof. If Lessor shall require,
Lessee shall furnish a surety bond in an amount equal to one and one-half
times the amount of such contested lien, claim or demand, indemnifying Lessor
against liability for the same. If Lessor elects to participate in any such
action, Lessee shall pay Lessor's attorneys' fees and costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered
a part of the Premises. Lessor may, at any time, elect in writing to be the
owner of all or any specified part of the Lessee Owned Alterations and
Utility Installations. Unless otherwise instructed per Paragraph 7.4(b)
hereof, all Lessee Owned Alterations and Utility Installations shall, at the
expiration or termination of this Lease, become the property of Lessor and be
surrendered by Lessee with the Premises.
(b) REMOVAL. By delivery to Lessee of written notice from
Lessor not earlier than ninety (90) and not later than thirty (30) days prior
to the end of the term of this Lease, Lessor may require that any or all
Lessee Owned Alterations or Utility Installations be removed by the
expiration or termination of this Lease. Lessor may require the removal at
any time of all or any part of any Lessee Owned Alterations or Utility
Installations made without the required consent.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises
by the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and
in good operating order, condition and state of repair, ordinary wear and
tear excepted. "Ordinary wear and tear" shall not include any damage or
deterioration that would have been prevented by good maintenance practice.
Lessee shall repair any damage occasioned by the installation, maintenance or
removal of Trade Fixtures, Lessee Owned Alterations and/or Utility
Installations, furnishings, and equipment as well as the removal of any
storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or groundwater contaminated by Lessee. Trade
Fixtures shall remain the property of Lessee and shall be removed by Lessee.
The failure by Lessee to timely vacate the Premises pursuant to this Paragraph
7.4(c) without the express written consent of Lessor shall constitute a
holdover under the provisions of Paragraph 26 below.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance
required under Paragraph 8 except to the extent of the cost attributable to
liability insurance carried by Lessor under Paragraph 8.2(b) in excess of
$2,000,000 per occurrence. Premiums for policy periods commencing prior to or
extending beyond the Lease term shall be prorated to correspond to the Lease
term. Payment shall be made by Lessee to Lessor within ten (10) days
following receipt of an invoice.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based
upon or arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be on an
occurrence basis providing single limit coverage in an amount not less than
$2,000,000 per occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF
PREMISES ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION
ENDORSEMENT" for damage caused by heat, smoke or fumes from a hostile fire.
The Policy shall not contain any intra-insured exclusions as between insured
persons or organizations, but shall include coverage for liability assumed
under this Lease as an `insured contract' for the performance of Lessee's
indemnity obligations under this Lease. The limits of said insurance shall
not, however, limit the liability of Lessee nor relieve Lessee of any
obligation hereunder. All insurance carried by Lessee shall be primary to and
not contributory with any similar insurance carried by Lessor, whose
insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall maintain liability
insurance as described in Paragraph 8.2(a), in addition to, and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be
named as an additional insured therein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with loss
payable to Lessor, any groundlessor, and to any Lender(s) insuring loss or
damage to the Premises. The amount of such insurance shall be equal to the
full replacement cost of the Premises, as the same shall exist from time to
time, or the amount required by any Lenders, but in no event more than the
commercially reasonable and available insurable value thereof. If Lessor is
the Insuring Party, however, Lessee Owned Alterations and Utility
Installations, Trade Fixtures, and Lessee's personal property shall be
insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage
is available and commercially appropriate, such policy or policies shall
insure against all risks of direct physical loss or damage (except the perils
of flood and/or earthquake), including coverage for debris removal and the
enforcement of any Applicable Requirements requiring the upgrading,
demolition, reconstruction or replacement of any portion of the Premises as
the result of a covered loss. Said policy or policies shall also contain an
agreed valuation provision in lieu of any coinsurance clause, waiver of
subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located. If such insurance coverage
has a deductible clause, the deductible amount shall not exceed $1,000 per
occurrence, and Lessee shall be liable for such deductible amount in the
event of an Insured Loss.
(b) RENTAL VALUE. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor with loss payable to Lessor
and any Lender, insuring the loss of the full Rent for one (1) year. Said
insurance shall provide that in the event the Lease is terminated by reason
of an insured loss, the period of indemnity for such coverage shall be
extended beyond the date of the completion of repairs or replacement of the
Premises, to provide for one full year's loss of Rent from the date of any
such loss. Said insurance shall contain an agreed valuation provision in lieu
of any coinsurance clause, and the amount of coverage shall be adjusted
annually to reflect the projected Rent otherwise payable by Lessee, for the
next twelve (12) month period. Lessee shall be liable for
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any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or a group of buildings owned by a Lessor which are adjacent to the
Premises, the Lessee shall pay for any increase in the premiums for the
property insurance of such building or buildings if said increase is caused
by Lessee's acts, omissions, use or occupancy of the Premises.
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee
Owned Alterations and Utility Installations. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property, Trade Fixtures and Lessee Owned
Alterations and Utility Installations. Lessee shall provide Lessor with
written evidence that such insurance is in force.
(b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain
loss of income and extra expense insurance in amounts as will reimburse
Lessee for direct or indirect loss of earnings attributable to all perils
commonly insured against by prudent lessees in the business of Lessee or
attributable to prevention of access to the Premises as a result of such
perils.
(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 INSURANCE POLICIES. Insurance required herein shall be by
companies duly licensed or admitted to transact business in the state where
the Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least B+, V, as set forth in the most current
issue of "Best's Insurance Guide", or such other rating as may be required by
a Lender. Lessee shall not do or permit to be done anything which invalidates
the required insurance policies. Lessee shall, prior to the Start Date,
deliver to Lessor certified copies of policies of such insurance or
certificates evidencing the existence and amounts of the required insurance.
No such policy shall be cancelable or subject to modification except after
thirty (30) days prior written notice to Lessor. Lessee shall, at least
thirty (30) days prior to the expiration of such policies, furnish Lessor
with evidence of renewals or "Insurance binders" evidencing renewal thereof,
or Lessor may order such insurance and charge the cost thereof to Lessee,
which amount shall be payable by Lessee to Lessor upon demand. Such policies
shall be for a term of at least one year, or the length of the remaining term
of this Lease, whichever is less. If either Party shall fail to procure and
maintain the insurance required to be carried by it, the other Party may, but
shall not be required to, procure and maintain the same.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and
waive their entire right to recover damages against the other, for loss of or
damage to its property arising out of or incident to the perils required to
be insured against herein. The effect of such releases and waivers is not
limited by the amount of insurance carried or required, or by any deductibles
applicable hereto. The Parties agree to have their respective property damage
insurance carriers waive any right to subrogation that such companies may
have against Lessor or Lessee, as the case may be, so long as the insurance
is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's gross negligence or willful
misconduct, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or
damages, liens, judgments, penalties, attorneys' and consultants' fees,
expenses and/or liabilities arising out of, involving, or in connection with,
the use and/or occupancy of the Premises by Lessee. If any action or
proceeding is brought against Lessor by reason of any of the foregoing
matters, Lessee shall upon notice defend the same at Lessee's expense by
counsel reasonably satisfactory to Lessor and Lessor shall cooperate with
Lessee in such defense. Lessor need not have first paid any such claim in
order to be defended or indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or
any other person in or about the Premises, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or
from the breakage, leakage, obstruction or other defects of pipes, fire
sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from
any other cause, whether the said injury or damage results from conditions
arising upon the Premises or upon other portions of the Building of which the
Premises are a part, or from other sources or places. Lessor shall not be
liable for any damages arising from any act or neglect of any other tenant of
Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor
shall under no circumstances be liable for injury to Lessee's business or for
any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction
to the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in six (6) months or
less from the date of the damage or destruction. Lessor shall notify Lessee
in writing within thirty (30) days from the date of the damage or destruction
as to whether or not the damage is Partial or Total.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which cannot reasonably be repaired in six
(6) months or less from the date of the damage or destruction. Lessor shall
notify Lessee in writing within thirty (30) days from the date of the damage
or destruction as to whether or not the damage is Partial or Total.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of Applicable Requirements,
and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence
or discovery of a condition involving the presence of, or a contamination by,
a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense,
repair such damage (but not Lessee's Trade Fixtures or Lessee Owned
Alterations and Utility Installations) as soon as reasonably possible and
this Lease shall continue in full force and effect; provided, however, that
Lessee shall, at Lessor's election, make the repair of any damage or
destruction the total cost to repair of which is $10,000 or less, and, in
such event, Lessor shall make any applicable insurance proceeds available to
Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing,
if the required insurance was not in force or the insurance proceeds are not
sufficient to effect such repair, the Insuring Party shall promptly
contribute the shortage in proceeds (except as to the deductible which is
Lessee's responsibility) as and when required to complete said repairs. In
the event, however, such shortage was due to the fact that, by reason of the
unique nature of the improvements, full replacement cost insurance coverage
was not commercially reasonable and available, Lessor shall have no
obligation to pay for the shortage in insurance proceeds or to fully restore
the unique aspects of the Premises unless Lessee provides Lessor with the
funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, the party responsible for making the repairs shall complete them
as soon as reasonably possible and this Lease shall remain in full force and
effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to: (1)
make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in
full force and effect, or have this Lease terminate thirty (30) days
thereafter. Lessee shall not be entitled to reimbursement of any funds
contributed by Lessee to repair any such damage or destruction. Premises
Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3,
notwithstanding that there may be some insurance coverage, but the net
proceeds of any such insurance shall be made available for the repairs if
made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent or willful
act of Lessee (in which event Lessee shall make the repairs at Lessee's
expense), Lessor may either: (i) repair such damage as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in
full force and effect, or (ii) terminate this Lease by giving written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage. Such termination shall be effective sixty (60)
days following the date of such notice. In the event Lessor elects to
terminate this Lease, Lessee shall have the right within ten (10) days after
receipt of the termination notice to give written notice to Lessor of
Lessee's commitment to pay for the repair of such damage without
reimbursement from Lessor. Lessee shall provide Lessor with said funds or
satisfactory assurance thereof within thirty (30) days after making such
commitment. In such event this Lease shall continue in full force and effect,
and Lessor shall proceed to make such repairs as soon as reasonably possible
after the required funds are available. If lessee does not make the required
commitment, this Lease shall terminate as of the date specified in the
termination notice.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if a Premises Total Destruction occurs, this Lease shall terminate sixty (60)
days following such Destruction. If the damage or destruction was caused by
the gross negligence or willful misconduct of Lessee, Lessor shall have the
right to recover Lessor's damages from Lessee, except as provided in
Paragraph 8.6.
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9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of this Lease there is damage for which the cost to repair exceeds one
(1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate
this Lease effective sixty (60) days following the date of occurrence of such
damage by giving a written termination notice to Lessee within thirty (30)
days after the date of occurence of such damage. Notwithstanding the
foregoing, if Lessee at that time has an exercisable option to extend this
Lease or to purchase the Premises, then Lessee may preserve this Lease by,
(a) exercising such option and (b) providing Lessor with any shortage in
insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or
(ii) the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds,
Lessor shall, at Lessor's commercially reasonable expense, repair such damage
as soon as reasonably possible and this Lease shall continue in full force
and effect. If Lessee fails to exercise such option and provide such funds or
assurance during such period, then this Lease shall terminate on the date
specified in the termination notice and Lessee's option shall be extinguished.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) ABATEMENT. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which
Lessee is not responsible under this Lease, the Rent payable by Lessee for
the period required for the repair, remediation or restoration of such damage
shall be abated in proportion to the degree to which Lessee's use of the
Premises is impaired, but not to exceed the proceeds received from the Rental
Value insurance. All other obligations of Lessee hereunder shall be performed
by Lessee, and Lessor shall have no liability for any such damage,
destruction, remediation, repair or restoration except as provided herein.
(b) REMEDIES. If Lessor shall be obligated to repair or restore
the Premises and does not commence, in a substantial and meaningful way, such
repair or restoration within ninety (90) days after such obligation shall
accrue, Lessee may, at any time prior to the commencement of such repair or
restoration, give written notice to Lessor and to any Lenders of which Lessee
has actual notice, of Lessee's election to terminate this Lease on a date not
less than sixty (60) days following the giving of such notice. If Lessee
gives such notice and such repair or restoration is not commenced within
thirty (30) days thereafter, this Lease shall terminate as of the date
specified in said notice. If the repair or restoration is commenced within
said thirty (30) days, this Lease shall continue in full force and effect.
"COMMENCE" shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.
9.7 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments made by
Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of
Lessee's Security Deposit as has not been, or is not then required to be,
used by Lessor.
9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions
of any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term
"REAL PROPERTY TAXES" shall include any form of assessment; real estate,
general, special, ordinary or extraordinary, or rental levy or tax (other
than inheritance, personal income or estate taxes); Improvement bond; and/or
license fee imposed upon or levied against any legal or equitable interest of
Lessor in the Premises, Lessor's right to other income therefrom, and/or
Lessor's business of leasing, by any authority having the direct or indirect
power to tax and where the funds are generated with reference to the Building
address and where the proceeds so generated are to be applied by the city,
county or other local taxing authority of a jurisdiction within which the
Premises are located. The term "REAL PROPERTY TAXES" shall also include any
tax, fee, levy, assessment or charge, or any increase therein, imposed by
reason of events occurring during the term of this Lease, including but not
limited to, a change in the ownership of the Premises.
10.2
(a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to
Paragraph 10.2(b), all such payments shall be made at least ten (10) days
prior to any delinquency date. Lessee shall promptly furnish Lessor with
satisfactory evidence that such taxes have been paid. If any such taxes shall
cover any period of time prior to or after expiration or termination of this
Lease, Lessee's share of such taxes shall be prorated to cover only that
portion of the tax bill applicable to the period that this Lease is in
effect, and Lessor shall reimburse Lessee for any overpayment. If Lessee
shall fail to pay any required Real Property Taxes, Lessor shall have the
right to pay the same, and Lessee shall reimburse Lessor therefor upon demand.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property
Taxes for all the land and improvements included within the tax parcel
assessed, such proportion to be conclusively determined by Lessor from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to
delinquency, all taxes assessed against and levied upon Lessee Owned
Alterations, Utility Installations, Trade Fixtures, furnishings, equipment
and all personal property of Lessee. When possible, Lessee shall cause such
property to be assessed and billed separately from the real property of
Lessor. If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to
Lessee's property within ten (10) days after receipt of a written statement.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent.
(b) A change in the control of Lessee shall constitute an
assignment requiring consent, which shall not be unreasonably withheld by
Lessor. The transfer, on a cumulative basis, of twenty-five percent (25%) or
more of the voting control of Lessee shall constitute a change in control for
this purpose.
(c) The involvement of Lessee or its assets in any transaction,
or series of transactions (by way of merger, sale, acquisition, financing,
transfer, leveraged-buy-out or otherwise), whether or not a formal assignment
or hypothecation of this Lease or Lessee's assets occurs, which results or
will result in a reduction of the Net Worth of Lessee by an amount greater
than twenty-five percent (25%) of such Net Worth as it was represented at the
time of the the execution of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior
to said transaction or transactions constituting such reduction, whichever
was or is greater, shall be considered an assignment of this Lease to which
Lessor may withhold its consent. "NET WORTH OF LESSEE" shall mean the net
worth of Lessee (excluding any guarantors) established under generally
accepted accounting principles.
(d) An assignment or subletting without consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or
a noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a
noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon
thirty (30) days written notice, increase the monthly Base Rent to one
hundred ten percent (110%) of the Base Rent then in effect. Further, in the
event of such Breach and rental adjustment, (i) the purchase price of any
option to purchase the Premises held by Lessee shall be subject to similar
adjustment to one hundred ten percent (110%) of the price previously in
effect, and (ii) all fixed and non-fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased to One Hundred Ten Percent
(110%) of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not: (i) be effective without the express written assumption
by such assignee or sublessee of the obligations of Lessee under this Lease;
(ii) release Lessee of any obligations hereunder; or (iii) after the primary
liability of Lessee for
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the payment of Rent or for the performance of any other obligations to be
performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment not the acceptance of Rent of performance shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for Lessee's
Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible
for the performance of Lessee's obligations under this Lease, including any
assignee or sublessee, without first exhausting Lessor's remedies against any
other person or entity responsible therefore to Lessor, or any security held
by Lessor.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not
intended use and/or required modification of the Premises, if any, together
with a fee of $500 or ten percent (10%) of the current monthly Base Rent
applicable to the portion of the Premises which is the subject of the
proposed assignment or sublease, whichever is greater, as consideration for
Lessor's considering and processing said request. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may
be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed
to have assumed and agreed to conform and comply with each and every term,
covenant, condition and obligation herein to be observed or performed by
Lessee during the term of said assignment or sublease, other than such
obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented to in
writing.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases
under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all Rent payable on any sublease, and Lessor may collect
such Rent and apply same toward Lessee's obligations under this Lease;
provided, however, that until a Breach shall occur in the performance of
Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by
reason of the foregoing or any assignment of such sublease, not by reason of
the collection of Rent, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such
sublessee. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor all Rent due and to become due under the sublease. Sublessee shall
rely upon any such notice from Lessor and shall pay all Rents to Lessor
without any obligation or right to inquire as to whether such Breach exists,
notwithstanding any claim from Lessee to the contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its
option, require sublessee to attorn to Lessor, in which event Lessor shall
undertake the obligations of the sublessor under such sublease from the time
of the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or for any prior Defaults or
Breaches of such sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also required the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the
Default of Lessee within the grace period, if any, specified in such notice.
The sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the
Lessee to comply with or perform any of the terms, covenants, conditions or
rules under this Lease. A `BREACH" is defined as the occurrence of one or
more of the following Defaults, and the failure of Lessee to cure such
Default within any applicable grace period:
(a) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security, or
where the coverage of the property insurance described in Paragraph 8.3 is
jeopardized as a result thereof, or without providing reasonable assurances
to minimize potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to Lessor
or to a third party, when due, to provide reasonable evidence of insurance or
surety bond, or to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of five
(5) business days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service
contracts, (iii) the rescission of an unauthorized assignment or subletting,
(iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence
concerning any guaranty and/or Guarantor, (vii) any document requested under
Paragraph 42 (easements), or (viii) any other documentation or information
which Lessor may reasonably require of Lessee under the terms of this Lease,
where any such failure continues for a period of ten (10) days following
written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under Paragraph 40
hereof, other than those described in subparagraphs 13.1(a), (b) or (c),
above, where such Default continues for a period of thirty (30) days after
written notice; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure,
then it shall not be deemed to be a Breach if Lessee commenced such cure
within said thirty (30) day period and thereafter diligently prosecutes such
cure to completion.
(e) The occurrence of any of the following events: (i) the
making of any general arrangement or assignment for the benefit of creditors;
(ii) becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days; (iii) the appointment of a trustee
or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where
possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this
Lease, where such seizure is not discharged within thirty (30) days;
provided, however, in the event that any provision of this subparagraph 13.1
(e) is contrary to any applicable law, such provision shall be of no force or
effect, and not affect the validity of the remaining provisions.
(f) The discovery that any financial statement of Lessee or of
any Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this Lease
is guaranteed: (i) the death of a Guarantor; (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance
with the terms of such guaranty; (iii) a Guarantor's becoming insolvent or
the subject of a bankruptcy filing; (iv) a Guarantor's refusal to honor the
guaranty; or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within sixty (60) days following
written notice of any such event, to provide written alternative assurance or
security, which, when coupled with the then existing resources of Lessee,
equals or exceeds the combined financial resources of Lessee and the
Guarantors that existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any of its affirmative
duties or obligations, within ten (10) days after written notice (or in case
of an emergency, without notice), Lessor may, at its option, perform such
duty or obligation on Lessee's behalf, including but not limited to the
obtaining of reasonably required bonds, insurance policies, or governmental
licenses, permits or approvals. The costs and expenses of any such
performance by Lessor shall be due and payable by Lessee upon receipt of
Invoice therefor. If any check given to Lessor by Lessee shall not be honored
by the bank upon which it is drawn, Lessor, at its option, may require all
future payments to be made by Lessee to be by cashier's check. In the event
of a Breach, Lessor may, with or without further notice or demand, and
without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until
the time of award exceeds the amount of such rental loss that the Lessee
proves could have been reasonably avoided; (iii) the worth at the time of
award of the amount by which the unpaid rent for the balance of the term
after the time of award exceeds the amount of such rental loss that the
Lessee proves could be reasonably avoided; and (iv) any other amount
necessary to compensate Lessor for all the detriment proximately caused by
the Lessee's failure to perform its obligations under this Lease or which in
the ordinary course of things would be likely to result therefrom, including
but not limited to the cost of recovering possession of the Premises,
expenses of reletting, including necessary renovation and alteration of the
Premises, reasonable attorneys' fees, and that portion of any leasing
commission paid by Lessor in connection with this Lease applicable to the
unexpired term of this Lease. The worth at the time of award of the amount
referred to in provision (iii) of the immediately preceding sentence shall be
computed by discounting such amount at the discount rate of the Federal
Reserve Bank of the District within which the Premises are located at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Breach of this Lease shall not waive Lessor's right to
recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the
right to recover in such proceeding any unpaid Rent and damages as are
recoverable therein, or Lessor may reserve the
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right to recover all or any part thereof in a separate suit. If a notice and
grace period required under Paragraph 13.1 was not previously given, a notice
to pay rent or quit, or to perform or quit given to Lessee under the unlawful
detainer statute shall also constitute the notice required by Paragraph 13.1.
In such case, the applicable grace period required by Paragraph 13.1 and the
unlawful detainer statute shall run concurrently, and the failure of Lessee
to cure the Default within the greater of the two such grace periods shall
constitute both an unlawful detainer and a Breach of this Lease entitling
Lessor to the remedies provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or
assign, subject only to reasonable limitations. Acts of maintenance, efforts
to relet, and/or the appointment of a receiver to protect the Lessor's
interests, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available under
the laws or judicial decisions of the state wherein the Premises are located.
The expiration or termination of this Lease and/or the termination of
Lessee's right to possession shall not relieve Lessee from liability under
any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or
other charges, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering into
this Lease, all of which concessions are hereinafter referred to as
"INDUCEMENT PROVISIONS," shall be deemed conditioned upon Lessee's full and
faithful performance of all of the terms, covenants and conditions of this
Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision
shall automatically be deemed deleted from this Lease and of no further force
or effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement
Provision shall be immediately due and payable by Lessee to Lessor,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance
by Lessor of Rent or the cure of the Breach which initiated the operation of
this paragraph shall not be deemed a waiver by Lessor of the provisions of
this paragraph unless specifically so stated in writing by Lessor at the time
of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain.
Such costs include, but are not limited to, processing and accounting
charges, and late charges which may be imposed upon Lessor by any Lender.
Accordingly, if any Rent shall not be received by Lessor within five (5) days
after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall pay to Lessor a one-time late charge equal to ten
percent (10%) of each such overdue amount. The Parties hereby agree that such
late charge represents a fair and reasonable estimate of the costs Lessor
will incur by reason of such late payment. Acceptance of such late charge by
Lessor shall in no event constitute a waiver of Lessee's Default or Breach
with respect to such overdue amount, nor prevent the exercise of any of the
other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding any provision of this Lease
to the contrary, Base Rent shall, at Lessor's option, become due and payable
quarterly in advance.
13.5 INTEREST. Any monetary payment due Lessor hereunder, other than
late charges, not received by Lessor, when due as to scheduled payments (such
as Base Rent) or within thirty (30) days following the date on which it was
due for non-scheduled payment, shall bear interest from the date when due, as
to scheduled payments, or the thirty-first (31st) day after it was due as to
non-scheduled payments. The interest ("INTEREST") charged shall be equal to the
prime rate reported in the Wall Street Journal as published closest prior to
the date when due plus four percent (4%), but shall not exceed the maximum
rate allowed by law. Interest is payable in addition to the potential late
charge provided for in Paragraph 13.4.
13.6 BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an
obligation required to be performed by Lessor. For purposes of this
Paragraph, a reasonable time shall in no event be less than thirty (30) days
after receipt by Lessor, and any Lender whose name and address shall have
been furnished Lessee in writing for such purpose, of written notice
specifying wherein such obligation of Lessor has not been performed;
provided, however, that if the nature of Lessor's obligation is such that
more than thirty (30) days are reasonably required for its performance, then
Lessor shall not be in breach if performance is commenced within such thirty
(30) day period and thereafter diligently pursued to completion.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event
that neither Lessor nor Lender cures said breach within thirty (30) days
after receipt of said notice, or if having commenced said cure they do not
diligently pursue it to completion, then Lessee may elect to cure said breach
at Lessee's expense and offset from Rent an amount equal to the greater of
one month's Base Rent or the Security Deposit, and to pay an excess of such
expense under protest, reserving Lessee's right to reimbursement from Lessor.
Lessee shall document the cost of said cure and supply said documentation to
Lessor.
14. CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (collectively "CONDEMNATION"), this Lease shall terminate as to the
part taken as of the date the condemning authority takes title or possession,
whichever first occurs. If more than ten percent (10%) of any building
portion of the Premises, or more than twenty-five percent (25%) of the land
area portion of the Premises not occupied by any building, is taken by
Condemnation, Lessee may, at Lessee's option, to be exercised in writing in
within ten (10) days after Lessor shall have given Lessee written notice of
such taking (or in the absence of such notice, within ten (10) days after the
condemning authority shall have taken possession) terminate this Lease as of
the date the condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the Base Rent shall be reduced in proportion to the reduction in
utility of the Premises caused by such Condemnation. Condemnation awards
and/or payments shall be the property of Lessor, whether such award shall be
made as compensation for diminution in value of the leasehold, the value of
the part taken, or for severance damages; provided, however, that Lessee
shall be entitled to any compensation for Lessee's relocation expenses, loss
of business goodwill and/or Trade Fixtures, without regard to whether or not
this Lease is terminated pursuant to the provisions of this Paragraph. All
Alterations and Utility Installations made to the Premises by Lessee, for
purposes of Condemnation only, shall be considered the property of the Lessee
and Lessee shall be entitled to any and all compensation which is payable
therefor. In the event that this Lease is not terminated by reason of the
Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. BROKERS' FEE.
15.1 ADDITIONAL COMMISSION. In addition to the payments owed pursuant
to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in
writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee
acquires any rights to the Premises or other premises owned by Lessor and
located within the same Project, if any, within which the Premises is
located, (c) if Lessee remains in possession of the Premises, with the consent
of Lessor, after the expiration of this Lease, or (d) if Base Rent is
increased, whether by agreement or operation of an escalation clause herein,
then, Lessor shall pay Brokers a fee in accordance with the schedule of said
Brokers in effect at the time of the execution of this Lease.
15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assumed Lessor's obligation
hereunder. Each Broker shall be a third party beneficiary of the provisions
of Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any
amounts due as and for commissions pertaining to this Lease when due, then
such amounts shall accrue interest. In addition, if Lessor fails to pay any
amounts to Lessee's Broker when due, Lessee's Broker may send written notice
to Lessor and Lessee of such failure and if Lessor fails to pay such amounts
within ten (10) days after said notice, Lessee shall pay said monies to its
Broker and offset such amounts against Rent. In addition, Lessee's Broker
shall be deemed to be a third party beneficiary of any commission agreement
entered into by and/or between Lessor and Lessor's Broker.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee
and Lessor each represent and warrant to the other that it has had no
dealings with any person, firm, broker or finder (other than the Brokers, if
any) in connection with this Lease, and that no one other than said named
Brokers is entitled to any commission or finder's fee in connection herewith.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges
which may be claimed by any such unnamed broker, finder or other similar
party by reason of any dealings or actions of the Indemnifying Party,
including any costs, expenses, and/or attorneys' fees reasonably incurred
with respect thereto.
16. ESTOPPEL CERTIFICATES.
(a) Each Party (as "RESPONDING PARTY") shall within ten (10)
days after written notice from the other Party (the "REQUESTING PARTY")
execute, acknowledge and deliver to the Requesting Party a statement in
writing in form similar to the then most current "ESTOPPEL CERTIFICATE" form
published by the American Industrial Real Estate Association, plus such
additional information, confirmation and/or statements as may be reasonably
requested by the Requesting Party.
(b) If the Responding Party shall fail to execute or deliver
the Estoppel Certificate within such ten day period, the Requesting Party may
execute an Estoppel Certificate stating that: (i) the Lease is in full force
and effect without modification except as may be represented by the
Requesting Party, (ii) there are no uncured defaults in the Requesting
Party's performance, and (iii) if Lessor is the Requesting Party, not more
than one month's Rent has been paid in advance. Prospective purchasers and
encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and
the Responding Party shall be estopped from denying the truth of the facts
contained in said Certificate.
(c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee and all Guarantors shall deliver to any
potential lender or purchaser designated by Lessor such financial statements
as may be reasonably required by such lender or purchaser, including, but not
limited to,
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Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.
17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or,
if this is a sublease, of the Lessee's interest in the prior lease. In the
event of a transfer of Lessor's title or interest in the Premises or this
Lease, Lessor shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit held by Lessor. Except as provided in
Paragraph 15, upon such transfer or assignment and delivery of the Security
Deposit, as aforesaid, the prior Lessor shall be relieved of all liability
with respect to the obligations and/or covenants under this Lease thereafter
to be preformed by the Lessor. Subject to the foregoing, the obligations
and/or covenants in this Lease to be performed by the Lessor shall be binding
only upon the Lessor as hereinabove defined. Notwithstanding the above, and
subject to the provisions of Paragraph 20 below, the original Lessor under
this Lease, and all subsequent holders of the Lessor's interest in this Lease
shall remain liable and responsible with regard to the potential duties and
liabilities of Lessor pertaining to Hazardous Substances as outlined in
Paragraph 6 above.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall be in no way affect
the validity of any other provision hereof.
19. DAYS. Unless otherwise specifically indicated to the contrary, the
word "days" as used in this Lease shall mean and refer to calendar days.
20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17
above, the obligations of Lessor under this Lease shall not constitute
personal obligations of Lessor, the individual partners of Lessor or its
or their individual partners, directors, officers or shareholders, and Lessee
shall look to the Premises, and to no other assets of Lessor, for the
satisfaction of any liability of Lessor with respect to this Lease, and shall
not seek recourse against the individual partners of Lessor, or its or their
individual partners, directors, officers or shareholders, or any of their
personal assets for such satisfaction.
21. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this
Lease.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains
agreements between the Parties with respect to any matter mentioned herein,
and no other prior to contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that
it has made, and is relying solely upon, its own investigation as to the
nature, quality, character and financial responsibility of the other Party to
this Lease and as to the nature, quality and character of the Premises.
Brokers have no responsibility with respect thereto or with respect to any
default or breach hereof by either Party. The liability (including court
costs and Attorneys' fees), of any Broker with responsibility with respect to
negotiation, execution, delivery or performance by either Lessor or Lessee
under this Lease or any amendment or modification hereto shall be limited to
an amount up to the fee received by such Broker pursuant to this Lease;
provided, however, that the foregoing limitation on each Broker's liability
shall not be applicable to any gross negligence or willful misconduct of such
Broker.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
courier) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile
transmission, and shall be deemed sufficiently given if served in a manner
specified in this Paragraph 23. The addresses noted adjacent to a Party's
signature on this Lease shall be that Party's address for delivery or mailing
of notices. Either Party may be written notice to the other specify a
different address for notice, except that upon Lessee's taking possession of
the Premises, the Premises shall constitute Lessee's address for notice. A
copy of all notices to Lessor shall be concurrently transmitted to such party
or parties at such addresses as Lessor may from time to time hereafter
designate in writing.
23.2 DATE OF NOTICE. Any notice sent by registered or certified
mail, return receipt requested, shall be deemed given on the date of delivery
shown on the receipt card, or if no delivery date is shown, the postmark
thereon. If sent by regular mail the notice shall be deemed given forty-eight
(48) hours after the same is addressed as required herein and mailed with
postage prepaid. Notices delivered by United States Express Mail or overnight
courier that guarantee next day delivery shall be deemed given twenty-four
(24) hours after delivery of the same to the Postal Service or courier.
Notices transmitted by facsimile transmission or similar means shall be
deemed delivered upon telephone confirmation of receipt, provided a copy is
also delivered via delivery or mail. If notice is received on a Saturday,
Sunday or legal holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any
other term, covenant or condition hereof, or of any subsequent Default or
Breach by Lessee of the same or of any subsequent Default of Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or
similar act by Lessee, or be construed as the basis of an estoppel to
enforce the provision or provisions of this Lease requiring such consent. The
acceptance of Rent by Lessor shall not be a waiver of any Default or Breach
by Lessee. Any payment by Lessee may be accepted by Lessor on account of
monies or damage due Lessor, notwithstanding any qualifying statements or
conditions made by Lessee in connection therewith, which such statements
and/or conditions shall be of no force of effect whatsoever unless
specifically agreed to writing by Lessor at or before the time of deposit of
such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of
this Lease to be observed or performed by Lessee are both covenants and
conditions. In construing this Lease, all headings and titles are for the
convenience of the Parties only and shall be considered a part of this Lease.
Whenever required by the context, the singular shall include the plural and
vice versa. This Lease shall not be construed as if prepared by one of the
Parties, but rather according to its fair meaning as a whole, as if both
Parties had prepared it.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be
governed by the laws of the State in which the Premises are located. Any
litigation between the Parties hereto concerning this Lease shall be
initiated in the county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall
be subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "SECURITY DEVICE"), now
or hereafter placed upon the Premises, to any and all advances made on the
security thereof, and to all renewals, modifications, and extensions thereof.
Lessee agrees that the holders of any such Security Devices (in this Lease
together referred to as "Lessor's Lender") shall have no liability or
obligation to perform any of the obligations of Lessor under this Lease. Any
Lender may elect to have this Lease and/or any Option granted hereby superior
to the lien of its Security Device by giving written notice thereof to
Lessee, whereupon this Lease and such Options shall be deemed prior to such
Security Device, nothwithstanding the relative dates of the documentation or
recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agree to attorn to a Lender of any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not:
(i) be liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership; (ii) be subject to any
offsets or defenses which Lessee might have against any prior lessor, or
(iii) be bound by prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into
by Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which
Non-Disturbance Agreement provides that Lessee's possession of the Premises,
and this Lease, including any options to extend the term hereof, will not be
disturbed so long as Lessee is not in Breach hereof and attorns to the record
owner of the Premises. Further, within sixty (60) days after the execution of
this Lease, Lessor shall use its commercially reasonable efforts to obtain a
Non-Disturbance Agreement from the holder of any pre-existing Security Device
which is secured by the Premises. In the event that Lessor is unable to
provide the Non-Disturbance Agreement within said sixty (60) days, then
Lessee may, at Lessee's option, directly contact Lessor's lender attempt to
negotiable for the execution and delivery of a Non-Disturbance Agreement.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection
with a safe, financing or refinancing of the Premises, Lessee and Lessor
shall execute such further writings as may be reasonably required to
separately document any subordination, attornment and/or Non-Disturbance
Agreement provided for herein.
31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such
proceeding, action, or appeal thereon, shall be entitled to reasonable
attorneys' fees. Such fees may be awarded in the same suit or recovered in a
separate suit, whether or not such action or proceeding is pursued to
decision or judgment. The term,
PAGE 9 OF 11 Initials /s/ Illegible
REVISED -------------
<PAGE>
"PREVAILING PARTY" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be,
whether by compromise, settlement, judgment, or the abandonment by the other
Party or Broker of its claim or defense. The attorneys' fees award shall not
be computed in accordance with any court fee schedule, but shall be such as
to fully reimburse all attorneys' fees reasonably incurred. In addition,
Lessor shall be entitled to attorneys' fees, costs and expenses incurred in
the preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced
in connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises as Lessor may
deem necessary. All such activities shall be without abatement of rent or
liability to Lessee. Lessor may at any time place on the Premises any
ordinary "FOR SALE" signs and Lessor may during the last six (6) months of
the term hereof place on the Premises any ordinary "FOR LEASE" signs. Lessee
may at any time place on or about the Premises any ordinary "FOR SUBLEASE"
sign.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent. Lessor
shall not be obligated to exercise any standard of reasonableness in
determining whether to permit an auction.
34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not
place any sign upon the Premises without Lessor's prior written consent. All
signs must comply with all Applicable Requirements.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing
by Lessor, the voluntary or other surrender of this Lease by Lessee, the
mutual termination or cancellation hereof, or a termination hereof by Lessor
for Breach by Lessee, shall automatically terminate any sublease or lesser
estate in the Premises; provided, however, that Lessor may elect to continue
any one or all existing subtenancies. Lessor's failure within ten (10) days
following any such event to elect the contrary by written notice to the
holder of any such lesser interest, shall constitute Lessor's election to
have such event constitute the termination of such interest.
36. CONSENTS. Except as otherwise provided herein, wherever in this Lease
the consent of a Party is required to an act by or for the other Party, such
consent shall not be unreasonably withheld or delayed. Lessor's actual
reasonable costs and expenses (including, but not limited to, architects',
attorneys', engineers' and other consultants' fees) incurred in the
consideration of, or response to, a request by Lessee for any Lessor consent,
including, but not limited to, consents to an assignment, a subletting or the
presence or use of a Hazardous Substance, shall be paid by Lessee upon
receipt of an invoice and supporting documentation therefor. Lessor's consent
to any act, assignment or subletting shall not constitute an acknowledgment
that no Default or Breach by Lessee of this Lease exists, nor shall such
consent to be deemed a waiver of any then existing Default or Breach, except
as may be otherwise specifically stated in writing by Lessor at the time of
such consent. The failure to specify herein any particular condition to
Lessor's consent shall not preclude the imposition by Lessor at the time of
consent of such further or other conditions as are then reasonable with
reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable
detail with ten (10) business days following such request.
37. GUARANTOR.
37.1 EXECUTION. The Guarantors, if any, shall each execute a
guaranty in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same obligations as
Lessee under this Lease.
37.2 DEFAULT. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, (b) current financial statements,
(c) a Tenancy Statement, or (d) written confirmation that the guaranty is
still in effect.
38. QUIET POSESSION. Subject to payment by Lessee of the Rent and
performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have a quiet
possession and quiet enjoyment of the Premises during the term hereof.
39. OPTIONS.
39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the
term of or renew this Lease or to extend or renew any lease that Lessee has on
other property of Lessor; (b) the right of first refusal or first offer to
lease either the Premises or other property of Lessor, (c) the right to
purchase or the right of first refusal to purchase the Premises or other
property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee, and cannot be
assigned or exercised by anyone other than said original Lessee and only
while the original Lessee is in full possession of the Premises and, if
requested by Lessor, with Lessee certifying that Lessee has no intention of
thereafter assigning or subletting.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later Option cannot be exercised
unless the prior Options have been validly exercised.
39.4 EFFECTS OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option: (i)
during the period commencing with the giving of any notice of Default and
continuing until said Default is cured, (ii) during the period of time any
Rent is unpaid (without regard to whether notice thereof is given Lessee),
(iii) during the time Lessee is in Breach of this Lease, or (iv) in the event
that Lessee has been given three (3) or more notices of separate Default,
whether or not the Defaults are cured, during the twelve (12) month period
immediately preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise
an Option because of the provisions of Paragraph 39.4 (a).
(c) An Option shall terminate and be of no further force or
effect, notwithstanding Lessee's due and timely exercise of the Option, if,
after such exercise and prior to the commencement of the extended term, (i)
Lessee fails to pay Rent for a period of thirty (30) days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), (ii)
Lessor gives to Lessee three (3) or more notices of separate Default during
any twelve (12) month period, whether or not the Defaults are cured, or (iii)
if Lessee commits a Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including the care and cleanliness of
the grounds and including the parking, loading and unloading of vehicles, and
that Lessee will pay its fair share of common expenses incurred in connection
therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other
security measures, and that Lessor shall have no obligation whatsoever to
provide same. Lessee assumes all responsibility for the protection of the
Premises, Lessee, its agents and invitees and their property from the acts of
third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time,
to grant, without the consent or joinder of Lessee, such easements, rights
and dedications that Lessor reasonably deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements,
rights, dedications, maps and restrictions do not unreasonably interfere with
the use of or access to the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement
rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment and there shall survive
the right on the part of said Party to institute suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part
of said Party to pay such sum or any part thereof, said Party shall be
entitled to recover such sum or so much thereof as it was not legally
required to pay.
44. AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each Party
shall, within thirty (30) days after request, delivery to the other Party
satisfactory evidence of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease
to the other Party. This Lease is not intended to be binding until executed
and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
PAGE 10 OF 11 Initials /s/ Illegible
REVISED -------------
<PAGE>
responsibility to comply with the terms of this Lease.
49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the
Mediation and/or the Arbitration of all disputes between the Parties and/or
Brokers arising out of this Lease / /is / /is not attached to this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISIONS CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW
THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT,
AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
- -------------------------------------------------------------------------------
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THE LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND
THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
- -------------------------------------------------------------------------------
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
<TABLE>
<S> <C>
Executed at: Irvine, Calif. Executed at: Irvine
-------------------------------------- -------------------------------------
on: 7/19/99 on: 7/19/99
---------------------------------------------- ----------------------------------------------
By LESSOR: By LESSEE:
The Burnett Family Trust dated October 13, 1983 Sync Research, Inc., a Delaware corporation
- ------------------------------------------------- -------------------------------------------------
- ------------------------------------------------- -------------------------------------------------
By: /s/ Ernest E. Burnett By: /s/ William K. Guerry
---------------------------------------------- ----------------------------------------------
Name Printed: Ernest E. Burnett Name Printed: William K. Guerry
------------------------------------- -------------------------------------
Title: Trustee Title: V.P., CFO
------------------------------------------- -------------------------------------------
By: By:
---------------------------------------------- ----------------------------------------------
Name Printed: Name Printed:
------------------------------------- -------------------------------------
Title: Title:
------------------------------------------- -------------------------------------------
Address: Address:
----------------------------------------- -----------------------------------------
- ------------------------------------------------- -------------------------------------------------
Telephone: ( ) Telephone: (949) 460-4453
------------------------------- -------------------------------
Facsimile: ( ) Facsimile: (949) 460-4481
------------------------------- -------------------------------
Federal ID No. Federal ID No.
--------------------------------- ---------------------------------
</TABLE>
NOTE: These forms are often modified to meet the changing requirements of law
and industry needs. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So.
Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777. Fax
No. (213) 687-8616
PAGE 11 OF 11
REVISED
<PAGE>
ADDENDUM TO LEASE DATED JULY 6, 1999
BY AND BETWEEN
THE BURNETT FAMILY TRUST DATED OCTOBER 13, 1983 ("LESSOR") AND
SYNC RESEARCH, INC., A DELAWARE CORPORATION ("LESSEE")
This Addendum is attached to and made part of the Standard
Industrial/Commercial AIR Single Tenant Lease-Net between the Burnett Family
Trust dated October 13, 1983 ("Lessor") and Sync Research, Inc., a Delaware
corporation ("Lessee") dated July 6, 1999 (the "Lease"). Capitalized terms
not defined herein shall have the meanings given them in the Lease.
50. BASE RENT: The base monthly rent shall be paid on the first of each
month as follows:
MONTHS MONTHLY RENT
------ ------------
1-12 $17,446.50
13-24 $18,144.36
25-36 $18,870.13
37-48 $19,624.94
49-60 $20,409.94
51. TENANT IMPROVEMENTS: Lessor shall contribute up to $100,000 towards
Lessee's tenant improvements. Said monies shall be paid upon receipt of
invoices from the architect and contractors at 50% of each invoice
until such time as $100,000 from Lessor is contributed. All plans and
construction contracts for Lessee's tenant improvements shall be
submitted to Lessor for review and be approved prior to the
commencement of such work. All approved tenant improvement costs in
excess of $200,000 shall be paid by Lessee. Should the tenant
improvement cost be less than $200,000, then Lessee shall, upon
completion of all tenant improvements, notify Lessor of any amount due
to Lessee so that Lessor's contribution equals $100,000.
52. LETTER OF CREDIT: Concurrently with the execution of this Lease, Lessee
shall deliver to Lessor, as additional security for Lessee's
obligations under the lease, a letter of credit (the "Letter of
Credit"), from a financial institution and in a form reasonably
satisfactory to Lessor, in the principal amount of $300,000. The Letter
of Credit shall be maintained in full force and effect for the entire
lease term, and any extensions thereof, provided, however, in the event
that Lessee is not at the time in Breach of any of its lease
obligations, which Breach is uncured and ongoing, the principal amount
of the Letter of Credit may be reduced by $50,000 (i) on August 15,
2002, and (ii) on August 15, 2003. The Letter of Credit shall provide
that Lessor may draw upon the Letter of Credit by written demand to the
issuer thereof, executed by an officer of Lessor, stating that Lessee
is in breach of the lease and identifying the amount to be drawn
thereon in order to compensate Lessor for damages it has sustained as a
result of said breach. Lessor shall be entitled to draw the entire
amount of the Letter of Credit if, at any time during the term of this
Lease, the Letter of Credit has not been renewed, with written evidence
thereof provided to Lessor, within fifteen (15) days prior to its
expiration date. In the event Lessor shall at any time sell or
otherwise transfer the premises, Lessee shall be obligated to obtain a
replacement Letter of Credit in the name of the transferee within
thirty (30) days written demand therefore by Lessor.
53. ADA COMPLIANCE: Lessee shall be responsible for compliance with ADA
requirements. Lessor acknowledges that some of the costs may be part of
Lessor's $100,000 tenant improvement contribution. Should the upstairs
restrooms require ADA modifications, Lessor will contribute $3,000
towards required modifications. This amount would be separate from
Lessor's tenant improvement allowance.
54. OPTION TO RENEW: Provided Lessee is not in default of the lease, Lessee
shall be granted one (1) option to renew the Lease for one (1)
additional three (3) year term. Lessee shall give Lessor not less than
six (6) months written notice prior to the expiration of the initial
term of Lessee's desire and intent to exercise the option. Base Rent
for the additional option period shall commence at the greater of: (i)
95% of the then fair market rent for similar buildings in the Irvine
Spectrum market, or (ii) the Base Rent applicable during the fifth
(5th) year of the initial term of this Lease, increased by four percent
(4%). The Base Rent thus determined for the initial year of the option
period shall be effective as of August 15, 2004, and shall increase
annually thereafter on August 15 of each year at the rate of four
percent (4%) per annum.
55. LANDSCAPE MAINTENANCE: Notwithstanding Section 7 of the Lease, Lessor
shall have the right to arrange for, and cause to be provided, all
landscape maintenance for the Premises, which maintenance shall be at
Lessee's cost and expense. Within ten (10) days of receipt of an
invoice for landscape maintenance, Lessee shall pay said invoice
directly, or, if already paid by Lessor, shall reimburse Lessor.
Failure to timely pay or reimburse Lessor for any such invoice shall be
a breach of this Lease.
<PAGE>
56. ROOF MAINTENANCE ALLOWANCE: In addition to Base Rent, Lessee shall pay
Lessor a roof maintenance allowance equal to $0.01 per square foot, or
$232.62, each month during the term of the Lease and any extensions
thereto.
57. CONFLICT: In the event of any conflict between the terms of this
Addendum and the Lease, the terms of this Addendum shall be
controlling.
58. EARLY ACCESS: Lessee will have access to the warehouse by July 26.
Lessor will use its best efforts to vacate the office concurrently, but
no later than August 1.
59. STRUCTURAL MAINTENANCE: Lessee shall not be responsible for maintenance
and/or repair of the structural portion of the roof, foundation and
bearing walls unless Lessee, or Lessee's invitees, causes damage.
60. RENT PAYMENTS: Payments shall be paid to:
Ernest Burnett
27672 Dungarvin Lane
San Juan Capistrano, CA 92675
61. PARKING LOT & EXTERIOR PAINT MAINTENANCE: If the parking lot needs
resurfacing or the building exterior needs to be repainted, the Lessee
will reimburse the Lessor for the cost of said work on a monthly basis
based upon the expected useful life of said work, (i.e., if the useful
life of a $10,000 paint job is one hundred [100] months), the Lessee's
reimbursement would be $100 per month.
AGREED & ACCEPTED:
LESSOR: THE BURNETT FAMILY TRUST DATED OCTOBER 13, 1983
BY: /s/ ERNEST E. BURNETT DATE: 7/19/99
------------------------------------------- -------------------
ERNEST E. BURNETT
LESSEE: SYNC RESEARCH, INC., A DELAWARE CORPORATION
BY: /s/ WILLIAM K. GUERRY DATE: 7/19/99
------------------------------------------- -------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,266
<SECURITIES> 0
<RECEIVABLES> 3,581
<ALLOWANCES> (315)
<INVENTORY> 5,030
<CURRENT-ASSETS> 17,919
<PP&E> 8,385
<DEPRECIATION> 6,615
<TOTAL-ASSETS> 19,780
<CURRENT-LIABILITIES> 5,934
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 13,810
<TOTAL-LIABILITY-AND-EQUITY> 19,780
<SALES> 13,933
<TOTAL-REVENUES> 13,933
<CGS> 7,663
<TOTAL-COSTS> 7,663
<OTHER-EXPENSES> 10,324
<LOSS-PROVISION> 12
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> (3,719)
<INCOME-TAX> 2
<INCOME-CONTINUING> (3,721)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,721)
<EPS-BASIC> (1.07)
<EPS-DILUTED> (1.07)
</TABLE>
