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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999
COMMISSION FILE NUMBER: 0-23023
MMC NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0319809
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1134 EAST ARQUES AVENUE, SUNNYVALE, CA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 731-1600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
(TITLE OF CLASS)
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on March
20, 2000, as reported on the National Market of The Nasdaq Stock Market, was
approximately $802,508,000. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. As of March 20, 2000, the registrant had outstanding
32,416,116 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for registrant's Annual Meeting of
Stockholders to be held May 31, 2000.
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The Business section and other parts of this Report contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Factors Affecting
Future Results" commencing on page 18 of this Report.
PART I
ITEM 1. BUSINESS
THE COMPANY
MMC Networks, Inc. (the "Company" or "MMC Networks") is a leading developer
and supplier of Network Processing Platforms, including both Network Processors
and Switch Fabrics, that allow network equipment vendors to more rapidly develop
high-performance, feature-rich, cost-effective products supporting a broad range
of networking functions.
Network Processors are high-performance, software-programmable processors
optimized for networking and communications applications, while Switch Fabrics
are high-capacity, software-configurable devices that provide central,
high-speed interconnections amongst multiple processors or other devices. MMC's
Network Processors and Switch Fabrics form the core silicon "engines" of LAN and
WAN products for both Service Provider and Enterprise networks.
The Company's AnyFlow(TM) family of products includes the MMC nP(TM) family
of Network Processors, the nPX(TM) family of Switch Fabrics, and the nPC family
of Coprocessors and Connectivity Components. MMC Networks also offers and
markets nP Design Services(TM), which include hardware and software design
consulting in addition to training and traditional support services. The Company
believes that network equipment vendors are able to reduce design and
development costs and accelerate product development cycles for high-performance
routers and switches by using the Company's products and services.
The Company's products employ its proprietary nPcore(TM)network-optimized
RISC processor core and its ViX(TM) interconnect architecture. These enable
network equipment vendors to implement high-performance, value-added features in
their switch and router products. MMC Networks' customers use the Company's
Network Processor Platforms to develop and market multi-gigabit, wire-speed,
policy-enabled, Layer 2-7 WAN and LAN switches and routers; wireless, cable, and
dial-up access and aggregation platforms; Web switching; optical switching;
security and firewall devices; Virtual Private Network (VPN) systems; Voice Over
IP (VoIP) switching; ATM switches; and other communications platforms.
The Company was incorporated in California in September 1992 and
reincorporated in Delaware in October 1997. The Company's principal executive
offices are located at 1134 East Arques Avenue, Sunnyvale, California 94086, and
its telephone number is (408) 731-1600.
INDUSTRY BACKGROUND
The volume of traffic sent over data networks has increased dramatically
over the past decade, and nearly all observers of the networking industry agree
that the next several years will see continued substantial growth. The
proliferation of high-performance personal computers, workstations and servers,
a growing reliance on increasingly data-intensive networked applications, and a
dramatic increase in the number of users connected to both corporate networks
and the Internet have all contributed to this growth. In addition, as
organizations increasingly rely on corporate intranets, the Internet, eCommerce,
and business-to-business electronic commerce, networks have been extended to
connect branch offices, home offices, mobile users and, more recently, customers
and suppliers. These trends continue to drive demand for high-performance
networking equipment that supports internetworking among a variety of types of
LANs and WANs, supporting a wide variety of network protocols.
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As the size and performance requirements of networks have grown, network
equipment vendors have increasingly focused on advanced switching and routing
devices to meet the increasing demand for both performance and features. In
addition to improved performance and multiprotocol connectivity, both network
service providers and enterprises are more frequently demanding networking
equipment that supports a broad variety of advanced features, without
compromising performance. For example, as the reach of enterprise data networks
has spread to WANs, the Internet, and business-to-business extranets, network
administrators need security at multiple points in the network. As businesses
become more dependent on intranets and the Internet, they are increasingly
demanding the ability to give different levels of priority, or Quality of
Service (QoS), to their multiple applications and users to make more efficient
use of networking resources. Similarly, new applications such as video
conferencing, multimedia training and Internet telephony (Voice Over IP) require
end-to-end QoS guaranteed across entire networks. Finally, in order to implement
such advanced features across complex, high-speed networks, network
administrators also need better network management capabilities to help them
analyze the traffic flowing through the network, to anticipate traffic growth
and to quickly isolate and solve network problems.
While attempting to respond to customer demands for more performance, new
capabilities, greater security and better management, network equipment vendors
face growing competition, evolving networking standards and increasing market
segmentation. Rapid growth in the data networking industry has attracted a
multitude of new entrants who are competing with or, in many instances, are
being acquired by major network equipment vendors. To compete effectively,
network equipment vendors must improve their time-to-market and lower their
costs while continuing to increase performance and add advanced features and
differentiated functionality.
To stay competitive in this environment, network equipment vendors must
address the needs of their increasingly diverse customer base and provide
support for a broad array of networking protocols and features without degrading
performance. To accomplish these purposes, these vendors have employed
increasingly capable semiconductor devices in their networking equipment, the
most important being those used as the switching or routing "engines." Network
equipment vendors have traditionally relied on one of two approaches for these
semiconductor engines: general-purpose processors or custom-developed
Application-Specific Integrated Circuits (ASICs). Each of these approaches has
both advantages and disadvantages. Switches and routers utilizing off-the-shelf,
general-purpose processors can be brought to market relatively quickly and can
be programmed in software to add new features or adapt to changes in industry
protocols and standards, but these processors cannot generally offer sufficient
performance for today's high-speed networks and usually bring unacceptably high
unit costs. Alternatively, switches and routers based on ASICs can be designed
to achieve high performance and produced at relatively low unit cost, but the
ASIC development cycle is usually too time consuming to permit the development
of high-performance ASICs with advanced feature sets while meeting network
equipment vendors' time-to-market constraints. In addition, ASICs involve the
risk of additional delays associated with multiple iterations that may be
required in the ASIC development cycle, provide little flexibility to conform to
rapidly evolving standards and protocols and lack the full feature support that
would allow them to address multiple segments of the networking market.
Consequently, neither approach achieves network equipment vendors' requirements
for high performance and advanced features without imposing an unacceptable
time-to-market and/or cost burden.
MARKET OPPORTUNITY FOR NETWORK PROCESSORS
These market trends have created a significant opportunity for Network
Processors and Switch Fabrics. Combining the lower costs of ASICs with the
flexibility and adaptability offered by general-purpose processors, Network
Processors are software-programmable processors optimized for networking and
communications applications. In combination with high-capacity interconnections
provided by Switch Fabrics, off-the-shelf Network Processors enable the rapid
design and development of switching and routing solutions that incorporate
advanced features, operate without significant performance degradation, and
address evolving standards and multiple market segments through software
programmability. They further allow vendors to develop systems that can be
produced in a cost-efficient manner and within the time-to-market constraints of
the competitive networking equipment market. Network Processors and Switch
Fabrics offer network
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equipment vendors the ability to reduce the time and expense involved in
developing customized chip sets for individual network switching products, while
allowing vendors to focus on developing networking systems which are powerful,
cost-effective, differentiated and feature-rich to satisfy the needs of their
increasingly diverse customer bases.
MMC NETWORKS' STRATEGY
MMC Networks' strategy is to enable network equipment vendors to rapidly
develop and introduce differentiated products by leveraging the Company's
high-performance, feature-rich, software-programmable, cost-effective Network
Processors and high-capacity, software-configurable Switching Fabrics. Key
elements of the Company's strategy include the following:
Provide a Complete Solution. Most high-performance WAN and LAN switches and
routers require both switching and packet processing components and may require
additional traffic management components. By offering a complete Network
Processing Platform, including both Switching Fabric and Network Processor
chipsets, and by further embedding rich traffic management functionality in its
fabrics and processors, MMC Networks seeks to accelerate network equipment
vendors' time to market by reducing the need to source, integrate, and test
multiple chipsets from multiple vendors.
Target High-Growth Markets. MMC Networks' Network Processors and Switching
Fabrics target the rapidly growing enterprise and service provider markets.
These markets also experience rapid growth in performance needs and rapid
changes in features required, all of which make the Company's adaptable,
software-programmable products ideal for equipment targeted at these sectors.
The Company focuses on the design and development of Network Processing
Platforms that enable network equipment vendors to rapidly design and bring to
market a broad variety of differentiated networking solutions meeting the
performance and feature requirements of this evolving market.
Facilitate Customer Success. Increasing competition and evolving networking
standards will continue to exert pressure on network equipment vendors to
introduce new products rapidly and cost-effectively. The Company works closely
with its customers to design products that enable rapid time-to-market, provide
performance and functionality compatible with such customers' current and future
needs, and complement network equipment vendors' own product development
efforts.
Extend Technology Leadership. MMC Networks has made substantial investments
in the technologies that underlie its Network Processors, with the goal of
setting new price/performance benchmarks and enabling the widespread use of
sophisticated networking functionality. For example, the Company's ViX
architecture, which forms the basis of all of its products, is designed to
enable network equipment vendors to implement value-added features without
significant performance degradation. MMC Networks is continually developing new
technologies for its Network Processors, such as the Policy Engine, introduced
in 1999 and embedded in the Company's nP7120 Gigabit Network Processor (formerly
known as the GPIF-207), which is designed to allow more features at wire-speed.
Leverage Fabless Semiconductor Model. MMC Networks seeks to leverage the
flexibility of its fabless semiconductor business model to lower technology and
production risks, increase profitability and reduce time-to-market. The
Company's fabless model allows it to focus on its core Network Processing
Platform design competencies, while minimizing the capital and operating
infrastructure requirements.
TECHNOLOGY
MMC Networks' Network Processing Platforms include high-capacity, flexible
switching fabrics and multi-gigabit, open-architecture, software-programmable
processors with instruction sets that have been optimized for processing and
switching networking data, voice and video packets and cells. The Company
believes that the key underlying technologies employed in its Network Processors
and Switching Fabrics give it a substantial competitive advantage. The core
technologies employed in current products include the Company's nPcore
network-optimized RISC processor core, Policy Engine, ViX architecture, Per-Flow
and Per-Stream Queuing technology, Direct Replication Engine technology, and
Virtual SAR technology.
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nPcore: Programmable BitStream Processor Technology. MMC Networks' nPcore
is a network-optimized instruction set processor core embedded in each of the
Company's Network Processors. Employing MMC Network's Programmable BitStream
Processor technology, the nPcore performs the processing of packet and cell
headers, including such functions as real-time parsing, matching and table
look-up, as well as bit stream manipulations such as adding, deleting,
substituting, appending and pre-pending. This functionality enables network
equipment vendors to build high-performance switches and routers with additional
services that address network security, class of service and quality of service
and improve management throughout the network.
Policy Engine. MMC Networks' latest Network Processors include embedded,
programmable Policy Engines that provide intelligent packet classification for
enabling Policy-based network services. Since they are programmable, they can
support both the fluid service requirements of network providers and evolving
policy-based network management standards.
ViX Architecture. The ViX architecture is a switch fabric architecture that
uses a patented point-to-point connection matrix that permits the use of a wide,
centralized, shared-memory structure, while separating control information from
user data. The ViX architecture's use of "point-to-point connections" is
designed to enable network equipment vendors to easily scale the number of ports
in their switches and routers, unlike shared-bus architectures that run into
clock frequency, bus capacitance and pin count limitations. The use of a "wide,
centralized shared-memory structure" enables network equipment vendors to scale
the bandwidth and amount of buffer memory, unlike crossbar architectures which
become increasingly expensive as bandwidth and buffer requirements increase. The
"separation of control information from user data" enables network equipment
vendors to more easily implement high-performance processing, queuing,
replication and switching functions for networking applications, unlike
shared-bus and crossbar architectures, which may require complex processors to
coordinate multiple functions across multiple ports and the replication of user
data within their buffers. In addition, the ViX architecture is designed as an
open architecture, providing external access to the appropriate timing and
control signals, which enables network equipment vendors to more easily
implement differentiated features and functionality.
Per-Flow and Per-Stream Queuing (PFQ and PSQ) Technology. All networking
switches and routers must buffer data when networks become congested. Networks
that use conventional switches and routers usually buffer data on a linear,
first-in-first-out ("FIFO") basis. As data accumulates in the buffer, new data
sits "behind" all of the information that previously arrived at the
switch/router. High-priority information sent to that switch or router is not
distinguished from other data and is therefore "stuck" in the back of the buffer
until such other data is sent. MMC Networks' PFQ and PSQ technology is designed
to alleviate the limitations of FIFO queuing by assigning each piece of data to
its own unique queue and then scheduling the sending of the data according to
software-programmable algorithms developed by the network equipment vendor, thus
allowing the switch or router to implement class of service or quality of
service functionality. Switches and routers incorporating PFQ technology can be
designed to support up to 500,000 queues, providing enough queues for
large-scale networks.
Direct Replication Engine Technology. When data must be broadcast to all
ports on a switch or router or "multicast" to select ports, routers and switches
must replicate data packets for each port connection. This process may
significantly degrade performance. MMC Networks' Direct Replication Engine
technology is designed to provide wire-speed multicast and broadcast capability
by leveraging the separation of control information from user data enabled by
the ViX architecture. This capability allows the switch or router to store a
single copy of the data to be transmitted and replicate it to multiple ports in
a single instruction cycle.
Virtual SAR Technology. Conventional switches and routers use expensive
segmentation and reassembly ("SAR") chips to convert frames to cells and vice
versa, thus enabling the internetworking of ATM with Ethernet, frame relay and
other packet-based protocols. The Company's Virtual SAR technology provides the
ability to convert frames to cells and vice versa, thus eliminating the need for
expensive external SAR chips.
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TARGET MARKETS AND PRODUCTS
MMC Networks' products serve two primary markets: enterprise networks and
service providers. The Company's products are designed into networking equipment
intended for both of these markets. The following table summarizes selected
product and service applications within each of these markets:
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ENTERPRISE NETWORK SERVICE PROVIDER SERVICES
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Layer 2/3/4/7 Switching Wiring Closet ATM Voice
10/100 Ethernet Power Workgroup Packet Over Sonet (POS) Cable
Gigabit Ethernet Campus Backbone Optical (MAN) Edge Dial
ATM Remote Access xDSL Wireless
Firewalls Internet Routers Web Switch VPN
VPN Frame Relay
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The Company's nP Network Processors and nPX Switching Fabrics provide the
core functionality for a wide array of switches and routers developed by network
equipment vendors targeting both the enterprise network and service provider
markets. The Company also offers development hardware kits, which assist
customers in their technical evaluation of the Company's products.
NETWORK PROCESSORS (NP FAMILY)
nP7120 Gigabit Network Processor. Also known as the GPIF-207 Gigabit Packet
Processor, the nP7120 Gigabit Network Processor is the Company's first
multi-gigabit packet processor. nP7120 offers two gigabit-rate ports for Gigabit
Ethernet or OC-12 rate Packet Over Sonet (POS)/HDLC connections, and these can
be further bonded together to support up to an OC-48 rate connection. With two
software-programmable, network-optimized nPcore processor cores, it enables
wire-speed Layer 2-7 packet processing, and the embedded Policy Engine allows
wire-speed intelligent packet classification for Policy-based network services
without degrading packet processing performance. With support for MMC Network's
ViX interconnect architecture, nP7120 can be connected to nPX5400 or nPX5500
switches, other fabrics, or custom logic so that it can function as a standalone
packet processor. The Company announced the nP7120 in 1999 and expects to bring
it into production in 2000. The development and introduction of new product
classes like the nP7120 is subject to numerous risks and uncertainties including
delays in the design and engineering process, uncertain manufacturing and
assembly lead times, yield uncertainties and product defects. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Results -- New Product Development and
Technological Change", "-- Dependence on Independent Manufacturers" and
"-- Product Complexity."
nP7110 Gigabit Network Processor. Also known as the XPIF Gigabit Packet
Processor, the nP7110 Gigabit Network Processor was the Company's first
gigabit-rate packet processor. nP7110 includes a software-programmable,
network-optimized nPcore processor core for wire-speed packet processing of a
Gigabit Ethernet or Packet Over Sonet (POS)/HDLC connection. nP7110 can be
connected to MMC's nPX5400 or nPX5500 switches or other fabrics. nP7110 began
shipping in volume in 1999.
nP7000 Ethernet Network Processor Family. Also known as the EPIF Ethernet
Packet Processor family, the members of the nP7000 family each support multiple
10/100 Ethernet interfaces, including embedded, on-chip 10/100 Ethernet Media
Access Control (MAC) functions. nP7100 family Network Processors all support
Layer 2-7 packet processing, enabling a wide variety of feature-rich enterprise
and service provider products.
SWITCH FABRIC PRODUCTS (NPX, ATMS, AND PS FAMILIES)
nPX5400 Switch Fabric. Also known as the AnyFlow 5400, the single-chip
nPX5400 can be cascaded to provide up to 22 Gbps full-duplex (44 Gbps aggregate)
high-throughput switching capacity, while simultane-
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ously providing wire-speed IP multicast operations and Per-Stream Queuing (PSQ).
The nPX5400 first sampled in 1998 and began shipping in volume in 1999 for
10/100/1000 Ethernet, PoS, and other packet-network applications.
nPX5500 Switch Fabric. Also known as the AnyFlow 5500, MMC Networks'
nPX5500 Switch Fabric chip set was the first member of the nPX (AnyFlow) family
and implements the Company's Virtual SAR and Per Flow Queuing (PFQ)
technologies. The nPX5500 employs a modular design which enables deployment in a
wide range of networking equipment, including ATM, 10/100/1000 Ethernet, HDLC,
Packet Over Sonet (PoS), and various WAN and MAN switches, routers, and other
communications platforms. The nPX5500 provides wire-speed switching and routing
with quality of service and packet/cell internetworking at a bandwidth of 20
Gbps full-duplex (40 Gbps aggregate), with throughput of up to 20 million
packets-per-second (pps). The nPX5500 sampled in 1997 and began volume shipments
in 1998.
ATMS2000 Family. The ATMS2000 ATM Switch chip set provides the core
functionality of a high-performance ATM switch, providing a cost-effective
solution for 2.5- or 5-Gbps switches and routers with port densities of up to 32
OC-3 ports or eight OC-12 ports.
PS1000 Family. The PS1000 Ethernet Switch chip set implements the core
functionality of a high-performance Fast Ethernet switch, enabling low-cost
solutions supporting scalable port densities from eight to 128 10-Mbps Ethernet
ports and up to 32 100-Mbps Fast Ethernet ports with the option of one or two
ATM uplinks.
PRODUCTS UNDER DEVELOPMENT
The Company expects to continue to enhance and refine its Network
Processors and Switch Fabrics, while adding additional operational features
designed to make the Company's products more attractive to a wide range of
network equipment vendors.
CUSTOMERS
MMC Networks sells its products to a variety of network equipment vendors.
As of December 31, 1999, the Company had achieved 54 design wins among more than
40 network equipment vendors for its newer nP Network Processor and nPX Switch
Fabric families, all formerly known as AnyFlow products. This total does not
include working designs employing the Company's older ATMS2000 and PS1000
product families. Each design win is a customer platform, usually containing
multiple units of the Company's chips. To qualify as a design win, a network
equipment vendor must have (i) purchased network processor prototypes, a
reference design kit or software drivers from the Company and (ii) commenced
development of a product incorporating the Company's network processors. During
the design-in process, the Company works closely with each customer to assist in
resolving technical questions and to help the customer achieve volume production
of its products. Achieving a design win with a network equipment vendor provides
no assurance that such network equipment vendor will ultimately ship products
incorporating the Company's network processors.
None of the Company's customer purchase agreements contain a minimum
purchase requirement. Customers typically purchase the Company's products
pursuant to short-term purchase orders that may be canceled without charge if
notice is given within an agreed-upon period.
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The Company's major customers for the last three years, from whom revenues
exceeded 10% of total revenues, are listed below.
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<CAPTION>
YEAR ENDED DECEMBER 31,
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1999 1998 1997
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Cisco Systems, Inc.......................................... 52% 50% 28%
International Business Machines Corporation ("IBM")......... 19% * *
Mitsui Comtek Corp., a non-stocking sales representative for
Japan..................................................... * 12% 28%
Hitachi..................................................... * * 12%
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* Less than 10% during year
In the third quarter of 1999, IBM accounted for 22% of total revenues.
During that quarter, IBM announced it was closing down most of its network
equipment business. IBM informed MMC that it will cease the manufacture and sale
of its network equipment products that use MMC products, and it will cease
future purchases of those MMC products. Revenues from IBM decreased to 6% during
the fourth quarter of 1999, and we do not expect to realize any revenue from IBM
in 2000. See risks and uncertainties described in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Results -- Customer Concentration".
SALES, MARKETING AND TECHNICAL SUPPORT
The Company targets customers based on industry leadership, technology
leadership and target applications. The Company works with large and small,
public and privately held network and communications equipment vendors. The
Company maintains close working relationships with its customers in order to
design and develop solutions which specifically address their needs. The Company
markets its products through a direct sales and marketing organization,
headquartered in Sunnyvale, California, direct sales offices in Massachusetts
and North Carolina, and through sales representatives in the United States, the
United Kingdom and several Pacific Rim countries. Sales representatives are
selected for their understanding of the networking marketplace and their ability
to provide effective field sales support for MMC Networks' products.
The Company has a number of marketing programs designed to inform network
equipment vendors about the capabilities and benefits of the Company's products.
The Company's marketing efforts include participation in industry trade shows,
technical conferences and technology seminars, preparation of competitive
analyses, sales training, publication of technical and educational articles in
industry journals, maintenance of MMC Networks' World Wide Web site, advertising
and direct mail distribution of Company literature.
The Company provides both technical support and design consulting to
customers via its nP Design Services programs, delivered through factory system
engineers and, if necessary, product designers and architects. Local field
support is provided in person or by telephone. The Company plans to hire
additional support and design consulting staff for remote offices, as the need
arises. The Company believes that providing network equipment vendors with
comprehensive product service and support is critical to maintaining a
competitive position in the networking market and is critical to shortening
customers' design-in cycles. The Company works closely with its customers to
monitor the performance of its product designs and to provide support at each
stage of customer product development.
RESEARCH AND DEVELOPMENT
The Company's success will depend to a substantial degree upon its ability
to develop and introduce in a timely fashion new products and enhancements to
its existing products that meet changing customer requirements and emerging
industry standards. MMC Networks has made and plans to continue to make
substantial investments in research and development and to participate in the
development of industry standards.
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The Company focuses its development efforts on network processor product
development. Before a new product is developed, the Company's research and
development engineers work with marketing managers and customers to develop a
comprehensive requirements specification. After the product is designed and
commercially released, Company engineers continue to work with customers on
early design-in efforts to understand requirements for future generations and
upgrades. The Company employs engineers working on many stages of chip
architecture, design, verification and test. In addition, the Company also
employs hardware and software engineers to develop its reference design kits and
related software.
The Company's research and development expenditures, net of non-recurring
engineering funding received from customers, totaled $22.6 million, $14.6
million and $8.3 million in the years ended December 31, 1999, 1998 and 1997,
respectively, representing 32%, 30% and 38% of revenues for such periods,
respectively. Research and development expenses primarily consist of salaries
and related costs of employees engaged in ongoing research, design and
development activities and subcontracting costs. Non-recurring engineering fees
paid by the Company's customers to facilitate product development projects
reduce these expenses.
MANUFACTURING
Currently, the Company outsources all of its semiconductor manufacturing,
including wafer fabrication, unit assembly and test. This "fabless"
semiconductor-manufacturing model allows the Company to focus substantially all
of its resources on the design, development and marketing of products. "Fabless"
manufacturing also significantly reduces the capital requirements of the
Company.
The Company purchases certain of its products fully assembled and tested,
on a "turnkey" basis. The Company obtains other products by purchasing processed
wafers and then subcontracting the assembly and test of finished units.
During 1999, the Company purchased turnkey products from Oki Semiconductor
and NEC in Japan, and the Company purchased wafers from Taiwan Semiconductor
Manufacturing Corporation (TSMC), United Microelectronics Corporation (UMC) in
Taiwan, and Panasonic in Japan. The Company anticipates that the portion of its
production purchased as wafers rather than turnkey units will increase in future
periods. The Company chose these three manufacturers in large part due to their
conformance with international standards of technology, their capacity, their
quality and their support for the state-of-the-art design tools used by MMC
Networks.
MMC Networks uses mainstream Complementary Metal Oxide Silicon (CMOS)
processes for the manufacturing of its products. The Company's main products
currently are fabricated in .25, .35, .5 and .8 micron CMOS. The Company plans
to build certain new products on .18 micron CMOS. The Company continuously
evaluates the benefits, on a product-by-product basis, of migrating to a smaller
geometry process in order to reduce costs and has commenced migration of certain
products to smaller geometries. The Company believes that transitioning its
products to increasingly smaller geometries will be important for the Company to
remain competitive. No assurance can be given that future process migration will
be achieved without difficulty. See risks and uncertainties described in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors Affecting Future Results -- New Product
Development and Technological Change" and "-- Dependence on Independent
Manufacturers".
The Company must place orders approximately 10 to 13 weeks in advance of
expected delivery. As a result, the Company has only a limited ability to react
to fluctuations in demand for its products, which could cause the Company to
have an excess or a shortage of inventory of a particular product. If capacity
becomes less available in the future, the Company may be required to place
orders earlier than 10 to 13 weeks in advance of expected delivery.
The success of the Company's manufacturing approach is subject to the risks
and uncertainties described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors Affecting Future
Results -- Dependence on Independent Manufacturers."
9
<PAGE> 10
COMPETITION
The data networking and semiconductor industries are intensely competitive
and are characterized by constant technological change, rapid rates of product
obsolescence and price erosion. The Company's Network Processors and Switch
Fabrics compete now or are expected to compete in the future with current or
future products from companies such as Broadcom, Conexant, Galileo Technology,
IBM, Intel, Lucent Technologies, Motorola, PMC-Sierra, SiTera, and Texas
Instruments, as well as additional and potential future smaller start-up
companies. Additional existing domestic and international semiconductor
suppliers could also enter the market in the future. The Company could also face
competition from suppliers of products based on new or emerging technologies. In
addition, many of the Company's existing and potential customers, including
Cisco, internally develop ASICs, general purpose processors, Network Processors,
or other devices which attempt to perform some or all of the functions performed
by the Company's products.
INTELLECTUAL PROPERTY
The Company's future success and ability to compete are dependent, in part,
upon its proprietary technology. The Company has been granted ten patents and
has filed nine other patent applications in the United States. Internationally
the Company has been granted four patents and has filed 21 other patent
applications. None of the Company's patent applications relate to specific
products of the Company, as the Company believes that it may be more effective
to seek patent protection with respect to its key underlying technologies, such
as aspects of its ViX Architecture.
In addition, the Company claims copyright protection for certain
proprietary software and documentation. The Company also attempts to protect its
trade secrets and other proprietary information through agreements with its
customers, suppliers, employees and consultants, and through other security
measures. Although the Company intends to protect its rights vigorously, there
can be no assurance that these measures will be successful. In addition, the
laws of certain countries in which the Company's products are or may be
manufactured or sold, including Japan and Taiwan, may not protect the Company's
products and intellectual property rights to the same extent as the laws of the
United States.
The Company believes that, because of the rapid pace of technological
change in the networking industry, its technical expertise and ability to
introduce new products on a timely basis will be more important in maintaining
its competitive position than protection of its intellectual property. The
Company believes that patent, trade secret and copyright protection are
important but must be supported by expanding the knowledge, ability and
experience of the Company's personnel and introducing and enhancing products.
Although the Company continues to implement protective measures and intends to
defend vigorously its intellectual property rights, there can be no assurance
that these measures will be successful.
EMPLOYEES
As of December 31, 1999, the Company had a total of 187 full-time employees
and 10 contractors. Of the full-time employees, 100 were in research and
development, 32 in marketing and technical support, 14 in sales and 41 in
operations and administration. The Company's employees are not represented by
any collective bargaining agreement, and the Company has never experienced a
work stoppage. The Company believes its employee relations are good.
10
<PAGE> 11
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The following table sets forth the current executive officers and directors
of the Company and their respective positions. The ages set forth below are as
of December 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Amos Wilnai................. 60 Chairman of the Board
Douglas C. Spreng........... 56 President and Chief Executive Officer
Alexander Joffe............. 42 Executive Vice President and Chief Technology Officer
Sena C. Reddy............... 51 Executive Vice President, Operations
Richard C. Yonker........... 52 Vice President, Finance and Chief Financial Officer
Frederick J. Berkowitz...... 42 Vice President, Engineering
Ari Birger.................. 40 Vice President, Customer Engineering
Andrew J. Gottlieb.......... 35 Vice President, Marketing
John A. Teegen.............. 41 Vice President, Sales
John G. Adler(1)............ 62 Director
Irwin Federman(2)........... 64 Director
Andrew S. Rappaport(2)...... 42 Director
Geoffrey Y. Yang(1)......... 40 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Amos Wilnai has served as the Chairman of the Board of Directors since he
founded the Company in September 1992. From September 1994 to June 1998, Mr.
Wilnai served as the Company's Executive Vice President of Business Development
and from September 1992 to October 1994, he was the President of the Company.
Mr. Wilnai has a B.S.E.E. degree from the Technion Institute of Technology in
Israel and an M.S.E.E. degree from the Polytechnic Institute in Brooklyn.
Douglas C. Spreng has served as the Company's President and Chief Executive
Officer since April 1999. Mr. Spreng was most recently the Executive Vice
President of the Client Access Business Unit of 3Com Corporation, a networking
company, from 1992 to 1999. Mr. Spreng holds a B.S.E.E. from the Massachusetts
Institute of Technology and an M.B.A. from Harvard Business School.
Alexander Joffe has served as Executive Vice President and Chief Technology
Officer since January 1999. Mr. Joffe served as the Company's Vice President of
Engineering from July 1994 to January 1999. From March 1993 to July 1994, Mr.
Joffe was the Company's Director of Engineering. Prior to joining the Company,
Mr. Joffe spent more than eight years with Motorola Semiconductor Products, a
semiconductor manufacturing subsidiary of Motorola, Inc., where he served last
as an engineering manager. Mr. Joffe holds a B.S.E.E. degree from the Technion
Institute of Technology in Israel.
Sena C. Reddy has served as the Company's Executive Vice President of
Operations since he joined the Company in January 1997. Prior to joining the
Company, Mr. Reddy spent more than 11 years at Cirrus Logic Inc., a
semiconductor company, where he served as the Senior Vice President of
Operations from April 1994 to January 1997, Vice President of Manufacturing from
July 1991 to April 1994 and the Director of Wafer Fabrication and Technology
from September 1985 to June 1991. Mr. Reddy holds an M.S.E.E. degree from
Oklahoma State University.
Richard C. Yonker joined the Company as Vice President of Finance and Chief
Financial Officer in March 2000. Prior to joining the Company, Mr. Yonker served
as Vice President and Chief Financial Officer of TesseracT Group, an integrated
education company in Phoenix, Arizona, from May 1999 to March 2000. From October
1996 to April 1999, Mr. Yonker served as Vice President and Chief Financial
Officer of InteSys Technologies in Phoenix, Arizona, a contract manufacturing
company. Mr. Yonker served as Vice President and Chief Financial Officer of
Computron Software, a software development company in Rutherford, New
11
<PAGE> 12
Jersey, from December 1995 to September 1996. Mr. Yonker holds a M.S. in
Management degree from Massachusetts Institute of Technology and a B.S.I.E.
degree from General Motors Institute in Michigan.
Frederick J. Berkowitz joined the Company as Vice President of Engineering
in January 1999. From January 1998 to January 1999, Mr. Berkowitz was a Director
of Engineering at Silicon Graphics, Inc., a computing workstation vendor. From
November 1996 to October 1997, Mr. Berkowitz served as Vice President of Systems
Engineering for Storage Dimensions, Inc., a storage subsystems vendor. From
November 1990 to October 1996, Mr. Berkowitz was employed at Fujitsu/HAL
Computer Systems, a computing workstation vendor, as Director of Platform
Development. Mr. Berkowitz holds a B.S.E.E. degree from Union College of New
York and an M.S.E degree from the University of Michigan.
Ari Birger was named Vice President of Customer Engineering in January
2000. Mr. Birger joined the Company in January 1993 and served in several
management positions, most recently as Senior Director of Customer Engineering.
Mr. Birger holds a B.S.E.E. degree from the Technion Institute of Technology in
Israel.
Andrew J. Gottlieb joined the Company as Vice President of Marketing in May
1999. Prior to joining the Company, Mr. Gottlieb spent more than 13 years at
3Com Corporation, where he most recently served as Vice President of Marketing.
Mr. Gottlieb holds a B.A. degree from Wesleyan University in Connecticut and a
M.S. degree from Stanford University.
John A. Teegen has served as the Company's Vice President of Sales since
joining the Company in January 1997. From August 1994 to January 1997, Mr.
Teegen was the Vice President of Worldwide Sales for Intellon Corporation, a
semiconductor company. From August 1987 to August 1994, Mr. Teegen was employed
by VLSI Technology, Inc., also a semiconductor company, where he served in a
variety of sales management positions, most recently as the Vice President of
Consumer and Industrial Sales. Mr. Teegen holds a B.S.E.E. degree from the
University of Florida.
John G. Adler has served as a director of the Company since March 1997. Mr.
Adler has served as director of Adaptec, Inc., an electronic equipment
manufacturing company, since June 1998. Mr. Adler served as the Chairman of the
Board of Directors of Adaptec, Inc. from May 1990 through August 1997, as the
President from May 1985 to August 1992 and as Chief Executive Officer from
December 1986 to July 1995. Mr. Adler holds a B.S.E.E. degree from University of
Mississippi and was a Sloan Executive Fellow at Stanford University in 1971.
Irwin Federman has served as a director of the Company since July 1994. Mr.
Federman has been a general partner of U.S. Venture Partners, a venture capital
firm, since April 1990. From 1988 to 1990 he was a Managing Director of Dillon
Read & Co., an investment banking firm, and a general partner in its venture
capital affiliate, Concord Partners. Mr. Federman also serves on the boards of
directors of SanDisk Corporation, a memory systems company, Netro Corporation, a
provider of wireless networking equipment, QuickLogic, Inc., a semiconductor
manufacturer, Komag Inc., a thin film media manufacturer, Checkpoint Software
Technologies, Inc., a network security software company and several
privately-held companies. Mr. Federman received a B.S. degree in Economics from
Brooklyn College and was awarded an honorary Doctorate of Engineering Science
from Santa Clara University.
Andrew S. Rappaport has served as a director of the Company since July
1994. Mr. Rappaport has been a partner of August Capital, LLC, a venture capital
firm, since July 1996. Prior to that time, Mr. Rappaport was the President of
The Technology Research Group, Inc., a Boston-based strategic management
consulting firm, which he founded in August 1984. He also serves on the boards
of directors of Silicon Image, a semiconductor manufacturer and Telocity, a
provider of residential Internet services. He is also a director of numerous
private companies. Mr. Rappaport attended Princeton University.
Geoffrey Y. Yang has served as a director of the Company since July 1994.
Mr. Yang has been a general partner of Institutional Venture Partners, a venture
capital firm, since June 1989. He has also been a managing director of Redpoint
Ventures, a venture capital firm, since August 1999. He serves on the boards of
directors of AskJeeves, Inc., an online personal service infrastructure company,
TiVo, Inc., a provider of personal television services, Turnstone Systems, Inc.,
a provider of digital subscriber line deployment and management
12
<PAGE> 13
products, and numerous private companies. Mr. Yang holds a B.A. in Economics
from Princeton University, a B.S.E. in Engineering and Management Systems from
Princeton University, as well as an M.B.A. from Stanford University.
There are no family relationships among any of the Company's directors or
executive officers.
ITEM 2. PROPERTIES
The Company's main executive, administrative and technical offices
currently occupy approximately 57,000 square feet in Sunnyvale, California under
leases that expire in May 2000. At the end of the leases, the Company plans to
move to adjacent facilities in Sunnyvale, California, where it has leased
approximately 128,000 square feet for its main executive, administrative and
technical offices, beginning May 2000 and ending May 2005.
The Company leases 12,000 square feet in Chelmsford, Massachusetts and
5,500 square feet in Raleigh, North Carolina, both used to house engineering and
sales personnel. The Chelmsford lease expires in June 2002 and the Raleigh
leases expires in November 2002.
The Company's wholly owned subsidiary, MMCIL, entered into a lease
effective October 1998 in Netanya, Israel for approximately 7,200 square feet
that expires in September 2001.
The Company believes that its existing facilities are adequate to meet its
requirements through 2000.
ITEM 3. LEGAL PROCEEDINGS
Currently, the Company is not aware of any pending legal matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "MMCN." The following table sets forth the range of the high and low
sale prices by quarter as reported on the Nasdaq National Market during 1999.
<TABLE>
<CAPTION>
QUARTER HIGH LOW
------- ---- ---
<S> <C> <C>
First Quarter............................................... $22 1/8 $11 3/4
Second Quarter.............................................. $45 1/4 $16
Third Quarter............................................... $57 $21 1/4
Fourth Quarter.............................................. $35 $16 3/8
</TABLE>
As of March 20, 2000, the number of holders of record of the Company's
Common Stock was 126. The Company currently intends to retain any earnings for
use in its business and does not anticipate paying any cash dividends in the
foreseeable future.
13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and notes thereto included elsewhere in
this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $70,149 $49,279 $21,930 $10,515 $ 577
Cost of revenues....................................... 21,524 14,353 6,542 3,576 304
------- ------- ------- ------- -------
Gross profit.................................. 48,625 34,926 15,388 6,939 273
------- ------- ------- ------- -------
Operating expenses:
Research and development, net........................ 22,645 14,552 8,318 3,312 1,802
Selling, general and administrative.................. 11,182 9,162 6,240 3,225 1,151
Litigation settlement................................ -- 1,250 -- -- --
------- ------- ------- ------- -------
Total operating expenses...................... 33,827 24,964 14,558 6,537 2,953
------- ------- ------- ------- -------
Operating income (loss)................................ 14,798 9,962 830 402 (2,680)
Other income, net.................................... 3,138 2,179 504 317 104
------- ------- ------- ------- -------
Income (loss) before income taxes...................... 17,936 12,141 1,334 719 (2,576)
Provision for income taxes............................. 6,099 3,730 138 17 --
------- ------- ------- ------- -------
Net income (loss)...................................... $11,837 $ 8,411 $ 1,196 $ 702 $(2,576)
======= ======= ======= ======= =======
Basic income (loss) per share(1)....................... $ 0.38 $ 0.28 $ 0.08 $ 0.07 $ (0.38)
======= ======= ======= ======= =======
Shares used to compute basic income (loss) per
share(1)............................................. 31,065 29,693 14,432 10,652 6,808
======= ======= ======= ======= =======
Diluted income (loss) per share(1)..................... $ 0.35 $ 0.25 $ 0.04 $ 0.03 $ (0.38)
======= ======= ======= ======= =======
Shares used to compute diluted income (loss) per
share(1)............................................. 33,791 33,611 29,113 25,745 6,808
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments... $71,995 $53,178 $45,401 $ 6,318 $8,102
Working capital..................................... 79,508 57,323 46,159 7,113 7,177
Total assets............................... 96,395 73,384 54,723 10,676 9,527
Long-term obligations............................... -- -- 286 636 301
Total stockholders' equity................. 87,960 62,945 49,717 8,177 7,446
</TABLE>
- ---------------
(1) For an explanation of the number of shares used to compute basic and diluted
net income per share, see Note 2 of Notes to the Consolidated Financial
Statements.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section and other parts of this Report contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the subsection entitled "Factors Affecting Future
Results" commencing on page 18. The following discussion of the financial
condition and results of operations of the Company should be read in conjunction
with the Financial Statements and the Notes thereto included elsewhere in this
Report.
RESULTS OF OPERATIONS
The following table shows certain statement of operations data as a
percentage of total revenues.
<TABLE>
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of revenues............................................ 30.7% 29.1% 29.8%
----- ----- -----
Gross profit...................................... 69.3% 70.9% 70.2%
----- ----- -----
Operating expenses:
Research and development, net............................. 32.3% 29.5% 37.9%
Selling, general and administrative....................... 15.9% 18.6% 28.5%
Litigation settlement..................................... -- 2.5% --
----- ----- -----
Total operating expenses.......................... 48.2% 50.6% 66.4%
----- ----- -----
Operating income............................................ 21.1% 20.3% 3.8%
Other income, net......................................... 4.5% 4.4% 2.3%
----- ----- -----
Income before income taxes.................................. 25.6% 24.7% 6.1%
Provision for income taxes.................................. 8.7% 7.6% 0.6%
----- ----- -----
Net income.................................................. 16.9% 17.1% 5.5%
===== ===== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues. Revenues increased to $70.1 million for the year ended December
31, 1999 from $49.3 million for the year ended December 31, 1998. Despite the
decline in average sales prices experienced in the data networking and
semiconductor industries during 1999, increased unit shipments in 1999 compared
to 1998 resulted in increased revenues. The increase in unit shipments was due
to both an increase in the number of customer designs in production and an
increase in the volume of shipments of existing and new designs. The Company may
experience substantial period-to-period fluctuations in future operating results
due to changes in demand for its product or continued average sales price
erosion.
The increase year to year was mainly due to an increase in sales of the
AnyFlow product line. Sales of the ATM and PS product lines were approximately
flat year to year. In 2000, we expect that revenues from the AnyFlow product
line will constitute most of the Company's revenue, as the ATM and PS lines near
the end of their life cycles.
Cost of Revenues; Gross Profit. Cost of revenues increased to $21.5 million
for the year ended December 31, 1999 from $14.4 million for the year ended
December 31, 1998 as a result of increased unit shipments. Gross margins
declined slightly to 69.3% from 70.9% for the years ended December 31, 1999 and
1998, respectively, due to the decline in average sales prices. We anticipate
that gross margins will continue to decrease in the first half of fiscal 2000
due to an expected decline in sales of higher margin ATM products and an
expected increase in sales of a certain low margin product.
Research and Development Expenses, Net. Net research and development
expenses increased to $22.6 million for the year ended December 31, 1999 from
$14.6 million for the year ended December 31, 1998. The increase is due
primarily to increased new product development activity. Research and
development expenses, net, include expenses incurred under a number of contracts
with customers whereby we receive partial or complete reimbursement for expenses
incurred. These reimbursements are recorded as an offset against research and
development expenses. For further discussion of funding received under the
Company's
15
<PAGE> 16
research and development contracts, see Note 9 of Notes to the Consolidated
Financial Statements -- Research and Development Contracts.
As a percentage of total revenues, research and development expenses net,
increased to 32.3% during 1999 from 29.5% during 1998. In 2000, the Company
expects research and development expenses to continue to increase in absolute
dollars.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $11.2 million for the year ended December
31, 1999 from $9.2 million for the year ended December 31, 1998 due to several
factors: increased sales commissions resulting from higher revenues, increased
selling and marketing costs associated with new products, additional personnel,
and additional costs incurred to provide customer support for new designs. As a
percentage of total revenues, selling, general and administrative expenses
decreased to 15.9% for the year ended December 31, 1999 from 18.6% for the year
ended December 31, 1998 as revenue growth outpaced the increase in selling,
general and administrative expenses required to support that growth. In 2000, we
expect selling, general and administrative expenses to continue to increase in
absolute dollars.
Interest income, net. Interest income, net consists of interest income
offset by interest expense. Interest income reflects interest earned on average
cash, cash equivalents and short-term investment balances. Interest income
increased to $3.2 million for the year ended December 31, 1999 from $2.2 million
for the year ended December 31, 1998. This increase is due to increased cash and
investment balances provided by cash flow from operations. Interest expense
reflects interest on borrowings against lease lines to finance the acquisition
of capital equipment. Interest expense was $34,000 and $55,000 for the years
ended December 31, 1999 and 1998, respectively.
Provision for Income Taxes. The provision for income taxes increased to
$6.1 million for the year ended December 31, 1999 from $3.7 million for the year
ended December 31, 1998, reflecting effective rates of 34% and 30.7%,
respectively. The increase in the provision and the increase in the effective
tax rate are due to the increase in pretax income from period to period and the
reduction of valuation allowances and resulting realizability of deferred tax
benefits during 1998. The Company expects its effective tax rate to decrease to
about 32% during 2000 due to increased Research and Development Tax Credits as
well as the anticipated increase in operations in Israel.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues. Revenues increased to $49.3 million for the year ended December
31, 1998 from $21.9 million for the year ended December 31, 1997. Despite a
decline in average sales prices during 1998, increased unit shipments in 1998 as
compared to 1997 resulted in increased revenues across all the Company's
products. The increase in unit shipments was primarily due to the shift of the
AF5500 into volume production and the continued success of the ATMS2000.
Although PS1000 revenue grew year over year, PS1000 revenue as a percent of
total revenue decreased year over year. This decline was due to the economic
downturn in Japan and Asia and poor acceptance in the marketplace of the end
products of equipment vendors using the PS1000.
Cost of Revenues; Gross Profit. Cost of revenues increased to $14.4 million
for the year ended December 31, 1998 from $6.5 million for the year ended
December 31, 1997 as a result of increased unit shipments associated with
increased sales of the Company's network processors to new and existing
customers. Gross margins remained relatively constant at 70.9% and 70.2% for the
years ended December 31, 1998 and 1997, respectively. Higher margins from newer
products offset declining margins from older products.
Research and Development Expenses, Net. Net research and development
expenses increased to $14.6 million for the year ended December 31, 1998 from
$8.3 million for the year ended December 31, 1997. The increase is due primarily
to increased new product development activity. As part of a plan to increase the
number of new products under development, during the second quarter of 1998 the
Company established a wholly owned subsidiary in Israel, MMC Networks Israel
Ltd., which functions as a design center. Research and development expenses net,
include expenses incurred under a number of contracts with customers whereby the
Company receives partial or complete reimbursement for expenses incurred. These
reimburse-
16
<PAGE> 17
ments are recorded as an offset against research and development expenses. For
further discussion of funding received under the Company's research and
development contracts see Note 9 of Notes to the Consolidated Financial
Statements -- Research and Development Contracts.
As a percentage of total revenues, research and development expenses, net
decreased to 29.5% for the year ended December 31, 1998 from 37.9% for the year
ended December 31, 1997. This percentage decrease resulted from revenues growing
faster than research and development expenses, net.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $9.2 million for the year ended December
31, 1998 from $6.2 million for the year ended December 31, 1997 due to several
factors: increased sales commissions resulting from higher revenues, increased
selling and marketing costs associated with new products, additional personnel,
additional costs incurred to provide customer support for new designs and
additional costs associated with being a public company. As a percentage of
total revenues, selling, general and administrative expenses decreased to 18.6%
for the year ended December 31, 1998 from 28.5% for the year ended December 31,
1997 as revenue growth outpaced the increase in selling, general and
administrative expenses required to support that growth.
Litigation settlement. During the fourth quarter of 1997, FORE filed
complaints alleging patent infringement and trade secret misappropriation
against the Company. The Company entered into a settlement agreement with FORE
in June 1998. In accordance with the settlement, the Company agreed to pay a
settlement fee and entered into a patent cross-licensing agreement pursuant to
which the Company and FORE granted each other perpetual, with certain
exceptions, and fully-paid licenses to certain patents held by them. The
settlement fee and related legal expenses totaling approximately $1.3 million
were charged to operating income in the quarter ended June 30, 1998.
Interest Income, net. Interest income, net consists of the difference
between interest income and interest expense. Interest income reflects interest
earned on average cash, cash equivalents and short-term investment balances.
Interest income increased to $2.2 million for the year ended December 31, 1998
from $630,000 for the year ended December 31, 1997. This increase is due to
increased cash and investment balances from period to period due to the receipt
of net proceeds from the Company's initial public offering in October 1997 and
cash flow from operations. Interest expense reflects interest on borrowings
against lease lines to finance the acquisition of capital equipment. Interest
expense was $55,000 and $126,000 for the years ended December 31, 1998 and 1997,
respectively.
Provision for Income Taxes. The provision for income taxes increased to
$3.7 million for the year ended December 31, 1998 from $138,000 for the year
ended December 31, 1997 reflecting effective tax rates of 30.7% and 10.3%,
respectively. The increase in the provision is due to a significant increase in
operating income from period to period coupled with an increase in the Company's
effective tax rate as compared to the prior year. The effective tax rate for
1998 is considerably higher than the effective tax rate for 1997 because the
Company utilized all of its net operating loss carryforwards during 1997 and all
of its research and development credit carryforwards in 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had cash, cash equivalents and
short-term investments of $72.0 million, up from $53.2 million at the end of the
prior year, an increase of $18.8 million. Operating activities in 1999 provided
net cash of $19.0 million, which mainly consisted of three components. The first
component was cash provided from net income, adjusted for depreciation and
amortization, of $15.1 million. The second component was cash provided by the
tax benefit from the exercise of stock options of $7.0 million. These components
were partially offset by the net increase in current assets and liabilities,
which produced a net decrease in cash of $3.2 million. A decrease in accounts
receivable of $4.2 million offset by increases in inventories, prepaid expenses
and other assets, and partially offset by a decrease in accrued expenses
produced this net decrease of $3.2 million. During 1999, cash and cash
equivalents decreased by $18.0 million as the Company used cash in investing
activities to purchase short-term investments of $36.9 million and acquire
property and equipment of $6.0 million. In 1999, financing activities, primarily
from the exercise of stock options, provided $6.0 million in cash.
17
<PAGE> 18
During 1998, cash and cash equivalents decreased by $13.9 million. Net cash
provided by operations was $10.2 million, and the Company used cash in investing
activities to purchase short-term investments of $21.7 million and acquire
property and equipment of $4.1 million.
During 1997, cash and cash equivalents increased by $40.6 million,
primarily due to the Company's initial public offering, which provided net cash
proceeds of $40.1 million.
The Company maintains an $8.0 million credit facility with a bank, which
expires in May 2000. Borrowings bear interest at the bank's prime rate. Our
agreement with the bank requires compliance with certain financial covenants. In
the event of default, all outstanding borrowings will accrue interest at a rate
of five percentage points above the rate effective immediately prior to the
default. The credit facility has not been used since its inception in 1998. See
Note 4 of Notes to the Consolidated Financial Statements -- Financing
Agreements.
Through December 31, 1999, the Company had acquired approximately $15.4
million in capital assets. We anticipate that a significant portion of future
capital expenditures will be devoted to investment in design tool software and
computer equipment on which the design software tools run.
We believe that our existing cash balances together with the borrowing
capacity under our credit facility and cash flow from future operations will be
sufficient to meet our capital requirements through the next twelve months. It
is possible that the Company could be required, or could elect, to seek to raise
additional capital before such time. This is a forward-looking statement and the
actual period of time for which our resources will be sufficient will depend on
many factors, including:
- the rate of revenue growth, if any
- the timing and extent of spending to support product development efforts
- the expansion of sales and marketing efforts
- the timing and size of business or technology acquisitions
- the timing of introductions of new products and enhancements to existing
products
- market acceptance of the Company's products
There can be no assurance that additional equity or debt financing, if
required, will be available on acceptable terms or at all.
THE YEAR 2000 ISSUE
The Company has successfully conducted business since the beginning of year
2000 without interruption to the Company's information technology systems ("IT")
or its non-IT systems. We are not aware of any system failure of the Company's
products due to a Year 2000 problem. The Company has not encountered any Year
2000 issues with any of the Company's suppliers, including banks, and is not
aware of any Year 2000 issue that will impact normal business activities in the
future. Total expenses to prepare for the Year 2000 Issue did not exceed
$50,000, excluding expenses related to internal IT staff.
However, the Company may discover Year 2000 problems in the future that
will cause disruption of operations. In the event a problem is encountered in
the future, the Company will act towards resolving the issue as part of normal
operations.
FACTORS AFFECTING FUTURE RESULTS
As described by the following factors, past financial performance should
not be considered a reliable indicator of future performance, and investors
should not use historical trends to anticipate results or trends in future
periods.
FLUCTUATIONS IN OPERATING RESULTS. The Company's revenues and expenses have
fluctuated significantly in the past and may continue to do so in the future.
For example, revenues in the fourth quarter of 1999 fell to
18
<PAGE> 19
$11.6 million from $23.1 million in the previous quarter. Two events caused this
decrease. First, IBM, one of our major customers, announced it was closing down
most of its network equipment business and informed MMC that it was ceasing the
manufacture and sale of its network equipment products that use MMC products.
Second, Cisco, our largest customer for the last 5 years, decreased its
purchases from MMC as it terminated one program and reduced production of two
other programs, all three of which used MMC products.
Such fluctuations in operating results can be caused by a variety of
factors, many of which are outside our control. Factors that could affect our
future operating results include:
- the loss of or a reduction in sales to major customers
- changes in demand for the network equipment products of our customers
- variations, delays or cancellations of orders and/or shipments of our
products
- reduction in the selling prices of our products
- changes in the mix of products being sold
- fluctuations in our manufacturing yields and other potential problems or
delays in the fabrication, assembly, testing or delivery of our products
- failure to manufacture and ship our products on time
- increases in the costs of products from our suppliers
- availability of semiconductor foundry capacity
- external events causing disruption of fabrication activities
- fluctuations in product life cycles
- delays in introducing new products
- introduction of new products by our competitors
- variances in the timing and amount of non-recurring engineering funding
and operating expenses
- intellectual property disputes
A large portion of our operating expenses, including salaries, rent and
capital lease expenses, is fixed and difficult to reduce or change on short
notice. Accordingly, if our total revenues do not meet our expectations, we may
not be able to adjust our expenses quickly enough to compensate for the
shortfall in revenues. This situation could have a negative effect on our
business, financial condition and results of operations.
CUSTOMER CONCENTRATION. A relatively small number of major network
equipment vendors dominate the network equipment market. Accordingly, a small
number of customers has accounted for a large portion of our revenues to date.
We expect the Company to continue to be dependent on a small number of
customers for the majority of its sales. For example, in 1999 Cisco accounted
for 52% and IBM accounted for 19% of our revenues. This subjects the Company and
its financial results to particular risks, including the loss of or reduction in
sales to these customers, as occurred in the fourth quarter of 1999 when IBM
informed the Company that it was ceasing the manufacture and sale of its network
equipment products that use our products.
If MMC loses other significant customers or if sales to these customers
decrease, future financial results would suffer. It is important to note that
our ability to maintain or increase sales to key customers and/or attract new
significant customers is subject to a variety of factors, including:
- our network equipment vendor customers may stop incorporating our
products into their own products with limited notice to us and suffer
little or no penalty
19
<PAGE> 20
- the introduction of one of our customer's significant new products may be
late or less successful in the market than planned
- a significant customer's product line using our products may rapidly
decline or be phased out
- our significant customers may not incorporate our Network Processors in
their future product designs
- design wins with customers may not result in significant sales to such
customers
- our agreements with our customers typically do not require them to
purchase a minimum amount of our products
- many of our customers have pre-existing relationships with our current or
potential competitors that may cause them to switch from our products to
competing products
- we may not be able to successfully develop relationships with additional
significant network equipment vendors
- our relationship with some of our larger customers may deter other
potential customers (who compete with these customers) from buying our
products
Any one of the factors above could have a material adverse effect on our
business, financial condition and results of operation.
DEPENDENCE UPON DEVELOPMENT OF THE MARKET FOR NETWORK PROCESSORS. Many of
the Company's current and potential customers have substantial technological
capabilities and financial resources. They traditionally use these resources to
internally develop the Application-Specific Integrated Circuit ("ASIC")
components and program the general purpose processors utilized in their
products.
The Company's future prospects are dependent upon our customers acceptance
of network processors as an alternative to ASIC components and general-purpose
processors. Future prospects are also dependent upon acceptance of third party
sourcing for network processors as an alternative to in-house development.
Network equipment vendors may in the future continue to use internally-developed
ASIC components and general-purpose processors. They may also decide to develop
or acquire components, technologies or network processors that are similar to,
or that may be substituted for, the Company's products.
The Company must anticipate market trends and the price, performance and
functionality requirements of its customers. It must also successfully develop
and manufacture products that meet these requirements. The products must be
available to customers on a timely basis and at competitive prices.
If the Company's network equipment vendor customers fail to accept network
processors as an alternative, if they develop or acquire the technology to
develop such components internally rather than purchase the Company's products,
or if the Company is otherwise unable to develop strong relationships with
network equipment vendors, the Company's business, financial condition and
results of operations would be materially and adversely affected.
LIMITED OPERATING HISTORY AS A PUBLIC COMPANY; NO ASSURANCE OF FUTURE
PROFITABILITY. Although the Company has experienced significant revenue growth
in recent years and has achieved profitability in each of the last four years,
these results should not be considered indicative of future performance. There
also is no assurance that the Company will be profitable in any future period.
Due to anticipated increases in the Company's operating expenses, the
Company's operating results will be adversely affected if the Company's revenues
do not continue to increase. The sales cycle for the Company's products can
range from three to six months or more. There is also an additional nine to 24
months or more before a network equipment vendor customer commences volume
production of equipment that incorporates the Company's products.
20
<PAGE> 21
As a result, there may be a significant delay between an increase in
research and development and sales and marketing expenses and the generation of
higher revenues, if any, from such expenditures. To remain profitable, the
Company must, among other things:
- successfully increase the scope of its operations
- respond to competitive developments
- continue to attract, retain and motivate qualified personnel
- continue to commercialize products incorporating innovative technologies.
There can be no assurance that the Company will be successful in doing so.
EROSION OF AVERAGE SELLING PRICES. The data networking and semiconductor
industries have experienced rapid erosion of average selling prices ("ASPs") due
to a number of factors, including rapid technological change, price/performance
enhancements and product obsolescence. The Company may experience substantial
period-to-period fluctuations in future operating results due to continued ASP
erosion.
The Company anticipates that ASPs will decrease in the future in response
to product introductions by competitors or new product introductions by MMC.
Other factors impacting ASPs also include price pressures from significant
customers. In particular, the market for Ethernet switching and routing
components has experienced, and is expected to continue to experience,
significant ASP erosion. During 1998 and 1999, the Company's PS1000 product line
experienced such erosion.
Therefore, the Company must continue to develop and introduce, on a timely
basis, new products that incorporate features that can be sold at higher ASPs or
provide a reduced cost per function. Failure to achieve any or all of the
factors that have been mentioned could cause the Company's revenues and gross
margins to decline, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE. The data networking and
semiconductor industries are characterized by rapidly changing technology,
frequent product introductions and evolving industry standards. The technical
innovations required for MMC to remain competitive must be completed before
developments in networking technologies or standards make them obsolete. These
innovations must also be compelling enough to make network equipment vendors
want to use them over other technologies. Accordingly, our future performance
depends on a number of factors, including our ability to:
- properly identify target markets
- identify emerging technological trends in our target markets
- develop and maintain competitive products
- enhance our products by adding innovative features that differentiate MMC
products from competitors' products
- bring products to market on a timely basis at competitive prices
- respond effectively to new technological changes or new product
announcements by others
It is possible that our design and introduction schedules for future
products and additions and enhancements to our existing products will not be
met. It is possible that these products will not achieve market acceptance or
that we will not be able to sell these products at prices that are favorable to
us. We must design new products and sometimes redesign existing products to be
manufactured on newer wafer process technologies that provide smaller circuit
dimensions. It is possible that either (1) the suppliers of these new
manufacturing technologies will not deliver them to us or our vendors on
schedule or (2) we will not be able to complete our designs on the new processes
on schedule. Our success will also depend on the ability of our customers to
develop new products and enhance existing products within our market segment and
to successfully introduce and promote those products.
21
<PAGE> 22
To keep pace with the rapid technological changes, we must incur
substantial research and development costs before we can determine the
likelihood that the technology for a product is sound and that our network
equipment vendors will accept the product. It is possible that revenues from
future products or product enhancements will not be sufficient to recover the
development costs associated with those products or enhancements. It is possible
that we may not be able to obtain additional financing necessary to fund future
development efforts. Our failure to adequately address any of the factors above
could have a negative impact on our business, financial condition and results of
operations.
DEPENDENCE ON INDEPENDENT MANUFACTURERS. We depend on independent foundries
to manufacture all of our products. We purchase both (1) fully assembled and
tested products which we can immediately resell to our customers and (2)
finished silicon wafers which we then consign to third party subcontractors who
perform assembly and test functions. Because we rely on independent foundries
and third party subcontractors, we face several significant risks including:
- a lack of committed manufacturing, assembly or test capacity
- limited control over delivery schedules, quality assurance and control,
manufacturing yields and production costs
- the unavailability of, or potential delays in, obtaining access to key
process technologies
Although we work closely with our suppliers to minimize the likelihood of
reduced manufacturing yields, in the past our suppliers have occasionally
experienced lower than anticipated manufacturing yields. This often occurs
during the production of new products or the installation and start-up of new
wafer process technologies that use smaller circuit dimensions.
We do not have long-term volume purchase agreements or a guaranteed level
of production capacity with any of our suppliers. We depend on our suppliers to
deliver sufficient quantities of finished product to us in a timely manner.
Since we place our orders on a purchase order basis, these suppliers can
allocate, and in the past have allocated, capacity to the production of other
companies' products while reducing deliveries to us on short notice. None of our
products is currently manufactured by more than one supplier.
In order to meet our customer demand, currently we must place most orders
approximately 10 to 13 weeks in advance of expected delivery. Some orders
require that orders be placed up to 18 weeks in advance of expected delivery. If
capacity becomes less available in the future, we may be required to place
orders earlier than 10 to 18 weeks in advance of expected delivery, making it
more difficult to meet customer demand. Any sudden increase in customer demand
that we did not anticipate in advance could result in our inability to deliver
product on a timely basis. This inability to deliver product may reduce our
product revenues or increase our cost of revenues and negatively impact our
business, financial condition and results of operations.
In addition, we must place orders based on forecast demand to ensure enough
lead time to be able to meet anticipated customer orders. Any sudden decrease in
customer demand could result in excess inventory that could reduce our profit
margins and have a negative effect on our business, financial condition and
results of operations.
Processes used to manufacture our products are complex, customized to our
specification and can only be performed by a limited number of manufacturing
facilities. If our current manufacturing suppliers were unable to provide us
with adequate manufacturing capacity, we would have to identify and qualify one
or more substitute suppliers for a substantial majority of our products. Our
manufacturers may experience unanticipated events, like the September 1999
Taiwan earthquake, that could inhibit their abilities to provide us with
adequate manufacturing capacity on a timely basis, or at all. All of the
Company's manufacturing subcontractors are located in countries outside the
United States. Disruptions in the political environment could cause these
suppliers to decrease or stop their supply of products to the Company.
Introducing new products or transferring existing products to a new third party
manufacturer would require significant development time to adapt our designs to
their manufacturing processes and could cause product shipment delays. In
addition, the costs associated with manufacturing our products may increase if
we are required to use a new third party manufacturer. If we fail to satisfy our
manufacturing requirements, our business would be materially harmed.
22
<PAGE> 23
COMPETITION. The data networking and semiconductor industries are intensely
competitive and are characterized by constant technological change, rapid rates
of product obsolescence and price erosion. The Company's Network Processors and
Switch Fabrics compete now or are expected to compete in the future with current
or future products from companies such as Broadcom, Conexant, Galileo
Technology, IBM, Intel, Lucent Technologies, Motorola, PMC-Sierra, SiTera, and
Texas Instruments, as well as additional and potential future smaller start-up
companies. Additional existing domestic and international semiconductor
suppliers could also enter the market in the future. The Company could also face
competition from suppliers of products based on new or emerging technologies. In
addition, many of the Company's existing and potential customers, including
Cisco, internally develop ASICs, general purpose processors, Network Processors,
or other devices which attempt to perform some or all of the functions performed
by the Company's products.
Many of our current and prospective competitors offer broader product lines
and have significantly greater financial, technical, manufacturing and marketing
resources than we do. To the extent we fail to overcome these challenges, there
would be a negative effect on our business and operating results.
DEPENDENCE ON GROWTH IN DEMAND FOR NETWORKING EQUIPMENT. The Company's
future success is in large measure dependent on continued growth in the market
for networking equipment, in particular the market for mid- to high-end switches
and routers which are manufactured and sold by the Company's customers. The
market for these products has in the past and may in the future fluctuate
significantly based upon numerous factors, including:
- the lack of industry standards
- adoption of alternative technologies
- capital spending levels
- general economic conditions.
There can be no assurance of the rate, or extent to which, the networking
equipment market will grow, if at all. The Company may experience a decline in
demand for its products. Any decrease in the growth of the networking equipment
market or decline in demand for the Company's products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
PRODUCT COMPLEXITY. Products as complex as those offered by the Company
frequently contain errors, defects and bugs when first introduced or as new
versions are released. The Company has in the past experienced such errors,
defects and bugs. Delivery of products with production defects or reliability,
quality or compatibility problems could significantly delay or hinder market
acceptance of our products. This, in turn, could damage the Company's reputation
and adversely affect the Company's ability to retain its existing customers and
to attract new customers. Errors, defects or bugs could cause problems,
interruptions, delays or a cessation of sales to the Company's customers.
Resolving such problems may require significant expenditures of capital and
resources by the Company. There can be no assurance that problems will not be
found in new products after commencement of commercial production, despite
testing by the Company, its suppliers or its customers. This could result in:
- additional development costs
- loss of, or delays in, market acceptance
- diversion of technical and other resources from the Company's other
development efforts
- claims by the Company's customers or others against the Company
- loss of credibility with the Company's current and prospective customers
Any such event could have a material adverse effect on the Company's
business, financial condition and results of operations.
PROTECTION OF INTELLECTUAL PROPERTY. We rely on nondisclosure agreements
and other contractual provisions as well as patent, trademark, trade secret and
copyright law to protect our proprietary rights.
23
<PAGE> 24
Although we have an active patent application program, we cannot be sure that
any patents will be issued from our current or future patent applications. It is
possible that patents issued from such applications may be invalidated,
circumvented, challenged or licensed to others. In addition, we cannot be sure
that the rights granted under any patents we receive will provide us with
competitive advantages or be adequate to safeguard and maintain our proprietary
rights. Any failure to enforce and protect our intellectual property rights
could have a negative effect on our business, financial condition and results of
operations.
From time to time, third parties, including our competitors, may assert
patent, copyright and other intellectual property rights to technologies that
are important to us. In the future third parties may assert infringement claims
against us, and these assertions may result in costly litigation. We may not
prevail in any such litigation or be able to license any valid and infringed
patents from third parties on commercially reasonable terms, if at all.
RISKS ASSOCIATED WITH EXPANSION OF INTERNATIONAL BUSINESS ACTIVITIES. Over
90% of all of our sales to date have been to customers located in North America,
including sales to U.S.-based affiliates of non-U.S. network equipment vendors.
We also ship products to our domestic customers' international manufacturing
divisions and subcontractors. We currently obtain substantially all of our
manufacturing, assembly and testing services from suppliers located outside of
the United States. In 1998 we established a wholly owned subsidiary in Israel,
which functions as a design center. In the future, we intend to expand these
international business activities. International operations are subject to many
inherent risks, including:
- political, social and economic instability
- trade restrictions
- changes in tariffs
- the imposition of governmental controls
- import and export license requirements and restrictions
- restrictions on the export of critical technology
- burdens of complying with a variety of foreign laws
- difficulties in staffing and managing international operations
- currency exchange fluctuations
In particular, certain Asian countries experienced significant economic
difficulties in 1998 and 1999. These difficulties included currency devaluation
and instability, business failures and a generally depressed business climate.
As a percentage of total revenues, sales to Mitsui declined to less than 5% for
the year ended December 31, 1999 as compared to 12.5% for the year ended
December 31, 1998. Sales to Mitsui may remain at this lower level or decline
further due to the economic environment in Japan and Asia and could have an
adverse effect on our revenues in the future.
General economic or industry-specific conditions in our primary overseas
markets may negatively impact the demand for our products abroad. All of our
international sales to date have been denominated in U.S. dollars. Accordingly,
an increase in the value of the U.S. dollar relative to foreign currencies could
make our products less competitive in international markets. Any one or more of
the factors mentioned above could have a negative effect on our business,
financial condition and results of operations or require us to modify our
current business practices significantly. These factors are anticipated to
impact our business to a greater degree in the event that we expand our
international business activities.
DEPENDENCE ON KEY PERSONNEL AND HIRING OF ADDITIONAL PERSONNEL. The
Company's success depends to a significant degree upon the continued
contributions of its key management, engineering and other personnel, many of
whom would be difficult to replace. The Company does not have employment
contracts with any of its key personnel. In addition, the Company believes that
its success depends, to a significant extent, on the ability of its management
to operate effectively, both individually and as a group.
24
<PAGE> 25
The Company must continue to attract and retain highly skilled managerial,
engineering and other personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting and
retaining such personnel. The loss of the services of any of the key personnel,
the inability to attract or retain qualified personnel in the future, or delays
in hiring required personnel, particularly engineers, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
NEED FOR ADDITIONAL CAPITAL. The Company may require additional working
capital to fund its business, particularly to finance inventories and accounts
receivable and for product development. Any such additional financing may result
in significant dilution to the Company's then existing investors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
RISKS RELATED TO ACQUISITIONS. The data networking and semiconductor
industries are intensely competitive and MMC's growth is dependent our ability
to introduce new products and enhancements to existing products on a timely
basis. It is possible that one way we may expand our business is through the
acquisition of businesses, products or technologies that complement our existing
products, expand our market coverage or enhance our technological capabilities.
Acquisitions involve numerous risks, including:
- the risk of diverting management's attention from normal daily operations
of the business
- difficulties in integration of the operations, technologies, products and
information systems of the acquired company
- potential difficulties in completing projects associated with purchased
in-process research and development projects
- risks of entering markets in which MMC has limited or no direct prior
experience and where competitors have stronger market positions
- the potential loss of key employees of the acquired company
In addition to the risks above, acquisitions may negatively affect our
results of operations because they may require large one-time write-offs,
increased debt and contingent liabilities, substantial depreciation or deferred
compensation charges or the amortization of expenses related to goodwill and
other intangible assets. We may seek to account for acquisitions under the
pooling of interest method, but that method may not be available. It is possible
that any of these events could cause the price of our stock to decline. We may
not be able to find suitable acquisition opportunities. Even if we do find such
opportunities, it is possible that the acquisitions may be unsuccessful.
Unsuccessful acquisitions could have a negative effect on our business,
financial condition and results of operations.
VOLATILITY OF STOCK PRICE. In recent years the stock market in general, and
the market for shares of high technology, data networking and semiconductor
companies in particular, have experienced extreme price fluctuations. Our stock
price has fluctuated substantially in the past and is likely to continue to be
highly volatile and subject to wide fluctuations in the future in response to
various factors, many of which we cannot control. These factors include:
- quarterly variations in operating results
- announcements of technological innovations or new products by our
competitors, our customers or ourselves
- the gain or loss of significant network equipment vendor customers
- changes in earnings estimates or investment recommendations of analysts
25
<PAGE> 26
- the presence or absence of short-selling of our stock
- changes in investor perceptions
- changes in expectations relating to our products, plans and strategic
position or those of our competitors or customers
The volatility of technology stocks has significantly affected the market
prices of securities of many technology companies for reasons frequently
unrelated to the operating performance of the specific companies. Accordingly,
investors may not be able to resell shares of our Common Stock at or above the
price originally paid for the stock. In the past, companies that have
experienced volatility in the market price of their securities have been the
subjects of securities class action litigation. If we were the object of
securities class action litigation, it could result in substantial losses and
divert management's attention and resources from other matters.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. As of December 31, 1999, the Company held a total of
$67.7 million in marketable securities. The Company classified $9.2 million of
this amount within the cash and cash equivalents category and classified the
remaining $58.5 million as short-term investments. These securities consisted
primarily of commercial paper and securities issued or guaranteed by the U.S.
government. These securities, like all fixed income instruments, are subject to
interest rate risk and will decline in value if market interest rates increase.
If market interest rates were to increase immediately and uniformly by 10
percent from levels as of December 31, 1999, the decline in the fair value of
the portfolio would be approximately $140,000. The Company has the ability to
hold its fixed income investments until maturity and, therefore, the Company
would not expect to recognize such an adverse impact in income or cash flows.
The Company currently does not use derivative financial instruments in its
investment portfolio. The Company currently has no fixed-rate obligations and
holds no equity securities. Thus the Company does not face risk of material
adverse impact from market rate changes from these sources.
FOREIGN CURRENCY RISK. The Company pays suppliers for its subsidiary in
Israel in local currency. The Company also has a supplier contract that requires
price changes based on currency fluctuations. Therefore, the Company is subject
to foreign currency rate exposure. If the Israeli currency rate had been 10
percent higher than it was during the year ended December 31, 1999, the effect
on the Company's financial position and results of operations would have been an
increase to expense of approximately $240,000. If the foreign currency
translation rate used for transactions with the supplier had been 10 percent
higher than it was during the year ended December 31, 1999, the cost of sales
for 1999 would have been higher by approximately $375,000. Foreign currency
rates fluctuate frequently and there is always a possibility that fluctuations
could have a material impact on the Company's income or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements and supplemental data
required by this item and set forth at the pages indicated in item 14(a) of this
Report.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
26
<PAGE> 27
PART III
Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") no later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference.
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY
Certain information regarding the directors and officers of the Company is
contained herein under Item 1, "Executive Officers and Directors of the
Company."
Information regarding directors appearing under the caption "Election of
Directors -- Directors and Nominees for Director" in the Proxy Statement is
hereby incorporated by reference.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is hereby incorporated herein by reference
from the section entitled "Election of Directors -- Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is set forth under the caption
"Additional Information Relating to Directors and Officers of the Company
- -Executive Compensation" in the Company's Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is set forth under the caption
"Security Ownership" in the Company's Proxy Statement, which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is set forth under the captions
"Election of Directors -- Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions" in the Company's Proxy Statement,
which information is incorporated herein by reference.
27
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following are filed as part of this Report:
1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 29
Consolidated Balance Sheets at December 31, 1999 and 1998... 30
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1999............... 31
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1999..... 32
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1999............... 33
Notes to Consolidated Financial Statements.................. 34
</TABLE>
2. FINANCIAL STATEMENTS SCHEDULE
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............ 48
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
28
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
MMC Networks, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 28 present fairly, in all material
respects, the financial position of MMC Networks, Inc. and its subsidiary at
December 31, 1999 and 1998 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 19, 2000
29
<PAGE> 30
MMC NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $13,484 $31,452
Short-term investments.................................... 58,511 21,726
Accounts receivable, net of allowances of $422 and $172... 6,358 10,582
Inventories............................................... 3,216 630
Prepaid expenses and other current assets................. 6,374 3,372
------- -------
Total current assets.............................. 87,943 67,762
Property and equipment, net................................. 8,222 5,487
Other assets................................................ 230 135
------- -------
$96,395 $73,384
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,725 $ 4,400
Accrued expenses.......................................... 3,710 5,753
Capital lease obligations................................. -- 286
------- -------
Total current liabilities......................... 8,435 10,439
------- -------
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred Stock: $0.001 par value; 10,000 shares
authorized; no shares issued or outstanding............ -- --
Common Stock: $0.001 par value; 100,000 shares authorized;
31,871 and 30,135 shares issued and outstanding........ 28 26
Additional paid-in capital................................ 68,771 55,520
Notes receivable from stockholders........................ (47) (107)
Retained earnings......................................... 19,343 7,506
Accumulated other comprehensive loss...................... (135) --
------- -------
Total stockholders' equity........................ 87,960 62,945
------- -------
$96,395 $73,384
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 31
MMC NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenues.................................................... $70,149 $49,279 $21,930
Cost of revenues............................................ 21,524 14,353 6,542
------- ------- -------
Gross profit...................................... 48,625 34,926 15,388
------- ------- -------
Operating expenses:
Research and development, net............................. 22,645 14,552 8,318
Selling, general and administrative....................... 11,182 9,162 6,240
Litigation settlement..................................... -- 1,250 --
------- ------- -------
Total operating expenses.......................... 33,827 24,964 14,558
------- ------- -------
Operating income............................................ 14,798 9,962 830
------- ------- -------
Other income (expense):
Interest income........................................... 3,172 2,234 630
Interest expense.......................................... (34) (55) (126)
------- ------- -------
Total other income................................ 3,138 2,179 504
------- ------- -------
Income before income taxes.................................. 17,936 12,141 1,334
Provision for income taxes.................................. 6,099 3,730 138
------- ------- -------
Net income.................................................. $11,837 $ 8,411 $ 1,196
======= ======= =======
Basic income per share...................................... $ 0.38 $ 0.28 $ 0.08
======= ======= =======
Shares used to compute basic income per share............... 31,065 29,693 14,432
======= ======= =======
Diluted income per share.................................... $ 0.35 $ 0.25 $ 0.04
======= ======= =======
Shares used to compute diluted income per share............. 33,791 33,611 29,113
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 32
MMC NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE OTHER
------------------ --------------- PAID-IN FROM RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS EARNINGS LOSS TOTAL
------- -------- ------ ------ ---------- ------------ -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1996.................... 13,342 $ 10,247 11,121 $ 7 $ 249 $(225) $(2,101) $ -- $ 8,177
Conversion of Preferred
Stock upon the
completion of the
initial public
offering................ (13,342) (10,247) 13,342 13 10,234 -- -- -- --
Issuance of Common Stock,
net of issue costs of
$1,104.................. -- -- 4,025 4 40,068 -- -- -- 40,072
Repurchase of Common Stock
and reduction of loan
receivable from
stockholder............. -- -- (170) -- (114) 114 -- -- --
Exercise of warrant....... -- -- 121 -- -- -- -- -- --
Exercise of stock options
and other............... -- -- 744 1 311 (70) -- -- 242
Issuance of Common Stock
in exchange for
services................ -- -- 15 -- 30 -- -- -- 30
Net income................ -- -- -- -- -- -- 1,196 -- 1,196
------- -------- ------ --- ------- ----- ------- ----- -------
BALANCE AT DECEMBER 31,
1997.................... -- -- 29,198 25 50,778 (181) (905) -- 49,717
Exercise of stock options
and other............... -- -- 859 1 1,218 -- -- -- 1,219
Shares issued under the
Employee Stock Purchase
Plan.................... -- -- 78 -- 716 -- -- -- 716
Repayment of notes
receivable from
stockholders............ -- -- -- -- -- 74 -- -- 74
Tax benefit from the
exercise of stock
options................. -- -- -- -- 2,808 -- -- -- 2,808
Net income................ -- -- -- -- -- -- 8,411 -- 8,411
------- -------- ------ --- ------- ----- ------- ----- -------
BALANCE AT DECEMBER 31,
1998.................... -- -- 30,135 26 55,520 (107) 7,506 -- 62,945
Exercise of stock options
and other............... -- -- 1,639 2 5,218 -- -- -- 5,220
Shares issued under the
Employee Stock Purchase
Plan.................... -- -- 97 -- 1,003 -- -- -- 1,003
Repayment of notes
receivable from
stockholders............ -- -- -- -- -- 60 -- -- 60
Tax benefit from the
exercise of stock
options................. -- -- -- -- 7,030 -- -- -- 7,030
Net income................ -- -- -- -- -- -- 11,837 -- 11,837
Unrealized loss on
short-term
investments............. -- -- -- -- -- -- -- (135) (135)
------- -------- ------ --- ------- ----- ------- ----- -------
BALANCE AT DECEMBER 31,
1999.................... -- $ -- 31,871 $28 $68,771 $ (47) $19,343 $(135) $87,960
======= ======== ====== === ======= ===== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 33
MMC NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 11,837 $ 8,411 $ 1,196
Adjustments to reconcile net income to net cash provided
by
(used in) operating activities:
Depreciation and amortization.......................... 3,309 2,224 1,186
Issuance of Common Stock in exchange for services...... -- -- 30
Tax benefit from the exercise of stock options......... 7,030 2,808 --
Changes in assets and liabilities:
Accounts receivable.................................. 4,224 (6,056) (2,501)
Inventories.......................................... (2,586) (60) (59)
Prepaid expenses and other assets.................... (3,097) (2,912) (389)
Accounts payable..................................... 325 1,774 2,040
Accrued expenses..................................... (2,043) 4,009 955
Deferred revenue and customer deposits............... -- -- (100)
-------- -------- -------
Net cash provided by operating activities......... 18,999 10,198 2,358
-------- -------- -------
Cash flows from investing activities:
Sale (purchase) of short-term investments................. (36,920) (21,726) 1,509
Acquisition of property and equipment..................... (6,044) (4,080) (3,201)
-------- -------- -------
Net cash used in investing activities............. (42,964) (25,806) (1,692)
-------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net............... 6,223 1,935 40,314
Proceeds from the repayment of notes receivable from
stockholders........................................... 60 74 --
Principal payments on capital lease obligations........... (286) (350) (388)
-------- -------- -------
Net cash provided by financing activities......... 5,997 1,659 39,926
-------- -------- -------
Net increase (decrease) in cash and cash equivalents........ (17,968) (13,949) 40,592
Cash and cash equivalents at beginning of year.............. 31,452 45,401 4,809
-------- -------- -------
Cash and cash equivalents at end of year.................... $ 13,484 $ 31,452 $45,401
======== ======== =======
Supplemental disclosure:
Cash paid for interest.................................... $ 34 $ 55 $ 126
Cash paid for income taxes................................ $ 4,664 $ 1,517 $ 13
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 34
MMC NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY
MMC Networks is a leading developer and supplier of Network Processors,
which are high-performance, open-architecture, software-programmable processors
optimized for network applications. MMC was incorporated in California in
September 1992 as a Subchapter S corporation and became a Subchapter C
corporation effective July 1994. MMC was reincorporated in Delaware in October
1997. In May 1998, the Company established a wholly owned subsidiary in Israel,
MMC Networks Israel, LTD, ("MMCIL"), which functions as an engineering design
center. MMC sells its products primarily in the United States.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements include the
accounts of MMC and its wholly owned subsidiary. All material intercompany
accounts and transactions have been eliminated.
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. Those estimates and assumptions affect the reported
amounts of assets and liabilities, and revenues and expenses during the
reporting period. They also affect disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates.
Cash, cash equivalents and short-term investments. All highly liquid
investments with a maturity of three months or less when purchased are
considered to be cash equivalents. Short-term investments have maturities of
more than three months when purchased and consist primarily of commercial paper
and securities issued or guaranteed by the U.S. government. Short-term
investments have been categorized as available-for-sale. At December 31, 1999,
the fair market value of the Company's short-term investments was less than cost
by $135,000 and the Company recorded the unrealized loss in Other Accumulated
Comprehensive Loss in Stockholders' Equity. At December 31, 1998, the fair
market value of the Company's short-term investments approximated cost.
Inventories. Inventories are stated at the lower of cost, determined using
the first-in, first-out method, or market.
Property and equipment. Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets, generally three years.
Long-lived assets. The Company evaluates the recoverability of long-lived
assets based on a gross cash flow basis whenever events or changes in
circumstances indicate the carrying amount of the assets may not be fully
recoverable. If the net book value of our long-lived assets exceeds the future
undiscounted cash flows of those assets, then impairment of those assets is
recognized. No such impairments have been identified to date.
Revenue recognition. Revenues are recognized upon shipment of product to
customers. Funds received in advance of product shipment are deferred and
recognized upon shipment of the product. The Company's normal policy is to not
accept returns except for defective products. Anticipated costs related to
product warranties are charged to operations as revenues are recognized. The
Company has not experienced significant warranty claims to date.
Research and development. Research and development expenses are charged to
operations as incurred. Occasionally the Company receives non-recurring
engineering funding for development projects to apply or enhance the Company's
technology to a particular customer's needs. This funding is recognized over the
term of the respective contract using the percentage-of-completion method. At
the time of recognition, amounts received under research and development
contracts are offset against research and development expenses. (See Note 9.)
34
<PAGE> 35
MMC NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Software development expenses. Software development expenses are included
in research and development. The Company's policy is to capitalize certain
software development expenses once technological feasibility is established,
which the Company defines as the completion of a working model. The capitalized
expense is then amortized on a straight-line basis over the estimated product
life, or on the ratio of current sales to total projected product sales,
whichever is greater. To date, the period between achieving technological
feasibility and the general availability of such software has been short.
Income taxes. The Company accounts for income taxes using an asset and
liability approach. It requires the recognition of taxes payable or refundable
for the current year. It also requires the recognition of deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. The measurement
of current and deferred tax liabilities and assets are based on the provisions
of the enacted tax law; the effects of future changes in tax laws or rates are
not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
Stock-based compensation. Our policy is to account for stock based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. The Company provides additional pro
forma disclosures as required under Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." (See Note 6.)
Concentrations of credit risk. Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash, cash equivalents, short-term investments and accounts
receivable. The Company places its cash, cash equivalents and short-term
investments primarily in market rate accounts, commercial paper, state and
municipal securities and securities issued by or guaranteed by the U.S.
government. The Company performs ongoing credit evaluations of our customers'
financial condition and generally does not require collateral from our
customers. The Company provides an allowance for doubtful accounts receivable
based upon the expected collectibility of the receivables and to date has not
experienced any material losses.
Net income per share. Basic EPS is computed by dividing net income
available to common stockholders (numerator) by the weighted average shares of
common stock outstanding (denominator) during the period. Basic EPS excludes the
dilutive effect of potential common stock. Diluted EPS gives effect to all
dilutive potential common stock outstanding during the period. In computing
diluted EPS, the average stock price for the period is used in determining the
number of shares assumed to be purchased from the exercise of potential common
stock.
35
<PAGE> 36
MMC NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table reconciles the numerators and denominators of the basic
and diluted EPS computations for the years ended December 31, 1997 and 1998 and
1999.
<TABLE>
<CAPTION>
NET PER SHARE
INCOME SHARES AMOUNT
------------ -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1997:
Earning per share of Common Stock -- basic.................. $ 1,196 14,432 $0.08
=====
Effect of dilutive securities:
Convertible Preferred Stock............................... -- 11,118
Warrants.................................................. -- 114
Stock options............................................. -- 3,449
------- ------
Earnings per share of Common Stock -- diluted............... $ 1,196 29,113 $0.04
======= ====== =====
FOR THE YEAR ENDED DECEMBER 31, 1998:
Earning per share of Common Stock -- basic.................. $ 8,411 29,693 $0.28
=====
Effect of dilutive securities:
Warrants.................................................. -- 30
Stock options............................................. -- 3,888
------- ------
Earnings per share of Common Stock -- diluted............... $ 8,411 33,611 $0.25
======= ====== =====
FOR THE YEAR ENDED DECEMBER 31, 1999:
Earning per share of Common Stock -- basic.................. $11,837 31,065 $0.38
=====
Effect of dilutive securities:
Stock options............................................. -- 2,726
------- ------
Earnings per share of Common Stock -- diluted............... $11,837 33,791 $0.35
======= ====== =====
</TABLE>
Options to purchase Common Stock are considered anti-dilutive if the
options' exercise price is greater than the average fair market value of the
Company's Common Stock. Anti-dilutive options are excluded from the calculation
of diluted net income per share. The anti-dilutive options excluded from diluted
net income per share were as follows:
<TABLE>
<CAPTION>
OPTIONS PRICE
------- ------
<S> <C> <C>
December 31, 1997......................................... 29,500 $15.94
December 31, 1998......................................... 354,500 $24.52
December 31, 1999......................................... 663,850 $35.21
</TABLE>
Comprehensive Income. Comprehensive income is recorded in accordance with
the standards of Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). Comprehensive gains or losses are reflected
in Stockholders' Equity. During 1999, the Company recorded a comprehensive loss
of $135,000 related to unrecognized losses on Short Term Investments. Items of
comprehensive income were not recorded during 1998 and 1997 because they were
immaterial. If the comprehensive loss of $135,000 had been recorded in the
Consolidated Statements of Operations during 1999, net income would have been
$11,702,000.
Segment Information. The Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131") in 1998. This statement establishes standards for the
way companies report information about operating segments in financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers.
36
<PAGE> 37
MMC NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Operating Segments -- While the Company has more than one product family,
it operates in one segment. All of the products are sold to network equipment
vendors for inclusion in their enterprise and service provider products.
Geographic Areas -- The Company reports its sales in geographic areas
according to the location the product is shipped. In the case that a customer
regularly directs product to be shipped to a manufacturing subcontractor located
in a different geographic area, sales are reported in the geographic area of the
customer and not the subcontractor. Revenues by geographic area were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
North America............................................... 92% 84% 69%
Asia (including Japan)...................................... 5% 13% 29%
Europe...................................................... 3% 3% 2%
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
Major Customers -- Significant customers are those customers accounting for
more than 10% of the Company's total revenues. Revenues as a percentage of total
revenues for significant customers are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cisco Systems, Inc.......................................... 52% 50% 28%
International Business Machines Corporation................. 19% * *
Mitsui Comtek Corp., a non-stocking sales representative for
Japan..................................................... * 12% 28%
Hitachi..................................................... * * 12%
</TABLE>
- ---------------
* Less than 10% during year
Cisco Systems Inc. and Nortel Networks Corp. represented 41% and 19% of
trade receivables at December 31, 1999, and Cisco Systems Inc. and Mitsui Comtek
Corp. represented 55% and 18% of trade receivables at December 31, 1998.
37
<PAGE> 38
MMC NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Work in process........................................... $ 1,541 $ 244
Finished goods............................................ 1,675 386
------- -------
$ 3,216 $ 630
======= =======
Property and equipment:
Computers and equipment................................... $ 5,732 $ 2,964
Purchased software........................................ 8,556 6,010
Furniture and fixtures.................................... 934 430
------- -------
15,222 9,404
Less accumulated depreciation and amortization............ (7,000) (3,917)
------- -------
$ 8,222 $ 5,487
======= =======
Accrued liabilities:
Accrued compensation and benefits......................... $ 1,639 $ 1,844
Income taxes payable...................................... -- 1,802
Accrued warranty.......................................... 1,894 1,899
Other accrued liabilities................................. 177 208
------- -------
$ 3,710 $ 5,753
======= =======
</TABLE>
NOTE 4 -- FINANCING AGREEMENTS
During the first half of 1998, the Company established two credit
facilities with a bank: 1) a loan agreement and 2) a non-recourse receivables
purchase agreement. The loan agreement allows borrowings up to $8.0 million.
Borrowings bear interest at the bank's prime interest rate, which was 8.5% at
December 31, 1999. The agreement requires that we comply with certain financial
covenants. In the event of default, all outstanding borrowings will accrue
interest at a rate of five percentage points above the rate effective
immediately prior to a default. The loan agreement expired in May 1999 and was
renewed for one year on the same terms. The non-recourse receivables purchase
agreement expired in February 1999 and was not renewed. The loan agreement has
not been utilized since its inception and the receivables purchase agreement was
also not utilized prior to its expiration.
38
<PAGE> 39
MMC NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- INCOME TAXES
The Company's income before taxes is primarily composed of domestic income.
The provision for income taxes for the years ended December 31, 1999 and 1998
consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1999 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
Current tax expense
United States............................................. $6,259 $ 5,212
State..................................................... 513 760
Foreign................................................... -- 29
------ -------
Total current tax expense......................... 6,772 6,001
Deferred income tax......................................... (673) (2,271)
------ -------
Total provision for income taxes.................. $6,099 $ 3,730
====== =======
</TABLE>
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1999 1998
------- --------
(IN THOUSANDS)
<S> <C> <C>
Reserve and basis differences............................... $ 840 $ 758
Accrued expenses............................................ 1,863 1,312
Other....................................................... 241 201
------ -------
Total deferred tax assets......................... $2,944 $ 2,271
====== =======
</TABLE>
The tax benefit of $7.0 million associated with the exercise of employee
stock options was recorded in Stockholders' Equity in 1999.
The effective tax rate for the years ended December 31, 1999 and 1998
reconciles to the statutory tax rates as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Federal statutory rate...................................... 35% 35%
State taxes, net of federal benefit......................... 3 2
Foreign income taxes........................................ (1) 2
Permanent differences....................................... -- 2
Research and development credit carryforwards............... (8) (3)
Release of valuation allowance.............................. -- (9)
Other....................................................... 5 2
-- --
Effective tax rate.......................................... 34% 31%
== ==
</TABLE>
NOTE 6 -- CAPITAL STOCK
Common Stock. The Company is authorized to issue 100,000,000 shares of
Common Stock with a par value of $0.001 per share and 10,000,00 shares of
undesignated Preferred Stock with a par value of $0.001 per share. Holders of
Common Stock are entitled to one vote per share on all matters voted on by the
Company's stockholders. The Board of Directors has the authority to issue the
undesignated Preferred Stock in one or more series. It may also fix the rights,
preferences, privileges and restrictions of any undesignated Preferred Stock
that is issued.
39
<PAGE> 40
MMC NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In October 1997, the Company completed its initial public offering (the
"IPO") of 4,025,000 shares of Common Stock at a price of $11.00 per share. The
Company received proceeds of approximately $40.1 million of cash, net of issue
costs. In conjunction with the IPO, all outstanding shares of Convertible
Preferred Stock were converted into shares of Common Stock on a one-for-one
basis. The Company converted 9,255,000 shares of Series A Convertible Preferred
Stock and 4,086,780 shares of Series B Convertible Preferred Stock.
Stock Option Repricing. On September 18, 1998, the Board of Directors
extended an offer to employees holding certain outstanding stock options the
opportunity to receive repriced options. The offer was made for options with
grant dates after October 28, 1997. The exercise price for repriced options was
$16.38, the closing sales price of the Company's Common Stock on the effective
date, which was September 25, 1998. No other terms or conditions of the original
option agreements were changed except that the repriced option was not
exercisable for a period of six months from the effective date of the repricing.
A total of 424,000 options with original exercise prices ranging from $16.75 to
$32.13 were repriced. Members of the Board of Directors and the Company's
officers were excluded from the repricing.
1997 Stock Plan. In August 1997, the Company's Board of Directors adopted,
and the stockholders subsequently approved, the 1997 Stock Plan (the "1997
Plan"), which replaced the 1993 Plan. The following shares have been reserved
for issuance under the 1997 Plan:
(a) 1,500,000 shares of Common Stock plus any shares which were
reserved but unissued under the 1993 Plan
(b) any shares returned to the 1993 Plan as a result of termination of
the options
(c) shares added to the 1997 Plan for automatic annual increases on
the date of each annual meeting of the stockholders beginning with the 1999
annual meeting
The automatic annual increases are limited to the lesser of:
(a) 1,000,000 shares,
(b) 5% of all outstanding shares of Common Stock
(c) an amount determined by the Board of Directors
Unless terminated sooner, the 1997 Plan will terminate automatically in
August 2007.
The 1997 Plan provides for the grant of incentive stock options ("ISOs") to
employees, officers and employee directors. It also provides for the grant of
nonstatutory stock options ("NSOs") and stock purchase rights ("SPRs") to
employees, directors and consultants. ISOs granted to participants owning stock
possessing more than 10% of the voting power of all classes of stock must have
an exercise price at least equal to 110% of the fair market value on the date of
grant and are for periods not to exceed five years. All other options granted
under the plan must have an exercise price at least equal to the fair market
value on the date of grant and are for periods not to exceed ten years. Options
granted under the 1997 Plan generally vest at a rate of 25% on the first
anniversary of the date of grant and 1/48 of the underlying shares per month
after the first anniversary.
Stock purchase rights ("SPRs") are for periods and prices determined by the
Board. Shares purchased through the exercise of SPRs are subject to repurchase
by the Company at the original price paid by the purchaser in the event that the
purchaser's employment with the Company terminates. The repurchase right lapses
at a rate determined by the Board. No stock purchase rights have been granted to
date under either the 1997 Plan or the Predecessor Plan.
1997 Director Option Plan. In August 1997, the Company's Board of Directors
adopted, and the stockholders subsequently approved, the 1997 Director Option
Plan (the "Director Plan"). The Director Plan
40
<PAGE> 41
MMC NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
provides for the grant of NSOs to non-employee directors. Options granted under
the Director Plan are for periods not to exceed ten years and are granted at
exercise prices not less than the fair market value on the date of grant. The
Director Plan provides that each non-employee director will automatically be
granted an NSO to purchase 40,000 shares of Common Stock (the "First Option") on
the date that the Director first becomes a non-employee director, unless
immediately prior to becoming a non-employee director, they were an employee
director of the Company. In addition to the First Option, each non-employee
director will automatically be granted an option to purchase 10,000 shares (a
"Subsequent Option") two days after the announcement of the Company's fiscal
year-end earnings of each year, if on that date they will have served on the
Board of Directors for at least the preceding six months.
Each First Option and each Subsequent Option will have a term of 10 years.
The First Options generally vest at a rate of 25% on the first anniversary of
the date of grant and 1/48 of the underlying shares per month after the first
anniversary, as long as the person continues to serve as a Director. Each
Subsequent Option will vest at a rate of 1/12 of the underlying shares per
month. At December 31, 1999, a total of 190,000 shares of Common Stock have been
reserved for issuance since inception of the Director Plan.
A total of 19,415,000 shares have been reserved for issuance under all
stock option plans since inception of the plans as of December 31, 1999.
Activity under the stock option plans is as follows:
<TABLE>
<CAPTION>
SHARES AVAILABLE OPTIONS WEIGHTED AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
---------------- ----------- ----------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996..................... 2,521,311 3,193,905 0.71
Authorized..................................... 7,650,000 -- --
Granted........................................ (3,213,500) 3,213,500 3.53
Exercised...................................... -- (743,830) 0.36
Canceled....................................... 431,688 (431,688) 0.97
---------- ----------
BALANCE AT DECEMBER 31, 1997..................... 7,389,499 5,231,887 2.47
Granted........................................ (1,638,000) 1,638,000 17.15
Exercised...................................... -- (859,445) 1.47
Canceled....................................... 782,783 (782,783) 15.95
---------- ----------
BALANCE AT DECEMBER 31, 1998..................... 6,534,282 5,227,659 $ 5.22
Authorized..................................... 1,040,000 -- --
Granted........................................ (3,189,467) 3,189,467 21.64
Exercised...................................... -- (1,608,777) 3.15
Canceled....................................... 673,914 (673,914) 8.89
---------- ----------
BALANCE AT DECEMBER 31, 1999..................... 5,058,729 6,134,435 $13.88
========== ==========
</TABLE>
The Company adopted the disclosure-only provisions of SFAS 123, "Accounting
for Stock Based Compensation". The fair value of stock options granted prior to
the filing of the Company's initial registration
41
<PAGE> 42
MMC NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
statement on August 19, 1997 were calculated using the minimum value model.
Options granted after that date were calculated based on the Black-Scholes model
utilizing the following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, OCTOBER 28 TO JANUARY 1 TO
---------------- DECMEBER 31, OCTOBER 27,
1999 1998 1997 1997
------ ------ -------------- -------------
<S> <C> <C> <C> <C>
STOCK OPTION PLANS:
Expected dividend yield......................... 0% 0% 0% 0%
Expected stock price volatility................. .90 .80 .70 0
Risk free interest rate......................... 6.66% 4.85% 6.03% 6.33%
Expected life of the options (years)............ 5.18 4.53 4.00 4.00
Weighted-average fair value..................... $16.08 $11.10 $1.16 $1.16
</TABLE>
Summary information concerning outstanding and exercisable options as of
December 31, 1999 is as follows (Remaining Contractual Life is expressed in
years):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- ------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING REMAINING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- ------------------ ----------- -------------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.03 - 2.00 1,231,146 6.58 $ 1.24 820,608 $1.05
2.17 - 12.63 1,606,038 8.09 7.81 457,334 5.20
12.75 - 16.75 1,797,388 8.92 16.33 248,660 16.20
16.94 - 54.25 1,499,863 9.55 27.82 40,000 17.16
--------- ---------
$ 0.03 - 54.25 6,134,435 8.39 $13.88 1,566,602 $5.08
========= =========
</TABLE>
1997 Employee Stock Purchase Plan. In August 1997, MMC's Board of Directors
adopted the 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan"). The
1997 Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code. It contains 24-month offering periods, with four six-month
purchase periods included in each offering period. The 1997 Purchase Plan
permits employees to purchase MMC Common Stock through payroll deductions of up
to 10% of the participant's compensation. The price of stock purchased under the
1997 Purchase Plan is 85% of the lower of the fair market value of the Common
Stock at the beginning of the offering period or at the end of the purchase
period. At December 31, 1999 a total of 545,102 shares of Common Stock have been
reserved for issuance since inception under the 1997 Purchase Plan. Shares
reserved for issuance under the 1997 Purchase Plan are subject to automatic
annual increases equal to the lesser of (i) 400,000 shares, (ii) 0.8% of all
then outstanding shares of Common Stock of the Company or (iii) a lesser amount
determined by the Board.
The fair value of shares granted under the 1997 Purchase Plan was
calculated utilizing the Black-Scholes model and the following weighted-average
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 28
DECEMBER 31, TO
-------------- DECEMBER 31,
1999 1998 1997
----- ----- ------------
<S> <C> <C> <C>
STOCK PURCHASE PLAN:
Expected dividend yield.............................. 0% 0% 0%
Expected stock price volatility...................... .81 .77 .70
Risk free interest rate.............................. 4.94% 4.92% 5.58%
Expected life of the options (years)................. 1.22 1.16 1.3
Weighted-average fair values......................... $6.32 $5.50 $4.63
</TABLE>
42
<PAGE> 43
MMC NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes SFAS 123 pro forma information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------ ------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income as reported.................................. $11,837 $8,411 $1,196
Pro forma net income.................................... 4,103 5,741 619
Basic income per share as reported...................... $ 0.38 $ 0.28 $ 0.08
Pro forma basic income per share........................ 0.13 0.19 0.04
Diluted income per share as reported.................... $ 0.35 $ 0.25 $ 0.04
Pro forma diluted income per share...................... 0.12 0.17 0.02
</TABLE>
The pro forma amounts reflect compensation expense related to 1999, 1998
and 1997 stock option grants and shares issued under the 1997 Purchase Plan.
Because the pro forma compensation cost for the stock options is recognized over
the stock option vesting period, the pro forma reductions in net income shown
above are not representative of the pro forma reduction in net income in future
periods.
NOTE 7 -- OTHER EMPLOYEE BENEFITS
Effective January 1994, the Company adopted a 401(k) plan for its employees
whereby eligible employees may contribute up to 20% of their earnings, on a
pre-tax basis, subject to the maximum amount permitted by the Internal Revenue
Code. At the discretion of the Board of Directors, the Company may make
contributions under the 401(k) plan. To date, the Company has not made any such
contributions.
NOTE 8 -- NOTES RECEIVABLE FROM STOCKHOLDERS
In October and November 1995, the Company made full recourse loans with
principal amounts totaling $125,000 to certain employees pursuant to the
Company's 1993 Plan. The loans are non-interest bearing and are due in October
and November 2000 or earlier in the event of the borrower's termination of
employment with the Company. At December 31, 1999 the outstanding balance under
these loans of $47,400 is secured by 85,500 shares of the Company's Common
Stock.
NOTE 9 -- RESEARCH AND DEVELOPMENT CONTRACTS
During the years ended December 31, 1999, 1998 and 1997 the Company
performed research and development, which was funded under a number of contracts
with certain customers. The Company recognized $200,000, $811,000, and $716,000,
respectively, as offsets against research and development expenses. Additionally
during 1999, $625,000 of 1998 funding was repaid in exchange for certain rights
to use the technology in the Company's products. One customer represented 100%
of the 1999 funding, and one customer represented 77% of the 1998 funding as
well as the repayment in 1999. Funding received under any of the research and
development contracts was not individually significant during 1997.
The contracts vary in term and provide for the development of technologies
that will enhance products to meet the customer's specific needs. The funding is
generally non-refundable, except under conditions specific to each contract.
43
<PAGE> 44
MMC NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
Leases. The Company leases its facilities under noncancelable lease
agreements, which expire from May 2000 through May 2005. Rent expense under
noncancelable operating leases was $1.2 million, $687,000 and $612,000 during
the years ended December 31, 1999, 1998 and 1997, respectively.
Future minimum lease payments under all non-cancelable operating leases are
as follows (in thousands):
<TABLE>
<S> <C>
FOR THE YEAR ENDED DECEMBER 31,
2000................................................... $ 1,450
2001................................................... 1,698
2002................................................... 2,444
2003................................................... 2,722
2004................................................... 2,722
2005................................................... 1,009
-------
Total minimum payments............................ $12,045
=======
</TABLE>
Through 1996, the Company leased property and equipment of $1.4 million
under master lease agreements with leasing companies. These capital leases
terminated during 1999.
During 1999, the Company entered into an agreement with a software vendor.
Under this agreement, the Company committed to pay $2.9 million over 3 years
beginning April 1999 in exchange for the use of certain design software. During
the year the commitment increased to $3.8 million in exchange for the use of
additional design software. As of December 31, 1999, $3.1 million remains
outstanding under this commitment.
Other. From time to time, third parties, including competitors of the
Company, may assert patent, copyright and other intellectual property rights to
technologies that are important to the Company. Management is not aware of any
such matters that are currently pending.
44
<PAGE> 45
3. EXHIBITS
The exhibits listed under Item 14(c) hereof are filed with this report on
Form 10-K.
(b) No reports were filed on Form 8-K during the three months ended December 31,
1998.
(c) EXHIBITS
The following exhibits are filed with this Report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation filed on
January 13, 1998.(2)
3.2 Bylaws of the Registrant.(1)
4.1 Form of Common Stock Certificate.(1)
10.1 Form of Indemnification Agreement for directors and
executive officers of the Registrant.(1)
+10.2 1993 Stock Plan.(1)
+10.3 1997 Employee Stock Purchase Plan.(1)
+10.4 1997 Stock Plan.(1)
+10.5 1997 Director Option Plan.(1)
10.6 First Amended and Restated Shareholder Rights Agreement
dated November 16, 1995, by and among the Registrant and the
Shareholders named therein.(1)
10.7 Sublease, dated June 14, 1996, by and between Olivetti
Advanced Technology Center, Inc. and the Registrant, and the
Lease Agreement, dated December 22, 1994, by and between
Herman Christensen, Jr., Raymond Christensen and Olivetti
Advanced Technology Center, Inc.(1)
-10.8 Development, License and Purchase Agreement, effective as of
December 19, 1994 (the "Cisco Agreement"), by and between
Cisco Systems, Inc. and the Registrant, as amended by the
First Amendment to the Cisco Agreement, effective as of
January 30, 1996, and Amendment Number 2 to the Cisco
Agreement, dated July 7, 1997.(1)
10.9 Supplier Escrow Agreement, dated as of April 21, 1997, by
and between the Registrant, Hitachi Computer Products
(America), Inc. and SourceFile.(1)
10.10 Loan and Security Agreement dated April 21, 1997, by and
between Silicon Valley Bank and the Registrant.(2)
10.11 Lease dated October 23, 1997, by and between New Boston Mill
Road Limited Partnership and the Registrant.(2)
10.12 Non-Recourse Receivables Purchase Agreement dated February
9, 1998, by and between Silicon Valley Financial Services, a
division of Silicon Valley Bank, and the Registrant.(3)
10.13 Loan Agreement dated May 7, 1998 by and between Silicon
Valley Bank and the Registrant.(4)
10.14 Loan Modification Agreement dated May 4, 1999, by and
between Silicon Valley Bank and the Registrant.(5)
10.15 Lease, dated January 7, 2000, by and between Herman
Christensen, Jr. and Raymond P. Christensen, and the
Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see Page 47).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
- Confidential treatment granted with respect to certain portions.
+ Denotes a compensation plan in which an executive officer or director
participates.
(1) Previously filed as exhibits to the Registrant's Registration Statement on
Form S-1 (File No. 33-34005), filed with the Securities Exchange Commission
on October 27, 1997.
45
<PAGE> 46
(2) Previously filed as exhibits to the Registrant's Form 10-K405 (File No.
00-23023), filed with the Securities and Exchange Commission on March 23,
1998.
(3) Previously filed as exhibits to the Registrant's Form 10-Q (File No.
00-23023), filed with the Securities and Exchange Commission on May 1, 1998.
(4) Previously filed as exhibits to the Registrant's Form 10-Q (File No.
00-23023), filed with the Securities and Exchange Commission on August 5,
1998.
(5) Previously files as exhibits to the Registrant's Form 10-Q (file No.
00-23023), filed with the Securities and Exchange Commission on May 11,
1999.
(d) FINANCIAL DATA SCHEDULES. See Item 14(a)(2) above.
46
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 24, 2000 MMC NETWORKS, INC.
By: /s/ DOUGLAS C. SPRENG
------------------------------------
Douglas C. Spreng
President and Chief Executive
Officer
Each person whose signature appears below constitutes and appoints Amos
Wilnai and Douglas Spreng, jointly and severally, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ AMOS WILNAI Chairman of the Board March 24, 2000
- -----------------------------------------------------
Amos Wilnai
/s/ DOUGLAS C. SPRENG President and March 24, 2000
- ----------------------------------------------------- Chief Executive Officer
Douglas C. Spreng
/s/ RICHARD C. YONKER Vice President, Finance, and March 24, 2000
- ----------------------------------------------------- Chief Financial Officer
Richard C. Yonker (Principal Financial and
Accounting Officer)
/s/ JOHN G. ADLER Director March 24, 2000
- -----------------------------------------------------
John G. Adler
/s/ IRWIN FEDERMAN Director March 24, 2000
- -----------------------------------------------------
Irwin Federman
/s/ ANDREW S. RAPPAPORT Director March 24, 2000
- -----------------------------------------------------
Andrew S. Rappaport
/s/ GEOFFREY Y. YANG Director March 24, 2000
- -----------------------------------------------------
Geoffrey Y. Yang
</TABLE>
47
<PAGE> 48
MMC NETWORKS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTION
BALANCE AT CHARGED TO FROM BALANCE
BEGINNING STATEMENT OF ALLOWANCE/ AT END
OF PERIOD OPERATIONS RESERVE OF PERIOD
---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended December 31, 1997.................... $133 $ 48 $-- $181
==== ==== == ====
Year ended December 31, 1998.................... $181 $ -- $9 $172
==== ==== == ====
Year ended December 31, 1999.................... $172 $250 $422
==== ==== == ====
</TABLE>
48
<PAGE> 49
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation filed on
January 13, 1998.(2)
3.2 Bylaws of the Registrant.(1)
4.1 Form of Common Stock Certificate.(1)
10.1 Form of Indemnification Agreement for directors and
executive officers of the Registrant.(1)
+10.2 1993 Stock Plan.(1)
+10.3 1997 Employee Stock Purchase Plan.(1)
+10.4 1997 Stock Plan.(1)
+10.5 1997 Director Option Plan.(1)
10.6 First Amended and Restated Shareholder Rights Agreement
dated November 16, 1995, by and among the Registrant and the
Shareholders named therein.(1)
10.7 Sublease, dated June 14, 1996, by and between Olivetti
Advanced Technology Center, Inc. and the Registrant, and the
Lease Agreement, dated December 22, 1994, by and between
Herman Christensen, Jr., Raymond Christensen and Olivetti
Advanced Technology Center, Inc.(1)
-10.8 Development, License and Purchase Agreement, effective as of
December 19, 1994 (the "Cisco Agreement"), by and between
Cisco Systems, Inc. and the Registrant, as amended by the
First Amendment to the Cisco Agreement, effective as of
January 30, 1996, and Amendment Number 2 to the Cisco
Agreement, dated July 7, 1997.(1)
10.9 Supplier Escrow Agreement, dated as of April 21, 1997, by
and between the Registrant, Hitachi Computer Products
(America), Inc. and SourceFile.(1)
10.10 Loan and Security Agreement dated April 21, 1997, by and
between Silicon Valley Bank and the Registrant.(2)
10.11 Lease dated October 23, 1997, by and between New Boston Mill
Road Limited Partnership and the Registrant.(2)
10.12 Non-Recourse Receivables Purchase Agreement dated February
9, 1998, by and between Silicon Valley Financial Services, a
division of Silicon Valley Bank, and the Registrant.(3)
10.13 Loan Agreement dated May 7, 1998 by and between Silicon
Valley Bank and the Registrant.(4)
10.14 Loan Modification Agreement dated May 4, 1999, by and
between Silicon Valley Bank and the Registrant.(5)
10.15 Lease, dated January 7, 2000, by and between Herman
Christensen, Jr. and Raymond P. Christensen, and the
Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see Page 47).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
- Confidential treatment granted with respect to certain portions.
+ Denotes a compensation plan in which an executive officer or director
participates.
(1) Previously filed as exhibits to the Registrant's Registration Statement on
Form S-1 (File No. 33-34005), filed with the Securities Exchange Commission
on October 27, 1997.
(2) Previously filed as exhibits to the Registrant's Form 10-K405 (File No.
00-23023), filed with the Securities and Exchange Commission on March 23,
1998.
(3) Previously filed as exhibits to the Registrant's Form 10-Q (File No.
00-23023), filed with the Securities and Exchange Commission on May 1, 1998.
49
<PAGE> 50
(4) Previously filed as exhibits to the Registrant's Form 10-Q (File No.
00-23023), filed with the Securities and Exchange Commission on August 5,
1998.
(5) Previously files as exhibits to the Registrant's Form 10-Q (file No.
00-23023), filed with the Securities and Exchange Commission on May 11,
1999.
50
<PAGE> 1
EXHIBIT 10.15
LEASE AGREEMENT
This Lease Agreement is made and entered into by and between HERMAN CHRISTENSEN,
JR. AND RAYMOND P. CHRISTENSEN, jointly, the Landlord, and MMC NETWORKS, INC., a
Delaware corporation, Tenant as of this 7th day of January, 2000.
1. DEMISE: In consideration of the rents and all other charges and payments
payable by Tenant, and for the agreements, terms and conditions to be performed
by Tenant in this Lease, LANDLORD DOES HEREBY LEASE TO TENANT, AND TENANT DOES
HEREBY HIRE AND TAKE FROM LANDLORD, the Premises described below (the
"Premises"), upon the agreements, terms and conditions of this Lease for the
Term hereinafter stated.
2. PREMISES: The Premises demised by this Lease are approximately 128,154 square
feet of space in the building at 1144 East Arques Avenue, Sunnyvale, California
as shown on attached Exhibit A being in "as is" condition together with the
outside areas to the extent set forth in paragraph 44 below and parking set
forth in paragraph 45 below. No easement for light or air is incorporated in the
Premises.
The Premises demised by this Lease shall also include the existing Tenant
Improvements on the terms and conditions set forth.
3. TERM: The term of this Lease (the "Term") shall be for a period of 60 months
commencing on May 15, 2000.
4. RENT:
(a) BASE RENT. Tenant shall pay to Landlord, in advance on the first day
of each calendar month, without further notice or demand and without offset or
deduction, the base monthly rent of $226,833.00.
(1) The base monthly rent of $226,833.00 for May 15, 2000 - May 31,
2000 shall be pro-rated and be in the amount of $124,392.26.
(2) The base monthly rental shall be adjusted at the end of each
TWELVE (12) month period within the lease term measured from the first day of
the calendar month containing the commencement date of the lease. The new base
monthly rental shall be determined by adjusting the base monthly rental for the
previous month by a percentage equal to the percentage that the Consumer Price
Index (San Francisco-Oakland-San Jose, All Urban Consumers, All Items
1982-84=100) most recently published by the U.S. Department of Labor, Bureau of
Labor Statistics, prior to the date that the rent adjustment is to be effective
has increased over the same index published twelve (12) months before said most
recently published index.
If said consumer price index, as now constituted, shall cease to be
compiled and/or published, comparable statistics on the purchasing power of the
consumer dollar as published at the time of said discontinuance by a responsible
financial authority shall be used for making such computation. If the parties
hereto are unable to agree upon suitable substitute statistics, the rental for
the extended portion of the term shall be determined under the rules of the
American Arbitration Association with the arbitrators instructed to set an Index
based on the intent of this clause.
In no event shall any adjustment of rental be effective to reduce
the base monthly rental below the base monthly rental for the prior month.
Upon execution of this Lease, Tenant shall pay to Landlord the Security
Deposit in the amount and at the time hereafter set forth.
1
<PAGE> 2
(b) ADDITIONAL RENT. In addition to the Base Rent, Tenant shall pay to
Landlord, in accordance with this Paragraph 4, Tenant's proportionate share of
the following items related to the Building, the Property, and/or the Outside
Areas (as defined in Paragraph 4 (b)(3))(the "Additional Rent").
(1) TAXES AND ASSESSMENTS. All real estate taxes and assessments
applicable to the Term. Real estate taxes and assessments shall include any form
of assessment, license, fee, tax, levy, penalty (if a result of Tenant's
delinquency), or tax (other than net income, estate, succession, inheritance,
transfer or franchise taxes), imposed by any authority having the direct or
indirect power to tax or by any city, county, state or federal government or any
Improvement or other district or division thereof, whether such tax is (i)
determined by the area of the Premises, the Building or the Property, or any
part thereof or the Rent and other sums payable hereunder by Tenant, including,
but not limited to, any gross income or excise tax levied by any of the
foregoing authorities with respect to receipt of Rent or other sums due under
this Lease; (ii) upon any legal or equitable interest of Landlord in the
Premises, the Building or the Property, or any part thereof; (iii) upon this
transaction or any document to which Tenant is a party creating or transferring
any interest in the Premises, the Building or the Property; (iv) levied or
assessed in lieu of, in substitution for, or in addition to, existing or
additional taxes against the Premises, the Building or the Property, whether or
not now customary or within the contemplation of the parties; or (v) surcharge
against the parking area. Tenant and Landlord acknowledge that Proposition 13
was adopted by the voters of the State of California in the June, 1978 election
and that assessments, taxes, fees, levies and charges may be imposed by
governmental agencies for such purposes as fire protection, street, sidewalk,
road, utility construction and maintenance, refuse removal and for other
governmental services which may formerly have been provided without charge to
property owners or occupants. It is the intention of the parties that all new
and increased assessments, taxes, fees, levies and charges due to Proposition 13
or any other cause are to be included within the definition of real property
taxes for purposes of this Lease.
(2) INSURANCE. All insurance premiums, including premiums for "all
risk", fire and extended coverage (not including earthquake endorsements)
insurance for the Building, public liability insurance, other insurance as
Landlord deems necessary, and any deductibles paid under policies of any such
insurance.
(3) OUTSIDE AREAS EXPENSES. All costs to operate, manage, maintain,
repair, supervise, insure (including provision of public liability insurance)
and administer the areas outside of the Building ("Outside Areas"), including
but not limited to watering, fertilizing, landscaping, tree work, spraying,
window washing of exterior window surfaces, plant and tree replacement,
lighting, building alarm system, repair of paving and sidewalks, striping,
clean-up and sweeping.
(4) PARKING CHARGES. Any parking charges or other costs levied,
assessed or imposed by, or at the direction of, or resulting from statutes or
regulations, or interpretations thereof, promulgated by any governmental
authority or insurer in connection with the use or occupancy of the Building,
the Outside Areas and/or the Property. The charge shall be the smallest amount
required by law.
(5) MAINTENANCE AND REPAIR OF BUILDING. All costs to maintain,
repair, and replace the building, including but not limited to the roof
coverings including the metal roofing, the floor slab, and the exterior walls
(including the painting and crack sealing thereof) of the Building, and all
costs to maintain, repair and replace all utility and plumbing systems, fixtures
and equipment located outside the Building. Notwithstanding said provisions, the
cost of any improvement or replacement to the building under this sub-paragraph,
which exceeds $25,000.00 in cost and which has a useful life of more than 5
years, shall be amortized on a straight-line basis together with interest hereon
at the rate of 10% per annum, and only the amortized portion of such cost and
interest shall be included in costs recoverable by Landlord. Also
notwithstanding anything to the contrary, Landlord shall not recover any costs
for repair or replacement incurred in maintaining, repairing or replacing for
structural integrity the load bearing part of the exterior walls (other than for
painting or crack sealing), interior
2
<PAGE> 3
structural columns, foundation, and structural components of the roof unless
said repair or replacement was necessitated by acts of Tenant.
(6) MANAGEMENT AND ADMINISTRATION. All costs for management and
administration of the Building and the Property, including a property
management fee, accounting, auditing, billing, postage, employee benefits,
payroll taxes, etc. All such expenses shall be reasonable and in accordance
with good management practices and shall not exceed 2% of annual Base Rent.
(c) ALLOCATION OF COSTS.
(1) If said real estate taxes and assessments are assessed against
the entire building and building site, each of greater extent than the
"Premises", the taxes and assessments allocated to the leased premises shall be
pro-rated on a square footage or other equitable basis, as calculated by
Landlord, such as the tax assessor's relative valuations. If the assessed
value of the Landlord's premises is increased by the inclusion therein of a
value placed upon the personal property or improvements of the Tenant, and if
the Landlord pays the taxes based on such increased assessment, the Tenant
shall, upon demand, repay to the Landlord the portion of such taxes resulting
from such increase in assessment. In the event the Premises and any improvements
installed therein by Tenant or Landlord are valued by the assessor
disproportionately higher or lower than those of other Tenants in the building
or parcel, Tenant's share of the property taxes shall be readjusted upwards or
downwards accordingly, and Tenant agrees to such readjusted share. Such
determination shall be made by Landlord from the respective valuations assigned
in the assessor's work sheet or such other information as may be reasonably
available. Landlord's reasonable determination thereof, in good faith, shall
be conclusive. Increase in real estate taxes due to reappraisal because of
transfer of Landlord's interest to a third party, shall not be charged to
Tenant under this sub-paragraph (c) (1).
(2) Insurance, Outside Areas Expenses, Parking Charges, Maintenance
and repair of building, and management and administration expense shall be
charged to Tenant in proportion to that portion of the total rentable building
area on the site rented by Tenant hereunder. Until further buildings on the
site are completed, Tenant's share shall be calculated as 128,154 square
feet/163,706 square feet or 78.283%.
(d) PAYMENT OF ADDITIONAL RENT.
(1) By April 15, 2000, Landlord shall submit to Tenant an estimate
of monthly Additional Rent for the period between May 15, 2000 - December 31,
2000 and Tenant shall pay such estimated Additional Rent in advance on a
monthly basis concurrently with the payment of the Base Rent. Tenant shall
continue to make said monthly payments until notified by Landlord of a change
therein. By March 1 of each calendar year, Landlord shall endeavor to provide
to Tenant a statement showing the actual Additional Rent due to Landlord for
the prior calendar year, prorated from the Commencement Date during the first
year. If the total of the monthly payments of Additional Rent that
Tenant has made for the prior calendar year (or portion thereof during which
this Lease was in effect) is less than the actual Additional Rent chargeable to
Tenant for such prior calendar year, then Tenant shall pay the difference in a
lump sum with thirty (30) days after receipt of such statement from Landlord.
Any overpayment by Tenant of Additional Rent for the prior calendar year shall
be promptly refunded to Tenant no later than April 15.
(2) The actual Additional Rent for the prior calendar year shall be
used for purposes of calculating Tenant's monthly payment of estimated
Additional Rent for the current year, subject to adjustment as provided above,
except that in any year in which resurfacing of the parking area, exterior
painting, or material roof repairs are planned, Landlord may include the
estimated cost of such work in the estimated monthly Additional Rent. Landlord
shall make final determination of Additional Rent for the year in which this
Lease terminates as soon as possible after termination. Tenant shall remain
liable for payment of any amount due to Landlord in excess of the estimated
Additional Rent previously paid by Tenant, and, conversely, Landlord shall
promptly return to Tenant any overpayment, even though the Term has expired
and Tenant has
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vacated the Premises. Failure of Landlord to submit statements as called for
herein shall not be deemed a waiver of Tenant's obligation to pay Additional
Rent as herein provided. Tenant shall have the right to review and audit
Landlord's records relating to Additional Rent at Tenant's expense, at
Landlord's business office, provided Tenant has given Landlord reasonable prior
notice.
(e) GENERAL PAYMENT TERMS. The Base Rent, Additional Rent and all other
sums payable by Tenant to Landlord hereunder are referred to as the "Rent". All
Rent shall be paid without deduction, offset or abatement in lawful money of
the United States of America. Rent for any partial month during the Term shall
be prorated for the portion thereof falling due within the Term.
5. LATE CHARGE: Notwithstanding any other provision of this Lease, Tenant
hereby acknowledges that late payment to Landlord of Rent, or other amounts
due hereunder will cause Landlord to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain. If
any Rent or other sums due from Tenant are not received by Landlord or by
Landlord's designated agent within ten (10) days after their due date, then
Tenant shall pay to Landlord a late charge equal to six percent (6%) of such
overdue amount, plus any attorneys' fees incurred by Landlord by reason of
Tenant's failure to pay Rent and/or other charges when due hereunder. Landlord
and Tenant hereby agree that such late charges represent a fair and reasonable
estimate of the cost that Landlord will incur by reason of Tenant's late
payment. Landlord's acceptance of such late charges shall not constitute a
waiver of Tenant's default with respect to such overdue amount or estop Landlord
from exercising any of the other rights and remedies granted under this Lease.
Initials:
Landlord ________________ Tenant ________________
5. SECURITY DEPOSIT: Tenant shall deposit with Landlord the Security Deposit
in the amount of $226,833.00 as security for the full and faithful performance
of each and every term, covenant and condition of this Lease. $115,000.00 of
said Security Deposit shall be paid with the execution of this Lease and the
balance of $111,833.00 shall be paid by April 14, 2000. Landlord may use,
apply or retain the whole or any part of the Security Deposit as may be
reasonably necessary (a) to remedy Tenant's default in the payment of any Rent,
(b) to repair damage to the Premises caused by Tenant, (c) to clean the
Premises upon termination of this Lease, (d) to reimburse Landlord for the
payment of any amount which Landlord may reasonably spend or be required to
spend by reason of Tenant's default, or (e) to compensate Landlord for any
other loss or damage which Landlord may suffer by reason of Tenant's default.
Should Tenant faithfully and fully comply with all of the terms, covenants and
conditions of this Lease, within thirty days following the expiration of the
Term, the Security Deposit or any balance thereof shall be returned to Tenant
or, at the option of Landlord, to the last assignee of Tenant's interest in
this Lease. When the Security Deposit has been paid in full, Landlord shall
deposit said Security Deposit in a savings account in a bank or savings and loan
institution, and Tenant will be entitled to Interest thereon at the rate
paid by savings institution, payable to Tenant at the termination of the lease.
If Landlord so uses or applies all or any portion of said deposit, within ten
(10) days after written demand therefor Tenant shall deposit cash with Landlord
in an amount sufficient to restore the Security Deposit to the full extent of
the above amount, and Tenant's failure to do so shall be a default under this
Lease. No part of the Security Deposit shall be considered to be held in trust,
to bear interest or another increment for its use, or to be prepayment for any
moneys to be paid by Tenant under this Lease. In the event Landlord transfers
its interest in this Lease, Landlord shall transfer the then remaining amount of
the Security Deposit to Landlord's successor in interest, and thereafter
Landlord shall have no further liability to Tenant with respect to such
Security Deposit.
7. POSSESSION:
(a) TENANT'S RIGHT OF POSSESSION. Tenant shall be entitled to early
access to the vacant part of the premises on April 15, 2000 for work as
specified in paragraph 48
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below. It is understood that certain subtenants of One World Systems may hold
over and become subtenants of Tenant subject to the terms and conditions of
this lease.
(b) DELAY IN DELIVERING POSSESSION. If Landlord cannot deliver possession
of the Premises to Tenant at the commencement of the Term, this Lease shall not
be void or voidable, nor shall Landlord, or Landlord's agents be liable to
Tenant for any loss or damage resulting therefrom. Tenant shall not be liable
for Rent until Landlord delivers possession of the Premises to Tenant. The
expiration date of the Term shall be extended by the same number of days that
Tenant's possession of the Premises is delayed. In the event that possession of
the premises cannot be delivered by July 15, 2000, Landlord may at its option
by notice in writing to Tenant within ten days thereafter, cancel this Lease,
in which event the Parties shall be discharged from all obligations hereunder.
(c) If the Premises suffer a casualty loss prior to the commencement of
this Lease, such that the Tenant will be denied the use of a material portion
of the Premises, then Tenant shall have the option of terminating this Lease
upon written notice to Landlord.
8. USE OF PREMISES:
(a) PERMITTED USES. The Premises shall be used only for general office,
engineering, research and development, service and repair, and storage of
computer hardware and software products and components, to the extent permitted
by governmental regulations. No printed circuit board manufacture or wafer
fabrication shall be permitted, or any activities involving toxic substances,
except that Tenant shall be permitted to use customary office products and
cleansers and minor quantities of cleaners and solvents in connection with its
business, but as to such cleaners and solvents subject to the prior written
consent of Landlord, which shall not be unreasonably withheld.
(b) COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Tenant shall, at Tenant's
expense, faithfully observe and comply with all Municipal, State and Federal
statutes, rules, regulations, ordinances, requirements, and orders, now in
force or which may hereafter be in force pertaining to the Premises or Tenant's
use thereof, including without limitation, any statutes, rules, regulations,
ordinances, requirements, or orders requiring installation of fire sprinkler
systems, and removal of asbestos placed on the Premises by Tenant, whether
substantial in cost or otherwise, and all recorded covenants, conditions and
restrictions affecting the Property ("Private Restrictions") now in force or
which may hereafter be in force; provided that no such future Private
Restrictions shall materially affect Tenant's use and enjoyment of the Premises
or Property and provided, however, that Tenant shall not be required to make
structural changes to the Premises or Building not related to Tenant's specific
use of the Premises unless the requirement for such changes is imposed as a
result of any improvements or additions made or proposed to be made at Tenant's
request. The judgement of any court of competent jurisdiction, or the admission
of Tenant in any action or proceeding against Tenant, whether Landlord be a
party thereto or not, that Tenant has violated any such rule, regulation,
ordinance, statute or Private Restrictions, shall be conclusive of that fact as
between Landlord and Tenant.
9. ACCEPTANCE OF PREMISES: By execution hereof, Tenant accepts the Premises as
suitable for Tenant's intended use and as being in good and sanitary operating
order, condition, and repair, AS IS, and without representation or warranty by
Landlord as to the condition, or use or occupancy which may be made thereof. Any
exceptions in the foregoing must be by written agreement executed by Landlord
and Tenant, and specifically set forth in Addendum One.
10. SURRENDER: Tenant agrees that on the termination of this Lease, Tenant
shall surrender the premises in the same condition as herein agreed they have
been received by Tenant. Damage caused by war, earthquake and ordinary wear and
tear excepted but with carpets vacuumed and other floors "broom clean." At the
time of termination of this lease, Landlord may require any or all of the
alterations or additions installed by Tenant or by Landlord for the benefit of
Tenant at Tenant's request, to be removed and
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the premises restored to their original condition, whether or not said
alterations or additions have become part of the premises under paragraph 11
hereof. Upon surrender of the premises, either at the expiration of the term of
otherwise, Lessee agrees to remove all personal property and rubbish from the
premises; but if not so removed by Tenant, Landlord may have the same removed
at Tenant's expense. All property of Tenant not so removed, unless such
non-removal is consented to by Landlord, shall be deemed abandoned by Tenant,
provided that in such event Tenant shall remain liable to Landlord for all
costs incurred in storing and disposing of such abandoned property of
Tenant. If the Premises are not surrendered at the end of the term or sooner
termination of this lease, Tenant hereby indemnifies Landlord against loss or
liability resulting from delay by Tenant in so surrendering the Premises
including, without limitation, any claims made by any succeeding tenant founded
on such delay. In the event of surrender of this lease, Landlord shall have the
option of terminating all existing sub-leases or of assigning said subleases to
Landlord.
11. ALTERATIONS AND ADDITIONS:
(a) Except for non-structural interior alterations and additions costing
less than $20,000.00 per alteration or addition. Tenant shall not make, or
permit to be made, any alteration or addition to the Premises, or any part
thereof, without the prior written consent of Landlord, such consent not to be
unreasonably withheld. Landlord's failure to disapprove proposed alterations or
additions within 10 working days after Landlord's receipt of the request for
approval, shall be deemed approval. Normal repair and maintenance work shall
not be deemed to be an alteration or addition to the Premises.
(b) Any alteration or addition to the Premises (including those in
subparagraph (a)) shall be at Tenant's sole cost and expense, in compliance
with all applicable laws and requirements requested by Landlord, and in
accordance with plans and specifications submitted in writing to Landlord and
approved as to alterations and additions costing over $20,000.00.
(c) All additions, alterations or improvements, including, but not
limited to, heating, lighting, electrical, air conditioning, fire
extinguishers, lighting fixtures, ballasts, light globes, and tubes, hot water
heaters, fixed partitioning, drapery, wall covering and paneling, built-in
cabinet work and carpeting installations made by Tenant, together with all
property that has become an integral part of the Building, shall at once be and
become the property of Landlord, and shall not be deemed trade fixtures, but
any or all are subject to removal pursuant to paragraph 10 hereof.
Notwithstanding the foregoing, the following Tenant improvements, if paid for
by Tenant and not included in any Tenant improvements, if paid for by Tenant
and not included in any Tenant Improvement Allowance, namely a warehouse cage
and telecommunication and computer-related equipment, including specialized
flooring, cabling, air conditioning equipment (for the sale purpose of cooling
said computers), may be removed by Tenant so long as Tenant repairs any damage
caused by such removal.
(d) Tenant agrees not to proceed to make such alterations or additions,
notwithstanding consent from Landlord to do so, until five (5) days after
Tenant's receipt of such consent.
12. MAINTENANCE OF PREMISES:
(A) MAINTENANCE BY TENANT. Throughout the Term, Tenant shall, at its sole
expense and at all times (whether or not such portion of the Premises requiring
repairs, or the means of repairing the same, are reasonably or readily
accessible to Lessee, and whether or not the need for such repairs occurs as a
result of Tenant's use, any prior use, the elements, or the age of such portion
of the Premises), (1) keep and maintain in good order, condition, and repair,
and to repair and to replace the Premises, and every part thereof, including
glass, windows, window frames, skylights, door closers, locks, storefronts,
interior and exterior doors and door frames, and the interior of the Premises,
(excepting only those portions of the Building to be maintained by Landlord, as
provided in Paragraph 12(c) below), (2) keep and maintain in good order and
condition, repair, and replace all utility lighting, and plumbing systems,
fixtures and equipment, including without limitation, electricity, gas, fire
sprinkler and stand pipes, fire alarms, smoke detection, HVAC, water, and
sewer, located in or on the Premises, and furnish all
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expendable, including fluorescent tubes, ballasts, light bulbs, paper goods and
soaps, used in the Premises, (3) repair all damage to the Building or the
Outside Areas caused by the negligence or willful misconduct of Tenant or its
agents, employees, contractors or invitees or other persons, including vandals.
Tenant shall not do anything to cause any damage, deterioration or unsightliness
to the Building and the Outside Areas. Tenant also agrees to maintain and pay
for a service contract which meets the manufacturer's recommendations of the air
conditioning, heating and ventilating systems installed in the leased premises
and which is approved by Landlord. Landlord reserves the right to hire a
licensed HVAC contractor to inspect annually the air conditioning, heating, and
ventilating system. If this contractor finds deficiencies in the condition of
this system, Tenant agrees to make all repairs and corrections within a
reasonable period of time at Tenant's expense, and after 30 days notice pay the
cost of the inspections by Landlord's contractor. If no deficiencies are found,
Landlord shall pay for the cost of the inspections.
(b) LANDLORD'S RIGHT TO MAINTAIN AND REPAIR AT TENANT'S EXPENSE.
Notwithstanding the foregoing, Landlord shall have the right, but not the
obligation, at Tenant's expense, to enter the Premises and perform Tenant's
maintenance, repair and replacement work. Within thirty (30) days after invoice
therefor from Landlord, Tenant shall pay all reasonable costs and expenses
incurred by Landlord in connection with such maintenance, repair and replacement
work. Landlord shall have the right to perform Tenant's maintenance, repair and
replacement work only if Tenant fails to take appropriate remedial action within
ten (10) days after receiving written notice from Landlord specifying the nature
of Tenant's failure to comply with Paragraph 12(a) of the Lease. Notwithstanding
the foregoing, if Tenant's failure to maintain, repair or replace as required by
Paragraph 12(a) of the Lease creates an immediate danger of material further
damage to the Premises, Landlord shall not be required to give the notice to
Tenant set forth in the previous sentence.
(c) MAINTENANCE BY LANDLORD. Subject to the provisions of Paragraphs
12(a), 22 and 23, and further subject to Tenant's obligation under Paragraph 4
to reimburse Landlord, in the form of Additional Rent, for Tenant's Share of the
cost and expense of the following items, Landlord agrees to repair and maintain
the following items: the roof coverings (provided that Tenant installs no
additional air conditioning or other equipment on the roof that damages the
roof coverings), the floor slab, and the exterior walls (excluding any glass
therein but including the painting thereof) of the Building; the utility and
plumbing systems, (including fountain and sewer lines), fixtures and equipment
located outside the Building; and the parking areas, landscaping, sprinkler
systems, alarm system, sidewalks, driveways, curbs, and lighting systems in the
Outside Areas. Subject to the provisions of Paragraphs 4, 22, and 23, Landlord
shall maintain, repair, or replace for structural integrity the load bearing
part of exterior walls, interior structural columns, the foundation, and the
structural components of the roof (providing that Tenant installs no additional
air conditioning or other equipment on the roof that damages these components).
Landlord shall not be obligated to repair minor settlement cracks on walls or
floor of the leased premises, and shall not be responsible for the leaking of
said walls due thereto or as a result of porosity thereof. Landlord shall not be
required to repair or maintain conditions due to any act, negligence or omission
of Tenant or its agents, contractors, employees or invitees. Landlord's
obligation hereunder to repair and maintain is subject to the condition
precedent that Landlord shall have received written notice of the need for such
repairs and maintenance. Tenant shall promptly report in writing to Landlord any
defective condition known to it which Landlord is required to repair. All work
by and for Landlord shall be performed during normal working hours and not on
weekends, holidays, and after normal working hours at overtime, holiday, or
premium pay.
(d) TENANT'S WAIVER OF RIGHTS. Tenant hereby expressly waives all rights
to make repairs at the expense of Landlord or to terminate this Lease, as
provided for in California Civil Cod Sections 1941 and 1942, and 1932 (1),
respectively, and any similar or successor statute or law in effect or any
amendment thereof during the Term.
13. LANDLORD'S INSURANCE: Landlord shall purchase and keep in force fire,
extended coverage and "all risk" insurance covering the Building, and earthquake
coverage at the option of the Landlord. Tenant shall, at its sole cost and
expense,
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comply with any and all reasonable requirements pertaining to the Premises of
any insurer necessary for the maintenance of reasonable fire and public
liability insurance, covering Building and appurtenances. Landlord, at Tenant's
cost, may maintain "Loss of Rents" insurance, insuring that the Rent will be
paid in a timely manner to Landlord for a period of at least twelve (12) months
if the Premises are destroyed or rendered unusable or inaccessible by any cause
insured against under this Lease. The premium for such Loss of Rents insurance
shall be Additional Rent as set forth in Paragraph 4(b)(2).
14. TENANT'S INSURANCE:
(a) PUBLIC LIABILITY INSURANCE. Tenant shall, at Tenant's expense secure
and keep in force a "broad form" public liability insurance and property damage
policy covering the Premises and the Outside Areas, insuring Tenant, and naming
Landlord and its lenders as additional insureds, against any liability arising
out of the ownership, use, occupancy or maintenance of the Premises and all
Outside Areas. The minimum limit of coverage of such policy shall be in the
amount of not less than One Million Dollars ($1,000,000.00) for injury or death
of one person in any one accident or occurrence and in the amount of not less
than One Million Dollars ($1,000,000.00) for injury or death of more than one
person in any one accident or occurrence, shall include an extended liability
endorsement providing contractual liability coverage (which shall include
coverage for Tenant's indemnification obligations in this Lease), and shall
contain a severability of interest clause or a cross liability endorsement. Such
insurance shall further insure Landlord and Tenant against liability for
property damage of at least One Million Dollars ($1,000,000.00). The limit of
any insurance shall not limit the liability of tenant hereunder. No policy shall
be cancelable or subject to reduction of coverage, without at least thirty (30)
days prior written notice to Landlord, and loss payable clauses shall be subject
to Landlord's approval. Such policies of insurance shall be issued as primary
policies and not contributing with or in excess of coverage that Landlord may
carry, by any insurance company authorized to do business in the State of
California for the issuance of such type of insurance coverage and rate A:XIII
or better in BEST'S KEY RATING GUIDE. A copy of said policy or a certificate
evidencing to Landlord's reasonable satisfaction that such insurance is in
effect shall be delivered to Landlord upon commencement of the Term, and
thereafter whenever said policies are renewed or modified, and also whenever
Landlord shall reasonably request.
(b) PERSONAL PROPERTY INSURANCE. Tenant shall maintain in full force and
effect on all of its fixtures and equipment on the Premises, a policy or
policies of fire and extended coverage insurance with standard coverage
endorsement to the extent of the full replacement cost thereof. During the term
of this Lease the proceeds from any such policy or policies of insurance shall
be used for the repair or replacement of the fixtures and equipment so insured.
Landlord shall have no interest in the insurance upon Tenant's equipment and
fixtures and will sign all documents reasonably necessary in connection with the
settlement of any claim or loss by Tenant. Landlord will not carry insurance on
Tenant's possessions. Tenant shall furnish Landlord with a certificate
evidencing to Landlord's reasonable satisfaction that such insurance is
currently in effect, and whenever required, shall satisfy Landlord that such
policy is in full force and effect.
15. INDEMNIFICATION:
(a) OF LANDLORD. Tenant shall indemnify and hold harmless Landlord and
agents, employees, partners, shareholders, directors, invitees, and independent
contractors (collectively "Agents") of Landlord against and from any and all
claims, liabilities, judgments, costs, demands, causes of action and expenses
(including, without limitation, reasonable attorneys' fees) arising from (1)
Tenant's use of the Premises or from any activity done, permitted or suffered by
Tenant, its agents, employees or independent contractors in and about the
Premises, the Building or the Property, and (2) any act, neglect, fault, willful
misconduct or omission of Tenant, or Tenant's Agents and invitees or from any
breach or default in the terms of this Lease by Tenant, and (3) any action or
proceeding brought on account of any matter in items (1) or (2). If any action
or proceeding is brought against Landlord by reason of any such claim, upon
notice from Landlord, Tenant shall defend the same at Tenant's expense by
counsel
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reasonably satisfactory to Landlord. As a material part of the consideration to
Landlord, Tenant hereby assumes all risk of damage to property or injury to
persons in or about the Premises from any cause whatsoever (except that which
is caused by the sole active negligence or willful misconduct by Landlord or its
Agents or by the failure of Landlord to observe any of the terms and conditions
of this Lease), if such failure has persisted for an unreasonable period of time
after written notice of such failure, and Tenant hereby waives all claims in
respect thereof against Landlord. The obligations of Tenant under this
Paragraph 15 shall survive any termination of this Lease.
(b) NO IMPAIRMENT OF INSURANCE. The foregoing indemnity shall not relieve
any insurance carrier of its obligations under any policies required to be
carried by either party pursuant to this Lease, to the extent that such policies
cover the peril or occurrence that results in the claim that is subject to the
foregoing indemnity.
16. SUBROGATION: Subject to the approval of its respective insurance carrier,
Landlord and Tenant hereby mutually waive any claim against the other during
the Term for any injury to person or loss or damage to any of their property
located on or about the Premises, the Building or the Property that is caused
by or results from perils covered by insurance carried by the respective
parties, to the extent of the proceeds of such insurance actually received with
respect to such injury, loss or damage, whether or not due to the negligence of
the other party or its agents. Because the foregoing waivers will preclude the
assignment of any claim by way of subrogation to an insurance company or any
other person, each party now agrees to immediately give to its insurer written
notice of the terms of these mutual waivers. Nothing in this Paragraph 16 shall
relieve a party of liability to the other for failure to carry insurance
required by this Lease.
17. ABANDONMENT: Tenant shall not abandon the Premises at any time during the
Term. In the event of abandonment, the rights and remedies of Tenant and
Landlord shall be determined in accordance with the applicable California
statutes in effect at the time of abandonment.
18. FREE FROM LIENS: Tenant shall keep the Premises and the Property free from
any liens arising out of any work performed, materials furnished, or
obligations incurred by or for Tenant.
19. ADVERTISEMENTS AND SIGNS: Tenant shall not place or permit to be placed in,
upon, or about the Premises or the Property any signs, advertisements or
notices without obtaining Landlord's prior written consent or without complying
with applicable law, and will not conduct, or permit to be conducted, any sale
by auction on the Premises or otherwise on the Property. Tenant shall remove any
sign, advertisement or notice placed on the Premises by Tenant upon the
expiration of the Term or sooner termination of this Lease, and Tenant shall
repair any damage or injury to the Premises or the Property caused thereby, all
at Tenant's expense. If any signs are not removed, or necessary repairs not
made, Landlord shall have the right to remove the signs and repair any damage
or injury to the Premises at Tenant's sole cost and expense.
20. UTILITIES: Tenant shall pay for all water, sewer, gas, heat, light, power,
telephone service and all other materials and services supplied to the
Premises. If Tenant fails to pay for any of the foregoing when due, Landlord
may pay the same and add such amount to the Rent.
It is further understood that certain utility services, including water, and
sewer are not separately metered to the Premises, but also serve other adjoining
premises. Landlord and Tenant agree that Landlord shall submit at regular
billing intervals, when utility bills are received, an allocation of the
monthly charges applicable to each user by area occupied by each. Said allocated
charges shall constitute additional rent. Landlord and Tenant agree that such
allocation shall cease as to any service for which Landlord shall arrange for a
separate meter for the Premises. The allocated costs shall also include the
expense of maintenance, repair and replacement of equipment providing
distribution of said utility services, which shall be charged on the same area
basis.
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21. ENTRY BY LANDLORD: Tenant shall permit Landlord and its Agents to enter
into and upon the Premises at all reasonable times, upon reasonable notice of no
less than twenty four (24) hours, (except in the case of an emergency, for which
no notice shall be required), and subject to Tenant's reasonable security
arrangements, for the purpose of inspecting the same or showing the Premises to
prospective purchasers, lenders or tenants or to alter, improve, maintain and
repair the Premises as required or permitted of Landlord under the terms hereof,
without any liability to Tenant for any loss of occupation of quiet enjoyment of
the Premises thereby occasioned (except for actual damages resulting from the
negligence or willful misconduct of Landlord or its agents); and Tenant shall
permit Landlord to post notices of non-responsibility and ordinary "for sale" or
"for lease" signs, provided that Landlord may post such "for lease" signs and
exhibit the Premises to prospective tenants only during the six (6) months prior
to termination of this Lease. No such entry shall be construed to be a forcible
or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant
from the Premises.
22. DESTRUCTION AND DAMAGE:
(a) If the Building is damaged by fire or other perils covered by
extended coverage insurance, Landlord shall, at Landlord's option:
(1) In the event of total destruction (which shall mean destruction
or damage in excess of twenty-five percent (25%) of the full insurable value
thereof) of the Building, elect either to commence promptly to repair and
restore the Building and prosecute the same diligently to completion, in which
event this lease shall remain in full force and effect; or not to repair or
restore the Building, in which event this Lease shall terminate, Landlord shall
give Tenant written notice of its intention within sixty (60) days after the
occurrence of such destruction. If Landlord elects not to restore the Building,
this Lease shall be deemed to have terminated as of the date of such total
destruction.
(2) In the event of a partial destruction (which shall mean
destruction or damage to an extent not exceeding twenty-five percent (25%) of
the full insurable value thereof) of the Building for which Landlord will
receive insurance proceeds sufficient to cover the cost to repair and restore
such partial destruction and, if the damage thereto is such that the Building
may be substantially repaired or restored to its condition existing immediately
prior to such damage or destruction within one hundred eighty (180) days from
the date of such destruction, Landlord shall commence and proceed diligently
with the work of repair and restoration, in which event the Lease shall continue
in full force and effect. If such repair and restoration requires longer than
one hundred eighty (180) days or if the insurance proceeds therefor (plus any
amounts Tenant may elect or is obligated to contribute) are not sufficient to
cover the cost of such repair and restoration, Landlord may elect either to so
repair and restore, in which event the Lease shall continue in full force and
effect, or not to repair or restore, in which event the Lease shall terminate.
In either case, Landlord shall give written notice to Tenant of its intention
within sixty (60) days after the destruction occurs. If Landlord elects not to
restore the Building, this Lease shall be deemed to have terminated as of the
date of such partial destruction.
(3) Notwithstanding anything to the contrary contained in this
Paragraph 22, in the event of damage to the Building or the Premises occurring
during the last twelve (12) months of the Term, Landlord may elect to terminate
this Lease by written notice of such election given to Tenant within thirty (30)
days after the damage occurs.
(b) If the Building is damaged by any peril not covered by extended
coverage insurance, and the cost to repair such damage exceeds any amount Tenant
may agree to contribute, Landlord may elect either to commence promptly to
repair and restore the Building and prosecute the same diligently to completion,
in which event this Lease shall remain in full force and effect; or not to
repair or restore the Building, in which event this Lease shall terminate.
Landlord shall give Tenant written notice of its intention within sixty (60)
days after the occurrence of such damage. If Landlord elects not to restore the
Building, this Lease shall be deemed to have terminated as of the date on which
Tenant surrenders possession of the Premises to Landlord, except that if the
damage to the Premises materially impairs Tenant's ability to continue its
business
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operations in the Premises, then this Lease shall be deemed to have terminated
as of the date such damage occurred.
(c) In the event of repair and restoration as herein provided, the monthly
installments of Base Rent shall be abated proportionately in the ratio which
Tenant's use of the Premises is impaired during the period of such repair or
restoration, unless the damage was caused by the negligent or willful acts of
omissions of Tenant, in which event there shall be abatement of Base Rent only
to the extent of rental abatement insurance proceeds received by Landlord.
Tenant shall not be entitled to any compensation or damages for loss of use of
the whole or any part of the Premises and/or any inconvenience or annoyance
occasioned by such damage, repair or restoration.
(d) If Landlord is obligated to or elects to repair or restore as herein
provided, Landlord shall repair or restore only those portions of the Building
and Premises which were originally provided at Landlord's expense,
substantially to their condition existing immediately prior to the occurrence
of the damage or destruction; and Tenant shall promptly repair and restore, at
Tenant's expense, Tenant's fixtures, improvements, alterations and additions in
and to the Premises or Building which were not provided at Landlord's expense.
(e) Tenant hereby waives the provisions of California Civil Code Section
1932(2) and Section 1933(4) which permit termination of a lease upon
destruction of the leased premises, and the provisions of any similar law now
or hereinafter in effect, and the provisions of this Paragraph 22 shall govern
exclusively in case of such destruction.
(f) Notwithstanding the provisions of Paragraph 22 of the Lease to the
contrary, in the event Landlord elects to repair or restore the Premises and
such repair or restoration is reasonably estimated by Landlord to require more
than one hundred eighty (180) days from the date of destruction, Landlord shall
notify Tenant and Tenant shall have ten (10) days after receipt of such notice
to elect to terminate the Lease by giving written notice of such election to
Landlord. If Tenant so elects to terminate the Lease, such termination shall be
effective as of (i) if Tenant is in possession of the Premises following such
damage or destruction the date Tenant surrenders possession of the Premises to
Landlord following Tenant's election to terminate the Lease or (ii) if Tenant
is unable to occupy the Premises following such damage and destruction, the
date on which the damage or destruction occurred.
23. CONDEMNATION: If twenty-five percent (25%) or more of the Building or the
parking area for the Premises is taken for any public or quasipublic purpose by
any lawful governmental power or authority, by exercise of the right of
appropriation, inverse condemnation, condemnation or eminent domain, or sold to
prevent such taking (each such event being referred to as a "Condemnation"),
Landlord or Tenant may, at its option, terminate this Lease as of the date
title vests in the condemning party. If the Building after any Condemnation and
any repairs by Landlord would be untenantable for the conduct of Tenant's
business operations, Tenant shall have the right to terminate this Lease as of
the date title vests in the condemning party. If either party elects to
terminate this Lease as provided herein, such election shall be made by written
notice to the other party given within thirty (30) days after the nature and
extent of such Condemnation have been finally determined. Tenant shall not
because of such taking assert any claim against Landlord. Landlord shall be
entitled to receive the proceeds of all Condemnation awards (except separate
awards for trade fixtures and relocation expense), and Tenant hereby assigns to
Landlord all of its interest in such awards. If less than twenty-five percent
(25%) of the Building or the parking area is taken, Landlord at its option may
terminate this Lease. If neither Landlord nor Tenant elects to terminate this
Lease to the extent permitted above, Landlord shall promptly proceed to restore
the Premises, to the extent of any Condemnation award received by Landlord, to
substantially their same condition as existed prior to such Condemnation,
allowing for the reasonable effects of such Condemnation, and a proportionate
abatement shall be made to the Base Rent corresponding to the time during
which, and to the portion of the floor area of the Building (adjusted for any
increase thereto resulting from any reconstruction) of which, Tenant is
deprived on account of such Condemnation and restoration. The provisions of
California Code of Civil Procedure Section 1265.130,
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which allows either party to petition the Superior Court to terminate the Lease
in the event of a partial taking of the Premises, and any other applicable law
now or hereinafter enacted, are hereby waived by Landlord and Tenant.
24. ASSIGNMENT AND SUBLETTING:
(a) Tenant shall not voluntarily or by operation of law, (1) mortgage,
pledge, hypothecate or encumber this Lease or any interest herein, (2) assign
or transfer this Lease or any interest herein, sublet the Premises or any part
thereof, or any right or privilege appurtenant thereto, or allow any other
person (the employees, agents and Invitees of Tenant excepted) to occupy or use
the Premises, or any portion thereof, without first obtaining the written
consent of Landlord. A change in control of Tenant shall constitute an
assignment requiring Landlord's consent to the transfer, on a cumulative basis,
of more the fifty percent (50%) of the voting control of Tenant shall
constitute a change in control for this purpose. When Tenant requests
Landlord's consent to such assignment or subletting, it shall notify Landlord
in writing of the name and address of the proposed assignee or subtenant and
the nature and character of the business of the proposed assignee or subtenant
and shall provide current financial statements for the proposed assignee or
subtenant prepared in accordance with generally accepted accounting principles.
Tenant shall also provide Landlord with a copy of the proposed sublet or
assignment agreement, including all material terms and conditions thereof.
Landlord shall have the option, to be exercised within thirty (30) days of
receipt of the foregoing, to (1) cancel this Lease as of the commencement date
stated in the proposed sublease or assignment, (2) acquire from Tenant the
interest, or any portion thereof, in this Lease and/or the Premises that Tenant
proposes to assign or sublease, on the same terms and conditions as stated in
the proposed sublet or assignment agreement, (3) consent to the proposed
assignment or sublease, or (4) refuse its consent to the proposed assignment or
sublease, providing that such consent shall not be unreasonably withheld.
(b) Without otherwise limiting the criteria upon which Landlord may
withhold its consent, Landlord may take into account the reputation and credit
worthiness of the proposed assignee or subtenant, the character of the business
proposed to be conducted in the Premises or portion thereof sought to be
subleased, and the potential impact of the proposed assignment or sublease on
the economic value of the Premises. In any event, Landlord may withhold its
consent to any assignment or sublease, if (1) the actual use proposed to be
conducted in the Premises or portion thereof conflicts with the provisions of
Paragraph 8(a) or (b) above or with any other lease which restricts the use to
which any space in the Building may be put, or (2) the proposed assignment or
sublease requires unreasonable alterations, improvements or additions to the
Premises or portions thereof.
(c) If Landlord approves an assignment or subletting as herein provided,
Tenant shall pay to Landlord, as Additional Rent, fifty percent (50%) of the
difference, if any, between (1) the Base Rent plus Additional Rent allocable to
that part of the Premises affected by such assignment or sublease pursuant to
the provisions of this Lease, and (2) the rent and any additional rent paid by
the assignee or sublessee to Tenant, after deducting the costs of a real estate
commission, if any, incurred by Tenant in connection with any such assignment
or sublease. If the sublease is "full service" sublease, the costs of providing
full service allocable to the part of the premises being subleased shall be
added to 1) The Base Rent plus Additional rent in determining the difference.
It is agreed that "full service" subleases at a rate of $2.50 per square foot
or lower shall not be subject to any additional payment to Landlord. The
assignment or sublease agreement, as the case may be, after approval by
Landlord, shall not be amended without Landlord's prior written consent, and
shall contain a provision directing the assignee or subtenant to pay the rent
and other sums due thereunder directly to Landlord upon receiving written
notice from Landlord that Tenant is in default under this Lease with respect to
the payment of Rent. Landlord's collection of such rent and other sums shall
not constitute an acceptance by Landlord of attornment by such assignee or
subtenant. A consent to one assignment subletting, occupation or use, and
consent to any assignment or subletting shall in no way relieve Tenant of any
liability under this Lease. Any assignment or subletting without Landlord's
consent shall be void, and shall, at the option of Landlord, constitute a
Default under this Lease.
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(d) Tenant shall pay Landlord's reasonable fees, not to exceed Five
Hundred Dollars ($500.00) per transaction, incurred in connection with
Landlord's review and processing of documents regarding any proposed assignment
or sublease.
(e) Tenant acknowledges and agrees that the restrictions, conditions and
limitations imposed by this Paragraph 24 on Tenant's ability to assign or
transfer this Lease or any interest therein, to sublet the Premises or any part
thereof, to transfer or assign any right or privilege appurtenant to the
Premises, or to allow any other person to occupy or, use the Premises or any
portion thereof, are, for the purposes of California Civil Code Section 1951.4,
as amended from time to time, and for all other purposes, reasonable at the
time that the Lease was entered into, and shall be deemed to be reasonable at
the time that Tenant seeks to assign or transfer this Lease or any interest
herein, to sublet the Premises or any part thereof, or transfer or assign any
right or privilege appurtenant to the Premises, or to allow any other person to
occupy or use the Premises or any portion thereof.
25. TENANT'S DEFAULT: The occurrence of any one of the following events shall
constitute an event of default on the part of Tenant ("Default"):
(a) The abandonment of the Premises by Tenant;
(b) Failure to pay any installment of Rent or to any other monies due
and payable hereunder, said failure continuing for a period of 10 calendar days
after the same is due;
(c) A general assignment by Tenant for the benefit of creditors;
(d) The filing of a voluntary petition in bankruptcy by Tenant, the
filing of a voluntary petition for an arrangement, the filing of a petition,
voluntary or involuntary, for reorganization, or the filing of an involuntary
petition by Tenant's creditors, said involuntary petition remaining
undischarged for a period of sixty (60) days;
(e) Receivership, attachment, or other judicial seizure of substantially
all of Tenant's assets on the Premises, such attachment or other seizure
remaining undismissed or undischarged for a period of sixty (60) days after the
levy thereof;
(f) Failure of Tenant to execute and deliver to Landlord any estoppel
certificate, subordination agreement, or lease amendment within the time
periods and in the manner required by Paragraph 30 or 31 or 40;
(g) An assignment or sublease, or attempted assignment or sublease, of
this Lease or the Premises by Tenant contrary to the provision of Paragraph 24,
unless such assignment or sublease is expressly conditioned upon Tenant having
received Landlord's consent thereto;
(h) Failure of Tenant to restore the Security Deposit to the amount and
within the time period provided in Paragraph 6 above;
(i) Failure in the performance of any of Tenant's covenants, agreements or
obligations hereunder (except those failures specified as events of Default in
other Paragraphs of this Paragraph 25, which shall be governed by such other
Paragraphs), which failure constitutes for ten (10) calendar days after written
notice thereof from Landlord to Tenant provided that, if Tenant has exercised
reasonable diligence to cure such failure and such failure cannot be cured
within such ten (10) day period despite reasonable diligence. Tenant shall not
be in default under this subparagraph unless Tenant fails thereafter diligently
and continuously to prosecute the cure to completion; and
(j) Chronic delinquency by Tenant in the payment of Rent, or any other
periodic payments required to be paid by Tenant under this Lease. "Chronic
Delinquency" shall mean failure by Tenant to pay Rent, or any other payments
required to be paid by Tenant under this Lease within (5) calendar days after
written notice thereof for any
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three (3) months (consecutive or nonconsecutive) during any twelve (12) month
period. In the event of a Chronic Delinquency, in addition to Landlord's other
remedies for Default provided in this Lease, at Landlord's option, Landlord
shall have the right to require that Rent be paid by Tenant quarterly, in
advance.
Tenant agrees that any notice given by Landlord pursuant to Paragraph 25(b), (i)
or (j) above shall satisfy the requirements for notice under California Code of
Civil Procedure Section 1161, and Landlord shall not be required to give any
additional notice in order to be entitled to commence an unlawful detainer
proceeding.
26. LANDLORD'S REMEDIES:
(a) TERMINATION. In the event of any Default by Tenant, then in addition to
any other remedies available to Landlord at law or in equity and under this
Lease, Landlord shall have the immediate option to terminate this Lease and all
rights of Tenant hereunder by giving written notice of such Intention to
terminate. In the event that Landlord shall elect to so terminate this Lease,
then Landlord may recover from Tenant:
(1) the worth at the time of award of any unpaid Rent and any other
sums due and payable which have been earned at the time of such termination;
plus
(2) the worth at the time of award of the amount by which the unpaid
Rent and any other sums due and payable which would have been earned after
termination until the time of award exceeds the amount of such rental loss
Tenant proves could have been reasonably avoided; plus
(3) the worth at the time of award of the amount by which the unpaid
Rent and any other sums due and payable for the balance of the term of this
Lease after the time of award exceeds the amount of such rental loss that Tenant
proves could be reasonably avoided; plus
(4) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course would be likely to result
therefrom, including, without limitation, any costs or expenses reasonably and
necessarily incurred by Landlord (i) in retaking possession of the Premises;
(ii) in maintaining, repairing, preserving, restoring, replacing, cleaning,
altering or rehabilitating the Premises or any portion thereof, including such
acts for reletting to a new tenant or tenants; (iii) for leasing commissions; or
(iv) for any other costs necessary or appropriate to relet the Premises; plus
(5) such reasonable attorneys' fees incurred by Landlord as a result
of a Default, and costs in the event suit is filed by Landlord to enforce such
remedy; and plus
(6) at Landlord's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by applicable law.
As used in subparagraphs (1), (2), and (3) above, the "worth at the time of
award" is computed by allowing interest at an annual rate equal to ten percent
(10%) per annum or the maximum rate permitted by law, whichever is less. Tenant
waives redemption of relief from forfeiture under California Code of Civil
Procedure Sections 1174 and 1179, or under any other present or future law, in
the event Tenant is evicted or Landlord takes possession of the Premises by
reason of any Default of Tenant hereunder.
(b) CONTINUATION OF LEASE. In the event of any Default by Tenant, then in
addition to any other remedies available to Landlord at law or in equity and
under this Lease, Landlord shall have the remedy described in California Civil
Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's
Default and abandonment and recover Rent as it becomes due, provided Tenant has
the right to sublet and assign, subject only to reasonable limitations).
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(c) RE-ENTRY. In the event of any Default by Tenant, Landlord shall also
have the right, with or without terminating this Lease, in compliance with
applicable law, to re-enter the Premises and remove all persons and property
from the Premises; such property may be removed and stored in a public warehouse
or elsewhere at the cost of and for the account of Tenant.
(d) RELETTING. in the event of the abandonment of the Premises by Tenant or
in the event that Landlord shall elect to re-enter as provided in Paragraph
26(b) or shall take possession of the Premises pursuant to legal proceeding or
pursuant to any notice provided by law, then if Landlord does not elect to
terminate this Lease as provided in Paragraph 26(a), Landlord may from time to
time, without terminating this Lease, relet the Premises or any part thereof for
such term or terms and at such rental or rentals and upon such other terms and
conditions as Landlord in its sole discretion may deem advisable with the right
to make alterations and repairs to the Premises. In the event that Landlord
shall elect to so relet, then rentals received by Landlord from such reletting
shall be applied in the following order: (1) to reasonable attorneys' fees
incurred by Landlord as a result of a Default and costs in the event suit is
filed by Landlord to enforce such remedies; (2) to the payment of any
indebtedness other than Rent due hereunder from Tenant to Landlord; (3) to the
payment of any reasonable costs of such reletting; (4) to the payment of the
costs of any reasonable alterations and repairs to the Premises; (5) to the
payment of Rent due and unpaid hereunder; and (6) the residue, if any, shall be
held by Landlord and applied in payment of future Rent and other sums payable by
Tenant hereunder as the same may become due and payable hereunder. Should that
portion of such rentals received from such reletting during any month, which is
applied to the payment of Rent hereunder, be less than the Rent payable during
the month by Tenant hereunder, then Tenant shall pay such deficiency to
Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall
also pay to Landlord, as soon as ascertained, any costs and expenses reasonably
and necessarily incurred by Landlord in such reletting or in making such
alterations and repairs not covered by the rentals received from such reletting.
(e) TERMINATION. No re-entry or taking of possession of the Premises by
Landlord pursuant to his Paragraph 26 shall be construed as an election to
terminate this Lease unless a written notice of such intention is given to
Tenant or unless the termination thereof is decreed by a court of competent
jurisdiction. Notwithstanding any reletting without termination by Landlord
because of any Default by Tenant, Landlord may at any time after such reletting
elect to terminate this Lease for any such Default.
(f) CUMULATIVE REMEDIES. The remedies herein provided are not exclusive and
Landlord shall have any and all other remedies provided herein or by law or in
equity.
(g) NO SURRENDER. No act or conduct of Landlord, whether consisting of the
acceptance of the keys to the Premises, or otherwise, shall be deemed to be or
constitute an acceptance of the surrender of the Premises by Tenant prior to the
expiration of the Term, and such acceptance by Landlord or surrender by Tenant
shall only flow from and must be evidenced by a written acknowledgment of
acceptance of surrender signed by Landlord. The surrender of this Lease by
Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects
in writing that such merger takes place, but shall operate as an assignment to
Landlord of any and all existing subleases, or Landlord may, at its option,
elect in writing to treat such surrender as a merger terminating Tenant's estate
under this Lease, and thereupon Landlord may terminate any or all such subleases
by notifying the sublessee of its election so to do within (5) days after such
surrender.
27. ATTORNEY'S FEES: In the event any legal action or proceeding, including
arbitration and declaratory relief, is commenced for the purpose of enforcing
any rights or remedies pursuant to this Lease, the prevailing party shall be
entitled to recover from the non-prevailing party reasonable attorneys' fees, as
well as costs or suit, in said action or proceeding, whether or not such action
is prosecuted to judgment.
28. TAXES: Tenant shall be liable for and shall pay, prior to delinquency, all
taxes levied against personal property and trade or business fixtures of Tenant.
If any alteration, addition or improvement installed by Tenant pursuant to
Paragraph 11, or
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any personal property, trade fixture or other property of Tenant, is assessed
and taxed with the Property, Tenant shall pay such taxes to Landlord within
fifteen (15) days after delivery to Tenant of a statement therefor.
29. EFFECT OF CONVEYANCE: The Term "Landlord" as used in this Lease, means only
the owner for the time being of the Property containing the Building, so that,
in the event of any sale of the Property or the Building, Landlord shall be and
hereby is entirely freed and relieved of all covenants and obligations of
Landlord hereunder accruing from and after transfer, and it shall be deemed and
construed, without further agreement between the parties and the purchaser at
any such sale, that the purchaser of the Property or the Building has assumed
and agreed to carry out any and all covenants and obligations of Landlord
hereunder.
30. TENANT'S ESTOPPEL CERTIFICATE: From time to time, upon written request of
Landlord, Tenant shall execute, acknowledge and deliver to Landlord or its
designee, a written certificate stating (a) the date this Lease was executed,
the Commencement Date of the Term and the date the Term expires; (b) the date
Tenant entered into occupancy of the Premises; (c) the amount of Rent and the
date to which such Rent has been paid; (d) that this Lease is in full force and
effect and has not been assigned, modified, supplemented or amended in any way
(or, if assigned, modified, supplemented or amended, specifying the date and
terms of any agreement so affecting this Lease); (e) that this Lease represents
the entire agreement between the parties with respect to Tenant's right to use
and occupy the Premises (or specifying such other agreements, if any); (f) that
all obligations under this Lease to be performed by Landlord as of the date of
such certificate have been satisfied (or specifying those as to which Tenant
claims that Landlord has yet to perform); (g) that all required contributions by
Landlord to Tenant on account of Tenant's improvements have been received (or
stating exceptions thereto); (h) to the best of Tenant's knowledge that on such
date there exist no defenses or offsets that Tenant has against the enforcement
of this Lease by Landlord (or stating exceptions thereto; (i) that no Rent or
other sum payable by Tenant hereunder has been paid more than one (1) month in
advance (or stating exceptions thereto); (j) that security has been deposited
with Landlord, stating the amount thereof; and (k) any other matters evidencing
the status of this Lease that may be required either by a lender making a loan
to Landlord to be secured by a deed of trust covering the Premises or by a
purchaser of the Premises. Any such certificate delivered pursuant to this
Paragraph 30 may be relied upon by a prospective purchaser of Landlord's
interest or a mortgagee of Landlord's interest or assignee of any mortgage upon
Landlord's interest in the Premises. If Tenant shall fail to provide such
certificate within ten (10) days of receipt by Tenant of a written request by
Landlord as herein provided, such failure shall, at Landlord's election,
constitute a Default under this Lease, and Tenant shall be deemed to have given
such certificate as above provided without modification and shall be deemed to
have given such certificate as above provided without modification and shall be
deemed to have admitted the accuracy of any information supplied by Landlord to
a prospective purchaser or mortgagee.
31. SUBORDINATION: Landlord shall have the right to cause this Lease to be and
remain subject and subordinate to any and all mortgages, deeds of trust
("Encumbrances") that are now or may hereafter be executed covering the
Premises, or any renewals, modifications, consolidations, replacements or
extensions thereof, for the full amount of all advances made or to be made
thereunder and without regard to the time or character of such advances,
together with interest thereon and subject to all the terms and provisions
thereof; provided only that in the event of the foreclosure of any such mortgage
or deed of trust, so long as Tenant is not in default, the holder thereof
("Holder") shall agree to recognize Tenant's rights under this Lease as long as
Tenant shall pay the Rent and observe and perform all the provisions of this
Lease to be observed and performed by Tenant. Within ten (10) days after
Landlord's written request, Tenant shall execute, acknowledge and deliver any
and all reasonable documents required by Landlord or the Holder to effectuate
such subordination. If Tenant fails to do so, such failure shall constitute a
Default by Tenant under this Lease. Notwithstanding anything to the contrary set
forth in this Paragraph 31, Tenant hereby attorns and agrees to attorn to any
person or entity purchasing or otherwise acquiring the Premises at any sale or
other proceeding or pursuant to the exercise of any other rights, powers or
remedies under such Encumbrance.
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32. ENVIRONMENTAL COVENANTS:
(a) As used herein, the term "Hazardous Material" shall mean any
substance or material which has been determined by any state, federal or local
governmental authority to be capable of posing a risk of injury to health,
safety or property, including all of those materials and substances designated
as hazardous or toxic by the city in which the Premises are located, the U.S.
Environmental Protection Agency, the Consumer Product Safety Commissions, the
Food and Drug Administration, the California Water Resources Control Board, the
Regional Water Quality Control Board, San Francisco Bay Region, the California
Air Resources Board, CAL/OSHA Standards Board, Division of Occupational Safety
and Health, the California Department of Food and Agriculture, the California
Department of Health Services, and any federal agencies that have overlapping
jurisdiction with such California agencies, or any other governmental agency
now or hereafter authorized to regulate materials and substances in the
environment. Without limiting the generality of the foregoing, the term
"Hazardous Material" shall include all of those materials and substances
defined as "hazardous materials" or "hazardous waste" in Sections 66680 through
66685 of Title 22 of the California Administrative Code, Division 4, Chapter
30, as the same products, fractions, constituents and sub-constituents of
petroleum or petroleum-related substances, asbestos, and any other materials
requiring remediation now or in the future under federal, state or local
statutes, ordinances, regulations or policies.
(b) Tenant represents, warrants and covenants (i) that subject to above
paragraph 8a it will use and store in, on or about the Premises, only those
Hazardous Materials that are necessary for Tenant to conduct its business
activities on the Premises, (ii) that, with respect to any such Hazardous
Materials, Tenant shall comply with all applicable federal, state and local
laws, rules, regulations, policies and authorities relating to the storage, use,
disposal or cleanup of Hazardous Materials, including, but not limited to, the
obtaining of proper permits, and (iii) that it will not dispose of any Hazardous
Materials in, on or about the Premises under any circumstances.
(c) Tenant shall immediately notify Landlord of any inquiry, test,
investigation or enforcement proceeding by or against Tenant, Landlord or the
Premises concerning a Hazardous Material. Tenant acknowledges that Landlord, as
the owner of the Premises, shall have the right to negotiate, defend, approve
and appeal, any action taken or order issued with regard to Hazardous Material
by an applicable governmental authority. Landlord shall immediately notify
Tenant of any inquiry, test, investigation or enforcement proceeding against the
Premises concerning a Hazardous Material on the Premises. Tenant shall pay
Landlord's cost of negotiating, defending or appealing any action or order
issued with regard to Hazardous Material by an applicable governmental authority
if Tenant caused, permitted or suffered such Hazardous Material to come onto the
Premises. Landlord agrees to indemnify, defend and hold Tenant harmless from and
against the cost and expense of any remediation or cleanup work required by any
governmental agency to be performed on the Premises as a result of any Hazardous
Materials existing on the Premises on the date of this Lease.
(d) If Tenant's storage, use or disposal of any Hazardous Material in, on
or adjacent to the Premises results in any contamination of the Premises, the
soil or surface of groundwater (1) requiring remediation under federal, state
or local statutes, ordinances, regulations, or policies, or (2) at levels which
are unacceptable to Landlord, in Landlord's reasonable judgment, Tenant agrees
to clean up said contamination. Tenant further agrees to indemnify, defend and
hold Landlord harmless from and against any claims, liabilities, suits, causes
of action, costs, expenses or fees, including reasonable attorneys' fees and
costs arising out of or in connection with any remediation, cleanup work,
inquiry or enforcement proceeding in connection therewith, and any Hazardous
Materials currently or hereafter used, stored or disposed of by Tenant or its
agents, employees, contractors or invitees in, on or adjacent to the Premises.
(e) Notwithstanding any other right of entry granted to Landlord under
this Lease, Landlord shall have the right upon reasonable prior written notice
(except in an
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emergency or in a situation where there is a danger of immediate further
contamination, in which case no prior notice will be required) to enter the
Premises or to have consultants enter the Premises throughout the term of this
Lease for the purpose of (1) determining whether the premises are in conformity
with federal, state and local statues, regulations, ordinances, and policies
including those pertaining to the environmental condition of the Premises, (2)
conducting an environmental audit or investigation of the Premises for purposes
of sale, transfer, conveyance or financing, (3) determining whether Tenant has
complied with this Paragraph 32, and (4) determining the corrective measures, if
any, required of Tenant to ensure the safe use, storage and disposal of
Hazardous Materials, or to remove Hazardous Materials (except to the extent
used, stored or disposed of by Tenant or its agents, employees, contractors or
invitees in compliance with applicable law). Tenant agrees to provide access and
reasonable assistance for such inspections. Such inspections may include, but
are not limited to, entering the Premises or adjacent property with drill rigs
or other machinery for the purpose of obtaining laboratory samples. Landlord
shall not be limited in the number of such inspections during the term of this
Lease. To the extent such inspection disclose the presence of Hazardous
Materials used, stored or disposed of other than in accordance with subparagraph
(b)(ii) above, Tenant shall reimburse Landlord for the reasonable cost of such
inspections within ten (10) days of receipt of a written statement thereof. If
such consultants determine that the Premises are contaminated with Hazardous
Materials used, stored or disposed of by Tenant or its agents, employees,
contractors or invitees, Tenant shall, in a timely manner, at its expense,
remove such Hazardous Materials or otherwise comply with the recommendations of
such consultants to the reasonable satisfaction of Landlord and any applicable
governmental agencies. The right granted to Landlord herein to inspect the
Premises shall not create a duty on Landlord's part to inspect the Premises, or
liability of Landlord for Tenant's use, storage or disposal of Hazardous
Materials, it being understood that Tenant shall be solely responsible for all
liability in connection therewith. Landlord shall be liable for the gross
negligence or willful misconduct of Landlord or its agents, employees or
consultants in conducting the aforementioned inspections.
(f) Tenant shall surrender the Premises to Landlord upon the expiration or
earlier termination of this Lease free of debris, waste and Hazardous Materials
used, stored or disposed of by Tenant or its agents, employees, contractors or
invitees, and in a condition which complies with all governmental statutes,
ordinances, regulations and policies, recommendations of consultants hired by
Landlord, and such other reasonable requirements as may be imposed by Landlord.
(g) Tenant's obligations under this Paragraph 32 shall survive termination
of this Lease, and tenant waives the Statute of Limitations, as to Landlord,
applicable to any action brought hereunder.
(h) Landlord hereby discloses to Tenant that the Premises and the Property
are in an area in which contamination of soils or groundwater by Hazardous
Materials may exist. If Tenant desires more definite information regarding the
existence or possible existence of contamination by Hazardous Materials of soils
or groundwater of or beneath the Premises, the Property, or other real property
in the general area of the Property, then tenant shall investigate such matters.
33. NOTICES: All notices and demands which may or are to be required or
permitted to be given to either party by the other hereunder shall be in writing
and shall be sent by United States mail, postage prepaid, certified, or by
personal delivery or overnight courier, addressed to the addressee at the
address for such addressee as specified herein, or to such other place as such
party may from time to time designate in a notice to the other party given as
provided herein. Notice shall be deemed given upon the earlier of actual receipt
or the date on which delivery was attempted if Tenant refuses to receive.
34. WAIVER: The waiver of any breach of any term, covenant or condition of this
Lease shall not be deemed to be a waiver of such term, covenant or condition or
any subsequent breach of the same or any other term, covenant or condition
herein contained. The subsequent acceptance of Rent by Landlord shall not be
deemed to be a waiver of any preceding breach by Tenant, other than the failure
of Tenant to pay the
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particular rental so accepted, regardless of Landlord's knowledge of such
preceding breach at the time of acceptance of such Rent. No delay or omission in
the exercise of any right or remedy of Landlord on any Default by Tenant shall
impair such a right or remedy or be construed as a waiver. Any waiver by
landlord of any Default must be in writing and shall not be a waiver of any
other Default concerning the same or any other provisions of this Lease.
24. HOLDING OVER: Any holding over after the expiration of the Term, without
the express written consent of Landlord, shall constitute a Default and,
without limiting Landlord's remedies provided in this Lease, such holding over
shall be construed to be a tenancy at sufferance, at a rental rate of one
hundred twenty percent (120%) of the Base Rent last due in this Lease, plus
Additional Rent, and shall otherwise be on the terms and conditions herein
specified, so far as applicable.
36. SUCCESSORS AND ASSIGNS: The terms, covenants and conditions of this Lease
shall, subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of all the parties hereto. If
Tenant shall consist of more than one entity or person, the obligations of
Tenant under this Lease shall be joint and several.
37. TIME: Time is of the essence of this Lease and each and every term,
condition and provision herein.
38. BROKERS: Landlord represents and warrants to Tenant that neither it nor
its officers or agents nor anyone acting on its behalf has dealt with any real
estate broker and Tenant represents to Landlord that it nor its officers or
agents nor anyone acting on its behalf has dealt with any real estate broker on
this transaction. Each party agrees to indemnify and hold harmless the other
from any claim or claims, and costs and expenses, including attorney's fees,
incurred by the indemnified party in conjunction with any such claim or claims
of any broker or brokers to a commission in connection with this Lease as a
result of the actions of the indemnifying party.
39. RULES AND REGULATIONS: Tenant agrees to comply with such reasonable rules
and regulations as Landlord may adopt from time to time for the orderly and
proper operating of the Building and parking and other common areas. Such rules
may include but shall not be limited to the following: (a) restriction of
employee parking to a limited, designated area or areas; and (b) regulation of
the removal, storage and disposal of Tenant's refuse and other rubbish at the
sole cost and expense of Tenant. The rules and regulations shall be binding
upon Tenant upon delivery of a copy of them to Tenant. Landlord shall not be
responsible to Tenant for the failure of any other person to observe and abide
by any of said rules and regulations.
40. MORTGAGE PROTECTION:
(a) MODIFICATIONS FOR LENDER. If, in connection with obtaining financing
for the Premises or any portion thereof, Landlord's lender shall request
reasonable modifications to this Lease as a condition to such financing. Tenant
shall not unreasonably withhold, delay or defer its consent to such
modifications, provided such modifications do not materially adversely affect
Tenant's rights or increase Tenant's obligations under this Lease.
(b) RIGHTS TO CURE. Tenant agrees to give any trust deed or mortgage
holder ("Holder") by registered mail, at the same time as it is given to
Landlord, a copy of any notice of default given to Landlord, provided that
prior to such notice Tenant has been notified, in writing, (by way of notice of
assignment of rents and leases, or otherwise) of the address of such Holder.
Tenant further agrees that if Landlord shall have failed to cure such default
within the time provided for in this Lease, then the Holder shall have an
additional twenty (20) days after expiration of such period, or after receipt
of such notice from Tenant (if such notice to the Holder is required by this
Paragraph 42(b)), whichever shall last occur, within which to cure such default
or if such default cannot be cured within that time, then such additional time
as may be necessary if within such twenty (20) days any Holder has commenced
and is diligently pursuing the remedies necessary to cure such default
(including but not limited to commencement of
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foreclosure proceedings, if necessary to effect such cure), in which event this
Lease shall not be terminated.
41. ENTIRE AGREEMENT: This Lease, including the Exhibits and any Addenda
attached hereto, which are hereby incorporated herein by this reference,
contains the entire agreement of the parties hereto, and no representations,
inducements, promises or agreements, oral or otherwise, between the parties,
not embodied herein or therein, shall be of any force and effect.
42. CONSTRUCTION: This Lease shall be construed and interpreted in accordance
with the laws of the State of California. The parties acknowledge and agree
that not rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall be employed in the interpretation of
this Lease, including the Exhibits and any Addenda attached hereto. All
captions in this Lease are for reference only and shall not be used in the
interpretation of this Lease. Whenever required by the context of this Lease,
the singular shall include the plural, the masculine shall include the
feminine, and vice versa. If any provision of this Lease shall be determined to
be illegal or unenforceable, such determination shall not affect any other
provision of this Lease and all such other provisions shall remain in full
force and effect.
43. REPRESENTATIONS AND WARRANTIES OF TENANT: Tenant hereby makes the following
representations and warranties, each of which is material and being relied upon
by Landlord, is true in all respects as of the date of this Lease, and shall
survive the expiration or termination of the Lease.
(a) If Tenant is an entity, Tenant is duly organized, validly existing and
in good standing under the laws of the state of its organization and the
persons executing this Lease on behalf of Tenant have the full right and
authority to execute this Lease on behalf of Tenant and to bind Tenant without
the consent or approval of any other person or entity. Tenant has full power,
capacity, authority and legal right to execute and deliver this Lease and to
perform all of its obligations hereunder. This Lease is a legal, valid and
binding obligation of Tenant, enforceable in accordance with its terms.
(b) Tenant has not (1) made a general assignment for the benefit of
creditors, (2) filed any voluntary petition in bankruptcy or suffered the
filing of an involuntary petition by any creditors, (3) suffered the
appointment of a receiver to take possession of all of substantially all of its
assets, (4) suffered the attachment or other judicial seizure of all or
substantially all of its assets, (5) admitted in writing its ability to pay its
debts as they come due, or (6) made an offer of settlement, extension or
composition to its creditors generally.
Landlord and tenant have executed and delivered this Lease as of the date first
hereinabove set forth.
44. OUTSIDE AREAS:
(a) Subject to the terms and conditions of this lease and such rules and
regulations as Landlord may from time to time prescribe, Tenant and Tenant's
employees, invitees, guests and customers shall have the nonexclusive right to
use the access roads, parking areas, and facilities provided and designated by
Landlord for the general use and convenience of the occupants of the building in
which the premises are located, which areas and facilities are referred to
herein as "Outside Area". This right shall terminate upon the termination of
this Lease. Landlord reserves the right from time to time to make changes in
the shape, size, location, amount and extent of "Outside Area:, and in painting
of exterior walls, Landlord further reserves the right to promulgate such
reasonable rules and regulations relating to the use of the "Outside Area", and
any part or parts thereof, as Landlord may deem appropriate for the best
interests of the occupants of the building. The rules and regulations shall be
binding upon Tenant upon delivery of a copy of them to Tenant and Tenant shall
abide by them and cooperate in their observance. Such rules and regulations may
be amended by Landlord from time to time, with or without advance notice, and
all amendments shall be effective upon delivery of a copy to Tenant. Tenant
agrees to require its employees, executives,
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<PAGE> 21
invitees, guests and customers to abide by such rules and regulations including
parking regulations.
(b) Landlord shall operate, manage and maintain the "Outside Areas", and
landscaping and the surface of the exterior walls. The manner in which the
"Outside Area" shall be maintained and the expenditures for such maintenance
shall be at the discretion of Lessor.
(c) No materials, supplies, equipment, finished products or semi-
finished products, raw materials or articles of any nature shall be stored upon
or permitted to remain on any portion of the leased premises outside of the
building constructed thereon, except with the prior written consent of the
Landlord. No waste materials or refuse shall be dumped upon or permitted to
remain unreasonable upon any part of the leased premises outside of building
proper, unless approved by Landlord.
(d) Tenant shall not use solid hard tires on any fork lifts or dollies on
paved parking, truck loading or driveway areas, and in the event Tenant
violates this provision, Tenant shall be responsible for the cost of
resurfacing the entire area.
45. PARKING: Motor vehicle parking shall be non-exclusive, subject to
reallocation by Landlord from time to time. Landlord reserves the right to
designate from time to time the parking spaces for vehicles of Tenant and its
guests and invitees. Said spaces shall total 474. The designation of 474 spaces
is shown on attached Exhibit B. Tenant agrees that Landlord shall have no
responsibility for policing these parking spaces or seeing that they are used
exclusively by Tenant's employees, guests, or invitees. Tenant shall not at any
time park or permit the parking of Tenant's trucks or other vehicles, or the
trucks or other vehicles of others in driveways or adjacent to loading areas as
to interfere in any way with the use of such areas, nor shall Tenant at any time
park or permit the parking of Tenant vehicles or trucks, or the vehicles or
trucks of Tenant's suppliers or invitees in any portion of the "Parking Area"
not designated by Landlord for such use by Tenant. Tenant shall not park or
permit to be parked inoperative vehicles or equipment on any portion of the
"Outside Area" and agrees that no vehicle will be parked on the "Outside Area"
for longer than sixty-six (66) hours in any seventy-two (72) hour period.
46. CALCULATION OF AREA:
The square footage of the leased premises (approximately 128,154 square feet as
set forth in Paragraph 2) has been calculated in this manner; the area of the
leased building, measured from the outer extent (drip line) of metal and
built-up roofed areas, or the outer walls. The Premises shall be deemed for all
purposes and agreed to consist of 128,154 square feet.
47. INTEREST OF PAST-DUE OBLIGATIONS: Any monetary payment due Landlord
hereunder, other than late charges, not received by Landlord within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 10% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 5.
48. EARLY ACCESS AND REFURBISHMENT ALLOWANCE:
(a) The Tenant accepts the premises in "as is" condition with the
following work to be performed by the Landlord at its cost:
(1) a new roof to replace the existing roof shall be installed
during the period April 15 - May 14, 2000
(2) the work on the roof-top HVAC equipment shown in Exhibit C shall
be completed prior to May 14, 2000.
(b) Landlord represents to Tenant that to the best of Landlord's
recollection, it has not received notice from any governmental agency regarding
code deficiencies in the premises. Landlord makes no representation with regard
to code conformance and
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<PAGE> 22
advises Tenant to thoroughly Inspect the premises and satisfy itself prior to
executing this lease.
(c) The vacant parts of the premises shall be accessible to Tenant
without the payment of rent under this Lease for the period April 15 - May 14,
2000, for the purposes of refurbishment and moving in. Landlord shall provide
an allowance for refurbishment of up to $200,000.00, which shall be reimbursed
to Tenant by Landlord within thirty days of receipt of paid invoices evidencing
such work. Refurbishment shall include repainting, recarpeting, alterations
approved by Landlord, governmental code conformance, and other similar work but
not any costs of procuring, constructing, or installing in the Premises any of
Tenant's personal property or trade fixtures. All of said refurbishment work
entitled to reimbursement of Tenant by Landlord must be completed by December
1, 2000, and Tenant shall forfeit any right to reimbursement as of February 1,
2001. No adjustment in rent or other terms of this Lease shall be made if the
full amount of the $200,000.00 refurbishment allowance is not reimbursed to
Tenant by February 1, 2001.
(d) Notwithstanding anything to the contrary above, rent for the period
April 15 - May 14, 2000 shall be paid to Landlord by Tenant for the space in
the premises currently occupied by Tenant under a sub-lease. Said rent shall be
at the same rate currently paid by Tenant less the mutually agreed upon cost of
any services deleted by Landlord.
Landlord and Tenant have executed and delivered this Lease as of the date first
hereinabove set forth.
LANDLORD TENANT
Herman Christensen, Jr. MMC Networks, Inc.
and Raymond P. Christensen
/s/ HERMAN CHRISTENSEN by: /s/ Douglas C. Spreng
- ------------------------------ -----------------------------------
Herman Christensen, Jr.
/s/ RAYMOND P. CHRISTENSEN Printed
- ------------------------------ Name: /s/ DOUGLAS C. SPRENG
Raymond P. Christensen ------------------------------
by: Herman Christensen Title: President & CEO
his attorney-in-fact ------------------------------
801 American Street
San Carlos, CA 94070-4174 By: /s/ Sena Reddy
----------------------------------
Printed
Name: SENA REDDY
------------------------------
Title: Executive V.P., Operations
-------------------------------
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<PAGE> 23
EXHIBIT 13
MAP
CENTRAL EXPRESSWAY
PHASE II
<PAGE> 24
EXHIBIT A
MAP
CENTRAL EXPRESSWAY
PHASE II
<PAGE> 25
EXHIBIT B
[CHART]
<PAGE> 26
EXHIBIT C
[LETTERHEAD OF PENINSULA AIR CONDITIONING, INC.]
November 18, 1999
Herman Christensen
HERMAN CHRISTENSEN AND SONS
801 American Street
San Carlos, CA 94070
RE: 1144 East Arques
Sunnyvale, Ca.
Dear Herman:
We have inspected the rooftop equipment at the above mentioned address and
found the equipment to be in good condition. The equipment is fifteen years old
and with good maintenance should have a five to ten year life expectancy.
We did find a couple of items that need attention:
Item #1: Condenser and evaporator coils should be cleaned on all A/C units.
Item #2: The first stage compressor in A/C unit #1 is noisy and needs to be
checked out, additionally the evaporator coil was observed to be iced
up and needs to be checked out.
Item #3: A/C unit #5 is discharging condensate water directly onto the roof, a
drainpipe needs to be installed.
Item #4: Some of the rooftop A/C units have broken grease seals on the supply
and relief fan bearings and need to be replaced.
If you have any questions, please give me a call.
Sincerely,
PENINSULA AIR CONDITIONING, INC.
/s/ ERNST HAEMMERLING
- ----------------------------
Ernst Haemmerling
President
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-40173) of MMC Networks, Inc. of our report dated
January 19, 2000 appearing on page 29 of this Form 10K.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 27, 2000
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<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,484
<SECURITIES> 58,511
<RECEIVABLES> 6,780
<ALLOWANCES> 422
<INVENTORY> 3,216
<CURRENT-ASSETS> 87,943
<PP&E> 15,222
<DEPRECIATION> 7,000
<TOTAL-ASSETS> 96,395
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<COMMON> 28
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<TOTAL-LIABILITY-AND-EQUITY> 96,395
<SALES> 70,149
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<CGS> 21,524
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<INCOME-PRETAX> 17,936
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<INCOME-CONTINUING> 11,837
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