<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 29, 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 0-27130
NETWORK APPLIANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 77-0307520
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
495 EAST JAVA DRIVE,
SUNNYVALE, CALIFORNIA 94089
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 822-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of the registrant's class of common stock,
as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS OCTOBER 29, 1999
----- ----------------
<S> <C>
Common Stock.................. 74,669,461
</TABLE>
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I -- FINANCIAL INFORMATION
<S> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of October 29, 1999 and April 30, 1999 2
Condensed Consolidated Statements of Income for the three and six-month periods
ended October 29, 1999 and October 30, 1998 3
Condensed Consolidated Statements of Cash Flows for the six-month periods ended
October 29, 1999 and October 30, 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II--OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to Vote of Securityholders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
</TABLE>
1
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 29, APRIL 30,
1999 1999
----------- ---------
(UNAUDITED) **
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $220,828 $221,284
Short-term investments 51,673 5,800
Accounts receivable, net 78,747 57,163
Inventories 17,542 13,581
Prepaid expenses and other assets 6,290 7,384
Deferred taxes 20,134 10,134
-------- --------
Total current assets 395,214 315,346
PROPERTY AND EQUIPMENT, NET 27,080 19,271
DEPOSITS 7,170 7,000
OTHER ASSETS 4,840 4,730
-------- --------
$434,304 $346,347
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 27,358 $ 15,126
Income taxes payable 460 1,108
Accrued compensation and related benefits 18,986 15,189
Other accrued liabilities 8,611 7,633
Deferred revenue 13,223 11,474
-------- --------
Total current liabilities 68,638 50,530
LONG-TERM OBLIGATIONS 52 93
-------- --------
68,690 50,623
-------- --------
SHAREHOLDERS' EQUITY:
Common stock 280,393 240,093
Retained earnings 85,470 55,954
Cumulative other comprehensive loss (249) (323)
-------- --------
Total shareholders' equity 365,614 295,724
-------- --------
$434,304 $346,347
======== ========
</TABLE>
** Derived from audited consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
2
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NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- --------------------------
OCTOBER 29, OCTOBER 30, OCTOBER 29, OCTOBER 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $124,712 $ 65,625 $227,991 $123,000
COST OF SALES 51,516 26,881 94,055 50,120
-------- -------- -------- --------
Gross Margin 73,196 38,744 133,936 72,880
-------- -------- -------- --------
OPERATING EXPENSES:
Sales and marketing 32,548 17,064 59,432 31,999
Research and development 13,462 6,722 24,682 12,803
General and administrative 4,487 2,552 8,305 4,437
-------- -------- -------- --------
Total operating expenses 50,497 26,338 92,419 49,239
-------- -------- -------- --------
INCOME FROM OPERATIONS 22,699 12,406 41,517 23,641
OTHER INCOME (EXPENSE):
Interest Income 2,537 550 4,643 1,008
Other income (expense) (356) 445 (399) 108
-------- -------- -------- --------
Total other income, net 2,181 995 4,244 1,116
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 24,880 13,401 45,761 24,757
PROVISION FOR INCOME TAXES 8,832 5,025 16,245 9,284
-------- -------- -------- --------
NET INCOME $ 16,048 $ 8,376 $ 29,516 $ 15,473
======== ======== ======== ========
NET INCOME PER SHARE:
Basic $ 0.22 $ 0.12 $ 0.40 $ 0.23
======== ======== ======== ========
Diluted $ 0.19 $ 0.11 $ 0.35 $ 0.20
======== ======== ======== ========
Pro Forma - Basic (Note 8) $ 0.11 $ 0.06 $ 0.20 $ 0.11
======== ======== ======== ========
Pro Forma - Diluted (Note 8) $ 0.09 $ 0.06 $ 0.18 $ 0.10
======== ======== ======== ========
SHARES USED IN PER SHARE CALCULATIONS:
Basic 74,122 67,878 73,608 67,468
======== ======== ======== ========
Diluted 84,492 76,112 83,833 75,544
======== ======== ======== ========
Pro Forma - Basic (Note 8) 148,244 135,756 147,216 134,936
======== ======== ======== ========
Pro Forma - Diluted (Note 8) 168,984 152,224 167,666 151,088
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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NETWORK APPLIANCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------
OCTOBER 29, 1999 OCTOBER 30, 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,516 $ 15,473
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,871 4,792
Provision for doubtful accounts 723 700
Deferred income taxes (10,000) (1,463)
Deferred rent (40) (29)
Changes in assets and liabilities:
Accounts receivable (22,294) (11,329)
Inventories (3,900) (2,019)
Prepaid expenses and other assets 871 472
Accounts payable 12,232 2,361
Income taxes payable 23,752 5,904
Accrued compensation and related benefits 3,798 1,167
Other accrued liabilities 978 1,689
Deferred revenue 1,749 2,449
-------- --------
Net cash provided by operating activities 43,256 20,167
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (51,673) (12,880)
Redemptions of short-term investments 5,800 14,930
Purchases of property and equipment (13,164) (6,183)
Payment/refund of deposits, net (170) (10,500)
-------- --------
Net cash used in investing activities (59,207) (14,633)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term obligations -- (17)
Proceeds from sale of common stock, net 15,495 5,523
-------- --------
Net cash provided by financing activities 15,495 5,506
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (456) 11,040
CASH AND CASH EQUIVALENTS:
Beginning of period 221,284 37,315
-------- --------
End of period $220,828 $ 48,355
======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Income tax benefit from employee stock transactions $ 24,400 $ 3,710
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid net of refund $ 1,407 $ 4,816
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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NETWORK APPLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared by Network Appliance, Inc. without audit and reflect all adjustments,
which are, in the opinion of management, necessary for a fair presentation of
our financial position and results of operations for the interim periods. The
statements have been prepared in accordance with the regulations of the
Securities and Exchange Commission (SEC). Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles.
The results of operations for the three and six-month periods ended October 29,
1999 are not necessarily indicative of the operating results to be expected for
the full fiscal year or future operating periods. The information included in
this report should be read in conjunction with the audited consolidated
financial statements and notes thereto for the fiscal year ended April 30, 1999
and the risk factors as set forth in our Annual Report on Form 10-K, including,
without limitation, risks relating to fluctuating operating results, customer
and market acceptance of new products, dependence on new products, rapid
technological change, litigation, dependence on growth in the network file
server market, expansion of international operations, product concentration,
changing product mix, competition, management of expanding operations,
dependence on high-quality components, dependence on proprietary technology,
intellectual property rights, dependence on key personnel, volatility of stock
price, shares eligible for future sale, effect of certain anti-takeover
provisions, dilution and the Year 2000 Issue. Any party interested in reviewing
these publicly available documents should contact the SEC or our Chief Financial
Officer.
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Periods - We operate on a 52-week or 53-week year ending on the
last Friday in April. Fiscal 2000 is a 52-week year. Fiscal 1999 was a 53-week
year. The quarter ended October 29, 1999 includes 13 weeks of operating
activity, compared to 13 weeks of activity for the corresponding period of the
prior fiscal year. The six-months ended October 29, 1999 includes 26 weeks of
activity, compared to 27 weeks of activity for the corresponding period of the
prior fiscal year.
Foreign Currency Translation - In the first quarter of fiscal 2000, we
determined that the functional currencies of certain of our foreign subsidiaries
had changed from the local currencies to the Euro. Accordingly, assets and
liabilities of such foreign subsidiaries are translated into Euro at the
exchange rates in effect as of the balance sheet date, and results of operations
for each subsidiary are translated using average rates in effect for the period
presented. Translation adjustments have been included within shareholders'
equity as a cumulative other comprehensive loss. The effect of the change in
functional currencies did not have a material impact on our consolidated
financial position, results of operations or cash flows.
5
<PAGE> 7
NETWORK APPLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 29, APRIL 30,
1999 1999
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Purchased components $ 3,239 $ 5,316
Work in process 4,066 1,727
Finished goods 10,237 6,538
-------- --------
$ 17,542 $ 13,581
======== ========
</TABLE>
4. COMMON STOCK AND NET INCOME PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted net income per share computations for the periods
presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 29, OCTOBER 30, OCTOBER 29, OCTOBER 30,
1999 1998 1999 1998
-------- --------- -------- --------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NET INCOME (NUMERATOR):
Net income, basic and diluted $ 16,048 $ 8,376 $ 29,516 $ 15,473
======== ======== ======== ========
SHARES (DENOMINATOR):
Weighted average common shares outstanding 74,170 68,052 73,663 67,796
Weighted average common shares outstanding
subject to repurchase (48) (174) (55) (328)
-------- -------- -------- --------
Shares used in basic computation 74,122 67,878 73,608 67,468
Weighted average common shares outstanding
subject to repurchase 48 174 55 328
Common shares issuable upon exercise of stock
options 10,322 8,060 10,170 7,748
-------- -------- -------- --------
Shares used in diluted computation 84,492 76,112 83,833 75,544
======== ======== ======== ========
NET INCOME PER SHARE:
Basic $ 0.22 $ 0.12 $ 0.40 $ 0.23
======== ======== ======== ========
Diluted $ 0.19 $ 0.11 $ 0.35 $ 0.20
======== ======== ======== ========
</TABLE>
6
<PAGE> 8
NETWORK APPLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ -------------------------
OCTOBER 29, OCTOBER 30, OCTOBER 29, OCTOBER 30,
1999 1998 1999 1998
-------- ---------- -------- ------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Net income $ 16,048 $ 8,376 $29,516 $ 15,473
Change in cumulative translation adjustment (190) (35) 74 (18)
-------- ------- ------- --------
Comprehensive income $ 15,858 $ 8,341 $29,590 $ 15,455
======== ======= ======= ========
</TABLE>
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which defines derivatives,
requires that all derivatives be carried at fair value, and provides for hedging
accounting when certain conditions are met. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. On a
forward-looking basis, although we have not fully assessed the implications of
this new statement, we do not believe adoption of this statement will have a
material impact on our consolidated financial position, results of operations or
cash flows.
7. COMMITMENTS
In fiscal 1999, we executed agreements to acquire approximately 18
acres of land in Sunnyvale, California and to develop 393,000 square feet of
buildings. We subsequently assigned our rights and obligations under all the
agreements for the Sunnyvale facilities to a third-party entity and entered into
three operating leases. The leases require monthly payments, which vary, based
on the London Interbank Offered Rate (LIBOR) plus a spread (7.6% at October 29,
1999). The aggregate annual minimum rent commitments under one lease which began
in August 1999, is approximately $3.3 million. The lease payments under the
other two operating leases are expected to commence in June 2000 and will also
vary based on LIBOR plus a spread.
The operating leases mentioned above require us to maintain specified
financial covenants with which we were in compliance as of October 29, 1999.
8. SUBSEQUENT EVENTS
On November 16, 1999, the Board of Directors approved a two-for-one
stock split of the Company's common stock to be distributed on or about December
20, 1999 to holders of record on December 10, 1999. Proforma share and per-share
amounts have been presented within the Condensed Consolidated Statements of
Income to reflect the stock split.
In November 1999, we executed an agreement to acquire certain property
in Sunnyvale, California. Under terms of the agreement, we paid $3.0 million of
the $61.0 million purchase price as a nonrefundable deposit subsequent to
October 29, 1999. The agreement allows us to assign our rights and obligations
to a third-party entity should we decide to enter into an operating lease. We
intend to assign our rights and obligations to a third-party entity and enter
into an operating lease provided we can obtain satisfactory leasing terms.
7
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This Form 10-Q contains forward-looking statements about future
results, which are subject to risks and uncertainties, including those discussed
below. Our actual results may differ significantly from the results discussed in
the forward-looking statements. We are subject to a variety of other additional
risk factors, more fully described in our Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
income data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ -----------------------------
October 29, October 30, October 29, October 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 41.3 41.0 41.3 40.7
-------- ------- ------- -------
Gross margin 58.7 59.0 58.7 59.3
-------- ------- ------- -------
Operating expenses:
Sales and marketing 26.1 26.0 26.1 26.0
Research and development 10.8 10.2 10.8 10.4
General and administrative 3.6 3.9 3.6 3.6
-------- ------- ------- -------
Total operating expenses 40.5 40.1 40.5 40.0
-------- ------- ------- -------
Income from operations 18.2 18.9 18.2 19.3
Other income, net 1.8 1.5 1.9 0.9
-------- ------- ------- -------
Income before income taxes 20.0 20.4 20.1 20.2
Provision for income taxes 7.1 7.6 7.1 7.6
-------- ------- ------- -------
Net income 12.9% 12.8% 13.0% 12.6%
======== ======= ======= =======
</TABLE>
Net Sales -- Net sales increased by 90.0% to $124.7 million for the
three-months ended October 29, 1999, from $65.6 million for the three-months
ended October 30, 1998. Net sales increased by 85.4% to $228.0 million for the
six-months ended October 29, 1999, from $123.0 million for the six-months ended
October 30, 1998. Net sales growth was across all geographies, products and
markets. This increase in net sales for both the three and six-months ended
October 29, 1999 was primarily attributable to a higher volume of units shipped,
as compared to the corresponding periods of the prior fiscal year. Factors
impacting unit growth include:
- growth in the network attached storage market, increased market
acceptance of the appliance concept and the growing enterprise
market driven by the need for reliable internet infrastructure;
- acceleration in deployment of our products among Internet and
enterprise related customers, particularly for E-business and new
E-commerce applications;
- strong demand for our F700 filer product family utilizing
primarily fibre-channel connectivity;
- increased worldwide shipment of NetApp(R) Cluster Failover
solutions;
- increased worldwide demand for our NetCache(TM) solutions;
- additional filer demand created by SnapMirror(TM) to store the
remote replicated data for disaster recovery;
- expansion of our direct sales force; and
- sales to our two OEM partners.
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Net sales growth was also positively impacted by:
- a higher average selling price due to the introduction of new
software features: SnapMirror, SnapRestore(TM) and Cluster
Failover, supporting mission-critical applications;
- the increase in storage capacity;
- increased add on software revenue from multi-protocol solutions;
and
- higher software subscription and service revenues to support a
growing installed base.
Overall net sales growth was partially offset by declining unit sales
of our older product family.
International net sales (including United States exports) grew by
102.2% and 111.5% for the three and six-month periods ended October 29, 1999, as
compared to the comparable period of the prior fiscal year. International net
sales were $34.2 million, or 27.5% of total net sales, and $62.7 million, or
27.5% of total net sales, for the three and six-month periods ended October 29,
1999, respectively. The increase in international sales for the three and
six-month periods ended October 29, 1999, was primarily a result of European
sales growth, due to increased headcount in the direct sales force, increased
indirect channel sales through resellers, increased shipments of filers, Cluster
Failover solutions, NetCache appliances and increased sales of add-on software
licenses. Asia Pacific net sales growth for the three and six-month periods
ended October 29, 1999, was also primarily driven by increased indirect sales
through resellers, increased headcount in the direct sales force, increased
shipments of filers, NetCache appliances and increased sales of add-on software
licenses, as compared to the corresponding periods of the prior fiscal year.
We cannot assure you that our net sales will continue to increase in
absolute dollars or at the rate at which they have grown in recent fiscal
periods.
Gross Margin -- Gross margin decreased slightly to 58.7% for the
three-months ended October 29, 1999 from 59.0% for the three-months ended
October 30, 1998. Gross margin decreased to 58.7% for the six-months ended
October 29, 1999 from 59.3% for the six-months ended October 30, 1998. Gross
margin was negatively impacted by recent price reductions on disk drives due to
competitive pricing pressure from other storage vendors.
Gross margin was also favorably impacted by:
- increased licensing of add on software from multi-protocol,
Cluster Failover, SnapMirror and SnapRestore;
- growth in software subscription and service revenues due to a
larger installed base;
- the increase in product volume;
- lower costs of key components; and
- increased manufacturing efficiencies.
Our gross margin has been and will continue to be affected by a variety
of factors, including:
- competition;
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- product configuration;
- direct versus indirect sales;
- the mix and average selling prices of products, including
software licenses;
- new product introductions and enhancements; and
- the cost of components and manufacturing labor.
Sales and Marketing -- Sales and marketing expenses consist primarily
of salaries, commissions, advertising and promotional expenses and certain
customer service and support costs. Sales and marketing expenses increased 90.7%
to $32.5 million for the three-months ended October 29, 1999 from $17.1 million
for the three-months ended October 30, 1998. Sales and marketing expenses
increased 85.7% to $59.4 million for the six-months ended October 29, 1999 from
$32.0 million for the six-months ended October 30, 1998. These expenses were
26.1% and 26.0% of net sales for the three-months ended October 29, 1999 and
October 30, 1998, respectively, and were 26.1% and 26.0%, respectively, of net
sales for the six-months periods then ended. The increase in absolute dollars
was primarily related to the continued worldwide expansion and increased
headcount growth of our sales and customer service organizations, and increased
commission expenses. We expect to continue to increase our sales and marketing
expenses in an effort to expand domestic and international markets, introduce
new products, establish and expand new distribution channels and increase
product and company awareness. We believe that our continued growth and
profitability is dependent in part on the successful expansion of our
international operations, and therefore, have committed significant resources to
increase international sales.
Research and Development -- Research and development expenses consist
primarily of salaries and benefits, prototype expenses, non-recurring
engineering charges and fees paid to outside consultants. Research and
development expenses increased 100.0% to $13.5 million for the three-months
ended October 29, 1999 from $6.7 million for the three-months ended October 30,
1998. These expenses represented 10.8% and 10.2% of net sales, respectively, for
the three-months ended October 29, 1999 and October 30, 1998. For the six-month
periods, research and development expenses increased 92.8% to $24.7 million in
fiscal 2000 from $12.8 million in fiscal 1999, and represented 10.8% and 10.4%
of net sales, respectively, for those periods. Research and development expenses
increased in absolute dollars, primarily as a result of increased headcount,
ongoing support of current and future product development and enhancement
efforts, prototyping expenses and non-recurring engineering charges associated
with the development of new products and technologies. These new products
included the F700 series filers, the Cluster Failover solutions, the C700
family, new enterprise software offerings and data management tools with
SnapMirror, SnapRestore and SecureAdmin(TM) as well as Netcache software release
4.0 and architecture supporting the next-generation of web and digital media. We
believe that our future performance will depend in large part on our ability to
maintain and enhance our current product line, develop new products that achieve
market acceptance, maintain technological competitiveness and meet an expanding
range of customer requirements. We intend to continuously expand our existing
product offerings and to introduce new products and expect that such
expenditures will continue to increase in absolute dollars. For the three and
six-months ended October 29, 1999 and October 30, 1998, no software development
costs were capitalized.
General and Administrative -- General and administrative expenses
increased 75.8% to $4.5 million for the three-months ended October 29, 1999,
from $2.6 million for the three-months ended October 30, 1998. These expenses
represented 3.6% and 3.9% of net sales for the three-months ended for such
periods. For the six-month periods, general and administrative expenses
increased 87.2% to $8.3 million in fiscal 2000 from $4.4 million in fiscal 1999
and represented 3.6% of net sales for both periods. Increases in absolute
dollars were primarily due to increased headcount, expenses associated with
initiatives to implement enterprise-wide management information systems,
increases in professional services, consulting fees and outside service fees. We
believe that our general and administrative expenses will increase in absolute
dollars as we continue to build our infrastructure.
Other Income, net -- Other income, net, was $2.2 million and $1.0
million for the three-months ended October 29, 1999 and October 30, 1998,
respectively. During the six-months ended October 29, 1999, other income was
$4.2 million, as compared to $1.1 million in the corresponding period of the
prior year. The increase was due primarily to interest income earned on the net
proceeds from the March 1999 follow-on public offering, cash generated from
operations, and net proceeds from stock option exercises.
10
<PAGE> 12
The second quarter of fiscal 1999 included gains from foreign currency
transactions as compared to the second quarter of fiscal 2000, where gains or
losses from foreign transactions are mitigated primarily through our hedging
program.
Provision for Income Taxes -- Our effective tax rate was 35.5% for the
three and six-month periods ended October 29, 1999 compared to 37.5% for the
three and six-month periods ended October 30, 1998. The effective tax rates
differed from the U.S. statutory rate of 35% primarily due to state taxes
partially offset by earnings of foreign subsidiaries being taxed at lower rates.
CERTAIN RISK FACTORS
Although we have experienced significant revenue growth in recent
periods, this growth may not be indicative of our future operating results. As a
result, we believe that period-to-period comparisons of our results of operation
are not necessarily meaningful and should not be relied upon as indicators of
future performance. Many of the factors that could cause our quarterly operating
results to fluctuate significantly in the future are beyond our control and
include the following:
- - the level of competition in our target product markets;
- - the size, timing, and cancellation of significant orders;
- - product configuration and mix;
- - market acceptance of new products and product enhancements;
- - new product announcements or introductions by us or our competitors;
- - deferrals of customer orders in anticipation of new products or product
enhancements;
- - changes in pricing by us or our competitors;
- - our ability to timely develop, introduce and market new products and
enhancements;
- - supply constraints;
- - technological changes in our target product markets;
- - the levels of expenditure on research and development and expansion of
our sales and marketing programs;
- - seasonality; and
- - general economic trends.
In addition, sales for any future quarter may vary and accordingly be
inconsistent with our plans. We generally operate with limited order backlog
because our products are typically shipped shortly after orders are received. As
a result, product sales in any quarter are generally dependent on orders booked
and shipped in that quarter. Product sales are difficult to forecast because the
network file server market is rapidly evolving and our sales cycle varies
substantially from customer to customer.
We conduct business internationally. For both the three and six-months
ended October 29, 1999, approximately 27.5% of our net sales were to
international customers (including United States exports). Accordingly, our
future operating results could be materially adversely affected by a variety of
factors, some of which are beyond our control, including regulatory, political
or economic conditions in a specific country or region, trade protection
measures and other regulatory requirements and government spending patterns.
Our international sales are denominated in U.S. dollars and in foreign
currencies. An increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive and, therefore, potentially
less competitive in foreign markets. For international sales and expenditures
denominated in foreign currencies, we are subject to risks associated with
currency fluctuations. We hedge risks associated with foreign currency
transactions in order to minimize the impact of changes in foreign currency
exchange rates on earnings. We utilize forward contracts to hedge trade and
intercompany receivables and payables. All hedge contracts are marked to market
through earnings every period.
11
<PAGE> 13
Additional risks inherent in our international business activities
generally include, among others, longer accounts receivable payment cycles,
difficulties in managing international operations and potentially adverse tax
consequences. We cannot assure you that such factors will not materially
adversely affect our future international sales and, consequently, our operating
results.
Although operating results have not been materially and adversely
affected by seasonality in the past, because of the significant seasonal effects
experienced within the industry, particularly in Europe, we cannot assure you
that our future operating results will not be adversely affected by seasonality.
We believe that continued growth and profitability will require
successful expansion of our international operations and sales and therefore we
have committed significant resources to such expansion. In order to successfully
expand international sales in fiscal 2000 and subsequent periods, we must
strengthen foreign operations, hire additional personnel and recruit additional
international distributors and resellers. This will require significant
management attention and financial resources and could materially adversely
affect our operating results. To the extent that we are unable to effect these
additions in a timely manner, our growth, if any, in international sales will be
limited, and our operating results could be materially adversely affected. In
addition, we cannot assure you that we will be able to maintain or increase
international market demand for our products.
LIQUIDITY AND CAPITAL RESOURCES
As of October 29, 1999, as compared to the April 30, 1999 balances, our
cash, cash equivalents and short-term investments increased by $45.4 million to
$272.5 million. Working capital increased by $61.8 million to $326.6 million. We
generated cash from operating activities totaling $43.3 million and $20.2
million for the six-month periods ended October 29, 1999 and October 30, 1998,
respectively. Net cash provided by operating activities for the six-month period
ended October 29, 1999 principally related to net income of $29.5 million,
increases in accounts payable, income taxes payable, accrued compensation and
related benefits, deferred revenue and other accrued liabilities and decreases
in prepaid expenses and other assets, coupled with depreciation and amortization
which are non-cash expenses, partially offset by increases in accounts
receivable, inventories, and deferred income taxes.
We used $13.2 million and $6.2 million of cash during the six-month
periods ended October 29, 1999 and October 30, 1998, respectively, for capital
expenditures. The increases were primarily attributed to upgrades of software
and computer equipment purchases and furniture and fixtures for the Sunnyvale
headquarters facility. We have used $45.9 million during the six-month period
ended October 29, 1999 and provided for $2.1 million during the six-month period
ended October 30, 1998, for net short-term investment purchases.
During the six-month period of fiscal 2000, we received back our $2.5
million deposit in connection with the $36.0 million operating lease. In
September 1999, we executed an agreement to acquire 9.9 acres of land in
Sunnyvale, California and the accompanying 178,996 square foot building. Under
terms of the agreement, we paid $2.7 million of the $23.4 million purchase price
as a nonrefundable deposit. The agreement allows us to assign our rights and
obligations to a third-party entity should we decide to enter into an operating
lease. We intend to assign our rights and obligations to a third-party entity
and enter into an operating lease provided we can obtain satisfactory leasing
terms.
In addition, we have commitments related to operating lease
arrangements, under which we have an option to purchase the properties for an
aggregate of $128.0 million, or arrange for the sale of the properties to a
third party for at least the option price with a contingent liability for any
deficiency.
Financing activities provided $15.5 million and $5.5 million during the
six-month periods ended October 29, 1999 and October 30, 1998, respectively. The
increase in cash provided by financing activities for the six-months ended
October 29, 1999, compared to the corresponding period of the prior fiscal year,
was due to an increased quantity of stock options exercised at a higher average
exercise price and a greater number of employees participating in the employee
stock purchase plan.
12
<PAGE> 14
In November 1999, we executed an agreement to acquire certain property
in Sunnyvale, California. Under terms of the agreement, we paid $3.0 million of
the $61.0 million purchase price as a nonrefundable deposit subsequent to
October 29, 1999. The agreement allows us to assign our rights and obligations
to a third-party entity should we decide to enter into an operating lease. We
intend to assign our rights and obligations to a third-party entity and enter
into an operating lease provided we can obtain satisfactory leasing terms.
Excluding the commitments related to the aforementioned properties,
which we intend to assign to third parties and account for as operating leases,
we currently have no significant commitments other than commitments under
operating leases. We believe that our existing liquidity and capital resources,
including the available amounts under the $5.0 million line of credit, are
sufficient to fund our operations for at least the next twelve months.
13
<PAGE> 15
YEAR 2000
The Year 2000 issue refers to computer programs which use two digits
rather than four to define a given year and which therefore might read a date
using "00" as the year 1900 rather than the year 2000. As a result, many
companies' systems and software may need to be upgraded or replaced in order to
function correctly after December 31, 1999.
We are currently conducting a general software upgrade and replacement
program to enhance our computer systems and applications, in particular those
systems and applications related to our manufacturing, distribution and
financial operations. As part of this larger program we are addressing the
critical areas of our internal computer systems, products and relationships with
external organizations for Year 2000 compliance. We are addressing Year 2000
compliance for both our IT and non-IT systems, which typically include embedded
technology such as microcontrollers.
As part of our general systems upgrade we have evaluated and selected
various significant computer software applications which are represented by
vendors as Year 2000 compliant. We have substantially completed installation of
such software in our domestic operations during the second quarter of fiscal
2000 which will be followed by installation in our international operations
throughout fiscal 2000. Most of our existing business applications are already
supported by Year 2000 compliant software. With the system changes implemented
to date and other planned changes, we anticipate that our internal computer
software systems will be Year 2000 compliant prior to December 31, 1999. We
believe that our current products are Year 2000 compliant, and our new products
are being designed to be Year 2000 compliant.
We rely on numerous third party vendors for certain products and
services. We have communicated with our principal service providers and
suppliers to assess their Year 2000 readiness. Responses indicate that our
significant service providers currently have compliant versions of their systems
available or are well into the renovation and testing phases with completion
scheduled prior to December 31, 1999. We have assessed the effect Year 2000
issues will have on our service providers and suppliers, however, our principal
service providers and suppliers have represented to us that they are Year 2000
compliant. We can give you no guarantee that the systems and products of these
service providers and suppliers on which we rely are, or will be, Year 2000
compliant.
Our contingency planning for Year 2000 issues relates primarily to the
efforts of our third-party vendors. In the event of any Year 2000 disruptions
related to third-party software, we expect to follow the individual vendor's
contingency directives. With respect to suppliers, we will consider alternative
sources as a contingency plan, if necessary. Contingency planning will continue
throughout 1999 and our plans will be modified based upon the progress of our
remediation efforts, system updates and installations and based upon our
communications with selected suppliers. We have determined that our "worst case"
scenario relates to Year 2000 compliance problems of our third party vendors and
suppliers and other external organizations which if not remedied could
materially adversely affect our operating results.
The costs we expect to incur in connection with our overall general
systems upgrade program, including both internal and third party costs, are
primarily external costs for software licenses, and implementation and
consulting services. These systems and applications were selected primarily for
features and functionality in addition to Year 2000 compliance. Accordingly, we
do not itemize costs of Year 2000 compliance separately.
Our expectations regarding the impact of Year 2000 issues are forward
looking statements and actual results could vary due to the factors discussed in
this section. While we believe that the estimated cost of becoming Year 2000
compliant will not be significant to our operating results, failure to complete
all the work in a timely manner could materially adversely affect our operating
results. While we expect all planned work to be completed, we can not guarantee
that all systems will be in compliance by the Year 2000, the systems of
suppliers and other companies and government agencies on which we rely will be
Year 2000 compliant, or that our contingency planning will be able to fully
address all potential interruptions. Therefore, Year 2000 issues could cause
delays in our ability to produce or ship our
14
<PAGE> 16
products, process transactions or otherwise conduct business in any of our
markets. Year 2000 issues could lower demand for our products while increasing
our costs. The occurrence of one or more of these factors could materially
adversely affect our operating results.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedging accounting
when certain conditions are met. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. On a forward-looking
basis, although we have not fully assessed the implications of this new
statement, we do not believe adoption of this statement will have a material
impact on our consolidated financial position, results of operations or cash
flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to fluctuations in interest rates
and in foreign currency exchange rates. We use certain derivative financial
instruments to manage these risks. We do not use derivative financial
instruments for speculative or trading purposes. All financial instruments are
used in accordance with management-approved policies.
Market Interest Risk
Short-term Investments - As of October 29, 1999, we had short-term
investments of $51.7 million. These short-term investments consist of highly
liquid investments with original maturities at the date of purchase between
three and twelve months. These investments are subject to interest rate risk and
will decrease in value if market interest rates increase. A hypothetical 10
percent increase in market interest rates from levels at October 29, 1999, would
cause the fair value of these short-term investments to decline by an immaterial
amount. Because we have the ability to hold these investments until maturity we
would not expect any significant decline in value of our investments caused by
market interest rate changes. Declines in interest rates over time will,
however, reduce our interest income.
Operating Lease Commitments - As of October 29, 1999, we have
outstanding lease commitments to a third-party entity under operating lease
agreements, which vary based on a monthly LIBOR rate plus a spread. However, a
hypothetical 10 percent decrease in interest rates would not have a material
impact on us. Increases in interest rates could, however, increase our rent
expenses associated with future lease payments. We do not currently hedge
against interest rate increases. However, our investment portfolio offers a
natural hedge against interest rate risk from our operating lease commitments
in the event of a significant increase in the market interest rate.
The hypothetical changes and assumptions discussed above will be
different from what actually occurs in the future. Furthermore, such
computations do not anticipate actions that may be taken by management, should
the hypothetical market changes actually occur over time. As a result, the
effect on actual earnings in the future will differ from those described above.
Foreign Currency Exchange Rate Risk - We hedge risks associated with
foreign currency transactions in order to minimize the impact of changes in
foreign currency exchange rates on earnings. We utilize forward contracts to
hedge against the short-term impact of foreign currency fluctuations on certain
assets and liabilities denominated in foreign currencies. All hedge instruments
are marked to market through earnings every period. We believe that these
forward contracts do not subject us to undue risk due to foreign exchange
movements because gains and losses on these contracts are offset by losses and
gains on the underlying assets and liabilities.
All contracts have a maturity of less than one year and we do not defer
any gains and losses, as they are all accounted for through earnings every
period.
15
<PAGE> 17
The following table provides information about our foreign exchange
forward contracts outstanding on October 29, 1999, (in thousands):
<TABLE>
<CAPTION>
Buy/ Foreign Contract Value Fair Value
Currency Sell Currency Amount USD in USD
- -------- ----- --------------- ------------- ----------
<S> <C> <C> <C> <C>
EUR Sell 14,954 16,042 15,730
GBP Sell 4,985 8,056 8,192
CHF Buy 1,288 852 845
</TABLE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
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
16
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.41 Purchase and Sale Agreement dated September 9, 1999, by and
between Trinet Essential Facilities XII, Inc., and the Company
10.42 Agreement of Assignment of Lease, dated September 3, 1999, by
and between Lockheed Martin Corporation, and the Company
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
17
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the registrant duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NETWORK APPLIANCE, INC.
(Registrant)
/S/ JEFFRY R.ALLEN
------------------------------------------
Jeffry R. Allen
Senior Vice President Finance and
Operations, Chief Financial
Officer and Secretary
Date: December 2, 1999
18
<PAGE> 20
EXHIBIT INDEX
DESCRIPTION
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
10.41 Purchase and Sale Agreement, dated September 9, 1999, by and between
Trinet Essential Facilities XII, Inc., and the Company
10.42 Agreement of Assignment of Lease, dated September 3, 1999 by and
between Lockheed Martin Corporation and the Company
27.1 Financial Data Schedule
</TABLE>
19
<PAGE> 1
EXHIBIT 10.41
PURCHASE AGREEMENT
between
TRINET ESSENTIAL FACILITIES XII, INC., Seller
and
NETWORK APPLIANCE, INC., Buyer
September 9, 1999
1260 Crossman Avenue
Sunnyvale, California
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1 Purchase and Sale...................................................................1
1.1 The Property........................................................................1
1.2 Property Approval Period............................................................1
1.3 Exchange by Seller..................................................................3
1.4 Exchange by Buyer...................................................................3
ARTICLE 2 Purchase Price......................................................................3
2.1 Amount and Payment..................................................................3
2.2 Deposit.............................................................................4
2.3 Liquidated Damages..................................................................4
ARTICLE 3 Completion of Sale..................................................................4
3.1 Place and Date......................................................................4
ARTICLE 4 Title and Condition.................................................................5
4.1 Title to the Property...............................................................5
4.2 Acceptance of Title.................................................................5
4.3 Condition of the Property...........................................................5
ARTICLE 5 Representations and Warranties......................................................5
5.1 Seller..............................................................................5
5.2 Buyer...............................................................................6
ARTICLE 6 Covenants...........................................................................7
6.1 Seller..............................................................................7
6.2 Buyer...............................................................................8
6.3 Casualty Damage.....................................................................9
6.4 Eminent Domain......................................................................9
ARTICLE 7 Conditions Precedent...............................................................10
7.1 Seller.............................................................................10
7.2 Buyer..............................................................................10
ARTICLE 8 Closing............................................................................11
8.1 Procedure..........................................................................11
8.2 Possession.........................................................................12
8.3 Closing Costs......................................................................12
8.4 Prorations.........................................................................12
ARTICLE 9 General............................................................................12
9.1 Notices............................................................................12
9.2 Attorneys' Fees....................................................................13
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
9.3 Governing Law......................................................................14
9.4 Construction.......................................................................14
9.5 Terms Generally....................................................................14
9.6 Further Assurances.................................................................14
9.7 Partial Invalidity.................................................................14
9.8 Waivers............................................................................14
9.9 Confidentiality....................................................................15
9.10 No Third-Party Beneficiaries.......................................................15
9.11 Miscellaneous......................................................................15
</TABLE>
Exhibit A Legal Description
Exhibit B Items Delivered by Seller
Exhibit C Grant Deed
Exhibit D Seller's Closing Certificate
Exhibit E Buyer's Closing Certificate
Exhibit F Assignment of Leases
Exhibit G Certificate of Nonforeign Status
Exhibit H General Release
-ii-
<PAGE> 4
PURCHASE AGREEMENT
THIS AGREEMENT, made as of September 9, 1999, by and between TRINET
ESSENTIAL FACILITIES XII, INC., a Maryland corporation ("Seller"), and NETWORK
APPLIANCE, INC., a California corporation ("Buyer"),
W I T N E S S E T H:
In consideration of the covenants in this Agreement, Seller and Buyer
agree as follows:
ARTICLE 1
Purchase and Sale
1.1 The Property. Seller agrees to sell to Buyer, and Buyer agrees to
purchase from Seller, in accordance with this Agreement, the real property in
the City of Sunnyvale, County of Santa Clara, State of California, commonly
known as 1260 Crossman Avenue, Sunnyvale, California, described in Exhibit A
attached hereto, together with the improvements on such real property, the
easements and rights appurtenant to such real property, and Seller's interest in
the Lease, dated May 5, 1978, between Lockheed Martin Corporation, a Maryland
corporation ("Tenant"), as successor to Ford Aerospace and Communications
Corporation, as tenant, and The Prudential Insurance Company of America, as
landlord, together with all amendments and ancillary agreements thereto (the
"Lease"), pertaining to such real property (all such real property,
improvements, easements, rights and Seller's interest in the Lease are
collectively the "Property").
1.2 Property Approval Period.
(a) During the period from the date of this Agreement to the date thirty
(30) days after the date of this Agreement (the "Property Approval Period"),
Buyer shall, in good faith and with diligence, at Buyer's expense, review and
investigate the physical and environmental condition of the Property, the
character, quality and general utility of the Property, the zoning, land use,
environmental and building requirements and restrictions applicable to the
Property, the state of title to the Property, and the Lease. Buyer shall
determine whether or not the Property is acceptable to Buyer within the Property
Approval Period. If, during the Property Approval Period, Buyer determines, in
Buyer's sole discretion, that the Property is not acceptable, Buyer shall have
the right, by giving notice to Seller on or before the last day of the Property
Approval Period, to terminate this Agreement. If Buyer exercises the right to
terminate this Agreement in accordance with this section 1.2, this Agreement
shall terminate as of the date such termination notice is given by Buyer, in
which event the Deposit (as hereinafter defined) and all interest thereon shall
be returned to Buyer. If Buyer does not exercise the right to terminate this
Agreement in accordance with this section 1.2, this Agreement shall continue in
full force and effect, and Buyer shall have no further right to terminate this
Agreement pursuant to this section 1.2.
-1-
<PAGE> 5
(b) Prior to the date of this Agreement Seller has delivered to Buyer,
and Buyer acknowledges receipt of, all of the items listed on Exhibit B attached
hereto which Seller is required to deliver. During the Property Approval Period,
subject to the rights of Tenant set forth in the Lease, Seller shall provide
Buyer and Buyer's representatives with access to the Property pursuant to, and
subject to the terms and conditions of, the Access Agreement dated September 3,
1999, among Buyer, Seller and Tenant. Buyer acknowledges that the materials
relating to the Property to be furnished by Seller to Buyer contain confidential
and proprietary information. Buyer agrees to keep all such information
confidential and not to disclose any such information to any third party except
to the extent necessary to carry out the responsibilities of Buyer pursuant to
this section 1.2 or to obtain financing for the Property. If Buyer exercises the
right to terminate this Agreement in accordance with this section 1.2, Buyer
shall, within five (5) days after the termination date, return to Seller all
materials relating to the Property theretofore furnished by Seller and all
copies thereof.
(c) Buyer shall indemnify and defend Seller against and hold Seller
harmless from all claims, demands, liabilities, losses, damages, costs and
expenses, including reasonable attorneys' fees and disbursements, arising from
any entry on the Property by Buyer or any of Buyer's representatives. The
foregoing indemnification covenant shall survive any termination of this
Agreement. Buyer shall, promptly after completion thereof, provide Seller with
copies of all studies, tests, reports and other documents or materials relating
to the Property that are prepared, conducted or made by, for or on behalf of
Buyer.
(d) Buyer acknowledges receipt of a Preliminary Title Report respecting
the Property dated August 26, 1999 (the "Preliminary Report") issued by First
American Title Company (the "Title Company"), together with copies of all
exception documents referred to therein. Buyer shall have the right to object in
writing, delivered to Seller no later than the date fifteen (15) days after the
date of this Agreement, to any exception listed in the Preliminary Report (a
"Challenged Exception"). Any such exception which Buyer does not so object to
shall be a Permitted Exception deemed approved by Buyer. Seller shall have the
right, but no obligation, by notice to Buyer delivered within ten (10) days
after Buyer's objection notice, to agree to cause any Challenged Exception to be
removed from title or insured over by the Title Company. Except as Buyer and
Seller may otherwise agreed in writing, by failing to terminate this Agreement
in accordance with section 1.2(a), Buyer shall be deemed to have approved any
Challenged Exception as to which Seller does not so agree to cause the removal
or insurance over, and such Challenged Exceptions shall be Permitted Exceptions.
Buyer shall accept title to the Property subject to the following (collectively,
the "Permitted Exceptions"): (a) the items listed as exceptions in the
Preliminary Report which Buyer approves or is deemed hereunder to have approved,
(b) any matter which would be disclosed by a current ALTA/ACSM survey or a
physical inspection of the Property and (c) any other matters created, permitted
or approved (or deemed approved) by Buyer. If on or prior to the Closing Date,
Buyer discovers the existence of any exception to title which is not a Permitted
Exception and which is not disclosed by the Preliminary Report (a "New
Exception"), Buyer may, by giving notice to Seller within three (3) business
days of such discovery, object to any such New Exception. Buyer shall be deemed
to have approved any such New Exception unless Buyer objects to any title
exception in accordance with this section 1.2(d). If Buyer makes any such
objection, Seller may, by giving notice to Buyer within three (3) business days
after receipt of such objection, elect either to remove such New Exception or
not to remove such New
-2-
<PAGE> 6
Exception. Seller shall be deemed to have elected not to remove any such New
Exception unless Seller elects to remove any such New Exception in accordance
with this section 1.2. If Seller elects not to remove any New Exception to which
Buyer shall have timely objected, Buyer may terminate this Agreement by notice
to Seller delivered within two (2) business days after expiration of such three
(3) business day period. Any such New Exception to which Buyer does not object
in accordance with this section 1.2 shall be deemed approved and deemed to be a
Permitted Exception. Seller agrees, on or before the Closing Date, to do all
things required by the Title Company to ensure the removal, or insurance over,
of any exception to title relating to any mortgage, deed of trust or other
voluntary monetary lien incurred by Seller.
1.3 Exchange by Seller. If requested by Seller, Buyer shall cooperate
with Seller to effect an exchange of the Property that qualifies for
nonrecognition treatment in accordance with section 1031 of the Internal Revenue
Code of 1986, as amended. Seller shall be responsible for negotiating the terms
of the acquisition of exchange property and for preparing and furnishing to
Buyer the necessary agreements, escrow instructions and other documents related
to the acquisition of exchange property. Buyer shall execute, acknowledge and
deliver such agreements, escrow instructions and other documents and take such
action as may be required in accordance with such agreements, escrow
instructions and other documents to complete the acquisition and conveyance of
the exchange property, as directed by Seller. Buyer shall not be required to
assume any additional obligation or to incur any additional liability in
connection with any acquisition of an exchange property that will survive
conveyance of the exchange property to Seller. The exchange shall not delay the
Closing Date.
1.4 Exchange by Buyer. If requested by Buyer, Seller shall cooperate
with Buyer to effect a purchase of the Property through an exchange that
qualifies for nonrecognition treatment in accordance with section 1031 of the
Internal Revenue Code of 1986, as amended. Buyer shall be responsible for
negotiating the terms of the disposition of exchange property and for preparing
and furnishing to Seller the necessary agreements, escrow instructions and other
documents related to the exchange. Seller shall execute, acknowledge and deliver
such agreements, escrow instructions and other documents and take such action as
may be required in accordance with such agreements, escrow instructions and
other documents to complete the acquisition and conveyance of the exchange
property, as directed by Buyer. Seller shall not be required to acquire title to
any other property, nor to assume any additional obligation or to incur any
additional liability in connection with any exchange that will survive
conveyance of the Property to Seller. The exchange shall not delay the Closing
Date.
ARTICLE 2
Purchase Price
2.1 Amount and Payment. The total purchase price for the Property shall
be thirteen million four hundred thousand dollars ($13,400,000). At the Closing
(as hereinafter defined) on the Closing Date (as hereinafter defined), Buyer
shall pay the total purchase price for the Property to Seller in cash in
immediately available funds.
-3-
<PAGE> 7
2.2 Deposit. Not later than the date five (5) days after the date of
this Agreement, Buyer shall deposit the sum of six hundred seventy thousand
dollars ($670,000) (the "Deposit") in cash in immediately available funds in
escrow with the Title Company. The Deposit shall be held by the Title Company in
an interest-bearing account designated in writing by Buyer and approved in
writing by Seller. If Seller and Buyer complete the purchase and sale of the
Property in accordance with this Agreement, the Deposit and all interest thereon
shall be applied to payment of the total purchase price for the Property in
accordance with section 2.1 hereof. If the purchase and sale of the Property is
not so completed and this Agreement terminates for any reason other than as set
forth in section 2.3, then the Deposit and all interest thereon shall be
returned to Buyer upon such termination of this Agreement.
2.3 Liquidated Damages. SELLER AND BUYER AGREE THAT, IF THE PURCHASE AND
SALE OF THE PROPERTY IS NOT COMPLETED IN ACCORDANCE WITH THIS AGREEMENT AND THIS
AGREEMENT TERMINATES FOR ANY REASON OTHER THAN (A) TERMINATION BY BUYER PURSUANT
TO SECTION 1.2(a) OR (B) THE FAILURE OF THE CONDITIONS DESCRIBED IN SECTION
7.2(a), (b) OR (c), THEN THE DEPOSIT AND ALL INTEREST THEREON SHALL BE PAID TO
SELLER UPON TERMINATION OF THIS AGREEMENT AND RETAINED BY SELLER AS LIQUIDATED
DAMAGES AND AS SELLER'S SOLE REMEDY AT LAW OR IN EQUITY. SELLER AND BUYER AGREE
THAT, UNDER THE CIRCUMSTANCES EXISTING AS OF THE DATE OF THIS AGREEMENT, ACTUAL
DAMAGES MAY BE DIFFICULT TO ASCERTAIN AND THE DEPOSIT AND ALL INTEREST THEREON
IS A REASONABLE ESTIMATE OF THE DAMAGES THAT WILL BE INCURRED BY SELLER IF BUYER
FAILS TO PURCHASE THE PROPERTY IN ACCORDANCE WITH THIS AGREEMENT.
SELLER'S INITIALS:[ILLEGIBLE INITIALS] BUYER'S INITIALS: [ILLEGIBLE INITIALS]
--------------------- -------------------
ARTICLE 3
Completion of Sale
3.1 Place and Date. The purchase and sale of the Property shall be
completed in accordance with Article 8 hereof (the "Closing"). The Closing shall
occur through escrow with the Title Company on March 1, 2000 (the "Closing
Date"), or at such other place or on such other date as Seller and Buyer agree
in writing. Prior to the Closing Date, Seller and Buyer each shall give
appropriate written escrow instructions, consistent with this Agreement, to the
Title Company for the Closing in accordance with this Agreement.
-4-
<PAGE> 8
ARTICLE 4
Title and Condition
4.1 Title to the Property. Seller shall convey to Buyer good and
marketable fee title to the Property, by a duly executed and acknowledged Grant
Deed (the "Grant Deed") in the form of Exhibit C attached hereto, free and clear
of liens, encumbrances, leases, easements, restrictions, rights, covenants and
conditions, except the Permitted Exceptions.
4.2 Acceptance of Title. Buyer's acceptance of the Grant Deed from
Seller for the Property at the Closing on the Closing Date and the issuance of a
title insurance policy to Buyer by the Title Company on the Closing Date shall
conclusively establish that Seller conveyed the Property to Buyer as required by
this Agreement and shall discharge in full Seller's obligations under section
4.1 hereof with respect to title to the Property.
4.3 Condition of the Property. Except for the express representations
and warranties of Seller set forth in section 5.1 hereof, Buyer is acquiring the
Property "as is," without any covenant, representation or warranty of any kind
or nature whatsoever, express or implied, and Buyer is relying solely on Buyer's
own investigation of the Property. In accordance with California Health and
Safety Code section 25359.7, Seller has delivered to Buyer a copy of the report
(the "Environmental Assessment") dated April 12, 1994, prepared by E2C, Inc.,
Job No. 6260100, containing certain environmental information about the
Property. Buyer acknowledges receipt of the Environmental Assessment and
confirms that Buyer has read the Environmental Assessment.
ARTICLE 5
Representations and Warranties
5.1 Seller. The representations and warranties of Seller in this section
5.1 and in Seller's Closing Certificate (as hereinafter defined) are a material
inducement for Buyer to enter into this Agreement. Buyer would not purchase the
Property from Seller without such representations and warranties of Seller. Such
representations and warranties shall survive the Closing for only one hundred
eighty (180) days after the Closing Date, at which time such representations and
warranties shall terminate. Seller represents and warrants to Buyer as of the
date of this Agreement as follows:
(a) Seller is a corporation duly incorporated and organized and validly
existing and in good standing under the laws of the State of Maryland. Seller is
duly qualified to do business and is in good standing in the State of
California. Seller has full corporate power and authority to enter into this
Agreement and to perform this Agreement. The execution, delivery and performance
of this Agreement by Seller have been duly and validly authorized by all
necessary action on the part of Seller and all required consents or approvals
have been duly obtained. This Agreement is a legal, valid and binding obligation
of Seller, enforceable against Seller in accordance with its terms, subject to
the effect of applicable bankruptcy, insolvency,
-5-
<PAGE> 9
reorganization, arrangement, moratorium or other similar laws affecting the
rights of creditors generally. There is no agreement to which Seller is a party
or, to Seller's actual knowledge, which is binding on Seller, which is in
conflict with this Agreement.
(b) The copy of the Lease delivered by Seller to Buyer is a complete and
accurate copy, and there are no amendments thereto other than amendments of
which Seller has provided Buyer with a complete and accurate copy. Except as
disclosed to Seller in writing, to the current actual knowledge of Seller,
Seller is not materially in default in the performance of any material covenant
to be performed by the landlord under the Lease and the Tenant under the Lease
has no material claims or offsets against Seller pursuant to the Lease.
(c) Seller is not a "foreign person" as defined in section 1445 of the
Internal Revenue Code of 1986, as amended, and the Income Tax Regulations
thereunder.
(d) Except for Cornish & Carey Commercial, Seller has not dealt with any
real estate broker or finder in connection with the sale of the Property to
Buyer or this Agreement.
(e) Seller has not (i) made a general assignment for the benefit of
creditors; (ii) filed any voluntary petition in bankruptcy or suffered the
filing of an involuntary petition by its creditors; (iii) suffered the
appointment of a receiver to take possession of all or substantially all of its
assets; (iv) suffered the attachment or other judicial seizure of all, or
substantially all, of its assets; (v) admitted in writing its inability to pay
its debts as they come due; or (vi) made an offer of settlement, extension or
composition to its creditors generally.
(f) Seller has not received any written notice from any governmental
authority with respect to, and Seller is not aware of, any eminent domain
proceedings for the condemnation of the Property that are threatened or
currently pending.
5.2 Buyer. The representations and warranties of Buyer in this section
5.2 and in Buyer's Closing Certificate (as hereinafter defined) are a material
inducement for Seller to enter into this Agreement. Seller would not sell the
Property to Buyer without such representations and warranties of Buyer. Such
representations and warranties shall survive the Closing for only one hundred
eight (180) days after the Closing Date, at which time such representations and
warranties shall terminate. Buyer represents and warrants to Seller as of the
date of this Agreement as follows:
(a) Buyer is a corporation duly incorporated and organized and validly
existing and in good standing under the laws of the State of California. Buyer
has full corporate power and authority to enter into this Agreement and to
perform this Agreement. The execution, delivery and performance of this
Agreement by Buyer have been duly and validly authorized by all necessary action
on the part of Buyer and all required consents or approvals have been duly
obtained. This Agreement is a legal, valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms, subject to the effect of
applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or
other similar laws affecting the rights of creditors generally. There is no
agreement to which Buyer is a party or, to Buyer's actual knowledge, which is
binding on Buyer, which is in conflict with this Agreement.
-6-
<PAGE> 10
(b) Except for Cornish & Carey Commercial, Buyer has not dealt with any
real estate broker or finder in connection with the purchase of the Property
from Seller or this Agreement.
(c) Buyer has not (i) made a general assignment for the benefit of
creditors; (ii) filed any voluntary petition in bankruptcy or suffered the
filing of an involuntary petition by its creditors; (iii) suffered the
appointment of a receiver to take possession of all or substantially all of its
assets; (iv) suffered the attachment or other judicial seizure of all, or
substantially all, of its assets; (v) admitted in writing its inability to pay
its debts as they come due; or (vi) made an offer of settlement, extension or
composition to its creditors generally.
ARTICLE 6
Covenants
6.1 Seller. Seller covenants and agrees with Buyer as follows:
(a) Seller shall use reasonable efforts, in good faith and with
diligence, to cause all of the representations and warranties made by Seller in
section 5.1 hereof to be true and correct on and as of the Closing Date. At the
Closing on the Closing Date, Seller shall execute and deliver to Buyer a
Seller's Closing Certificate ("Seller's Closing Certificate") in the form of
Exhibit D attached hereto, certifying to Buyer that all such representations and
warranties are true and correct on and as of the Closing Date, with only such
exceptions therein as are necessary to reflect facts or circumstances arising
between the date of this Agreement and the Closing Date which would make any
such representation or warranty untrue or incorrect on and as of the Closing
Date.
(b) Seller shall indemnify and defend Buyer against and hold Buyer
harmless from all claims, demands, liabilities, losses, damages, costs and
expenses, including reasonable attorneys' fees and disbursements, that may be
suffered or incurred by Buyer if any representation or warranty made by Seller
in section 5.1 hereof or in Seller's Closing Certificate was untrue or incorrect
in any respect when made or that may be caused by any breach by Seller of any
such representation or warranty.
(c) Between the date of this Agreement and the Closing Date or earlier
termination of this Agreement, Seller shall (i) not enter into any new lease of
the Property or any part thereof, and shall give Buyer notice of any amendment
of the Lease, (ii) not enter into any service agreements or other third party
agreements that will survive the Closing and be binding on Buyer, except for
ordinary service agreement on customary terms which shall be terminable on not
more than thirty (30) days' notice without penalty; and (iii) maintain or cause
to be maintained in effect property and liability insurance on the Property to
the extent required to be maintained by Seller in accordance with the Lease.
(d) Between the date of this Agreement and the Closing Date or earlier
termination of this Agreement, Seller shall, at Buyer's sole cost, provide
reasonable cooperation to Buyer in connection with Buyer's efforts to obtain
governmental, quasi-governmental and third-party
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<PAGE> 11
approvals, as Buyer may deem appropriate to enable Buyer after the Closing to
develop the Property, construct improvements thereon and operate its business
from the Property ("Buyer's Development Efforts"); provided that, (i) Seller
shall not become liable to any governmental entity or other third party in any
respect by reason of Buyer's Development Efforts or Seller's cooperation
therewith and Buyer shall indemnify, defend and hold Seller harmless from and
against any such liability, (ii) if the Closing does not occur for any reason,
Buyer shall, on Seller's request, take all steps necessary to reverse the
effects of any of Buyer's Development Efforts, including withdrawing any
applications and canceling any permits or approvals, and (iii) Buyer shall,
promptly upon demand, reimburse Seller for any costs or expenses incurred by
Seller in connection with or relating to Buyer's Development Efforts or Seller's
cooperation therewith, including any attorneys' or consultants' fees.
Notwithstanding the foregoing, Buyer shall not take any action with respect to
the Property or in furtherance of Buyer's Development Efforts if, in Seller's
reasonable judgment, such action could reasonably be expected to have a
detrimental effect on the value or utility of the Property.
6.2 Buyer. Buyer covenants and agrees with Seller as follows:
(a) Buyer shall use reasonable efforts, in good faith and with
diligence, to cause all of the representations and warranties made by Buyer in
section 5.2 hereof to be true and correct on and as of the Closing Date. At the
Closing on the Closing Date, Buyer shall execute and deliver to Seller a Buyer's
Closing Certificate ("Buyer's Closing Certificate") in the form of Exhibit E
attached hereto, certifying to Seller that all such representations and
warranties are true and correct on and as of the Closing Date, with only such
exceptions therein as are necessary to reflect facts or circumstances arising
between the date of this Agreement and the Closing Date which would make any
such representation or warranty untrue or incorrect on and as of the Closing
Date.
(b) Buyer shall indemnify and defend Seller against and hold Seller
harmless from all claims, demands, liabilities, losses, damages, costs and
expenses, including reasonable attorneys' fees and disbursements, that may be
suffered or incurred by Seller if any representation or warranty made by Buyer
in section 5.2 hereof or in Buyer's Closing Certificate was untrue or incorrect
in any respect when made or that may be caused by any breach by Buyer of any
such representation or warranty.
(c) Buyer shall be responsible for the payment of any commission, fee or
other compensation payable to Cornish & Carey Commercial in connection with this
Agreement or the Property, and Buyer shall indemnify, defend and hold Seller
harmless from and against any claim or liability for any commission, fee or
other compensation payable in connection with this Agreement or the Property
unless such claim or liability arises from an express agreement made by Seller.
6.3 Casualty Damage. If, before the Closing Date, the improvements on
the Property 6.3 are damaged by any casualty whether or not insured and the cost
to restore such improvements, as reasonably determined by Seller and Buyer, is
more than one million dollars ($1,000,000), Buyer shall have the right, by
giving notice to Seller within thirty (30) days after Seller gives notice of the
occurrence of such casualty to Buyer, to terminate this Agreement, in which
event this Agreement shall terminate. If, before the Closing Date, the
improvements on
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<PAGE> 12
the Property are damaged by any casualty and the cost to restore such
improvements, as reasonably determined by Seller and Buyer, is one million
dollars ($1,000,000) or less, or Buyer has the right to terminate this Agreement
pursuant to the preceding sentence but Buyer does not exercise such right, then
this Agreement shall remain in full force and effect and, on the Closing Date,
any insurance proceeds (or, if not theretofore received, the right to receive
such proceeds) payable on account of the damage shall be transferred to Buyer.
In no event shall Seller be obligated to provide any credit or price reduction
on account of any casualty. Seller shall give notice to Buyer reasonably
promptly after the occurrence of any damage to the improvements on the Property
by any casualty. If necessary, the Closing Date shall be postponed until Seller
has given any notice to Buyer required by this section 6.3 and the period of
thirty (30) days described in this section 6.3 has expired, and the restoration
cost has been determined by Seller and Buyer. In the event of any casualty
damage, Seller shall use commercially reasonable efforts to enforce Tenant's
obligations under the Lease respecting repair and restoration.
6.4 Eminent Domain. If, before the Closing Date, proceedings are
commenced for the taking by exercise of the power of eminent domain of all or a
material part of the Property which, as reasonably determined by Buyer, would
render the Property unsuitable for Buyer's intended use, Buyer shall have the
right, by giving notice to Seller within thirty (30) days after Seller gives
notice of the commencement of such proceedings to Buyer, to terminate this
Agreement, in which event this Agreement shall terminate. If, before the Closing
Date, proceedings are commenced for the taking by exercise of the power of
eminent domain of less than such a material part of the Property, or if Buyer
has the right to terminate this Agreement pursuant to the preceding sentence but
Buyer does not exercise such right, then this Agreement shall remain in full
force and effect and, on the Closing Date, the condemnation award (or, if not
theretofore received, the right to receive such award) payable on account of the
taking shall be transferred to Buyer. Seller shall give notice to Buyer
reasonably promptly after Seller's receiving notice of the commencement of any
proceedings for the taking by exercise of the power of eminent domain of all or
any part of the Property. If necessary, the Closing Date shall be postponed
until Seller has given any notice to Buyer required by this section 6.4 and the
period of thirty (30) days described in this section 6.4 has expired.
ARTICLE 7
Conditions Precedent
7.1 Seller. The obligations of Seller under this Agreement are subject
to satisfaction of all of the conditions set forth in this section 7.1. Seller
may waive any or all of such conditions in whole or in part but any such waiver
shall be effective only if made in writing. After the Closing, any such
condition that has not been satisfied shall be treated as having been waived in
writing. No such waiver shall constitute a waiver by Seller of any of its rights
or remedies if Buyer defaults in the performance of any covenant or agreement to
be performed by Buyer under this Agreement or if Buyer breaches any
representation or warranty made by Buyer in section 5.2 hereof or in Buyer's
Closing Certificate. If any condition set forth in this section 7.1 is not fully
satisfied or waived in writing by Seller, this Agreement shall terminate,
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<PAGE> 13
but without releasing Buyer from liability if Buyer defaults in the performance
of any such covenant or agreement to be performed by Buyer or if Buyer breaches
any such representation or warranty made by Buyer before such termination.
(a) On the Closing Date, Buyer shall not be materially in default
in the performance of any material covenant to be performed by Buyer under this
Agreement.
(b) On the Closing Date, all representations and warranties made
by Buyer in section 5.2 hereof shall be true and correct in all material
respects as if made on and as of the Closing Date and Seller shall have received
Buyer's Closing Certificate, executed by Buyer, in which Buyer certifies to
Seller that all representations and warranties made by Buyer in section 5.2
hereof are true and correct on and as of the Closing Date, without material
adverse exceptions.
(c) On the Closing Date, Tenant and Buyer shall have executed and
delivered to Seller a General Release in the form of Exhibit H attached hereto
(the "General Release").
7.2 Buyer. The obligations of Buyer under this Agreement are subject to
satisfaction of all of the conditions set forth in this section 7.2. Buyer may
waive any or all of such conditions in whole or in part but any such waiver
shall be effective only if made in writing. After the Closing, any such
condition that has not been satisfied shall be treated as having been waived in
writing. No such waiver shall constitute a waiver by Buyer of any of its rights
or remedies if Seller defaults in the performance of any covenant or agreement
to be performed by Seller under this Agreement or if Seller breaches any
representation or warranty made by Seller in section 5.1 hereof or in Seller's
Closing Certificate. If any condition set forth in this section 7.2 is not fully
satisfied or waived in writing by Buyer, this Agreement shall terminate, but
without releasing Seller from liability if Seller defaults in the performance of
any such covenant or agreement to be performed by Seller or if Seller breaches
any such representation or warranty made by Seller before such termination.
(a) On the Closing Date, Seller shall not be materially in
default in the performance of any material covenant to be performed by Seller
under this Agreement.
(b) On the Closing Date, all representations and warranties made
by Seller in section 5.1 hereof shall be true and correct in all material
respects as if made on and as of the Closing Date and Buyer shall have received
Seller's Closing Certificate, executed by Seller, in which Seller certifies to
Buyer that all representations and warranties made by Seller in section 5.1
hereof are true and correct on and as of the Closing Date, without material
adverse exceptions.
(c) On the Closing Date, the Title Company shall be prepared to
issue to Buyer a California Land Title Association or ALTA Extended Coverage
Policy of title insurance, with liability equal to the total purchase price for
the Property, insuring Buyer that fee title to the Property is vested in Buyer
subject only to the Permitted Exceptions.
(d) Tenant shall have agreed in writing to assign its interest in
the Lease to Buyer, which assignment shall be consummated and effective
immediately upon the Closing.
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<PAGE> 14
ARTICLE 8
Closing
8.1 Procedure. Seller and Buyer shall cause the following to occur at
the Closing on the Closing Date:
(a) The Grant Deed for the Property, duly executed and acknowledged by
Seller, shall be recorded in the Official Records of the county in which the
Property is located.
(b) Seller shall date as of the Closing Date, execute and deliver to
Buyer (i) Seller's Closing Certificate, (ii) an Assignment of Leases (the
"Assignment of Leases") in the form of Exhibit F attached hereto, and (iii) a
Certificate of Nonforeign Status in the form of Exhibit G attached hereto.
(c) Buyer shall date as of the Closing Date, execute and deliver to
Seller (i) Buyer's Closing Certificate and (ii) the Assignment of Leases.
(d) Buyer shall pay to Seller the total purchase price for the Property
in cash in immediately available funds in accordance with section 2.1 hereof.
(e) The Title Company shall issue to Buyer the title insurance policy
described in section 7.2(c) hereof.
(f) Tenant and Buyer shall date as of the Closing Date, execute and
deliver to Seller the General Release.
8.2 Possession. Subject to the Lease, Seller shall transfer possession
of the Property to Buyer on the Closing Date. Seller shall, on the Closing Date,
deliver to Buyer the Leases and any plans and specifications, permits,
certificates, licenses and approvals relating to the Property in the possession
of Seller, which shall become the property of Buyer on the Closing Date.
8.3 Closing Costs. Seller shall pay the County documentary transfer tax
in respect of the Grant Deed, the premium for a CLTA title policy described in
section 7.2(c) hereof, and the escrow fee charged by the Title Company. Buyer
shall pay the premium for the title insurance policy obtained by Buyer to the
extent in excess of a standard premium for a CLTA policy, and any charges for
endorsements, and the recording fee for the Grant Deed. All other closing costs
shall be paid according to the custom in Santa Clara County.
8.4 Prorations. At the Closing on the Closing Date, the current rent
under the Leases, the current installment of real property taxes and assessments
levied against the Property, current utilities, and other current operating and
maintenance expenses of the Property (net of any payments paid or payable by
Tenant for taxes, assessments, utilities and expenses) shall be prorated between
Seller and Buyer as of the Closing Date on the basis of a thirty-day month. Any
security deposits held by Seller under the Leases on the Closing Date shall be
credited to Buyer and charged to Seller at the Closing.
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<PAGE> 15
ARTICLE 9
General
9.1 Notices. All notices and other communications under this Agreement
shall be properly given only if made in writing and mailed by certified mail,
return receipt requested, postage prepaid, or delivered by hand (including
messenger or recognized delivery, courier or air express service) to the party
at the address set forth in this section 9.1 or such other address as such party
may designate by notice to the other party. Such notices and other
communications shall be effective on the date of receipt (evidenced by the
certified mail receipt) if mailed or on the date of such hand delivery (or upon
refusal to accept such delivery) if hand delivered. If any such notice or other
communication is not received or cannot be delivered due to a change in the
address of the receiving party of which notice was not previously given to the
sending party or due to a refusal to accept by the receiving party, such notice
or other communication shall be effective on the date delivery is attempted. Any
notice or other communication under this Agreement may be given on behalf of a
party by the attorney for such party.
(a) The address of Seller is:
TriNet Corporate Realty Trust, Inc.
One Embarcadero Center, Suite 3300
San Francisco, CA 94111
Attention: Mr. James Pierre
with a copy to:
TriNet Corporate Realty Trust, Inc.
One Embarcadero Center, Suite 3300
San Francisco, CA 94111
Attention: Geoffrey M. Dugan, Esq.
and with a further copy to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street, 14th Floor
San Francisco, CA 94104
Attention: Glenn Q. Snyder, Esq.
(b) The address of Buyer is:
Network Appliance, Inc.
495 East Java Drive
Sunnyvale, CA 94089
Attention: Mr. Thom Bryant
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<PAGE> 16
with a copy to:
Brobeck, Phleger & Harrison LLP
Spear Street Tower
One Market Plaza
San Francisco, CA 94105
Attention: Douglas Van Gessel, Esq.
9.2 Attorneys' Fees. If there is any legal action or proceeding between
Seller and Buyer arising from or based on this Agreement, the unsuccessful party
to such action or proceeding shall pay to the prevailing party all costs and
expenses, including reasonable attorneys' fees, incurred by such prevailing
party in such action or proceeding and in any appeal in connection therewith. If
such prevailing party recovers a judgment in any such action, proceeding or
appeal, such costs, expenses and attorneys' fees shall be included in and as a
part of such judgment.
9.3 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
9.4 Construction. Seller and Buyer acknowledge that each party and its
counsel have reviewed and revised this Agreement and that the rule of
construction to the effect that ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement or
any document executed and delivered by either party in connection with the
transactions contemplated by this Agreement. The captions in this Agreement are
for convenience of reference only and shall not be used to interpret this
Agreement.
9.5 Terms Generally. The defined terms in this Agreement shall apply
equally to both the singular and the plural forms of the terms defined. Whenever
the context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The term "person" includes individuals, corporations,
partnerships, trusts, other legal entities, organizations and associations, and
any government or governmental agency or authority. The words "include,"
"includes" and "including" shall be deemed to be followed by the phrase "without
limitation." The words "approval," "consent" and "notice" shall be deemed to be
preceded by the word "written."
9.6 Further Assurances. From and after the date of this Agreement,
Seller and Buyer agree to do such things, perform such acts, and make, execute,
acknowledge and deliver such documents as may be reasonably necessary or proper
and usual to complete the transactions contemplated by this Agreement and to
carry out the purpose of this Agreement in accordance with this Agreement.
9.7 Partial Invalidity. If any provision of this Agreement is determined
by a proper court to be invalid, illegal or unenforceable, such invalidity,
illegality or unenforceability shall not affect the other provisions of this
Agreement and this Agreement shall remain in full force and effect without such
invalid, illegal or unenforceable provision.
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<PAGE> 17
9.8 Waivers. No waiver of any provision of this Agreement or any breach
of this Agreement shall be effective unless such waiver is in writing and signed
by the waiving party and any such waiver shall not be deemed a waiver of any
other provision of this Agreement or any other or subsequent breach of this
Agreement.
9.9 Confidentiality. Except for such disclosure as may be required by
law or agreed to by the parties hereto in writing, Seller and Buyer agree that,
prior to the Closing, they shall keep in confidence this Agreement and each and
every term and provision hereof, including, without limitation, the Purchase
Price; provided, however, that Buyer and Seller may disclose this Agreement to
their employees, accountants, attorneys and lenders as necessary to fulfill the
terms hereof.
9.10 No Third-Party Beneficiaries. Nothing in this Agreement shall be
construed as conferring upon Tenant or any other third party any rights
hereunder. Buyer and Seller do not intend that this Agreement have any
third-party beneficiaries.
9.11 Miscellaneous. The Exhibits attached to this Agreement are made a
part of this Agreement. Buyer shall not assign or transfer this Agreement, or
any interest in or part of this Agreement, without the prior consent of Seller,
except that Buyer may assign this Agreement, without Seller's prior written
consent, as necessary to facilitate a synthetic lease transaction or an exchange
pursuant to section 1031 of the Internal Revenue Code. No such assignment or
transfer shall release Buyer from any obligation or liability under this
Agreement. Subject to the foregoing, this Agreement shall benefit and bind
Seller and Buyer and their respective personal representatives, heirs,
successors and assigns. Time is of the essence of this Agreement. This Agreement
may be executed in counterparts, each of which shall be an original, but all of
which shall constitute one and the same Agreement. This Agreement may not be
amended or modified except by a written agreement signed by Seller and Buyer.
This Agreement constitutes the entire and integrated agreement between Seller
and Buyer relating to the purchase and sale of the Property and supersedes all
prior agreements, understandings, offers and negotiations, oral or written, with
respect to the sale of the Property.
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<PAGE> 18
IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement
as of the date first hereinabove written.
SELLER: TRINET ESSENTIAL FACILITIES XII,
INC., a Maryland corporation
By /s/ [SIGNATURE ILLEGIBLE]
---------------------------------
Its VICE PRESIDENT
--------------------------------
BUYER: NETWORK APPLIANCE, INC., a
California corporation
By /s/ [SIGNATURE ILLEGIBLE]
---------------------------------
Its CHIEF FINANCIAL OFFICER
--------------------------------
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<PAGE> 19
LEGAL DESCRIPTION
EXHIBIT A
<PAGE> 20
ITEMS DELIVERED BY SELLER
1. Copies of all recorded exception documents listed in Preliminary Report.
2. Copy of the Lease, including all amendments and ancillary agreements.
3. Copies of soils, geologic and environmental reports.*
4. Plans and specifications and structural reports.*
5. Copies of certificates of occupancy and governmental permits.*
- -------------------
* To the extent in Seller's possession or available to Seller at no material
expense.
EXHIBIT B
<PAGE> 21
Recorded at Request of:
- ------------------------------
When Recorded Mail to:
- ------------------------------
- ------------------------------
- ------------------------------
Mail Tax Statements to:
- ------------------------------
- ------------------------------
- ------------------------------
GRANT DEED
For valuable consideration, receipt of which is acknowledged, TRINET
ESSENTIAL FACILITIES XII, INC., a Maryland corporation, hereby grants to NETWORK
APPLIANCE, INC., a California corporation, the real property in the City of
Sunnyvale, County of Santa Clara, State of California, described in Exhibit A
attached hereto and made a part hereof, subject to the matters described in
Exhibit B attached hereto and made a part hereof.
Dated: ___________, 2000.
TRINET ESSENTIAL FACILITIES XII, INC.,
a Maryland corporation
By
-------------------------------------
Its
------------------------------------
EXHIBIT C
<PAGE> 22
EXHIBIT A
GRANT DEED
All of the real property in the City of Sunnyvale, County of Santa
Clara, State of California, described as follows:
EXHIBIT C
<PAGE> 23
EXHIBIT B
GRANT DEED
Permitted Exceptions
EXHIBIT C
<PAGE> 24
STATE OF CALIFORNIA, )
) ss.
County of ____________________. )
On ____________, 2000, before me, ______________________________
__________________________, a Notary Public in and for the State of California,
personally appeared ______________________________________________, personally
known to me (or proved to me on the basis of satisfactory evidence) to be the
person whose name is subscribed to the within instrument, and acknowledged to me
that he or she executed the within instrument in his or her authorized capacity
and that, by his or her signature on the within instrument, the person or entity
upon behalf of which he or she acted executed the within instrument.
WITNESS my hand and official seal.
Signature _________________________ (Seal)
EXHIBIT C
<PAGE> 25
SELLER'S CLOSING CERTIFICATE
For valuable consideration, receipt of which is acknowledged, TRINET
ESSENTIAL FACILITIES XII, INC., a Maryland corporation ("Seller"), hereby
certifies to NETWORK APPLIANCE, INC., a California corporation ("Buyer"), that
all representations and warranties made by Seller in section 5.1 of the Purchase
Agreement (the "Purchase Agreement") dated ______________, 1999, between Seller
and Buyer are true and correct on and as of the date of this Certificate. This
Certificate is executed by Seller and delivered to Buyer pursuant to the
Purchase Agreement.
Dated: ____________, 2000.
TRINET ESSENTIAL FACILITIES XII, INC.,
a Maryland corporation
By
-------------------------------------
Its
------------------------------------
EXHIBIT D
<PAGE> 26
BUYER'S CLOSING CERTIFICATE
For valuable consideration, receipt of which is acknowledged, NETWORK
APPLIANCE, INC., a California corporation ("Buyer"), hereby certifies to TRINET
ESSENTIAL FACILITIES XII, INC., a Maryland corporation ("Seller"), that all
representations and warranties made by Buyer in section 5.2 of the Purchase
Agreement (the "Purchase Agreement") dated _____________, 1999, between Seller
and Buyer are true and correct on and as of the date of this Certificate. This
Certificate is executed by Buyer and delivered to Seller pursuant to the
Purchase Agreement.
Dated: ____________, 2000.
NETWORK APPLIANCE, INC.,
a California corporation
By
-------------------------------------
Its
------------------------------------
EXHIBIT E
<PAGE> 27
ASSIGNMENT OF LEASES
THIS ASSIGNMENT, made as of ___________, 2000, by and between
TRINET ESSENTIAL FACILITIES XII, INC., a Maryland corporation ("Seller"), and
NETWORK APPLIANCE, INC., a California corporation ("Buyer"),
W I T N E S S E T H:
For valuable consideration, receipt of which is acknowledged,
Seller and Buyer agree as follows:
1. Assignment and Assumption.
(a) Seller hereby assigns and transfers to Buyer all right, title
and interest of Seller in and to the Lease (the "Lease") described in Exhibit A
attached hereto and made a part hereof.
(b) Buyer hereby accepts the foregoing assignment, and assumes
and agrees to perform all of the covenants and agreements in the Lease to be
performed by the landlord thereunder from and after the date of this Assignment.
2. Indemnification.
(a) Seller shall indemnify and defend Buyer against and hold
Buyer harmless from all claims, demands, liabilities, losses, damages, costs and
expenses, including, without limitation, reasonable attorneys' fees and
disbursements, that are caused by any failure by Seller to perform the
obligations of the landlord under the Lease before the date of this Assignment.
(b) Buyer shall indemnify and defend Seller against and hold
Seller harmless form all claims, demands, liabilities, losses, damages, costs
and expenses, including, without limitation, reasonable attorneys' fees and
disbursements, that are caused by any failure by Buyer to perform the
obligations of the landlord under the Lease on or after the date of this
Assignment.
3. Further Assurances. Seller and Buyer agree to execute such
other documents and perform such other acts as may be reasonably necessary or
proper and usual to effect this Assignment.
4. Governing Law. This Assignment shall be governed by and
construed in accordance with the laws of the State of California.
EXHIBIT F
<PAGE> 28
5. Successors and Assigns. This Assignment shall be binding upon
and shall inure to the benefit of Seller and Buyer and their respective personal
representatives, heirs, successors and assigns.
IN WITNESS WHEREOF, Seller and Buyer have executed this
Assignment as of the date first hereinabove written.
TRINET ESSENTIAL FACILITIES XI, INC.,
a Maryland corporation
By
-------------------------------------
Its
------------------------------------
NETWORK APPLIANCE, INC., a
California corporation
By
-------------------------------------
Its
------------------------------------
EXHIBIT A
ASSIGNMENT OF LEASES
Description of Lease
EXHIBIT F
<PAGE> 29
CERTIFICATE OF NONFOREIGN STATUS
Section 1445 of the Internal Revenue Code provides that a transferee of
a U.S. real property interest must withhold tax if the transferor is a foreign
person. To inform the transferee that withholding of tax is not required upon
the disposition of a U.S. real property interest by TRINET ESSENTIAL FACILITIES
XII, INC., a Maryland corporation ("Seller"), the undersigned hereby certifies
the following on behalf of Seller:
1. Seller is not a foreign corporation, foreign partnership,
foreign trust or foreign estate (as those terms are defined in the Internal
Revenue Code and Income Tax Regulations);
2. Seller's U.S. employer identification number is ___________;
and
3. Seller's office address is One Embarcadero Center, Suite
3300, San Francisco, CA 94111.
Seller understands that this certification may be disclosed to
the Internal Revenue Service by the transferee and that any false statement
contained herein could be punished by fine, imprisonment, or both.
Under penalties of perjury I declare that I have examined this
certificate and to the best of my knowledge and belief it is true, correct and
complete, and I further declare that I have authority to sign this document on
behalf of Seller.
Dated: ____________, 2000.
TRINET ESSENTIAL FACILITIES XII, INC.,
a Maryland corporation
By
-------------------------------------
Its
------------------------------------
EXHIBIT H
<PAGE> 30
GENERAL RELEASE
THIS GENERAL RELEASE ("Agreement") is made and entered into as of
____________, 2000 by and among LOCKHEED MARTIN CORPORATION, a Maryland
corporation ("Lockheed"), NETWORK APPLIANCE, INC., a California corporation
("Network"; Lockheed and Network are referred to herein, collectively, as
"Releasors") and TRINET ESSENTIAL FACILITIES XII, INC., a Maryland corporation
("TriNet").
Recitals
A. TriNet is the landlord and Lockheed is the tenant under a lease dated
May 5, 1978 (as amended, the "Lease") between TriNet's predecessor in title, The
Prudential Insurance Company of America, and Lockheed's predecessor-in-title,
Ford Aerospace and Communications Corporation, respecting property known as 1260
Crossman Avenue, Sunnyvale, California (the "Property"). Lockheed and Network
have entered into an Agreement of Assignment of Lease, dated as of September 3,
1999 (as the same may be amended, modified, supplemented or restated from time
to time, the "Assignment Agreement"), pursuant to which Lockheed is assigning
the Lease to Network. TriNet has consented to the Assignment Agreement.
B. As of the date hereof, TriNet is selling the Property to ________,
pursuant to a Purchase Agreement dated as of September __, 1999 (the "Purchase
Agreement") between TriNet and Network.
C. Lockheed and Network have each agreed to release TriNet from any
claims or liabilities relating to the Lease or the Property, as set forth in
detail hereinbelow.
N o w, T h e r e f o r e, in light of the foregoing recitals and for
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Lockheed and Network agree as follows:
1. (a) Lockheed and Network each hereby releases and forever discharges
TriNet and its constituent owners, and TriNet's and such constituent owners'
officers, directors, agents, employees, attorneys, successors and assigns and
each of them separately and collectively (hereinafter referred to separately and
collectively as the "Releasees") from any and all claims, liens, demands, causes
of action, obligations, damages and liabilities, known or unknown, that any
Releasor ever had, now has or may hereafter claim to have against any of the
Releasees arising directly or indirectly out of, or in any way connected with or
based upon, or related in any way to, the Lease or the Property (the foregoing
matters from which the Releasees are released are referred to herein as the
"Claims"). Notwithstanding the foregoing, Network neither releases nor
discharges TriNet from, and the Claims shall not include, any claims, liens,
demands, causes of action, obligations, damages and liabilities (i) arising
under or in connection with the Purchase Agreement, or (ii) arising from
TriNet's willful misconduct.
EXHIBIT H
<PAGE> 31
(b) The foregoing release extends to unknown claims and each
Releasor expressly waives all rights under section 1542 of the Civil Code of
California which provides:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the
timer of executing the release, which if known by him must have
materially affected his settlement with the debtor."
2. In the event of any breach of this Agreement, the party
aggrieved shall be entitled to recover from the breaching party, not only the
amount of any judgment which may be awarded against said breaching party, but
also all such other damages, cost and expenses as may be incurred by said
aggrieved party, including court costs and attorneys' fees, in connection
therewith.
3. Each Releasor acknowledges that nothing in this Agreement
constitutes an admission or concession by any of the Releasees of any liability
of any kind to the Releasors, liability for which is expressly denied by the
Releasees.
4. This Agreement shall bind and shall inure to the benefit of
the respective heirs, executors, administrators, successors and assigns of the
parties hereto.
This Agreement is executed as of the date first above written.
LOCKHEED MARTIN CORPORATION
a Maryland corporation
By
---------------------------------
Its
-----------------------------
NETWORK APPLIANCE, INC., a
California corporation
By
---------------------------------
Its
-----------------------------
EXHIBIT H
<PAGE> 1
EXHIBIT 10.42
AGREEMENT OF ASSIGNMENT OF LEASE
DEFINED TERMS
EFFECTIVE DATE: September 3, 1999
ASSIGNEE: NETWORK APPLIANCE, INC.,
a California corporation
ASSIGNEE'S ADDRESS: 495 Java Drive
Sunnyvale, California 94089
Attention: Mr. Thom Bryant
Telephone: (408) 822-6175
Facsimile: (408) 822-4411
ASSIGNOR: LOCKHEED MARTIN CORPORATION,
a Maryland corporation
ASSIGNOR'S ADDRESS: c/o LMC Properties, Inc.
100 S. Charles Street, Suite 1400
Baltimore, Maryland 21201
Attn: Ms. Terri E. Beattie
Telephone: (410) 468-1009
Facsimile: (410) 468-1078
LEASEHOLD INTEREST AND OTHER
PROPERTY: See Section 1.1.
ASSIGNMENT FEE: Ten Million Dollars ($10,000,000)
DEPOSIT: Two Million Dollars ($2,000,000)
DUE DILIGENCE PERIOD: See Section 4.1.1.
TITLE COMPANY and ESCROW First American Title Guaranty Company
HOLDER: 1737 North First Street
San Jose, California 95112
CLOSING DATE: See Section 5.
CLOSING COST ALLOCATIONS:
<TABLE>
<S> <C> <C>
- - ASSIGNEE: ESCROW FEES 50%
RECORDING FEES 100%
</TABLE>
i.
<PAGE> 2
<TABLE>
<S> <C> <C>
- - ASSIGNOR: ESCROW FEES 50%
RECORDING FEES 0%
BROKER: None
</TABLE>
ii.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. Assignment of Leasehold Interest and Other Property..................................1
1.1 Lease.........................................................................1
1.2 Intangible Property...........................................................1
2. Assignment Fee.......................................................................1
2.1 Assignment Fee Deposit........................................................1
2.2 Cash at Closing...............................................................2
3. Assignor's Due Diligence Deliveries..................................................2
4. Conditions Precedent.................................................................2
4.1 Assignee's Conditions.........................................................2
4.2 Assignor's Conditions.........................................................3
4.3 Failure or Waiver of Conditions Precedent.....................................4
5. Close of Escrow......................................................................4
5.1 Assignor's Deliveries into Escrow.............................................4
5.2 Assignee's Deliveries into Escrow.............................................5
5.3 Assignor's Deliveries Outside of Escrow.......................................5
5.4 Escrow Holder's Duties........................................................6
5.5 Holdover......................................................................6
6. Covenants, Representations and Warranties............................................6
6.1 Assignor's Covenants..........................................................6
6.2 Assignor's Representations and Warranties.....................................7
7. Closing Adjustments and Prorations...................................................8
7.1 Closing Costs.................................................................8
7.2 Utilities.....................................................................9
7.3 Calculations for Closing......................................................9
8. LIQUIDATED DAMAGES...................................................................9
9. Default by Assignor.................................................................10
10. Miscellaneous.......................................................................10
10.1 Brokerage Commissions........................................................10
10.2 No Liability.................................................................10
10.3 Time of the Essence..........................................................10
10.4 Notices......................................................................10
10.5 Marketing....................................................................11
10.6 Attorneys' Fees..............................................................11
</TABLE>
iii.
<PAGE> 4
<TABLE>
<S> <C> <C>
10.7 Successors and Assigns.......................................................11
10.8 Confidentiality..............................................................11
10.9 Captions.....................................................................11
10.10 Exhibits.....................................................................11
10.11 Binding Effect...............................................................11
10.12 Construction.................................................................12
10.13 Counterparts.................................................................12
10.14 Further Assurances...........................................................12
10.15 Governing Law................................................................12
10.16 Entire Agreement.............................................................12
10.17 Waiver of Jury Trial.........................................................12
</TABLE>
Exhibits: A - Consent and Estoppel Certificate
B - Assignment of Lease
C - Bill of Sale
D - Assignment of Intangible Property
E - Closing Certificate
F - Access Agreement
iv.
<PAGE> 5
AGREEMENT OF ASSIGNMENT OF LEASE
THIS AGREEMENT OF ASSIGNMENT OF LEASE, dated as of September 3,
1999 (the "Effective Date"), is entered between Lockheed Martin Corporation, a
Maryland corporation, successor-in-interest to Ford Aerospace & Communications
Corporation ("Assignor") and Network Appliance, Inc., a California corporation
("Assignee"), who, for valuable consideration received, agree as follows:
1. ASSIGNMENT OF LEASEHOLD INTEREST AND OTHER PROPERTY. Assignor
agrees to sell to Assignee, and Assignee agrees to purchase from Assignor, on
the terms hereafter stated all of Assignor's right, title and interest in the
following described property (collectively, the "Property"):
1.1 Lease. All of Assignor's right, title and interest, as
tenant (the "Leasehold Interest"), in that certain Lease (the "Lease") dated May
5, 1978, as amended by Lease Amendment One dated May 5, 1978, Lease Amendment
Two dated June 6, 1988, Lease Amendment Three dated September 24, 1993 and all
other amendments thereto, and entered into between TriNet Essential Facilities
XII, Inc., a Maryland corporation ("Landlord"), as successor-in-interest to The
Prudential Insurance Company of America, and Assignor, as successor-in-interest
to Ford Aerospace & Communications Corporation, pursuant to which Landlord
leases to Assignor all of that certain real property (the "Real Property")
located at 1260 Crossman Avenue in Sunnyvale, California and more particularly
described in the Lease; and
1.2 Intangible Property. Any and all intangible personal
property owned by Assignor and arising out of or in connection with the
ownership of the Leasehold Interest or operation of the Property, including the
right to use the permits and certificates of occupancy issued by Federal, state
or local municipal authorities relating to the use, maintenance, occupancy or
operation of the Property, all plans, specifications and drawings relating to
the construction of the improvements, all warranties, guaranties or sureties
with respect thereto, any unpaid award for damage to the Property and any
proceeds of insurance or claim or cause of action for damage, loss or injury of
or to the Property and all service, equipment, maintenance, construction and
employment agreements (collectively the "Service Contracts") with respect to the
Real Property and entered into by Assignor (collectively, the "Intangible
Property").
2. ASSIGNMENT FEE. Subject to the closing adjustments and
prorations hereafter described, Assignee shall pay to Assignor the amount of Ten
Million Dollars ($10,000,000) (the "Assignment Fee") for the Property, in the
following manner:
2.1 Assignment Fee Deposit. Within two (2) business days
after Assignee's and Assignor's execution of this Agreement, Assignee shall
deposit with First American Title Guaranty Company ("Escrow Holder") cash in an
amount equal to Two Million Dollars ($2,000,000) (the "Deposit"). Escrow Holder
shall place such funds in an interest-bearing account. (The Deposit and all
interest earned thereon shall hereinafter collectively be referred to as the
"Assignment Fee Deposit.") Upon expiration of the Due Diligence Period (defined
below), the Assignment Fee Deposit shall become nonrefundable but
1.
<PAGE> 6
shall remain with Escrow Holder until the earlier of: (i) Close of Escrow; (ii)
the release to Assignor of such Assignment Fee Deposit in accordance with the
terms hereof because of a Assignee default; or (iii) immediately upon Assignee's
delivery of notice to Assignor that Assignee will not consummate the transaction
contemplated hereunder. Following expiration of the Due Diligence Period, the
Assignment Fee Deposit shall be returned to Assignee if and only if the
transaction contemplated hereunder fails to close because of a default by
Assignor or a default by Landlord under the Real Property Purchase Agreement.
Upon the Close of Escrow (as hereinafter defined), the Assignment Fee Deposit
shall be applied against the Assignment Fee.
2.2 Cash at Closing. On or before the Close of Escrow,
Assignee shall deposit with Escrow Holder by federal wire transfer or cashier's
check cash in an amount equal to the Assignment Fee, minus the Assignment Fee
Deposit (the "Cash Payment"), plus or minus the closing adjustments and
prorations.
3. ASSIGNOR'S DUE DILIGENCE DELIVERIES. Assignor shall deliver to
Assignee no later than five (5) days after the Effective Date the following
documents (the "Due Diligence Materials"), ownership of which shall be deemed
transferred from Assignor to Assignee upon the Close of Escrow: (i) all leases,
subleases, service agreements, maintenance agreements and other contracts
relating to the ownership, operation, use and maintenance of the Property,
including the Lease, (ii) any and all environmental reports or studies with
respect to the Improvements or the Real Property and any and all reports or
studies regarding the physical condition of the Improvements in the possession
of Assignor, and (iii) any and all surveys of the Real Property which were
prepared by or are in the possession or control of Assignor.
4. CONDITIONS PRECEDENT.
4.1 Assignee's Conditions. Assignee's obligation to accept
an assignment of the Leasehold Interest in the Property shall be subject to and
contingent upon the satisfaction or written waiver of the following conditions
precedent:
4.1.1 Due Diligence Period. Assignee's inspection and
approval during the Due Diligence Period of all Due Diligence Materials, all
records and files of Assignor relating to the Property, and all physical,
environmental, legal and any other matters relating to the Property (including
zoning, land use and similar public agency or governmental conditions or
approvals with respect to the ownership, operation and use of the Property) as
Assignee may, in Assignee's sole discretion, elect to investigate. As used in
this Agreement, the term "Due Diligence Period" shall mean the period commencing
on the Effective Date and ending at 5:00 P.M. Pacific Standard Time on the
thirtieth (30th) day after the Effective Date of this Agreement.
2.
<PAGE> 7
4.1.1.1 Physical Inspection. During the Due
Diligence Period, Assignee shall be permitted to make complete physical,
environmental, legal and other inspections of the Property and to make and
remove copies of any and all records and files regarding the Property; provided,
however, that in no event shall Assignor be required to provide Assignee with
access to or copies of proprietary or government-classified documents. Assignor
shall allow Assignee access to the Property in accordance with the terms and
provisions of the Access Agreement attached hereto as Exhibit F.
4.1.2 Consent; Estoppel. Assignee's receipt and
approval, on or before the Close of Escrow, of a Consent and Estoppel
Certificate executed by Landlord in the form attached hereto as Exhibit A (the
"Consent and Estoppel Certificate");
4.1.3 Covenants; Representations. Assignor's
performance of each and every covenant required to be performed by Assignor
hereunder, and the truth and correctness of each of Assignor's representations
and warranties as set forth in Section 6.2.
4.1.4 Change in Representations or Warranties. Assignee
shall have approved any material (in Assignee's judgment) change to Assignor's
representations and warranties reflected in the Closing Certificate (as defined
in Section 5.1.7). Assignee shall have two (2) business days following receipt
of said certificate to approve or disapprove any such changes (and if necessary,
the Close of Escrow shall be extended by the number of days necessary to give
Assignee this full two (2) business day period).
4.1.5 Change in Condition. There shall have been no
material adverse changes in the physical condition of the Property.
4.1.6 Real Property Purchase Agreement. Assignee and
Landlord have negotiated and executed a purchase and sale agreement (the "Real
Property Purchase Agreement") pursuant to which Landlord has agreed to sell
Landlord's fee interest in the Real Property to Assignee. All conditions and
contingencies under the Real Property Purchase Agreement between Landlord and
Assignee shall have been satisfied in accordance with the terms thereof. At the
Close of Escrow, Landlord shall simultaneously transfer title to the Real
Property to Assignee pursuant to the terms of the Real Property Purchase
Agreement.
4.2 Assignor's Conditions. Assignor's obligation to assign
the Leasehold Interest in the Property shall be subject to and contingent upon
satisfaction or written waiver of the following conditions precedent:
4.2.1 Other Property. Upon mutual execution of this
Agreement and of the Real Property Purchase Agreement, Assignee shall terminate
any and all other negotiations and contracts for the purchase of real property
being considered by Assignee as an alternative to the Real Property. During the
Due Diligence Period, Assignee shall not enter into any new contract for the
purchase of real property as an alternative to the Real Property.
4.2.2 Real Property Purchase. Assignee shall have
obtained the fee interest to the Real Property; provided, however, that
Assignee's failure to consummate the
3.
<PAGE> 8
transaction pursuant to which Assignee acquires title to the Real Property shall
not result in the return of the Assignment Fee Deposit to Assignee.
4.2.3 Assignee's Fulfillment of Conditions. Assignor's
obligation to sell the Property shall be subject to and contingent upon
Assignee's performance of each and every covenant required to be performed by
Assignee hereunder and the truth and correctness of each of Assignee's
representations and warranties, as set forth in Section 6.3.
4.3 Failure or Waiver of Conditions Precedent. In the event
any of the conditions set forth above in Sections 4.1 and 4.2 are not fulfilled,
waived or deemed waived (for any reason other than a default by either Assignee
or Assignor hereunder), this Agreement shall terminate and all rights and
obligations hereunder of each party shall be at an end. Assignee or Assignor may
elect, at any time or times on or before the date specified for the satisfaction
of the condition, to waive in writing the benefit of any of their respective
conditions set forth in Section 4.1 or Section 4.2 above, as applicable.
Assignee's failure to notify Assignor in writing of the satisfaction of the
condition set forth in Section 4.1.1 on or before the date specified for
satisfaction shall be deemed to constitute a failure of such condition. In any
event, Assignee's and Assignor's consent to the Close of Escrow shall waive any
remaining unfulfilled conditions (but such waiver shall not be deemed to waive
any subsequently discovered breach of any representation, warranty or covenant
made by either party to this Agreement.)
5. CLOSE OF ESCROW. Concurrently herewith, Assignor and Assignee
shall open an escrow (the "Escrow") with Escrow Holder for the assignment
contemplated by this Agreement. Assignee and Assignor agree that such Escrow
shall be closed and the assignment shall be consummated (the "Close of Escrow")
on March 1, 2000 (the "Closing Date"), in the following manner:
5.1 Assignor's Deliveries into Escrow. Prior to the Close of
Escrow, Assignor shall deliver into Escrow the following (all documents shall be
duly executed by Assignor and shall be acknowledged where required):
5.1.1 Assignment of Lease. An Assignment and Assumption
of Lease ("Assignment of Lease") in the form of Exhibit B attached hereto;
5.1.2 Bill of Sale. A bill of sale (the "Bill of Sale")
with respect to the Personal Property in the form of Exhibit C, attached hereto;
5.1.3 Assignment of Intangible Property. A duplicate
original of an assignment of Assignor's interest in the Intangible Property (the
"Assignment of Intangible Property") in the form of Exhibit D, attached hereto;
5.1.4 Lease. Assignor shall use commercially reasonable
efforts to locate and to provide to Assignee a true, correct and complete
original copy of the Lease; provided, however, that if no such original can be
located, Assignor shall provide a fully-executed, correct and complete copy of
the Lease to Assignee;
4.
<PAGE> 9
5.1.5 Consent and Estoppel. A fully-executed Consent
and Estoppel Certificate;
5.1.6 Closing Certificate. A certificate (the "Closing
Certificate") in the form attached hereto as Exhibit E, which certificate shall
incorporate each representation and warranty of Assignor set forth in Section
6.2, and which certifies that each such representation and warranty is true as
of the Close of Escrow, or sets forth the reason that any such representation or
warranty is not true;
5.1.7 Escrow Instructions. Assignor's written escrow
instructions to close Escrow in accordance with the terms of this Agreement; and
5.1.8 Formation Documents. Resolutions, authorizations,
bylaws or other corporate and/or partnership documents or agreements relating to
Assignor and its shareholders as shall be required by Escrow Holder to close the
transaction contemplated hereunder.
5.2 Assignee's Deliveries into Escrow. Prior to the Close of
Escrow, Assignee shall deliver into Escrow the following:
5.2.1 Cash Payment. The Cash Payment plus or minus
closing adjustments and prorations;
5.2.2 Documents. Duplicate originals, duly executed by
Assignee, of the Assignment of Lease and Assignment of Intangible Property; and
5.2.3 Escrow Instructions. Assignee's written
instructions to close Escrow in accordance with the terms of this Agreement.
5.3 Assignor's Deliveries Outside of Escrow. Upon or before
the Close of Escrow, Assignor shall deliver or shall have previously delivered
to Assignee the following items:
5.3.1 Service Contracts. Ink-signed originals of those
Service Contracts that have not been terminated by Assignee on or before the
Close of Escrow, or, if Assignor does not possess the same, then the best copies
of such contracts available to Assignor, together with an affidavit of Assignor
that such copies constitute true, correct and complete copies of such contracts;
5.3.2 Licenses, Permits and Approvals. Originals of all
governmental licenses, permits and approvals relating to the occupancy or use of
the Real Property in Assignor's possession; and
5.3.3 Due Diligence Materials. The originals of all
other Due Diligence Materials.
5.
<PAGE> 10
5.4 Escrow Holder's Duties. On the Close of Escrow, Escrow
Holder shall:
5.4.1 Clear Title. Record all documents as may be
necessary to clear title in accordance with the requirements of this Agreement;
5.4.2 Closing Costs; Prorations. Pay all closing costs
and making all prorations in accordance with the terms of this Agreement and a
statement of adjustments and prorations prepared by Assignee and Assignor and
delivered to Escrow Holder prior to the Close of Escrow;
5.4.3 Deliveries to Assignee. Deliver to Assignee the
Escrow Holder's certified closing statement and an original of each of the
Lease, Bill of Sale, Assignment of Intangible Property, Assignment of Lease,
Non-Foreign Certificate and Closing Certificate; and
5.4.4 Deliveries to Assignor. Deliver to Assignor the
Assignment Fee and Cash Payment, plus or minus closing adjustments and
prorations, Escrow Holder's certified closing statement and an original of each
of the Assignment of Intangible Property and Assignment of Lease.
5.5 Holdover. Pursuant to the terms and conditions of a
separate agreement entered into by Assignor and Assignee, which shall be
negotiated and executed during the Due Diligence Period, Assignee shall allow
Assignor to continue to occupy approximately 45,000 square feet of the building
located on the Real Property for a period not to exceed ninety (90) days after
the Close of Escrow. In the event of such holdover by Assignor, Assignor shall
pay to Assignee rent in an amount equal to Assignor's then existing rental rate
and any additional rent owing under the Lease.
6. COVENANTS, REPRESENTATIONS AND WARRANTIES.
6.1 Assignor's Covenants. Assignor hereby covenants and
agrees that during the period from the date of this Agreement through the Close
of Escrow (the "Contract Period"):
6.1.1 Alterations; Damage. Assignor shall not make any
alterations to the Property (except as required by law or governmental order, or
in the event of an emergency); and Assignor shall notify Assignee promptly upon
becoming aware of any damage, destruction, repair or replacement of any part of
the Property.
6.1.2 Liens; Encumbrances. Assignor shall not cause or
allow to be recorded any encumbrance, lien, deed of trust, easement or similar
agreement against the Leasehold Interest without the express prior written
consent of Assignee, nor shall Assignor cause to be recorded any encumbrance,
lien, deed of trust, easement or similar agreement against title to the Property
without the express prior written consent of Assignee.
6.
<PAGE> 11
6.1.3 Insurance. Assignor shall maintain Assignor's
insurance and operate and maintain the Property in a manner consistent with
Assignor's past practice.
6.1.4 Permits, Etc. Assignor shall not modify or
terminate any of the permits or other governmental approvals or any warranties
pertaining to the Property.
6.1.5 Subleases. Assignor shall not, without notice and
Assignee's written consent, which consent shall not be unreasonably withheld,
enter into any new sublease or agreement pertaining to the Property.
6.1.6 Notice to Assignee. Assignor shall promptly
notify Assignee in writing of any event or circumstance of which Assignor
becomes aware that materially and adversely affects Assignor's ability to timely
perform its obligations under this Agreement.
6.2 Assignor's Representations and Warranties. Assignor
hereby represents and warrants to Assignee as follows:
6.2.1 Authority. Assignor has full power and authority
to enter into this Agreement and any other documents contemplated by this
Agreement and to assume and perform all of Assignor's obligations hereunder; the
persons executing this Agreement and any other documents contemplated by this
Agreement on behalf of Assignor have been authorized and empowered to bind
Assignor thereto; and this Agreement is, and each instrument and document to be
executed by Assignor hereunder shall be, a valid, legally binding obligation of
Assignor enforceable against Assignor in accordance with its terms.
6.2.2 No Conflict. Neither the execution and delivery
of this Agreement and the instruments and documents referenced herein nor the
consummation of the transaction contemplated herein conflict with or result in
the breach of any terms, conditions or provisions of any contract or other
agreement or instrument to which Assignor is a party; and except as required by
the Lease, no consent of any lender, partner, shareholder, beneficiary, creditor
or investor of Assignor is required which has not already been obtained in order
to enter into this Agreement and consummate the transaction contemplated herein;
and all loans, extensions of credit or other accommodations secured by the
Leasehold Interest shall be paid upon the Close of Escrow from Assignor's
proceeds and the Property shall be released from any liens securing the same.
6.2.3 Leases. Assignor has not entered into, and there
does not exist, any lease, sublease or other occupancy agreement relating to the
Property other than the Lease.
6.2.4 Marketable Title. Assignor holds a valid
leasehold interest in the Property, which leasehold interest is insurable and
free and clear of all liens and encumbrances.
6.2.5 Lease. The copy of the Lease attached hereto as
Schedule 1 is a complete, true and correct copy of the Lease and, except as
identified to Assignee
7.
<PAGE> 12
in writing and attached hereto together with the Lease, there are no
modifications, amendments, supplements or understandings, oral or written,
amending, supplementing or changing the terms of the Lease. The Lease is in full
force and effect, having been duly executed and delivered by Tenant, and is a
valid and binding obligation of Landlord and Assignor. Current base monthly rent
under the Lease is $94,654.05, which Assignor will continue to timely pay
through and including the Close of Escrow. Tenant has not paid rent for more
than one (1) month after the month during which this Agreement is executed.
Landlord has no claims or causes of action against Assignor. There is no default
under the Lease on the part of Assignor or Landlord. Assignor and Landlord have
each performed the obligations required to be performed by them under the Lease
through the date hereof. There are no existing conditions which upon giving
notice or lapse of time or both would constitute a default under the Lease.
6.2.6 Assignor's Knowledge. To the best of Assignor's
knowledge, after due inquiry and investigation:
6.2.6.1 Eminent Domain. There are no eminent
domain proceedings for the condemnation of the Real Property pending or
contemplated.
6.2.6.2 Litigation. There is no pending or
threatened litigation, proceedings or governmental action which would adversely
affect the Real Property.
6.2.6.3 Defaults. There are no defaults or
breaches under the terms and provisions of the Service Contracts.
6.2.6.4 Bankruptcy. Assignor has not (i) made a
general assignment for the benefit of creditors, (ii) filed any voluntary
petition in bankruptcy or suffered the filing of involuntary petition by
Assignor's creditors, (iii) suffered the appointment of a receiver to take place
of all, or substantially all, of Assignor's assets, (iv) suffered the attachment
or other judicial seizure of all or substantially all of Assignor's assets, (v)
admitted in writing its inability to pay its debts as they become due or (vi)
made an offer of settlement, extension or composition to its creditors in
general.
6.2.6.5 Taxes; Assessments. Assignor has received
no written notice that the Property is subject to any special taxes,
assessments, benefit charges, nor has Assignor received written notice of the
intention of any governmental authority to impose any such special tax,
assessments or benefit charges.
7. CLOSING ADJUSTMENTS AND PRORATIONS. The adjustments and
prorations set forth below shall be made at the Close of Escrow. For the
purposes of this Section 7, the term "Proration Date" shall be defined as 11:59
P.M. on the day preceding the Close of Escrow.
7.1 Closing Costs. Assignor and Assignee shall pay the
following closing costs incurred in connection with the transaction contemplated
by this Agreement:
7.1.1 Assignor's Closing Costs. Assignor shall pay all
sales taxes and city and county documentary and other transfer taxes with
respect to the conveyance of the Leasehold Interest by Assignor to Assignee. In
addition, Assignor shall pay fifty percent
8.
<PAGE> 13
(50%) of all escrow fees incurred in connection with the conveyance of the
Property by Assignor to Assignee.
7.1.2 Assignee's Closing Costs. Assignee shall pay
fifty percent (50%) of all escrow fees and one hundred percent (100%) of all
recording fees incurred in connection with the assignment of the Property by
Assignor to Assignee.
7.2 Utilities. Assignee shall arrange with all utility
services and companies serving the Property to have accounts started in the name
of Assignee or its property manager beginning as of the Proration Date. Assignee
and Assignor shall cooperate to have the utility services and companies make
utility readings as of the Proration Date. If readings cannot be made, utility
charges shall be prorated as of the Proration Date based on estimates from the
latest bills available; provided, in any event, Assignor shall pay, through and
including the Proration Date, all utility charges attributable to the Property
which are not payable directly by tenants or other occupants of the Property.
7.3 Calculations for Closing. Assignor and Assignee shall
provide Escrow Holder with a preliminary calculation of prorations no later than
three (3) days prior to the Proration Date and a final calculation no later than
one (1) day prior to the Proration Date. The final calculation shall be executed
by each party and may be relied upon by Escrow Holder in completing the closing
adjustments and prorations. In the event incomplete information is available, or
estimates have been utilized to calculate prorations as of the Proration Date,
any prorations relating thereto shall be further adjusted and completed outside
of Escrow within sixty (60) days after the Proration Date or as and when
complete information becomes available to Assignee and Assignor. Any adjustments
to initial estimated prorations which are required upon review of such complete
information shall be made by Assignee and Assignor, with due diligence and
cooperation, by prompt cash payment to the party entitled to a credit as a
result of such adjustments. Any errors or adjustments in calculations of the
foregoing adjustments shall be corrected or adjusted as soon as practicable
after the Close of Escrow; provided, however, the provisions hereof shall
survive the Close of Escrow for not more than eighteen (18) months after the
Close of Escrow.
8. LIQUIDATED DAMAGES. IN THE EVENT OF THE FAILURE TO CLOSE
ESCROW DUE TO DEFAULT BY ASSIGNEE IN THE PERFORMANCE OF ITS OBLIGATIONS
HEREUNDER, ASSIGNOR SHALL HAVE THE RIGHT TO TERMINATE THIS AGREEMENT FORTHWITH
AND NEITHER PARTY SHALL HAVE FURTHER OBLIGATIONS TO THE OTHER HEREUNDER EXCEPT
ASSIGNOR'S RIGHT TO OBTAIN IMMEDIATE DISBURSEMENT OF AND TO RETAIN THE EARNEST
MONEY DEPOSIT. SUCH RETENTION OF THE EARNEST MONEY DEPOSIT IS INTENDED TO
CONSTITUTE LIQUIDATED DAMAGES TO ASSIGNOR. SAID AMOUNT SHALL BE THE FULL, AGREED
AND LIQUIDATED DAMAGES FOR THE BREACH OF THIS AGREEMENT BY ASSIGNEE, ALL OTHER
CLAIMS TO DAMAGES OR OTHER REMEDIES AT LAW OR EQUITY, INCLUDING ANY RIGHT TO
BRING AN ACTION FOR SPECIFIC PERFORMANCE, BEING HEREIN EXPRESSLY WAIVED BY
ASSIGNOR. THE PARTIES ACKNOWLEDGE THAT THE ACTUAL DAMAGES WHICH WOULD RESULT TO
ASSIGNOR AS A
9.
<PAGE> 14
RESULT OF SUCH FAILURE WOULD BE EXTREMELY DIFFICULT TO ESTABLISH. IN ADDITION,
ASSIGNEE DESIRES TO HAVE A LIMITATION PUT UPON ITS POTENTIAL LIABILITY TO
ASSIGNOR IN THE EVENT THAT THIS TRANSACTION SHALL FAIL TO CLOSE. BY PLACING
THEIR RESPECTIVE INITIALS IN THE SPACES HEREINAFTER PROVIDED, THE PARTIES
ACKNOWLEDGE THAT (i) ASSIGNOR SHALL ONLY BE ENTITLED TO LIQUIDATED DAMAGES IN
THE AMOUNT OF THE EARNEST MONEY DEPOSIT UPON A DEFAULT BY ASSIGNEE UNDER THE
TERMS OF THIS AGREEMENT AND (ii) ASSIGNOR HAS WAIVED ANY RIGHT TO BRING AN
ACTION FOR SPECIFIC PERFORMANCE.
ASSIGNEE ( ) AND ASSIGNOR ( ) AGREE.
9. DEFAULT BY ASSIGNOR. In the event of a default by Assignor
under this Agreement, Assignee shall have the right to pursue any remedy
available to Assignee at law or equity, including, without limitation, specific
performance of this Agreement.
10. MISCELLANEOUS.
10.1 Brokerage Commissions. Each party to this Agreement
warrants to the other that no person or entity can properly claim a right to a
real estate commission, finder's fee or other real estate brokerage-type
compensation (collectively, "Real Estate Compensation") based upon the acts of
that party with respect to the transaction contemplated by this Agreement other
than Cornish & Carey Commercial. Each party hereby agrees to indemnify and
defend the other (by counsel acceptable to the party seeking indemnification)
against and hold the other harmless from and against any and all loss, damage,
liability or expense, including costs and reasonable attorneys' fees, resulting
from any claims for Real Estate Compensation by any person or entity based upon
such acts. Assignee shall pay all commissions and fees payable to Cornish &
Carey Commercial.
10.2 No Liability. Assignor agrees that, except for any
Leases approved by Assignee and Service Contracts assigned to and accepted by
Assignee upon the Close of Escrow, Assignee shall have no liability as a
successor in interest for any contracts or agreements entered into by Assignor
in connection with its interest in or operation of the Property or the use,
occupancy or construction of the improvements located thereon; and Assignor
shall fully perform all of its commitments and obligations under any such
contracts and agreements and shall indemnify and defend Assignee against (by
counsel acceptable to Assignee) and hold Assignee harmless from any and all
losses, costs, damages, liabilities and expenses, including, without limitation,
reasonable counsel fees, brokerage commissions and lease assumptions under any
Leases.
10.3 Time of the Essence. Time is of the essence of every
provision of this Agreement.
10.4 Notices. Whenever Escrow Holder or any party hereto
shall desire to give or serve upon the other any notice, demand, request or
other communication, each such notice, demand, request or other communication
shall be in writing and shall be given or served
10.
<PAGE> 15
upon the other party by facsimile (with copy to be sent by United States Mail or
any method of delivery provided in this Section 10.4), by personal service or by
certified, registered or Express United States Mail, Federal Express or other
nationally recognized commercial courier, postage prepaid, addressed as set
forth above.
10.5 Marketing. Assignor shall not market or show the
Property to any other prospective assignees after the date of this Agreement and
until after this Agreement terminates.
10.6 Attorneys' Fees. If Assignee or Assignor is required to
employ counsel to enforce any of the terms of this Agreement or for damages by
reason of any alleged breach of this Agreement or for a declaration of rights
hereunder or to enforce the judgment of any judicial or quasi-judicial body with
respect to the terms of this Agreement, the prevailing party shall be entitled
to recover its reasonable attorneys' fees and court costs incurred, including
but not limited to attorneys' fees after the award, and prior to the payment, of
any judgment or other settlement.
10.7 Successors and Assigns. This Agreement shall be binding
upon the heirs, executors, administrators, successors and assigns of Assignor
and Assignee; and Assignee shall have the right to assign its rights hereunder
to any party and such assignment shall be effective as a release of Assignee
from the obligations hereunder, provided that the assignee of Assignee accepts
such assignment. Assignor shall not assign or transfer all or any portion of its
rights or obligations under this Agreement to any other individual, entity or
other person without the consent of Assignee.
10.8 Confidentiality. Except for such disclosure as may be
required by law or agreed to by the parties hereto in writing, Assignor and
Assignee agree to keep in confidence this Agreement and each and every term and
provision hereof, including, without limitation, the Assignment Fee; provided,
however, that Assignor and Assignee may disclose this Agreement to certain
employees as necessary to fulfill the terms hereof, accountants, attorneys, and
lenders on the condition that such person shall be advised as to the
confidentiality requirements of this paragraph 10.8. Except as required by law,
no publicity release or public announcement concerning this Agreement or the
transactions contemplated hereby shall be issued without advance written
approval of the form and substance thereof by Assignor and Assignee.
10.9 Captions. Section titles or captions contained herein
are inserted as a matter of convenience and for reference, and in no way define,
limit, extend or describe the scope of this Agreement.
10.10 Exhibits. All exhibits attached hereto shall be
incorporated herein by reference as if set out herein in full.
10.11 Binding Effect. Regardless of which party prepared or
communicated this Agreement, this Agreement shall be of binding effect between
Assignee and Assignor only upon its execution by an authorized representative of
each such party.
11.
<PAGE> 16
10.12 Construction. The parties acknowledge that each party
and its counsel have reviewed and revised this Agreement and that the normal
rule of construction to the effect that any ambiguities are to be resolved
against the drafting party shall not be employed in the interpretation of this
Agreement or any amendment or exhibits hereto.
10.13 Counterparts. This Agreement may be executed in
several counterparts, each of which shall be an original, but all of such
counterparts shall constitute one such Agreement.
10.14 Further Assurances. Assignee and Assignor shall make,
execute, and deliver such documents and undertake such other and further acts as
may be reasonably necessary to carry out the intent of the parties hereto.
10.15 Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of California.
10.16 Entire Agreement. This Agreement embodies the entire
agreement between Assignee and Assignor in connection with this transaction.
This Agreement cannot be modified except in writing signed by all parties.
10.17 Waiver of Jury Trial. Assignor and Assignee each waive
trial by jury in any action or other proceeding (including counterclaims),
whether at law or equity, brought by Assignor or Assignee against the other on
matters arising out of or in any way related to or connected with this Agreement
or any transaction contemplated by, or the relationship between Assignor and
Assignee, or any action or inaction by any party under this Agreement.
(Remainder of Page Intentionally Left Blank)
12.
<PAGE> 17
IN WITNESS WHEREOF, Assignee and Assignor have executed and
delivered this Agreement as of the Effective Date.
"Assignor"
LOCKHEED MARTIN CORPORATION,
a Maryland corporation
By: ____________________________________
Print Name:_____________________________
Its:____________________________________
"Assignee"
NETWORK APPLIANCE, INC., a California
corporation
By:_____________________________________
Name:___________________________________
Its:____________________________________
13.
<PAGE> 18
Landlord hereby consents to Assignor entering into the foregoing Agreement of
Assignment of Lease, subject to the following conditions: (a) no assignment of
the Lease or other transfer of any of Assignor's rights or interest therein or
thereunder shall be consummated or effective unless and until the closing of the
sale of the fee interest in the Real Property (the "Sale Closing") shall have
occurred pursuant to the Real Property Purchase Agreement, and (b) on or prior
to the Sale Closing, Assignor and Assignee shall have executed and delivered to
Landlord a General Release substantially in the form attached as an exhibit to
the Real Property Purchase Agreement. Nothing in this consent or in the Real
Property Purchase Agreement shall be construed as conferring upon Assignor or
any other third party any rights under the Real Property Purchase Agreement.
Neither Assignor nor any third party is intended to be a third-party beneficiary
under the Real Property Purchase Agreement.
TRINET ESSENTIAL FACILITIES XII, INC.,
a Maryland corporation
By:___________________________________
Print Name:___________________________
Its:__________________________________
Date: September 3, 1999
14.
<PAGE> 19
EXHIBIT A
CONSENT AND ESTOPPEL CERTIFICATE
Date: ________________, 19____.
____________________
____________________
____________________
____________________
Re: Lease dated ________________ ("Lease") between
____________________________________ ("Tenant") and
______________________________ ("Landlord"); Leased Premises:
_______________________ square feet in Suite/Floor ______ ("Leased
Premises")________________________________________________________
Ladies and Gentlemen:
The undersigned, as Landlord under the above-referenced Lease,
hereby represents, warrants and certifies to __________ ("Assignee") the truth
and accuracy of the foregoing descriptions and the following statements:
1. Attached hereto as Schedule 1 is a complete, true and correct
copy of the Lease and, except as identified to Assignee in writing and attached
hereto together with the Lease, there are no modifications, amendments,
supplements or understandings, oral or written, amending, supplementing or
changing the terms of the Lease.
2. The Lease is in full force and effect.
3. To the actual knowledge of Landlord, (a) there is no default
under the Lease on the part of Tenant or Landlord, and (b) there are no existing
conditions which upon giving notice or lapse of time or both would constitute a
default under the Lease.
4. Landlord has no claim against Tenant for any security, rental,
cleaning or other deposits, except for a security deposit under the Lease in the
amount of $______.
5. Landlord has not entered into any assignment or other
agreement transferring any of its interest in the Lease or the Leased Premises
other than that certain Purchase Agreement executed by Landlord and Assignee.
6. There has not been filed by or against Landlord a petition in
bankruptcy, voluntary or otherwise, any assignment for the benefit of creditors,
any petition seeking reorganization or arrangement under the bankruptcy laws of
the United States, or any state thereof, or any other action brought under said
bankruptcy laws with respect to Landlord.
EXHIBIT A
A-1.
<PAGE> 20
This Estoppel Certificate is made to Assignee in connection with
the prospective purchase by Assignee of the Tenant's interest in the Lease. This
Estoppel Certificate may be relied on by Assignee in connection with such
purchase.
Very truly yours,
"Landlord"
___________________________________
By:________________________________
Its:_______________________________
EXHIBIT A
A-2.
<PAGE> 21
EXHIBIT B
ASSIGNMENT OF LEASE
This ASSIGNMENT OF LEASE ("Assignment") is entered into this ___
day of _______________, 1999 (the "Effective Date"), by and between LOCKHEED
MARTIN CORPORATION, a Maryland corporation ("Assignor"), NETWORK APPLIANCE,
INC., a California corporation ("Assignee"), and ________________________, a
_____________ _______________________ ("Landlord").
RECITALS
A. Assignor, as tenant, and Landlord, as landlord, are now
parties to that certain ___________________ ____________________________, dated
________________ (the "Lease"), pursuant to which Assignor leases from Landlord
approximately 175,000 square feet of space located at 1260 Crossman Avenue,
Sunnyvale, California and more particularly described in the Lease. The Lease is
attached hereto as Exhibit A and incorporated herein by this reference.
B. Assignor desires to assign the Lease to Assignee, and Assignee
desires to accept the assignment of the Lease on the terms and conditions set
forth herein.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and
promises of the parties, the parties hereto agree as follows:
1. ASSIGNMENT. As of the Effective Date, Assignor assigns and
transfers to Assignee , without reservation, all of Assignor's right, title and
interest in and to the Lease, and Assignee hereby accepts the assignment in
accordance with the terms of this Agreement.
2. ASSUMPTION. As of the Effective Date, Assignee shall assume
and be bound by all of Assignor's right, title, interest, obligations and
liabilities as tenant under the terms of the Lease.
3. CONSIDERATION. As consideration for the assignment of the
Lease from Assignor to Assignee, Assignee shall pay to Assignor on or before the
Effective Date, the sum of Ten Million and No/100 Dollars ($10,000,000.00).
4. SUCCESSORS. This Assignment shall be binding on, and inure to
the benefit of, the parties hereto, their successors-in-interest, and assigns.
EXHIBIT B
B-1.
<PAGE> 22
5. COUNTERPARTS. This Assignment may be executed in two or more
counterparts, each of which shall be deemed an original, but when taken together
shall constitute one entire agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Assignment as of the day and year first above written.
"Assignor"
LOCKHEED MARTIN CORPORATION,
a Maryland corporation
By:__________________________________
Print Name:__________________________
Title:_______________________________
"Assignee"
NETWORK APPLIANCE, INC.,
a California corporation
By:__________________________________
Print Name:__________________________
Title:_______________________________
EXHIBIT B
B-2.
<PAGE> 23
Schedule 1
LEASE
EXHIBIT B
B-3.
<PAGE> 24
EXHIBIT C
BILL OF SALE
For valuable consideration, receipt of which is acknowledged,
___________________________, a _______________ ("Assignor") grants, sells,
transfers and assigns to _______________________________________________________
("Assignee") all of the Personal Property and Due Diligence Materials described
in that certain Agreement of Assignment of Lease (the "Agreement") dated
____________, 19___ entered into by and between Assignor and Assignee,
including, without limitation, that certain Personal Property described in
Schedule 1 attached hereto.
Assignor hereby covenants with, and warrants to, Assignee that
Assignor is the lawful owner of the Personal Property and Due Diligence
Materials, and that the Personal Property and Due Diligence Materials are free
from the rights and claims of others, including any leases, financing agreements
and/or encumbrances.
IN WITNESS WHEREOF, Assignor has executed this Bill of Sale this
_______ day of ________, 19____.
____________________________________
By:_________________________________
Title:__________________________
EXHIBIT C
C-1.
<PAGE> 25
EXHIBIT D
ASSIGNMENT OF INTANGIBLE PROPERTY
FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which
are hereby expressly acknowledged, ___________________, a
_______________________ ("Assignor"), hereby assigns, transfers and conveys to
_______________________________ ("Assignee"), all of Assignor's right, title and
interest in and to the Intangible Property, as that term is defined in that
certain Agreement of Assignment of Lease (the "Agreement") dated ___________,
19___ entered into by and between Assignor, as Assignor, and Assignee, as
Assignee; provided, however, such Intangible Property shall only include those
Service Contracts more particularly described in Schedule 1 attached hereto
(hereinafter referred to as the "Assigned Contracts").
Assignee hereby assumes and agrees to keep, perform and fulfill
all of Assignor's obligations as obligor under the Assigned Contracts. Assignee
also agrees to indemnify, protect, defend and hold Assignor harmless from and
against any and all claims, damages, losses, costs and expenses (including
attorneys' fees) arising in connection with the Assigned Contracts and relating
to the period after Closing.
Assignor hereby covenants and warrants that it has performed all
of the obligations to be performed by Assignor pursuant to and in accordance
with, or with respect to, the Assigned Contracts and agrees to indemnify,
protect, defend and hold Assignee harmless from and against any and all claims,
damages, losses, costs and expenses (including attorneys' fees) arising in
connection with the Assigned Contracts and relating to the period prior to
Closing, including the date of Closing.
Assignor hereby covenants with, and warrants to, Assignee that
Assignor is the lawful owner of the Intangible Property and that the Intangible
Property is free from the rights and claims of others, including any leases,
financing agreements and/or encumbrances.
This Assignment of Intangible Property is given pursuant to the
Agreement.
IN WITNESS WHEREOF, Assignor and Assignee have executed this
Assignment of Intangible Property as of ______________, 199__.
_____________________________ __________________________________
By:__________________________ By:_______________________________
Title:___________________ Title:________________________
EXHIBIT D
D-1.
<PAGE> 26
EXHIBIT E
CLOSING CERTIFICATE
This Closing Certificate is made and delivered by the undersigned
Assignor with reference to that certain Agreement of Assignment of Lease, dated
_______________, 199__, ("Agreement") between Assignor and
________________________________ ("Assignee").
Assignor hereby restates and reaffirms its representations and
warranties set forth in Section 6.2 of the Agreement with full force and affect
as if set forth fully herein and made and delivered on the date hereof without
any exception or qualification.
"Assignor"
_____________________________________
By___________________________________
Its________________________________
Dated: ________________________, 1999
EXHIBIT E
E-1.
<PAGE> 27
EXHIBIT F
ACCESS AGREEMENT
This Access Agreement ("Agreement"), grants to NETWORK APPLIANCE,
INC., a California corporation and its agents, consultants and experts
(hereinafter collectively "Permittee") the right to enter the real property
commonly known as 495 Java Drive, Sunnyvale, California (the "Property") and
perform the activities described below.
RECITALS
A. The Property is occupied by Lockheed Martin Corporation, a Maryland
corporation ("LMC"), and owned by TriNet Essential Facilities XII, Inc., a
Maryland corporation ("TriNet").
B. In order for Permittee to perform due diligence for the purpose of
purchasing the Property, Permittee seeks to gain access to the Property for the
purpose of performing inspections and investigations, including, but not limited
to, an environmental assessment, structural and soils tests, roof sampling, and
the preparation of a survey of the Property (collectively, the "Work").
AGREEMENT
Subject to the limitations and conditions set forth below, LMC
grants to Permittee, as of the date of mutual execution hereof, the right to
enter onto the Property for the limited purposes set forth below:
1. This Agreement authorizes Permittee to perform the Work as described
above, at Permittee's expense, on the Property subject to the terms and
conditions set forth herein. Permittee will notify LMC and TriNet forty-eight
(48) hours in advance of when Permittee intends to perform Work on the Property.
Permittee will provide LMC and TriNet with a work plan describing the task to be
performed on the Property in advance of the commencement of Work. Permittee
shall not drill boreholes or wells without first obtaining the consent of
representatives of LMC and TriNet as to the precise location of the boreholes
and wells, which consent shall not be unreasonably withheld or delayed.
Permittee shall contact John Macchi of LMC at (408) 734-6115 and James Pierre of
TriNet at (415) 391-4300 to obtain consent for boreholes and wells.
2. The commencement date of this Agreement shall be the date on which it
is fully executed by the parties hereto.
3. Prior to commencement of the Work, Permittee shall obtain from any
City, County or other local, state or federal authority having jurisdiction over
any aspect of the Work, all required permits, authorizations, and approvals. All
Work performed by Permittee pursuant to this Agreement shall be completed in
compliance with all applicable codes, ordinances, laws,
EXHIBIT F
F-1.
<PAGE> 28
regulations and orders, and in a workmanlike and professional manner, and so as
not to unreasonably disturb LMC as occupant of the Property.
4. If Permittee drills through any impervious layer of material between
distinct groundwater bearing zones, it shall close the borehole or complete the
wells in an appropriate manner. Removal and disposal of soil, drilling mud,
extracted groundwater, and any other materials or wastes from the Property
generated by Permittee shall be the responsibility of Permittee, and such
removal and disposal shall be completed by Permittee promptly upon completion of
drilling activities and groundwater sampling, but in no event later than fifteen
(15) days after the completion of drilling activities and groundwater sampling.
If access to LMC's facilities, including parking, will be obstructed during or
after drilling, sampling or surveying activities, Permittee shall obtain prior
approval from LMC to conduct such activities, which approval shall not be
unreasonably withheld or delayed. If requested by LMC or TriNet, Permittee shall
provide LMC and/or TriNet with split samples from the boreholes immediately upon
collection of the samples, and thereafter shall not be responsible for
maintaining the integrity of the split sample.
5. Permittee shall make available to and send to LMC and TriNet any and
all test results Permittee gathers within fifteen (15) days from the date of
completion of such testing or surveying. Permittee shall not release or disclose
any test results to any third party unless (i) Permittee has received written
approval from LMC and TriNet as to the release or disclosure of such
information, (ii) Permittee is required by law to release or disclose such
information, or (iii) such test results are released to Permittee's agents,
lawyers, experts or consultants in order to ascertain the impact thereof. Copies
of all test results and surveys shall be sent to LMC and TriNet at the following
respective addresses:
LOCKHEED MARTIN CORPORATION
c/o LMC Properties, Inc.
100 South Charles Street, Suite 1400
Baltimore, MD 21220
Attn: Ms. Terri E. Beattie
Telephone: (410) 468-1007
Facsimile: (410) 468-1079
TRINET CORPORATE REALTY TRUST, INC.
One Embarcadero Center, Suite 3300
San Francisco, CA 94111
Attention: Mr. James Pierre
6. All work performed by Permittee under this Agreement shall be
performed by Permittee at its expense.
7. Permittee certifies that it has a policy or policies of comprehensive
liability insurance with respect to its activities permitted under this
Agreement as well as those of its experts and consultants, that provide personal
and broad form property damage coverage for not
EXHIBIT F
F-2.
<PAGE> 29
less than Two Million Dollars ($2,000,000.00) combined single limit for bodily
injury, death and property damage liability. The insurance carried pursuant to
this Agreement shall name LMC and TriNet as an additional insured. Permittee
shall send to LMC and TriNet a Certificate of Insurance evidencing insurance
coverage required by this Section 7 prior to access by Permittee to the
Property.
8. Permittee hereby assumes responsibility and liability for and shall
indemnify, defend and hold harmless LMC and TriNet for any and all costs,
claims, liabilities, losses, damages for expenses (including without limitation
attorney's fees and costs) resulting from the work performed on the Property
pursuant to this Agreement by Permittee or by any other person or Persons
performing such services for Permittee. The foregoing obligation shall survive
termination of this Agreement.
9. The Permittee shall be responsible, at Permittee's sole expense, for
repairing any damage caused to the Property by Permittee as a result of the Work
or Permittee's access to the Property. All repairs shall be made promptly upon
completion of the Work.
10. The authorization granted herein to Permittee to enter onto the
Property shall terminate upon completion of the Work and the Work repairs unless
this Agreement is extended by mutual consent of the parties.
11. The access granted herein is exclusive to Permittee and is not
assignable.
(Remainder of Page Intentionally Left Blank)
EXHIBIT F
F-3.
<PAGE> 30
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date written below.
PERMITTEE LMC
NETWORK APPLIANCE, INC., LOCKHEED MARTIN CORPORATION,
a California corporation a Maryland corporation
By: ________________________________ By: _________________________________
Name:_______________________________ Name:________________________________
Title:______________________________ Title:_______________________________
Date:_______________________________ Date:________________________________
TRINET
TRINET ESSENTIAL FACILITIES XII, INC.,
a Maryland corporation
By: ________________________________
Name:_______________________________
Title:______________________________
Date:_______________________________
EXHIBIT F
F-4.
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-28-2000
<PERIOD-START> MAY-01-1999
<PERIOD-END> OCT-29-1999
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<SECURITIES> 51,673
<RECEIVABLES> 78,747
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<PP&E> 47,122
<DEPRECIATION> 20,042
<TOTAL-ASSETS> 434,304
<CURRENT-LIABILITIES> 68,638
<BONDS> 0
0
0
<COMMON> 280,393
<OTHER-SE> 85,221
<TOTAL-LIABILITY-AND-EQUITY> 434,304
<SALES> 227,991
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<CGS> 94,055
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<INCOME-CONTINUING> 29,516
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