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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________ .
COMMISSION FILE NUMBER: 000-24647
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TERAYON COMMUNICATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0328533
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2952 BUNKER HILL LANE
SANTA CLARA, CALIFORNIA 95054
(408) 727-4400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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Indicate by check mark whether the registrant (1) has filed all reports required
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. [X] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 20,913,831 at August 9, 1999
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<PAGE>
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements of Terayon
Communication Systems, Inc. within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 which are subject to the "safe harbor" created by those sections.
These forward-looking statements include, but are not limited to:
statements related to industry trends and future growth in the markets
for cable modem systems; industry standards activities; our strategies
for reducing the cost of our products; our product development efforts;
the effect of GAAP accounting pronouncements on our recognition of
revenues; our future research and development; the timing of our
introduction of new products; the timing and extent of deployment of our
products by our customers; and future profitability. Discussions
containing such forward-looking statements may be found in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations." These forward-looking statements involve certain risks and
uncertainties that could cause actual results to differ materially from
those in such forward-looking statements. We disclaim any obligation to
update these forward-looking statements as a result of subsequent
events. The business risks on pages 15 through 19, among other things,
should be considered in evaluating our prospects and future financial
performance
TERAYON COMMUNICATION SYSTEMS, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998
Condensed Consolidated Statements of Operations - Three and Six Months
Ended June 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows -- Six Months
Ended June 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TERAYON COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $27,939 $14,342
Short-term investments........................... 78,154 14,538
Accounts receivable, less allowance for doubtful
accounts of $1,224 in 1999 and $594 in 1998....... 6,878 2,090
Accounts receivable from related party........... 1,985 1,549
Inventory........................................ 5,618 3,950
Other current assets............................. 3,245 1,856
------------ ------------
Total current assets............................... 123,819 38,325
Property and equipment, net........................ 4,109 3,593
Officer note receivable............................ -- 100
Other assets....................................... 720 128
------------ ------------
Total assets....................................... $128,648 $42,146
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $14,058 $8,600
Accrued payroll and related expenses............. 2,757 2,475
Other accrued liabilities........................ 3,912 2,799
Current portion of capital lease obligations..... 5 29
------------ ------------
Total current liabilities...................... 20,732 13,903
Long-term portion of capital lease obligations..... 9 10
Deferred rent...................................... 127 130
Commitments and contingencies
Common stock, $.001 par value.................... 21 16
Additional paid-in capital....................... 214,475 114,594
Accumulated deficit.............................. (104,841) (84,301)
Deferred compensation............................ (1,869) (2,184)
Stockholders' notes receivable................... (6) (22)
------------ ------------
Total stockholders' equity......................... 107,780 28,103
------------ ------------
Total liabilities and stockholders' equity......... $128,648 $42,146
============ ============
</TABLE>
See accompanying notes.
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ende Six Months Ended
June 30, June 30,
------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product revenues.................... $13,534 $2,202 $24,448 $4,279
Related party product revenues...... 5,548 4,730 10,507 5,097
--------- --------- --------- ----------
Total revenues............... 19,082 6,932 34,955 9,376
--------- --------- --------- ----------
Cost of goods sold:
Cost of product revenues............ 11,410 1,453 22,018 5,017
Cost of related party product
revenues........................... 3,864 5,930 7,211 6,500
--------- --------- --------- ----------
Total cost of goods sold..... 15,274 7,383 29,229 11,517
--------- --------- --------- ----------
Gross profit (loss).................... 3,808 (451) 5,726 (2,141)
--------- --------- --------- ----------
Operating expenses:
Research and development............ 3,951 2,618 7,106 4,923
Cost of product development assistance
agreement 11,178 - 12,793 -
Sales and marketing................. 3,016 1,829 5,852 2,969
General and administrative.......... 1,549 777 2,712 1,282
--------- --------- --------- ----------
Total operating expenses..... 19,694 5,224 28,463 9,174
--------- --------- --------- ----------
Loss from operations.................. (15,886) (5,675) (22,737) (11,315)
Net interest income (expense)......... 1,239 32 2,197 (32)
--------- --------- --------- ----------
Net loss.............................. (14,647) (5,643) (20,540) (11,347)
Series F convertible preferred
stock dividend....................... -- (23,910) -- (23,910)
--------- --------- --------- ----------
Net loss applicable to common
stockholders......................... ($14,647) ($29,553) ($20,540) ($35,257)
========= ========= ========= ==========
Historical basic and diluted net
loss per share applicable to common
stockholders......................... ($0.71) ($6.33) ($1.06) ($7.65)
========= ========= ========= ==========
Shares used in computing historical
basic and diluted net loss per share
applicable to common stockholders.... 20,492 4,667 19,425 4,611
========= ========= ========= ==========
Pro forma basic and diluted net
loss per share applicable to common
stockholders......................... ($2.36) ($2.91)
========= ==========
Shares used in computing pro forma
basic and diluted net loss per share
applicable to common stockholders.... 12,529 12,132
========= ==========
</TABLE>
See accompanying notes
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash Used in Operating Activities ($7,130) ($8,516)
---------- ----------
Investing Activities:
Purchase of short-term investments................ (148,972) --
Proceeds from sales and maturities of
short-term investments.......................... 85,356 418
Purchase of property and equipment................ (1,547) (727)
Purchase of developed technology................. (502) --
---------- ----------
Net cash used in investing activities............ (65,665) (309)
---------- ----------
Financing Activities:
Principal payments on capital leases.............. (25) (42)
Principal payments on long-term debt.............. -- (675)
Exercise of options and warrant to purchase
common stock................................... 10,809 56
Proceeds from issuance of preferred stock......... -- 6,387
Proceeds from issuance of redeemable
preferred stock................................. -- 7,500
Principal payments on common stockholder
notes receivable ............................... 16 60
Proceeds from issuance of common stock............ 75,592 --
---------- ----------
Net cash provided by financing activities.......... 86,392 13,286
---------- ----------
Net increase in cash and cash
equivalents...................................... 13,597 4,461
Cash and cash equivalents at beginning
of period........................................ 14,342 1,569
---------- ----------
Cash and cash equivalents at end of period......... $27,939 $6,030
========== ==========
</TABLE>
See accompanying notes
<PAGE>
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the financial
statements at June 30, 1999 and for the three and six month periods ended
June 30, 1999 and 1998 have been included.
The unaudited condensed consolidated financial statements include the
accounts Terayon Communication Systems, Inc. (the "Company") and its
majority owned subsidiaries, Terayon Communication Systems Europe and
Terayon do Brasil. The minority interest in net losses of Terayon
Communication Systems Europe and Terayon do Brasil were not significant for
all periods presented. All material intercompany balances and transactions
have been eliminated.
Results for the three and six months ended June 30, 1999 are not
necessarily indicative of results for the entire fiscal year or future
periods. These financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes included in the
Company's Form 10-K dated March 23, 1999 as filed with the U.S. Securities
and Exchange Commission. The accompanying balance sheet at December 31,
1998 is derived from audited financial statements at that date.
Cash Equivalents and Short-Term Investments
The Company invests its excess cash in money market accounts and debt
instruments and considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
Investments with an original maturity at the time of purchase of over three
months are classified as short-term investments regardless of maturity date
as all instruments are classified as available-for-sale and can be readily
liquidated to meet current operational needs. At June 30, 1999, all of the
Company's total cash equivalents and short-term investments were classified
as available-for-sale and were obligations issued by U.S. government
agencies and multinational corporations, maturing within two years.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market.
The components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Finished goods.................... $4,497 $3,355
Work-in-process................... 536 170
Raw materials..................... 585 425
------------ ------------
$5,618 $3,950
============ ============
</TABLE>
Net Loss Per Share Applicable to Common Stockholders
Historical basic and diluted net loss per share applicable to
common stockholders were computed using the weighted average number of
common shares outstanding. Options, warrants, restricted stock and
preferred stock were not included in the computation of diluted net
loss per share applicable to common stockholders because the effect
would be antidilutive.
Pro forma net loss per share applicable to common stockholders was
computed as described above and also gives effect, even if
antidilutive, to common equivalent shares from preferred stock that
automatically converted upon the closing of the Company's initial
public offering (using the as-if-converted method).
A reconciliation of shares used in the calculation of historical
and pro forma basic and diluted net loss per share applicable to
common stockholders follows (in thousands, except per share date):
<TABLE>
<CAPTION>
Three Months End Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss applicable to common
stockholders..................... ($14,647) ($29,553) ($20,540) ($35,257)
========= ========= ========= =========
Shares used in computing
historical basic and diluted net
loss applicable to common
stockholders..................... 20,492 4,667 19,425 4,611
======== ======== ======== ========
Historical basic and diluted net
loss per share applicable to
common stockholders.............. ($0.71) ($6.33) ($1.06) ($7.65)
======== ======== ======== ========
Shares used in computing
historical basic and diluted net
loss per share applicable to
common stockholders.............. 4,667 4,611
Adjustment to reflect the effect
of the assumed conversion of
weighted average shares of
convertible preferred stock
outstanding to common stock..... 7,862 7,521
--------- ---------
Shares used in computing pro
forma basic and diluted net loss
per share applicable to common
stockholders..................... 12,529 12,132
======== ========
Pro forma basic and diluted net
loss per share applicable to
common stockholders.............. ($2.36) ($2.91)
========= =========
</TABLE>
Comprehensive Net Loss
The Company has adopted Statement of Accounting Standard No. 130
"Reporting Comprehensive Income" (FAS130). FAS 130 requires
that all items required to be recognized under accounting standards as
components of comprehensive income (comprehensive net loss) be
reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company's comprehensive
net loss was the same as its net loss for the three and six months
ended June 30, 1999 and 1998.
Segments of an Enterprise and Related Information
The Company operates in one business segment, the sale of cable
modem access systems, which it sells primarily to customers within the
cable and communications industries. The TeraPro and TeraLink are sold
together as part of an entire system, and the Company accordingly does
not report revenue derived from these components.
The Chief Executive Officer has been identified as the Chief
Operating Decision Maker (CODM) because he has final authority over
resource allocation decisions and performance assessment. The CODM
does not receive discrete financial information about the individual
components.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133
provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. FAS 133 was
effective for fiscal years beginning after June 15, 1999. In July
1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -Deferral of the Effective Date of
FASB Statement No. 133" (FAS 137). FAS 137 defers for one year the
effective date of FAS 133 which will now apply to all fiscal quarters
of all fiscal years beginning after June 15, 2000. The Company
believes that the adoption of FAS 137 will not have a significant
impact on the Company's operating results or cash flows.
2. Stockholders' Equity
Public Offering
In January 1999, the Company completed a public offering of
3,250,000 shares of common stock, of which 1,750,000 shares were
offered by the Company and 1,500,000 shares were offered by existing
stockholders. The public offering resulted in proceeds to the Company
of approximately $62,500,000, net of underwriting discounts,
commissions and other offering costs. In February 1999, the
underwriters purchased 487,500 additional shares of common stock as a
result of the exercise of the over-allotment option, of which 351,946
and 135,554 shares of common stock were purchased from the Company and
certain existing stockholders, respectively. This additional sale of
common stock resulted in proceeds of approximately $12,700,000 to the
Company, net of underwriting discounts and commissions.
Shaw Warrant Exercise
On March 11, 1999, Shaw Communications, Inc. ("Shaw") purchased
1,500,000 unregistered shares of the Company's common stock at $6.50
per share, resulting in net proceeds to the Company of approximately
$9,750,000. The shares were purchased pursuant to the exercise of a
warrant to purchase 3,000,000 shares of the Company's common stock
issued to Shaw in 1998.
During 1998, the Company also issued a warrant (the "Anti-Dilution
Warrant") to Shaw to purchase an indeterminate number of shares of the
Company's common stock. The Anti-Dilution Warrant is exercisable at
the option of Shaw during the period that Shaw owns equity securities
of the Company (purchased in April 1998) and in the event the Company
issues new equity securities at below the current market price as
defined in the Anti-Dilution Warrant. The aggregate exercise price is
$1.00. Should the Company be required to issue to Shaw certain
additional shares of its common stock under the Anti-Dilution Warrant,
future material charges may arise that would adversely affect the
Company's results of operations. The Company recorded expenses of
approximately $300,000 for the three and six months ended June 30,
1999 relating to shares issuable pursuant to the Anti-Dilution Warrant
(none during the three and six month period ended June 30, 1998).
3. Product Development Assistance Agreement
On March 18, 1999, the Company entered into a one-year Product
Development Assistance Agreement ("Development Agreement") with Rogers
Communications Inc. ("Rogers Communications"). Under the terms of the
Development Agreement, Rogers Communications will provide the Company
assistance with the characterization and testing of the Company's
subscriber-end and head-end voice-over-cable equipment. In addition,
Rogers Communications will provide the Company with technology to
assist the Company in connection with its efforts to develop high
quality, field proven technology solutions that are DOCSIS (1.0, 1.1
and 1.2)-compliant and packet cable-compliant. In consideration of
Rogers Communications entering into the Development Agreement, the
Company issued Rogers Communications two fully vested and non-
forfeitable warrants, each to purchase 1,000,000 shares of common
stock. One warrant provides for an exercise price of $1.00 per share
and one warrant provides for an exercise price of $37.00 per share.
The warrants may be exercised at any time in full or in part through
June 30, 2000. The fair value of the two warrants is estimated to be
approximately $45,000,000 and will result in a noncash charge included
in operations over the one-year term of the Development Agreement.
For the three and six months ended June 30, 1999, the Company incurred
approximately $11,200,000 and $12,800,000, respectively, of product
development expense related to the Development Agreement.
In addition, on March 18, 1999, the Company entered into a Supply
Agreement with Rogers Cablevision Limited ("Rogers Cablevision"), a
subsidiary of Rogers Communications. Under the Supply Agreement, the
Company agreed to make available to Rogers Cablevision its current
TeraLink Gateway and TeraLink 1000 Master Controller, and TeraPro
Cable Modems and specified software. The Company also committed to
certain product pricing and specifications.
The Supply Agreement and the Development Agreement do not
constitute a commitment by either Rogers Cablevision or Rogers
Communications to purchase or deploy any particular volume or quantity
of the Company's product. No such commitment will be made unless
Rogers Cablevision or Rogers Communications issues a purchase order to
the Company.
4. Contingencies
In the normal course of business, the Company from time to time
receives inquiries with regard to various legal proceedings. In the
opinion of management, any liability resulting from these inquiries
has been accrued and will not have a material adverse effect on the
Company's financial position or results of operations.
5. Subsequent Event
In July 1999, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") to acquire Imedia Corporation
("Imedia"), a California corporation. Imedia produces routing and re-
multiplexing systems for digital video that enable cable operators to
select and customize their program lineup for viewer preferences,
while maximizing video capacity and quality over standards-based set-
top boxes. In general, the Imedia shareholders, vested optionholders
and warrantholders will receive shares of Terayon common stock,
options and warrants to purchase shares of Terayon common stock and,
in certain circumstances, cash, valued at up to approximately
$99,000,000 and not less than approximately $69,000,000, subject to
adjustment. The holders of unvested Imedia options also will receive
options to purchase Terayon common stock, the fair value of which will
be included in the purchase price. The maximum total purchase price is
estimated to be approximately $107,000,000. The shares of Terayon
common stock, options and warrants to purchase shares of Terayon
common stock and, if applicable, cash payments will be delivered at up
to three different closings over the 18-month period following the
effective date of the transaction. The transaction is subject to
customary closing conditions, including approval by Imedia's
shareholders, and is expected to close late in the third quarter of
1999. The Company expects to account for the acquisition as a
purchase transaction.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We develop, market and sell broadband access systems based upon our S-
CDMA technology. Our objective is to be the leading provider of broadband
access systems to cable operators seeking to provide broadband access
services to residential and commercial end users. Since our inception in
January 1993, we have focused on the development of our S-CDMA technology,
as well as certain other core technologies, to enable broadband transmission
of data over cable networks. We began the specification and design of our
first ASIC in October 1994 and produced the first version of this ASIC in
June 1996. At the same time, we developed an end-to-end broadband access
system, the TeraComm system, around the ASIC. During late 1996 and through
1997, we began limited field trials of the TeraComm system with several
cable operators. We commenced volume shipments to a small number of cable
operators in the first quarter of 1998. We had revenues of $19.1 million
for the three months ended June 30, 1999 and $35.0 million for the six
months ended June 30, 1999. This compares to revenues of $6.9 million for
the three months ended June 30, 1998 and $9.4 million for the six months
ended June 30, 1998.
We sell our products both in the United States and internationally, and
we market our products primarily to cable operators and distributors. Our
strategy is to supply leading cable operators worldwide. Consistent with
this strategy, our initial target market consists of the ten largest cable
companies in each major geographic area. In most markets, a small number of
large cable operators often provide services to a majority of the
subscribers in a specific region and thus influence the purchase decisions
of smaller cable operators. To date, four of the largest North American
cable operators, Rogers Cablevision, Shaw Communications Inc., Cablevision
Systems, Inc. and TCA Cable TC, Inc., are deploying the TeraComm system. In
Japan, through our partner Sumitomo Corporation, we have established
ourselves as the market leader. In Europe, we have a contract to ship
225,000 modems to United Pan-Europe Communications ("UPC"), Europe's largest
cable operator. As a result of the nature of the cable industry and our
strategic focus, a small number of customers have accounted for all of our
revenues to date, and we expect that the majority of our revenues will
continue to be generated from a small number of customers for the
foreseeable future. In the three months ended June 30, 1999, sales to Shaw
represented approximately 29% of our revenues and sales to Sumitomo
represented approximately 17% of our revenues. This compares to
approximately 41% of revenues from Shaw and approximately 14% of revenues
from each of Sumitomo and Cablevision in the three months ended June 30,
1998. In the six months ended June 30, 1999, sales to Shaw represented
approximately 30% of revenues, sales to Sumitomo represented approximately
16% of revenues and sales to Cablevision represented approximately 12% of
revenues. This compares to 40% of revenues from sales to Shaw, 14% of
revenues from sales to Sumitomo and 10% of revenues from sales to
Cablevision in the six months ended June 30, 1998.
The market for broadband access products and services is characterized
by rapid technological change, new product development and product
obsolescence and evolving industry standards. A significant element of our
strategy is to advance industry standards and to extend our technology
leadership and achieve rapid time to market. In November 1998, we were
selected by CableLabs to co-author DOCSIS 1.2, an enhanced version of the
DOSCIS cable modem specification based in part on our S-CDMA technology. In
order to advance the standardization of cable modem technology, we have
agreed to contribute some aspects of our S-CDMA technology to the DOCSIS
intellectual property pool upon completion and acceptance of a specification
that includes our S-CDMA technology. We intend to develop future products
that are DOCSIS 1.2-compliant and are actively participating in the
development of additional industry standards.
The intensely competitive nature of the market for broadband access
systems has resulted in significant price erosion over time. We have
experienced and expect to continue to experience downward pressure on our
unit average selling price ("ASP"). We had negative gross margins from
inception until the fourth quarter of 1998 when we achieved a positive gross
margin for the first time. A key component of our strategy is to decrease
the cost of manufacturing our products to improve our gross margins. For
example, in the fourth quarter of 1998, we introduced a cable modem using a
single-board design, which has higher gross margins than our original dual
board design. We intend to continue to engage in and implement cost
reduction efforts, including the further integration of ASIC components,
other design changes and the introduction of a second contract manufacturer.
We sustained net losses applicable to common stockholders of $14.6
million for the three months ended June 30, 1999 and $29.6 million for the
same period of 1998. For the six months ended June 30, 1999, we sustained
net losses applicable to common stockholders of $20.5 million compared to
$35.3 million for the same period of 1998. As a result, we had an
accumulated deficit of $104.8 million as of June 30, 1999. Our operating
expenses are based in part on our expectations of future sales, and we
expect that a significant portion of our expenses will be committed in
advance of sales. We expect to increase significantly our expenditures in
technical development and sales and marketing as we engage in activities
related to product enhancement, cost reduction and increasing market
penetration. Additionally, we expect to increase our capital expenditures
and other operating expenses in order to support and expand our operations.
We anticipate that we will spend approximately $4.0 million on capital
expenditures and approximately $22.3 million on research and development
during the 12 months ended June 30, 2000. Anticipated capital expenditures
consist of purchases of additional test equipment to support higher levels
of production and computer hardware, software and equipment for newly hired
employees. As a result of these anticipated increased operating expenses, we
expect to continue to incur losses for the foreseeable future.
Recent Developments
In July 1999, we entered into an Agreement and Plan of Reorganization
(the "Agreement") to acquire Imedia Corporation ("Imedia"), a California
corporation. Imedia produces routing and re-multiplexing systems for digital
video that enable cable operators to select and customize their program
lineup for viewer preferences, while maximizing video capacity and quality
over standards-based set-top boxes. In general, the Imedia shareholders,
vested optionholders and warrantholders will receive shares of our common
stock, options and warrants to purchase shares of our common stock and, in
certain circumstances, cash, valued at up to approximately $99.0 million and
not less than approximately $69.0 million, subject to adjustment. The
holders of unvested Imedia options also will receive options to purchase our
common stock, the fair value of which will be included in the purchase
price. The maximum total purchase price is estimated to be approximately
$107.0 million. The shares of our common stock, options and warrants to
purchase shares of our common stock and, if applicable, cash payments will
be delivered at up to three different closings over the 18-month period
following the effective date of the transaction. The transaction is subject
to customary closing conditions, including approval by Imedia's
shareholders, and is expected to close late in the third quarter of 1999. We
expect to account for the acquisition as a purchase transaction.
Results of Operations
Three and Six Months Ended June 30, 1999 and 1998
Revenues. Revenues consist primarily of sales of cable modems and
headend equipment to new and existing customers. We generally recognize
revenues upon shipment of products to customers. Our revenues increased to
$19.1 million for the three months ended June 30, 1999 from $6.9 million for
the same period in 1998. For the six months ended June 30, 1999 our
revenues increased to $35.0 million from $9.4 million for the same period in
1998. Our revenues increased during the three and six months ended June 30,
1999 compared to the same periods in 1998, due to shipments made to new
customers, such as UPC, as well as increased shipments to existing
customers, such as Shaw and Sumitomo. Our components are sold together as
part of an entire system and, accordingly, we do not report revenues derived
from each component.
Cost of Goods Sold. Cost of goods sold consists of direct product costs
and the cost of our manufacturing operations group. The cost of our
manufacturing operations group consists of assembly, test and quality
assurance for products, warranty costs and associated costs of personnel and
equipment. For the three months ended June 30, 1999, we incurred cost of
goods sold of $15.3 million compared to $7.4 million for the three months
ended June 30, 1998. We incurred cost of goods sold of $29.2 million for the
six months ended June 30, 1999 compared to $11.5 million for the same period
in 1998. Our cost of goods sold increased during the three and six months
ended June 30, 1999 compared to the same periods in 1998 primarily due to
increased product shipments. Cost of goods sold for the six months ended
June 30, 1998 included a charge of $1.3 million relating to the write-off of
obsolete inventory and the transition of manufacturing operations to
Solectron during the first quarter of 1998.
Gross Profit (Loss). We achieved a gross profit of $3.8 million for the
three months ended June 30, 1999 compared to a gross loss of $451,000 for
the same period in 1998. Gross profit for the six months ended June 30,
1999 was $5.7 million compared to a gross loss of $2.1 million for the six
month period ended June 30, 1998. The gross profit for the three months
ended June 30, 1999 represents the third consecutive quarter we have
achieved positive margins. This improvement in our gross margin is largely
the result of the introduction of our lower cost, single-board modem and our
continued cost reduction efforts. We are continuing to pursue further
cost reductions in our products. We also expect continued decreases in the
average sales price of our modem. It is anticipated that these price
decreases could offset, at least partially, any further cost reductions that
we may be able to achieve.
Our gross profit also is influenced by the sales mix of TeraLink Master
Controllers, TeraLink Gateways and TeraPro cable modems and the maturity of
TeraComm system deployments in any quarter. TeraPro cable modems have lower
margins than the TeraLink Master Controllers and TeraLink Gateway headend
products. New deployments of TeraComm systems typically include a higher mix
of headend equipment and involve smaller quantities of product sold.
Products sold in connection with new deployments thus generally are sold at
higher margins than products associated with more mature deployments of the
TeraComm system, which generally involve larger quantities of products. We
expect that the introduction of new customers and the relationship of
revenues generated from the sale of TeraPro cable modems to our overall
revenue will result in fluctuations in our gross profit in future quarters.
Research and Development. Research and development expenses consist
primarily of personnel costs, as well as design expenditures, equipment and
supplies required to develop and enhance our products. Research and
development expenses increased to $4.0 million for the three months ended
June 30, 1999 from $2.6 million for the three months ended June 30, 1998,
primarily due to increased personnel. For the six months ended June 30,
1999, research and development expenses were $7.1 million compared to $4.9
million for the same period in 1998, also primarily due to increased
personnel. We intend to increase investment in research and development
programs in future periods for the purpose of enhancing current products,
reducing the cost of current products and developing new products.
Cost of Product Development Assistance Agreement. In March 1999, we
entered into a one-year Product Development Assistance Agreement with Rogers
Communications Inc. Under the terms of the Development Agreement, Rogers
will assist us with the characterization and testing of our subscriber-end
and head-end voice-over-cable equipment. In addition, Rogers will provide
us with technology to assist us with our efforts to develop high quality,
field proven technology solutions that are DOCSIS-compliant and packet
cable-compliant. The Development Agreement has a term of one year. In
consideration of Rogers entering into the Development Agreement, we issued
Rogers two fully vested and non-forfeitable warrants, each to purchase
1,000,000 shares of common stock. One warrant has an exercise price of
$1.00 per share and one warrant has an exercise price of $37.00 per share.
The warrants may be exercised at any time in full or in part through June
30, 2000. The fair value of the two warrants is estimated to be
approximately $45,000,000 and will result in a noncash charge included in
operations over the one-year term of the Development Agreement. As a
result of the Development Agreement, our results for the three months ended
June 30, 1999 include a noncash charge of $11.2 million and our results for
the six months ended June 30, 1999 include a noncash charge of $12.8
million.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions for sales, marketing and customer service and
support personnel and costs related to trade shows, consulting and travel.
Sales and marketing expenses increased to $3.0 million for the three months
ended June 30, 1999 from $1.8 million for the three months ended June 30,
1998. For the six months ended June 30, 1999, sales and marketing expenses
increased to $5.9 million from $3.0 million for the same period in 1998. The
increase in sales and marketing expenses was primarily due to increased
payroll and commission costs related to additional sales and support
personnel required to support higher sales in 1999. We expect sales and
marketing expenses to increase in the future as we expand our sales,
marketing and customer support capabilities through increases in both our
direct sales staff and our marketing staff, as well as increased
relationships with distributors.
General and Administrative. General and administrative expenses consist
primarily of salaries and benefits for administrative officers and support
personnel, travel expenses, legal, accounting and consulting fees. General
and administrative expenses increased to $1.5 million for the three months
ended June 30, 1999 from $777,000 for the three months ended June 30, 1998.
General and administrative expenses increased to $2.7 million for the six
months ended June 30, 1999 from $1.3 million for the six months ended June
30, 1998. The increase was primarily a result of the additional reporting
requirements imposed on us as a public company and the increased
infrastructure required to support our expanded activities. We expect that
general and administrative expenses will continue to increase in the near
term as a result of these factors.
Series F Convertible Preferred Stock Dividend. We recorded a dividend of
$23.9 million in the six months ended June 30, 1998. The dividend
represented the fair value of a warrant to purchase 3,000,000 shares of our
common stock (the "Shaw Warrant"), and was recorded under the provision of
the Financial Accounting Standards Board's Emerging Issues Task Force Issue
No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock." The Shaw Warrant was issued
in connection with the sale of $5.0 million of convertible preferred stock
to Shaw (the "Shaw Financing"). Our accounting conclusion was that the sale
of preferred stock was, in substance, a financing transaction and not the
issuance of equity instruments in exchange for goods or services. When we
issued the $5.0 million of convertible preferred stock and the Shaw Warrant
on April 6, 1998, our singular objective was to obtain sufficient liquidity
to continue as a going concern. At the time of the Shaw Financing, our
ability to continue as a going concern was in serious doubt. At March 31,
1998, we had only $109,000 in cash, but were using cash of approximately
$1.0 million, net, per month in operations. In addition, we had a deficit
in working capital of $8.8 million. On March 11, 1999, Shaw purchased
1,500,000 shares of our common stock under the terms of the above warrant,
resulting in net proceeds to us of $9.8 million.
Net Interest Income (Expense). Net interest income was $1.2 million for
the three months ended June 30, 1999 compared to $32,000 for the three
months ended June 30, 1998. Net interest income was $2.2 million for the six
months ended June 30, 1999 compared to net interest expense of $32,000 for
the same period in 1998. The increases were due to higher cash balances
resulting from the proceeds of our initial public offering in August 1998
and our subsequent follow-on public offering in January 1999.
Income Taxes. We have not generated net income to date and therefore we
have not incurred or accrued any income taxes since our inception.
Liquidity and Capital Resources
At June 30, 1999, we had approximately $27.9 million in cash and cash
equivalents, $78.2 million in short-term investments and a $10.0 million
revolving line of credit. There were no outstanding borrowings under the
line of credit and approximately $3.0 million was available.
On January 21, 1999, we completed a public offering of 3,250,000 shares
of common stock at a public offering price of $38.00 per share. Of the
3,250,000 shares, we sold 1,750,000 shares and selling stockholders sold
1,500,000 shares. We received net proceeds of $62.5 million, after the
underwriting discount of approximately $3.3 million and offering expenses of
approximately $700,000. The proceeds from this offering have been designated
for general corporate purposes. On February 9, 1999, the underwriters
exercised their option to purchase 487,500 additional shares of common stock
to cover over-allotments, of which 351,946 shares were purchased from us and
135,554 shares were purchased from selling stockholders. Our net proceeds
from the exercise of the over-allotment option were $12.7 million.
On March 11, 1999, Shaw purchased 1,500,000 unregistered shares of our
common stock at $6.50 per share, resulting in net proceeds to us of $9.8
million. The shares were purchased pursuant to the exercise of a warrant to
purchase 3,000,000 shares of our common stock issued to Shaw in 1998.
Cash used in operating activities in the first six months of 1999 was
$7.1 million compared to $8.5 million in the first six months of 1998. Cash
used in investing activities was $65.7 million in the first six months of
1999 compared to $309,000 in the first six months of 1998. Investment
activities consisted primarily of the purchase of short-term investments in
1999 and the purchase of property and equipment in 1998. Cash provided by
financing activities was $86.4 million for the six months ended June 30,
1999 compared to $13.3 million for the six months ended June 30, 1998.
Financing activities consisted primarily of proceeds from the issuance of
common stock in 1999 and from the issuance of preferred stock in 1998.
As of June 30, 1999, we had approximately $24.8 million of unconditional
purchase obligations. We anticipate that we will pay approximately $13.6
million of these obligations by September 30, 1999. We intend to make these
payments out of available working capital.
We believe that our current cash balances will be sufficient to satisfy
our cash requirements for at least the next 12 months.
Year 2000
The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year (the "Year 2000
Issue"). Computer programs that have date-sensitive software like this may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
We are heavily dependent upon the proper functioning of our own
computer or data-dependent systems. This includes, but is not limited to,
our systems in information, business, finance, operations, manufacturing and
service. Any failure or malfunctioning on the part of these or other systems
could harm us in ways that are not currently known, discernible,
quantifiable or otherwise anticipated.
We have established an internal task force to evaluate those areas of
our business that may be affected by the Year 2000 Issue. The task force
has developed a plan for timely Year 2000 compliance (the "Plan"). The Plan
consists of four identifiable activities.
* Inventory and Assessment. This activity involves identifying and
compliance classifying products and internal systems and assessing the
potential impact to critical business processes and business continuity in
the event the products and systems are non-compliant. In addition, this
activity includes formal communication with significant suppliers, large
customers and development partners to determine the extent to which we are
vulnerable to these third parties' failures to remedy their own Year 2000
issues.
* Testing and Remediation. This activity involves testing our products
and internal systems and upgrading and replacement of non-compliant products
and systems.
* Contingency Planning. This activity involves the development of
contingency plans for situations that may result if we are unable to achieve
Year 2000 readiness of our critical operations.
* Internal Audit. This activity involves assuring complete and continued
compliance of our products and systems.
The Plan has been implemented but has not been completed. We have
developed and conducted tests to determine whether our products are Year
2000 compliant. All TeraComm System hardware and software passed the
compliance tests. Based on these results, we believe our products are Year
2000 compliant and we will continue to test our products to ensure
continuing compliance. Inventory and assessment of our internal systems in
finance, operations, manufacturing and service is continuing. In some
instances, we have received assurances from software vendors that Year 2000
compliance can be achieved in these areas through standard, planned upgrades
of system software. Many of these upgrades already have been completed. We
anticipate that we will address the critical Year 2000 issues by the end of
the third quarter of 1999, prior to any anticipated impacts on our operating
systems. We expect that we may address some non-critical Year 2000 issues
beyond the Year 2000.
We also are in the process of attempting to determine whether our key
suppliers and customers are Year 2000 compliant. To date, we have only
limited information on the Year 2000 compliance of these suppliers and
customers. The operations of our key suppliers and customers could be harmed
in the event they do not successfully and timely achieve Year 2000
compliance. Our business and results of operations could suffer if our key
suppliers were to experience Year 2000 issues that caused them to delay
manufacturing or shipment of key components to us. In addition, our results
of operations may be harmed if any of our key customers encounter Year 2000
issues that cause them to delay or cancel substantial purchase orders or
delivery of our product.
To date, we have not incurred significant costs associated with our
efforts to become Year 2000 compliant, as the majority of the costs have
occurred as a result of normal upgrade procedures. Furthermore, we believe
that future costs associated with our Year 2000 compliance efforts will not
be material.
We may not be able to address the Year 2000 Issue in a timely manner or
to upgrade any or all of our major systems in accordance with the plan. In
addition, any upgrades we do may not effectively address the Year 2000
Issue. If required upgrades are not completed timely or are not successful,
we may be unable to conduct our business or manufacture our products.
Furthermore, there can be no guarantee that the systems of other companies
on which our systems rely will be timely converted. In addition, a failure
to convert by another company, or a conversion that is incompatible with our
systems, would harm our business. We intend to, but have not yet established
a contingency plan detailing actions that will be taken in the event that
the assessment of the Year 2000 Issue is not successfully completed on a
timely basis.
Recent Financial Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133
provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. FAS 133 was
effective for fiscal years beginning after June 15, 1999. In July
1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -Deferral of the Effective Date of
FASB Statement No. 133" (FAS 137). FAS 137 defers for one year the
effective date of FAS 133 which will now apply to all fiscal quarters
of all fiscal years beginning after June 15, 2000. The Company
believes that the adoption of FAS 137 will not have a significant
impact on the Company's operating results or cash flows.
CERTAIN BUSINESS RISKS
We Have a Limited Operating History and a History of Losses.
We have a very limited operating history, and it is difficult to
predict our future operating results. We were incorporated in January 1993
and began shipping products commercially in June 1997. We have only been
shipping products in volume since the first quarter of 1998. As of June 30,
1999, we had an accumulated deficit of $104.8 million. We believe that we
will continue to experience net losses for the foreseeable future. Most of
our expenses are fixed in advance, and we generally are unable to reduce our
expenses significantly in the short term to compensate for any unexpected
delay or decrease in anticipated revenues. We expect to increase expense
levels in each of the next several quarters to support increased sales and
marketing activities and technical support costs. Any significant delay in
our anticipated revenues or commercialization of new products would harm our
business. The revenue and profit potential of our business and our industry
are unproven. We had negative gross margins from our inception until the
fourth quarter of 1998, and any future growth in revenues may not result in
positive gross margins or operating profits in future periods.
Our Operating Results May Fluctuate.
Our quarterly revenues are likely to fluctuate significantly in the
future due to a number of factors, many of which are outside our control.
Factors that could affect our revenues include the following:
* variations in the timing of orders and shipments of our products;
* variations in the size of the orders by our customers;
* new product introductions by competitors;
* delays in introducing new products;
*delays of orders forecast by our customers;
* delays by our customers in the completion of upgrades of cable
infrastructure;
* variations in capital spending budgets of cable operators; and
* delays in obtaining regulatory approval for commercial deployment of
cable modem systems.
Our expenses generally will vary from quarter to quarter depending on
the level of actual and anticipated business activities. Research and
development expenses will vary as we begin development of new products and
as our development programs move to wafer fabrication, which results in
higher engineering expenses.
We have a limited backlog of orders, and net sales for any future
quarter are difficult to predict. Supply, manufacturing or testing
constraints could result in delays in the delivery of our products. Any
delay in the product deployment schedule of one or more of the cable
operators that we target would have an adverse effect on our operating
results for a particular period. In addition, due to the large dollar size
of a typical transaction in comparison to our total revenues, any delay in
the closing of a transaction could have a significant impact on our
operating results for a particular period.
A variety of factors affect our gross margin, including the following:
* the sales mix of our products;
* the volume of products manufactured;
* the type of distribution channel through which we sell our products;
* the average selling prices or "ASPs" of our products; and
* the effectiveness of our cost reduction measures.
We anticipate that the ASPs of our products will decline in the future.
This could cause a decrease in the gross margins for these products. In
addition, the maturity of TeraComm system deployments affects our gross
margin. New deployments of the TeraComm system involve the sale of headend
equipment (which has higher margins) and generally involve smaller
quantities of product. New deployments typically are sold at higher margins
than the larger volume sales of product associated with more mature
deployments of the TeraComm system. The sales mix of TeraLink 1000 Master
Controllers, TeraLink Gateways and TeraPro cable modems also affects our
gross margin. The TeraPro cable modems have significantly lower margins than
the TeraLink 1000 Master Controller and TeraLink Gateway headend products.
We expect to achieve only nominal margins on the TeraPro cable modems for
the foreseeable future. Further, we expect that sales of TeraPro cable
modems will continue to constitute a significant portion of our revenues for
the foreseeable future.
We Are Dependent on a Small Number of Customers.
Three customers accounted for approximately 58% of our revenues in the
first six months of 1999 and for approximately 64% of our revenues in the
first six months of 1998. We believe that a substantial majority of our
revenues will continue to be derived from sales to a relatively small number
of customers for the foreseeable future. In addition, we believe that sales
to these customers will be focused on a small number of projects. The cable
industry is undergoing significant consolidation in the United States and
internationally, and a limited number of cable operators controls an
increasing number of cable systems. As a result, our sales will be largely
dependent upon product acceptance by the leading cable operators. Currently,
ten cable operators in the United States own and operate facilities passing
approximately 86% of total homes passed. The timing and size of each
customer's order is critical to our operating results. Our major customers
are likely to have significant negotiating leverage and may attempt to
change the terms, including pricing, on which we do business with them.
These customers also may require longer payment terms than we anticipate,
which could require us to raise additional capital to meet our working
capital requirements. Our success will depend on our cable modems being
widely deployed and our ability to sell to new customers.
Our Acquisition of Imedia Could Result in Dilution, Operating Difficulties
and Other Harmful Consequences
If appropriate opportunities present themselves, we intend to acquire
businesses, technologies, services or products that we believe are
strategic. In July 1999, we signed an agreement to acquire Imedia
Corporation. The process of integrating an acquired business into our
business and operations may result in unforeseen operating difficulties and
expenditures. Integrating Imedia, or any other business, will require
significant management resources that would otherwise be available for the
ongoing development of our business. Moreover, the anticipated benefits of
any acquisition, including Imedia, may not be realized. Future acquisitions
could result in us issuing potentially dilutive equity securities, incurring
debt, contingent liabilities or amortization expenses related to goodwill
and other intangible assets, any of which could harm our business. Future
acquisitions may require us to obtain additional equity or debt financing,
which may not be available on favorable terms or at all. Even if available,
this financing may be dilutive.
The Sales Cycle for Our Products Is Lengthy.
The sales cycle associated with our products typically is lengthy, often
lasting six months to a year. Our customers typically conduct significant
technical evaluations of competing technologies prior to the commitment of
capital and other resources. In addition, purchasing decisions may be
delayed because of our customers' internal budget approval procedures. Sales
also generally are subject to customer trials, which typically last three
months. Because of the lengthy sales cycle and the large size of customers'
orders, if orders forecasted for a specific customer for a particular
quarter do not occur in that quarter, our operating results for that quarter
could suffer.
There are Many Risks Associated with Our Participation in Co-Authoring the
DOCSIS 1.2 Specification.
In November 1998, CableLabs selected us to co-author a technical
specification for DOCSIS 1.2, an enhanced version of the DOCSIS cable modem
standard based in part on our S-CDMA technology. Our agreement to co-author
the DOCSIS 1.2 specification will require us to contribute some aspects of
our S-CDMA technology to a royalty-free intellectual property pool. As a
result, any of our competitors who join the DOCSIS intellectual property
pool will have access to some aspects of our technology and will not be
required to pay us any royalties or other compensation. Further, some of our
competitors have been successful in reverse engineering the technology of
other companies, and our contribution to the DOCSIS 1.2 intellectual
property pool would expose some aspects of our technology to those
competitors. If a competitor is able to duplicate the functionality and
capabilities of our technology, we could lose some or all of the time-to-
market advantage we might otherwise have.
CableLabs may select additional authors to contribute to the DOCSIS 1.2
proposal. Any vendors that participate in the drafting process, including
us, must contribute any of their technology that is essential to implement
the DOCSIS 1.2 specification to the DOCSIS intellectual property pool on a
royalty-free basis. If the DOCSIS Certification Board includes our proposal
in the DOCSIS 1.2 draft specification, it will then be made available for
comment by the organizations that participate in the DOCSIS specification
process. The DOCSIS Certification Board may decide not to proceed with our
proposal. Further, the comment process may take considerably longer than
expected and may delay the publication of a DOCSIS 1.2 standard, currently
anticipated to occur in 2000. If our draft proposal is not approved by the
DOCSIS Certification Board, we may be unable to develop DOCSIS 1.2-compliant
cable modems in a timely fashion or at all.
We believe the adoption of DOCSIS 1.2 will result in increased
competition in the North American cable modem market. This competition could
come from existing competitors or from new competitors who enter the market
as a result of the adoption of DOCSIS 1.2. This increased competition is
likely to result in lower ASPs of cable modem systems and likely will harm
our gross margin. Because our competitors will be able to incorporate some
aspects of our technology into their products, our current customers may
choose alternate cable modem suppliers or choose to purchase DOCSIS 1.2-
compliant cable modems from multiple suppliers. We may be unable to produce
DOCSIS 1.2-compliant cable modems more quickly or at lower cost than our
competitors. The inclusion of our S-CDMA technology in DOCSIS 1.2 could
result in increased competition for the services of our existing employees
who have experience with S-CDMA. The loss of these employees to one or more
competitors could harm our business.
DOCSIS standards have not yet been accepted in Europe and Asia. If
standards that are not compatible with DOCSIS standards ultimately achieve
widespread acceptance outside of the United States and Canada, we could be
required to redesign our products for use in those markets. Even if we were
able to successfully redesign our products, this would likely delay the
deployment of our products in markets outside of the United States and
Canada.
We Need to Develop New Products.
Our future success will depend in part on our ability to develop,
introduce and market new products in a timely manner. We must also respond
to competitive pressures, evolving industry standards and technological
advances. Our current products are not DOCSIS-compliant, and we do not
expect to sell our DOCSIS 1.2-compliant products until 2000. As 2000
approaches, existing or potential customers may delay purchases of our
current cable modem system in order to purchase systems that comply with the
DOCSIS 1.2 standard. In addition, potential new customers could decide to
purchase DOCSIS 1.2-compliant products from one or more of our competitors
rather than from us. As a result, in the second half of 1999 and early 2000,
our product sales may be lower than we anticipate. As 2000 approaches, we
may be required to reduce the price of our current products for sales to
existing customers. This would harm our operating results and gross margin.
It is expected that the DOCSIS 1.2 specifications will be based upon
both S-CDMA and advanced TDMA technology. In that event, we will have to
incorporate advanced TDMA technology into our DOCSIS 1.2-compliant products.
If we are unable to do this effectively, or in a timely manner, we will lose
some or all of the time-to-market advantage we might otherwise have had.
Average Selling Prices of Cable Equipment Typically Decrease.
The cable equipment systems industry has been characterized by erosion
of average selling prices. We expect this to continue. This erosion is due
to a number of factors, including competition, rapid technological change
and price performance enhancements. The average selling prices for our
products may be lower than expected as a result of competitive pricing
pressures, our promotional programs and customers who negotiate price
reductions in exchange for longer term purchase commitments. We anticipate
that ASPs and gross margins for our products will decrease over product life
cycles. In addition, we believe that the widespread adoption of industry
standards is likely to further erode ASPs, particularly for cable modems. It
is likely that the adoption of industry standards will result in increased
retail distribution of cable modems, which could put further price pressure
on our modems. Decreasing ASPs could result in decreased revenues even if
the number of units sold increases. As a result, we may experience
substantial period-to-period fluctuations in future operating results due to
ASP erosion. Therefore, we must continue to develop and introduce on a
timely basis next-generation products with enhanced functionality that can
be sold at higher gross margins. Our failure to do this could cause our
revenues and gross margin to decline.
We Must Achieve Cost Reductions.
Certain of our competitors currently offer cable modems at prices lower
than ours. Market acceptance of our products will depend in part on
reductions in the unit cost of our products. We expect that as headend
equipment becomes more widely deployed, the price of cable modems and other
products will decline. In particular, we believe that the adoption of
industry standards such as DOCSIS will cause increased price competition for
cable modems. However, we may be unable to reduce the cost of our modems
sufficiently to enable us to compete with other cable modem suppliers. Our
cost reduction efforts may not allow us to keep pace with competitive
pricing pressures or lead to gross margin improvement.
Some of our competitors are larger and manufacture products in
significantly greater quantities than we intend to for the foreseeable
future. Consequently, these competitors have more leverage in obtaining
favorable pricing from suppliers and manufacturers. In order to remain
competitive, we must significantly reduce the cost of manufacturing our
cable modems through design and engineering changes. We may not be
successful in redesigning our products. Even if we are successful, our
redesign may be delayed or may contain significant errors and product
defects. In addition, any redesign may not result in sufficient cost
reductions to allow us to significantly reduce the list price of our
products or improve our gross margin. Reductions in our manufacturing costs
will require us to use more highly integrated components in future products
and may require us to enter into high volume or long-term purchase or
manufacturing agreements. Volume purchase or manufacturing agreements may
not be available on acceptable terms. We could incur expenses without
related revenues if we enter into a high volume or long-term purchase or
manufacturing agreement and then decide that we cannot use the products or
services offered by that agreement.
We Face Many Other Risks.
Also inherent in our business are additional risks, which include but are
not limited to the following:
* acceptance of cable modems by cable operators and end users of
broadband access services;
* our ability to develop additional distribution channels;
* our ability to convince cable operators to accept our technologies,
purchase our products and effectively market our product to end users;
* the magnitude and timing of capital spending by cable operators for
implementation of access systems for data transmission over cable
networks;
* future customer agreements that may contain price protection
provisions and certain return rights.
* our limited experience manufacturing our products and our dependence
on the manufacturing capabilities of our contract manufacturers to
assemble and test our products;
* our dependence on key suppliers;
* our ability to develop products that utilize new semiconductor process
technologies;
* the risks associated with our international business activities, which
account for a substantial portion of our total revenues;
* the highly competitive nature of the market for broadband access
systems and the existence of many established competitors;
* our dependence on the Internet and the development of the Internet
infrastructure;
* our ability to manage growth;
* the sufficiency of cash resources and our ability to obtain additional
financing on favorable terms, if at all, if required;
* our dependence on key personnel;
* the risks of product returns, product liability and product defects;
* our ability to adequately protect or enforce our intellectual property
rights; and,
* communications industry and other regulatory approvals.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds from Sales of Registered Securities. We commenced our
initial public offering on August 18, 1998 pursuant to a Registration
Statement on Form S-1 (the "Registration Statement") (File No. 333-56911).
The managing underwriters of the public offering were BT Alex. Brown (now
known as Deutsche Banc Alex. Brown), Hambrecht & Quist, Lehman Brothers and
Salomon Smith Barney. In the offering, we sold an aggregate of 3,000,000
shares of our common stock for an initial price of $13.00 per share.
The aggregate proceeds from the offering were $39.0 million. We paid
expenses of approximately $3.9 million, of which approximately $2.7 million
represented underwriting discounts and commissions and approximately $1.2
million represented expenses related to the offering. Net proceeds from the
offering were $35.1 million. Of the net proceeds, as of June 30, 1999,
approximately $12.4 million had been used to fund operating activities, $1.5
million had been used for payments on long-term debt and capital lease
obligations, $2.5 million had been used to purchase property and equipment
and $500,000 had been used to purchase other assets. The use of the proceeds
from the offering does not represent a material change in the use of
proceeds described in our Registration Statement. At June 30, 1999, the
remainder of the net proceeds were invested in short-term, interest-bearing,
investment grade securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of stockholders occurred on May 12, 1999. At the
meeting, our stockholders approved the reelection of two directors, approved
an amendment to the Company's Restated Certificate of Incorporation to
increase the authorized number of shares from 30,000,000 to 45,000,000 and
ratified the selection of Ernst &Young LLP as our independent auditors for
the 1999 fiscal year.
Our stockholders voted as follows with respect to each of the above
matters:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Proposal Number of Shares Voted
In favor Against Abstain Broker
Nonvotes
Lewis Solomon, nominee for director 17,327,556 18,661 -- --
Mark Stevens, nominee for director 17,328,044 18,173 -- --
Amendment to Restated Certificate
of Incorporation 17,300,352 40,982 4,883 --
Selection of Ernst & Young LLP 17,335,071 8,367 2,779 --
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
Exhibit
Number Description of Document
10.24 Amendment No. 1 to Lease dated April 8, 1999 between the
Company and John Arrillaga Survivor's Trust and Richard
T. Peery Separate Property Trust
10.25 Lease Agreement dated April 8, 1999 between John Arrillaga
Survivor's Trust and Richard T. Peery Separate Property
Trust.
27.1 Financial Data Schedule
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TERAYON COMMUNICATION SYSTEMS, INC.
By: /s/ RAY M. FRITZ Date: August 13, 1999
------------------------------------
Ray M. Fritz
Chief Financial Officer
(Principal Accounting and Financial Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE SIX MONTH PERIOD ENDED JUNE 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 27,939
<SECURITIES> 78,154
<RECEIVABLES> 10,087
<ALLOWANCES> 1,224
<INVENTORY> 5,618
<CURRENT-ASSETS> 123,819
<PP&E> 4,109
<DEPRECIATION> 0
<TOTAL-ASSETS> 128,648
<CURRENT-LIABILITIES> 20,732
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 107,759
<TOTAL-LIABILITY-AND-EQUITY> 128,648
<SALES> 34,955
<TOTAL-REVENUES> 34,955
<CGS> 29,229
<TOTAL-COSTS> 29,229
<OTHER-EXPENSES> 28,463
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> (20,540)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,540)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,540)
<EPS-BASIC> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
AMENDMENT NO. 1 TO LEASE
THIS AMENDMENT NO. 1 is made and entered into this 8th day of
April, 1999, by and between JOHN ARRILLAGA, Trustee, or his Successor
Trustee UTA dated 7/20/77 (JOHN ARRILLAGA SURVIVOR'S TRUST) (previously
known as the "John Arrillaga Separate Property Trust") as amended, and
RICHARD T. PEERY, Trustee, or his Successor Trustee UTA dated 7/20/77
(RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended, collectively as
LANDLORD, and TERAYON COMMUNICATION SYSTEMS, INC., a Delaware
corporation, as TENANT.
RECITALS
A. WHEREAS, by Lease Agreement dated January 23, 1996 Landlord
leased to Tenant approximately 29,313+/- square feet of that certain
37,145+/- square foot building (with Tenant occupying one hundred
percent (100%) of the building effective July 1, 1998) located at 2952
Bunker Hill Lane, Santa Clara, California, the details of which are more
particularly set forth in said January 23, 1996 Lease Agreement, and
B. WHEREAS, said Lease was amended by the Commencement Letter
dated March 28, 1996 which confirmed the April 1, 1996 Lease
Commencement Date and the March 31, 2002 Lease Termination Date, and,
C. WHEREAS, it is now the desire of the parties hereto to amend
the Lease by adding a "Coterminous" paragraph and a "Cross Default"
paragraph under said Lease Agreement as hereinafter set forth.
AGREEMENT
NOW THEREFORE, for valuable consideration, receipt of which is
hereby acknowledged, and in consideration of the hereinafter mutual
promises, the parties hereto do agree as follows:
1. LEASE TERMS CO-TERMINOUS: It is acknowledged that (i) concurrently
with the execution of this Amendment, Landlord and Tenant are also
executing Lease Agreement dated April 8, 1999 (hereinafter referred to
as the "New Lease") affecting adjacent property located at 5150 Great
America Parkway, Santa Clara, California and (ii) it is the intention of
the parties that the term of this Lease be coterminous with the term of
the New Lease such that the terms of both leases expire on the same
date; provided, however, the termination of this Lease resulting from
the terms and conditions stated under Paragraph 22 "Bankruptcy and
Default" (subject to Landlord's option as stated in the respective
leases' "Cross Default" Paragraph) or Paragraph 24 "Destruction" or
Paragraph 25 "Eminent Domain" shall not result in a termination of the
New Lease, unless Landlord elects, at its sole and absolute discretion,
to terminate both of the leases.
2. CROSS DEFAULT: As a material part of the consideration for the
execution of the New Lease by Landlord, it is agreed between Landlord
and Tenant that a default under this Lease, or a default under said
New Lease may, at the option of Landlord, be considered a default under
both leases, in which event Landlord shall be entitled (but in no event
required) to apply all rights and remedies of Landlord under the terms
of one lease to both leases including, but not limited to, the right to
terminate one or both of said leases by reason of a default under said
New Lease or hereunder.
EXCEPT AS MODIFIED HEREIN, all other terms, covenants, and
conditions of said January 23, 1996 Lease Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this
Amendment No. I to Lease as of the day and year last written below.
LANDLORD:
JOHN ARRILLAGA SURVIVOR'S TRUST
BY:___________________________
John Arrillaga, Trustee
Date: June 14, 1999
RICHARD T. PEERY SEPARATE PROPERTY TRUST
BY: _______________________________
Richard T. Peey, Trustee
Date: June 15, 1999
TENANT:
TERAYON COMMUNICATION SYSTEMS, INC. a Delaware corporation
BY: _________________________________
Zaki Rakib, CEO
Date: May 21, 1999
<PAGE>
LEASE AGREEMENT
THIS LEASE made this 8th day of April, 1999 between John Arrillaga,
Trustee, or his Successor Trustee, UTA dated 7/20/77 (JOHN ARRILLAGA
SURVIVOR'S TRUST) as amended, and RICHARD T. PEERY, Trustee, or his
Successor Trustee. UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY
TRUST) as amended, hereinafter called Landlord and TERAYON COMMUNICATION
SYSTEMS, INC., a Delaware corporation, hereinafter called Tenant.
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby hires and takes
from Landlord those certain premises (the "Premises") outlined in red
on Exhibit "A" attached hereto and incorporated herein by this
reference thereto more particularly described as follows:
All of that certain 30,745+ square foot, two-story building located
at 5150 Great America Parkway, Santa Clara, California 95054. Said
Premises is more particularly shown within the area outlined in Red on
Exhibit A attached hereto. The entire parcel, of which the Premises is a
part, is shown within the area outlined in Green on Exhibit A attached.
The Premises shall be improved by Landlord as shown on Exhibit B
attached hereto, and is leased on an as is basis, in its present
condition, and in the configuration as shown in Red on Exhibit B
attached hereto.
As used herein the Complex shall mean and include all of the land
outlined in Green and described in Exhibit "A" , attached hereto, and
all of the buildings, improvements fixtures and equipment now or
hereafter situated on said land.
Said telling and hiring is upon and subject to the terms, covenants and
conditions hereinafter set forth and Tenant covenants as a material part
of the consideration for this Lease to perform and observe each and all of the
said terms, covenants and conditions.
This Lease is made upon the conditions of such performance and
observance.
1. USE
Tenant shall use the Premises only in conformance with applicable
governmental laws, regulations, rules and ordinances for the purpose of
general office, light manufacturing, research and development, and
storage and other uses necessary for Tenant to conduct Tenant s
business, provided such uses shall be in accordance with all applicable
governmental laws and ordinances and for no other purpose. Tenant shall
not do or permit to be done in or about the Premises or the Complex nor
bring or keep or permit to be brought or kept in or about the Premises
or the Complex anything which is prohibited by or will in any way
increase the existing rate of (or otherwise affect) fire or any
insurance covering the Complex or any part thereof, or any of its
contents, or will cause a cancellation of any insurance covering the
Complex or any part thereof. or any of its contents, Tenant shall not do
or permit to be done anything in, on or about the Premises or the
Complex which will in any way obstruct or interfere with the rights of
other tenants or occupants of the Complex or injure or annoy them, or
use or allow the Premises to be used in any improper, immoral, unlawful
or objectionable purpose, nor shall Tenant cause, maintain or permit any
nuisance in, on or about the Premises or the Complex. No sale by auction
shall be permitted on the Premises. Tenant shall not place any loads
upon the floors walls, or ceiling, which endanger the structure. or
place any harmful fluids or other materials in the drainage system of
the building, or overload existing electrical or other mechanical
systems. No waste materials or refuse shall be dumped upon or permitted
to remain upon any part of the Premises or outside of the building in
which the Premises are a part, except in trash containers placed inside
exterior enclosures designated by Landlord for that purpose or inside of
the building proper where designated by Landlord. 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 outside the Premises or on any portion of common area of the
Complex. No loudspeaker or other device, system or apparatus which can
be heard outside the Premises shall tee used in or at the Premises
without the prior written consent of Landlord. Tenant shall not commit
or suffer to be committed any waste in or upon the Premises, Tenant
shall indemnify, defend and hold Landlord harmless against any loss,
expense, damage, attorneys fees, or liability arising out of failure of
Tenant to comply with any applicable law. Tenant shall comply with any
covenant, condition, or restriction ( CC&R's ) affecting the Premises.
The provisions of this paragraph are for the benefit of Landlord only
and shall not be construed to be for the benefit of any tenant or
occupant of the Complex.
2. TERM
A. The term of this Lease shall be for a period of TWO (2) years NINE
(9) months and TWELVE (12) days (unless sooner terminated as
hereinafter provided) and, subject to Paragraphs (B) and 3, shall
commence on the 19th day of June 1999 and end on the 31st day of March
2002.
B. Possession of the Premises shall be deemed tendered and the term at
this Lease shall commence June 19, 1999, or as otherwise agreed in
writing.
3. POSSESSION
If Landlord, for any reason whatsoever, cannot deliver possession of
term ,said premises to Tenant at the commencement of the said term, as
hereinbefore specified, this Lease shall not be void or voidable;
no obligation of Tenant shall be affected thereby;
nor shall Landlord or Landlord's agents be liable to Tenant for any loss
or damage resulting therefrom; but in the event the commencement and
termination dates of the Lease, and all other dates affected thereby
shall be revised to conform to the date of Landlord's delivery of
possession, as specified in Paragraph 2 (b) above. The above is,
however, subject to the provision that the period of delay, of delivery
of the premises shall not exceed 30 days from the commencement date
herein (except those delays caused by Acts of God. strikes, war,
utilities. governmental bodies, weather, unavailable materials and
delays beyond Landlord's control shall be excluded in calculating such
period) in which instance Tenant, at its option, may, by written notice
to Landlord, terminate this Lease.
* It is agreed in the event said Lease commences on a date other than
the first day of the month the term of the Lease will be extended to
account for the number of days in the partial month. The Basic Rent
during the resulting partial month will he pro-rated (for the number of
days in the partial month) at the Basic Rent scheduled for the projected
commencement date as shown in Paragraph 43.
4. RENT
A. Basic Rent. Tenant agrees to pay to Landlord at such place as
Landlord may designate without deduction, offset, prior notice, or
demand, and Landlord agrees to accept as Basic Rent for the leased
Premises the total sum of ONE MILLION FIVE HUNDRED NINETY FIVE THOUSAND
SIX HUNDRED SIXTY FIVE AND 50/100($1 595.665.50) Dollars in lawful money
Of (the United States of America, payable as, follows:
See Paragraph 43 for Basic Rent Schedule
B. Time for Payment. In the event that the term of this Lease commences
on a date other then the first day of a calendar month. on the date of
commencement of the term hereof Tenant shall pay to Landlord as rent for
the period from such date of commencement to the first day of the next
succeeding calendar month the proportion of the monthly rent hereunder
which the number of days between such date to commencement and the first
day of the next succeeding calendar month bears to thirty (30). In the
event that the term of this Lease for any reason ends on a date other
than the last day of a calendar month, on the first day of the last
calendar month of the term hereof Tenant shall pay to landlord as rent
for the period from Said first day of said last calendar month to and
including the last day of the term hereof that proportion of the monthly
rent hereunder which the number of days between Said first day of Said
last calendar month and the last day of the term hereof bears to thirty
(30).
C. Late Charge. Notwithstanding any other provision of this Lease, if
Tenant is in default in the payment of rental as net forth in this
Paragraph 4 when due or any part thereof Tenant agrees to pay Landlord
in addition to the delinquent rental due a late charge for each rental
payment in default ten (10) days. Said late charge shall equal ten (10%)
percent of each rental payment so in default.
D. Additional Rent. Beginning with the commencement dale of the term of
this Lease, Tenant Shall pay to landlord in addition to the basic Rent
and as Additional Rent the following:
(a) Tenant's proportionate share of all Taxes relating to the Complex as
forth in Paragraph 12, and
(b) Tenant's proportionate share of all insurance premiums relating to
the Complex. as forth in Paragraph 15, and
(c) Tenant's proportionate share of expenses for the operation,
management, maintenance and repair of the Building (including common
areas of the Building); and Common Areas of the Complex in which the
Premises are located as se' forth in Paragraph 7, and
(d) All charges, costs and expenses which Tenant is required to pay
hereunder together with all interest and penalties costs and expends
including attorneys fees and legal expense that may accrue thereto in
the event of Tenant's failure to pay such amounts and all damages,
reasonable costs and expenses which Landlord may incur by reason of
default of Tenant or failure on Tenant's pan to comply with the terms
of this Lease. In the event of nonpayment by Tenant of Additional
Rent, Landlord shall have all the rights and remedies with respect
thereto as Landlord has for nonpayment of rent.
The Additional Rent due hereunder shall be paid to Landlord or
Landlord's agent (i) within five days after for taxes and insurance and
within thirty days for all other Additional Rent after presentation of
invoice from Landlord or Landlord's agent setting forth such Additional
Rent and/or (ii) at the option of Landlord Tenant shall pay to landlord
monthly, in advance, Tenant's pro rata share of an amount estimated by
Landlord to be Landlord's approximate average monthly expenditure for
such Additional Rent items, which estimated amount shall be reconciled
within 120 days of the end of each calendar year, or more frequently if
Landlord so elects to do so at Landlord's sole and absolute discretion,
as compared to Landlord's actual expenditure for said Additional Rent
items, with Tenant paying to Landlord, upon demand any amount of actual
expenses expended by Landlord in excess of said estimated amount or
Landlord crediting to Tenant (providing Tenant is not in default in the
performance of any of the terms, covenants and conditions of this Lease)
any amount of estimated payments made by Tenant in excess of Landlord s
actual expenditures for said Additional Rent items.
The respective obligations of Landlord and Tenant under this paragraph
shall survive the expiration or other termination of the term of this
Lease, and if the term hereof shall expire or shall otherwise terminate
on a day other than the last day of a calendar year, the actual
Additional Rent incurred for the calendar year in which the term hereof
expires or otherwise terminates shall be determined and settled on the
basis of the statement of actual Additional Rent for such calendar year
and shall be prorated in the proportion which the number of days in such
calendar year preceding such expiration or termination bears to 365.
E. Fixed Management Fee. Beginning with the Commencement Date of the
Term of this Lease, Tenant shall pay to Landlord, in addition to the
Basic Rent and Additional Rent, a fixed monthly management fee equal to
2% of the Basic Rent due for each month during the Lease Term
("Management Fee").
F. Place of Payment of Rent and Additional Rent. All Basic Rent
hereunder and all payments hereunder for Additional Rent shall be paid
to Landlord at the office of Landlord at Peery/Arrillaga. File 1504, BOX
60000, San Francisco, CA 94160 or to such other person or to such other
place as Landlord may from time to time designate in writing.
G. Security Deposit. Concurrently with Tenant's execution of this Lease
Tenant shall deposit with Landlord the sum of NINETY EIGHT THOUSAND
THREE HUNDRED EIGHTY FOUR AND 00/100, ($98 384.00) Dollars. Said sum
shall be held by Landlord as a Security Deposit for the faithful
performance by Tenant of all of the terms, covenants, and conditions of
this Lease to be kept and performed by Tenant during the term hereof. If
Tenant defaults with respect to any provision of this Lease, including,
but not limited to, the provisions relating to the payment of rent and
any of the monetary sums due herewith Landlord may (but shall not be
required to) use, apply or retain all or any part of this Security
Deposit for the payment any other amount which Landlord may spend by
reason of Tenant's default or to compensate Landlord for any other loss
or damage which Landlord may suffer by reason of Tenant's default. If
any portion of said Deposit is so used or applied. Tenant shall. within
ten (10) days after written demand therefor deposit cash with Landlord
in the amount sufficient to restore the Security Deposit to its original
amount. Tenant's failure to do so shall be a material breach of this
Lease. Landlord shall not be required to keep this Security Deposit
separate from in general funds, and Tenant shad not be entitled to
interest on such Deposit. If Tenant fully and faithfully performs every
provision of this Lease to be performed by it, the Security Deposit or
any balance thereof shall be returned to Tenant for (or at Landlord's
option, to the last assignee of Tenant's interest hereunder) al the
expiration of the Lease term and after Tenant has vacated the Premises.
In the event on termination of Landlord's interest in this Lease,
Landlord shall transfer said Deposit to Landlord's successor in interest
whereupon Tenant agrees to release Landlord from liability for the
return of such Deposit or the accounting therefor.
5. RULES AND REGULATIONS AND COMMON AREA
Subject to the terms and conditions of this Lease and such Rules and
Regulations as Land lord may from time to time prescribe Tenant and
Tenant's employees invites and customers shall in common with other
occupants of the Complex in which the Premises are located, and their
respective employees, invitees and customers and others entitled to the
use thereof, have the non-exclusive 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 Complex in which
the Premises are located which areas and facilities are referred to
herein as Common 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 Common Area.
Landlord further reserves the right to promulgate such reasonable rules
and regulations relating to the use of the Common Area, and any part or
parts thereof, as Landlord may deem appropriate for the best interests
of the occupants of the Complex. 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. Landlord shall not be responsible to
Tenant for the nonperformance by any other tenant or occupant of the
Complex of any of said Rules and Regulations.
Landlord shall operate manage and maintain the Common Area. The
manner in which the Common Area shall be mainlined and the expenditures
for such maintenance shall be at the discretion of the landlord.
6. PARKING - DELETED SEE PARAGRAPH 46.
7, EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON
AREAS OF THE COMPLEX
As Additional Rent and in accordance with Paragraph 4 D of this Lease,
Tenant shall pay to Landlord Tenant's proportionae share (calculated
on a square footage or other equitable basis as calculated by Landlord)
of all expenses of operation, management
maintenance and repair of the Common Areas of the Complex including, but
not limited to, license, permit, and inspection fees; security; utility
charges associated with exterior landscaping and fighting (including
water and sewer charges): all charges incurred in the maintenance and
replacement of landscaped areas, lakes, parking lots and paved areas
(including repairs, replacement, resealing and restriping), sidewalks,
driveways; maintenance, repair and replacement of all fixtures and
electrical, mechanical, and plumbing systems; structural elements and
exterior surfaces of the buildings; salaries and employee benefits of
personnel and payroll taxes applicable thereto; supplies, materials,
equipment and tools; the cost of capital expenditures which have the
effect of reducing operating expenses, provided, however, that in the
event Landlord makes such capital improvements, Landlord may amortize
its investment in said improvements (together with interest at the rate
of fifteen ( 15%) percent per annum on the unamortized balance) as an
operating expense in accordance with standard accounting practices,
provided, that such amortization is not at a rate greater than the
anticipated savings in the operating expenses.
"Additional Rent" as used herein shall not include Landlord s debt
repayments; interest on charges; expenses directly or indirectly
incurred by Landlord for the benefit of any other tenant; cost for the
installation of partitioning or any other tenant improvements; cost of
attracting tenants; depreciation; interest, or executive salaries
8. ACCEPTANCE AND SURRENDER OF PREMISES
By entry hereunder, Tenant accepts the Premises as being in good and
sanitary order, condition and repair and accepts the building and
improvements included in the Premises in their present condition and
without representation or warranty by Landlord as to the condition of
such building or as to the user occupancy which may be made thereof Any
exceptions to the foregoing must be by written agreement executed by
Landlord and Tenant. Tenant agrees on the last day of the Lease term, or
on the sooner termination of this Lease, to surrender the Premises
promptly and peaceably to Landlord in good condition and repair (damage
by Acts of God, fire, normal wear and tear excepted), with all interior
walls painted, or cleaned so that they appear freshly painted, and
repaired and replaced, if damaged; all floors cleaned and waxed; all
carpets cleaned and shampooed; the air conditioning and heating
equipment serviced by a reputable and licensed service firm and in good
operating condition (provided the maintenance of such equipment has been
Tenant's responsibility during the term of this Lease) together with all
alterations, additions, and improvements which may have been made in,
to, or on the Premises (except movable trade fixtures installed at the
expense of Tenant) except that Tenant shall ascertain from Landlord
within thirty (30) days before the end of the term of this Lease whether
Landlord desires to have the Premises or any part or parts thereof
restored to their condition and configuration shown on Exhibit B and if
Landlord shall so desire, then Tenant shall restore said Premises or
such part or parts thereof before the end of this Lease at Tenant's sole
cost and expense. Tenant, on or before the end of the term or sooner
termination of this Lease, shall remove all of Tenant's personal
property and trade fixtures from the Premises, and all property not so
removed on or before the end of the term or sooner termination of this
Lease shall be deemed abandoned by Tenant and title to same shall
thereupon pass to Landlord without compensation to Tenant. Landlord may,
upon termination of this Lease, remove all moveable furniture and
equipment so abandoned by Tenant, at Tenant's sole cost, and repair any
damage caused by such removal at Tenant's sole cost. If the Premises are
not surrendered at the end of the term or sooner termination of this
Lease, Tenant shall indemnify Landlord against loss or liability
resulting from the delay by Tenant in so surrendering the Premises
including, without limitation, any claims made by any succeeding tenant
founded on such delay. Nothing contained herein shall be construed as an
extension of the term hereof or as a consent of Landlord to any holding
over by Tenant. The voluntary or other surrender of this Lease or the
Premises by Tenant or a mutual cancellation of this Lease shall not work
as a merger and, at the option of Landlord, shall either terminate all
or any existing subleases or subtenancies or operate as an assignment to
Landlord of all or any such subleases or subtenancies.
9. ALTERATIONS AND ADDITIONS
Tenant shall not make, or suffer to be made, any alteration or addition
to the Premises, or any part thereof, without the written consent of
Landlord first had and obtained by Tenant, but at the cost of Tenant,
and any addition to, or alteration of, the Premises, except moveable
furniture and trade fixtures, shall at once become a part of the
Premises and belong to Landlord. Landlord reserves the right to approve
all contractors and mechanics proposed by Tenant to make such
alterations and additions. Tenant shall retain title to all moveable
furniture and trade fixtures placed in the Premises. All heating,
lighting, electrical, air conditioning, floor to celing partitioning,
drapery, carpeting, and door installations made by tenant, together with
all property that has become an integral part to the Premises, shall not
be deemed trade fixtures. Tenant agrees that it will not proceed to make
such alteration or additions, without having obtained consent from
Landlord to do so, and until five (5) days from receipt of such consent,
in order that Landlord may post appropriate notices to avoid any
liability to contractors or material suppliers for payment for Tenant's
improvements. Tenant will at all times permit such notices to be posted
and to remain posted until the completion of work. Tenant shall, if
required by Landlord, secure at Tenant's own cost and expense, a
completion and lien indemnity bond, satisfactory to Landlord, for such
work. Tenant further covenants and agrees that any mechanics lien
against the Premises or against the Complex for work claimed to have
been done for, or materials claimed to have been furnished to Tenant,
will be discharged by Tenant, by bond or otherwise. within ten (10) days
after the filing thereof, at the cost and expense of Tenant. Any
exceptions to the foregoing must be made in writing and executed by both
Landlord and Tenant.
10. TENANT MAINTENANCE
Tenant shall, at its sole cost and expense, keep and maintain the
Premises (including appurtenances) and every part thereof in a high
standard of maintenance and repair, and in good and sanitary condition
Tenant's maintenance and repair responsibilities herein referred to
include, but are not limited to, all windows, window frames, plate
glass, glazing, truck doors, plumbing systems (such as water and drain
lines, sinks, toilets, faucets, drains, showers and water fountains),
electrical systems (such as panels, conduits, outlets, lighting
fixtures, lamps, bulbs, tubes, ballasts), heating and air conditioning
systems (such as compressors, fans, air handlers, ducts, mixing boxes,
thermostats, time clocks, boilers, heaters, supply and return grills),
store fronts, roofs, downspouts, all interior improvements within the
premises including but not limited to wall coverings, window coverings,
carpet, floor-coverings, partitioning, ceilings, doors (both interior
and exterior, including closing mechanisms, latches, locks, skylights
(if any), automatic fire extinguishing systems, and elevators and all
other interior improvements of any nature whatsoever. Tenant agrees to
provide carpet shields under all rolling chairs or to otherwise be
responsible for wear and tear of the carpet caused by such rolling
chairs if such wear and tear exceeds that caused by normal foot traffic
in surrounding areas. Areas of excessive wear shall be replaced at
Tenant's sole expense upon Lease termination. Tenant hereby waives all
rights under, and benefits of, subsection I of Section 1932 and Section
1941 and 1942 of the California Civil Code and under any similar law,
statute or ordinance now or hereafter in effect.
11. UTILITIES
Tenant shall pay promptly, as the same become due, all charges for
water, gas, electricity, telephone, telex and other electronic
communications service, sewer service, waste pick-up and any other
utilities, materials or services furnished directly to or used by Tenant
on or about the Premises during the term of this Lease, including,
without limitation, any temporary or permanent utility surcharge or
other exactions whether or not hereinafter imposed.
Landlord shall not be liable for and Tenant shall not he entitled to
any abatement or reduction of rent by reason of any interruption or
failure of utility services to the Premises when such interruption or
failure is caused by accident, breakage, repair, strikes, lockouts, or
other labor disturbances or labor disputes of any nature, or by any
other cause, similar or dissimilar, beyond the reasonable control of
Landlord.
12. TAXES
A. As Additional Rent and in accordance with Paragraph 4 D of this
Lease, Tenant shall pay to Landlord Tenant's proportionate share of all
Real Property Taxes, which prompt share shall be allocated to the leased
Premises by square footage or other equitable basis, as calculated by
Landlord. The term ''Real Property taxes", as used herein, shall mean
(ii all taxes, assessments, levies and other charges of any kind or
nature whatsoever, general and special, foreseen and unforeseen
(including installments of principle and interest required to pay any
general or special assessments for public improvements and any increases
resulting from
reassessments accrued by any change in ownership of the Complex) now or
hereafter by any governmental or quasi-governmental authority or special
district having the direct or indirect power to tax or levy assessments,
which are levied or assessed against, or with respect to the value,
occupancy or use of, all or any portion of the Complex (as wow
constructed or as may at any time hereafter be constructed, altered, or
otherwise chanced) for Landlord s interest therein: any improvements
located within the Complex (regardless of ownership); the fixtures,
equipment and other property of Landlord, real or personal, that arc an
integral part of and located in the Complex; or parking areas, public
utilities, or energy within the Complex; (ii) all charges, levies or
fees imposed by reason of environmental regulation or other governmental
control of the Complex: and (iii) all costs and fees (including
attorneys fees) incurred by Landlord in contesting any Real Property Tax
and in negotiating with public authorities as to any Real Property Tax.
If at any time during the term of this Lease the taxation or assessment
of the Complex prevailing as of the commencement date of this Lease
shall be altered so that in lieu of or in addition to any Real Property
Tax described above there shall be levied, assessed or imposed (whether
by reason of a change in the method of taxation or assessment, creation
of a new tax or charge, or any other cause) an alternate or additional
tax or charge (i) on the value, use or occupancy of the Complex or
Landlord's interest therein or (ii) on or measured by the gross
receipts, income or rentals from the Complex, on Landlord;s business of
leasing the Complex, or computed in any manner with respect to the
operation of the Complex, then any such tax or charge, however
designated, shall be included within the meaning of the term "Real
Property Taxes'' for purposes of this Lease. If any Real Property Tax is
based upon property or rents unrelated to the Complex, then only that
part of such real Property Tax that is fairly allocable to the Complex
shall be included within the meaning of the term Real Property Taxes .
Notwithstanding the foregoing, the term Real Property Taxes shall not
include estate, inheritance, gift or franchise taxes of Landlord or the
federal or state net income tax imposed on Landlord's income from all
sources.
B. Taxes on Tenant's Property
(a) Tenant shall be liable for and shall pay ten days before
delinquency, taxes levied against any personal property or trade
fixtures placed by Tenant in or about the Premises. If any such taxes on
Tenant s personal property or trade fixtures arc levied against Landlord
or Landlord's property or it the assessed value of the Premises is
increased by the inclusion therein of a value placed upon such personal
property or trade fixtures of Tenant and if Landlord, after written
notice to Tenant, pays the taxes based on such increased assessment,
which Landlord shall have the right to do regardless of the validity
thereof, but only under proper protest if requested by Tenant, Tenant
shall upon demand, as the case may be, repay to Landlord the taxes so
levied against Landlord, or the proportion of such taxes resulting from
such increase in the assessment: provided that in any such event Tenant
shall have the right, in the name of Landlord and with Landlord's full
cooperation, to bring suit in any court of competent jurisdiction to
recover the amount of any such taxes so paid under protest, and any
amount so recovered shall belong to Tenant.
(b) If the Tenant improvements in the Premises, whether installed.
and/or paid for by Landlord or Tenant and whether or not affixed to the
real property so as to become a part thereof, are assessed for real
property tax purposes at a valuation higher than the valuation at which
standard office improvements in other space in the Complex are assessed,
then the real property taxes and assessments levied against Landlord or
the Complex by reason of such excess assessed valuation shall be deemed
to be taxes levied against personal property of Tenant and shall be
governed by the provisions of l2Ba above. If the records of the County
Assessor are available and sufficiently detailed to serve as a basis for
determining whether said Tenant improvements are assessed at a higher
valuation than standard office improvements in other space in the
Complex, such records shall be binding on both the Landlord and the
Tenant. IF the records of the County Assessor are not available or
sufficiently detailed to serve as a basis for making said determination,
the actual cost of construction shall be used.
13. LIABILITY INSURANCE
Tenant at Tenant's expense, agrees to keep in force during the term
of this Lease a policy of commercial general liability insurance with a
combined single limit coverage of not less that two million dollars
($2,000,000) per occurrence for injures to or death of persons occurring
in, on or about the Premises or the Complex, and property damage
insurance with limits of $500,000. The policy or policies affecting such
insurance certificates of insurance of which shall be furnished to the
Landlord, shall name Landlord as additional insureds, and shall insure
any liability of Landlord, contingent or otherwise, as respects acts or
omissions of Tenant, its agents, employees or invitees or otherwise by
any conduct or transactions of said persons in or about or concerning
the Premise, including any failure of 'Tenant to observe or perform any
of its obligations hereunder; shall be issued by an insurance company
admitted to transaction business in the State of California; and shall
that the insurance effected thereby shall not be canceled, except upon
thirty (30) days written notice to Landlord. If during the term of this
Lease, in the considered opinion of Landlord's Lender, insurance
advisor, or counsel, the amount of insurance described in Paragraph 13
is not adequate, Tenant agrees to increase said coverage to such
reasonable amount as Landlord's Lender, insurance advisor or counsel
shall deem adequate.
14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION
INSURANCE
Tenant shall maintain a policy or policies of fire and property
damage insurance in all risk form with D sprinkler leakage endorsement
insuring the personal property, inventory, trade fixtures, and leasehold
improvements within the leased Premises for the full replacement value
thereof. The proceeds from any of such policies shall be used for the
repair or replacement of such items so insured.
Tenant shall also maintain a policy or policies of workman s
compensation insurance and any other employee benefit insurance
sufficient to comply with all laws.
15. PROPERTY INSURANCE
Landlord shall purchase and keep in force and as Additional Rent and
in accordance with Paragraph 4D of this Lease, Tenant shall pay to
Landlord (or Landlord's agent if so directed by Landlord) Tenant's
proportionate share (calculated on a square footage or other equitable
basis as calculated by Landlord) of the deductibles on insurance claims
and the cost of policy or policies of insurance covering loss or damage
to the Premises and Complex in the amount of the full replacement value
thereof, providing protection against those perils included within the
classification of all risks insurance and (food and/or earthquake
insurance, if available, plus a policy of rental income insurance in the
amount of one hundred ( 100%) percent of twelve (12) months Basic Rent,
plus sums paid as Additional Rent and any deductibles related thereto.
If such insurance cost is increased due to Tenant's use of the Premises
or the Complex, Tenant agrees to pay to Landlord the full cost of such
increase. Tenant shall have not interest in nor any right to the
proceeds of any insurance procured by the Landlord for the Complex.
Landlord and Tenant do each hereby respectively release the other, to
the extent of insurance coverage of the releasing party, from any
liability for loss or damdage caused the by fire or any other extended
coverage casualties included in the releasing party's insurance
policies, irrespective of the cause of such fire or casualty, provided,
however, that if the insurance policy of either releasing party
prohibits such waiver, then this waiver shall not take effect until
consent to such waiver is obtained. If such waiver is so prohibited the
insured party affected shall promptly notify the other party thereof.
16. INDEMNIFICATION
Landlord shall not be liable to Tenant and Tenant hereby waives all
claims against landlord for any injury to or death of any person or
damage to or destruction of property in or about the Premises or the
Complex by or from any cause whatsoever, including, without limitation,
gas, fire, oil electricity or leakage of any character from the roof.
walls, basement or other portion of the Premises or the Complex but
excluding, however, the willful misconduct or negligence of Landlord,
its agents, servants, employees, invitees, or contractors of which
negligence Landlord has knowledge and reasonable time to correct. Except
as to injury to persons or damage to property to the extent arising
from the willful misconduct or negligence of Landlord, its agents,
servants employees, invitees or contractors Tenant shall hold Landlord
harmless from and defend Landlord against any and all expenses,
including reasonable attorneys lees, in connection therewith, arising
out of injury to or death of any person or damage to or destruction or
property occurring in, on or about the Premises or any part thereof
.from any cause whatsoever.
17. COMPLIANCE
Tenant at its sole cost and expense, shall promptly comply with all
laws, statues, ordinances and governmental rules, regulations or
requirements now or hereafter in effect; with the requirements of any
board of fire underwriters or other similar body now or hereafter
constituted: and with any direction or occupancy certificate issued
pursuant to law by any public officer; provided. however, that no such
failure shall be deemed a breach of the provisions if Tenant,
immediately upon notification, commences to remedy or rectify said
failure. The judgment of any court of competent jurisdiction or the
admission of Tenant in any action against Tenant, whether Landlord be a
party thereto or not, that Tenant has violated any such law, statute,
ordinance or governmental rule, regulation, requirement, direction or
provision, shall be conclusive of that fact as between Landlord and
Tenant This paragraph shall not be interpreted as requiring Tenant to
make structural changes or improvements, except to the extent such
changes or improvements are required as a result of Tenant's use of the
Premises. Tenant shall, at its sole cost and expense comply with any and
all requirements pertaining to said Premises. of any insurance
organization or comparty, necessary for the maintenance of reasonable
fire and public liability insurance covering the Premises.
18. LIENS
Tenant shall keep the Premises and the Complex free from any liens
arising out of any work performed, materials furnished or obligation
incurred by Tenant. In the event that Tenant shall not, within ten ( 10)
days, following the imposition of such lien, cause the same to be
released of record, Landlord shall have, in addition to all other
remedies provided herein and by law, the right, but no obligation to
cause the same to be released by such means as it shall deem proper,
including payment of the claim giving rise to such lien. All sums paid
by Landlord for such purpose, and all expenses incurred by it in
connection therewith, shall be payable to Landlord by Tenant on demand
with interest at the prime rate of interest as quoted by Bank of
America.
19. ASSIGNMENT AND SUBLETTING
Tenant shall not assign, transfer, or hypothecate the leasehold
estate under this Lease, or any interest thereon, and shall not subject
the Premises, or any part thereof, or any right or privilege appurtenant
thereto, or suffer any other person or entity to occupy or use the
Premises, or any portion thereof, without, in each case, the prior
written consent of Landlord which consent will not be unreasonably
withheld. As a condition for giving this consent to an, assignment,
transfer, or subletting, Landlord shall require Tenant pay to Landlord,
as Additional Rent, all rent and/or additional consideration due Tenant
from its assignees, transferees, or subtenants in excess of the rent
paid by Tenant to Landlord hereunder for the assigned, transferred
and/or subleased space. Tenant shall, by thirty (30) days written
notice, advise Landlord of its intent to assign or transfer Tenant s
interest in the Lease or sublet the Premises or any portion thereof for
any part of the term hereof. Within thirty (30) days after receipt of
said written notice, Landlord may, in its sole discretion, elect to
terminate this Lease as to the portion of the Premises described in
Tenant's notice on the date specified in Tenant's notice by giving
written notice of such election to terminate. If no such notice to
terminate is given to Tenant within said thirty (30) day period, Tenant
may proceed to locate an acceptable subleasee, assignee, or other
transferee for presentment to Landlord for Landlord's approval, all in
accordance with the terms, covenants, and conditions of this paragraph
19. If Tenant intends to sublet the entire Premises and Landlord elects
to terminate this Lease, this Lease shall be terminated on the date
specified in Tenant's notice. If, however, this Lease shall terminate
pursuant to the foregoing with respect to less than all the Premises,
the rent, as defined and reserved herein above shall be adjusted on a
pro rata basis to the number of square feet retained by Tenant, and this
Lease as so amended shall continue in full force and effect. In the
event Tenant is allowed to assign, transfer or sublet the whole or any
part of the Premises, with the prior written consent of Landlord, no
assignee, transferee or subtenant shall assign or transfer this Lease,
either in whole or in part, or sublet the whole or any part of the
Premises, without also having obtained the prior written consent of
Landlord. A consent of Landlord to one assignment, transfer,
hypothecation, subletting, occupation or use by any other person shall
not release Tenant from any of Tenant's obligations hereunder or be
deemed to be a consent to any subsequent similar or dissimilar
assignment, transfer, hypothecation, subletting, occupation or use by
any other person. Any such assignments transfer, hypothecation,
subletting, occupation or use without such consent shall be void and
shall constitute a breach of this Lease by Tenant and shall, at the
option of Landlord exercised by written notice to Tenant, terminate this
Lease. The leasehold estate under this Lease shall not, nor shall any
interest therein, be assignable for any purpose by operation of law
without the written consent of Landlord. As a condition to its consent,
Landlord shall require Tenant to pay all expenses in connection with the
assignment, and Landlord shall require Tenant's assignee or transferee
(or other assignees or transferees) to assume in writing all of the
obligations under this Lease and for Tenant to remain liable to Landlord
under the Lease. Notwithstanding the above, in no event will Landlord
consent to a sub-sublease.
20. SUBORDINATION AND MORTGAGES
In the event Landlord's title or leasehold interest is now or hereafter
encumbered by a deed of trust, upon the interest of Landlord in the land
and buildings in which the demised Premises are located, to secure a
loan from a lender (hereinafter referred to as " Lender ') to Landlord,
Tenant shall, al the request of Landlord or Lender, execute in writing
an agreement subordinating its rights under this Lease to the lien of
such deed of trust, or, if so requested, agreeing that the lien of
Lender's deed oftrOust shall be or remain subject and subordinate to the
rights of Tenant under this Lease. Notwithstanding an such
subordination, Tenant's possession under this Lease shall not be
disturbed if Tenant is not in default and so long as Tenant shall pay
all rent and observe and perform all of the provisions set forth in this
Lease.
21. ENTRY BY LANDLORD
Landlord reserves, and shall at all reasonable time, after at least
24 hours notice (except in emergencies) have, the right to enter the
Premises to inspect them; to perform any services to be provided by
Landlord hereunder; to submit the Premises to prospective purchasers,
mortgagers or tenants; to post notices of nonresponsibility, and to
alter, improve or repair the Premises and any portion of the Complex,
all without abatement of rent; and may erect scaffolding and other
necessary structures in or through the Premises where reasonably
required by the character of the work to be performed; provided, however
that the business of Tenant shall be interfered with to the least extent
that is reasonably practical. For each ofthe foregoing purposes,
Landlord shall at all times have and retain a key with which to unlock
all of the doors in an emergency in order to obtain entry to the
Premises, and any entry to the Premises obtained by Landlord by any of
said means, or otherwise, shall not under any circumstances be construed
or deemed to be a forcible or unlawful entry into or a detainer of the
Premises or an eviction, actual or constructive, of Tenant from the
Premises or any portion thereof. Landlord shall also have the right at
any time to change the arrangement or location of entrances or
passageways, doors and doorways, and corridors, elevators, stairs,
toilets or other public parts of the Complex and to change the name,
number or designation by which the Complex is commonly known, and none
of the foregoing shall be deemed an actual or constructive eviction of
Tenant, or shall entitle Tenant to any reduction of rent hereunder,
22. BANKRUPTCY AND DEFAULT
The commencement of a bankruptcy action or liquidation action or
reorganization action or insolvency action or an assignment of or by
Tenant for the benefit of creditors, or any similar action undertaken by
Tenant, or the insolvency of Tenant, shall, at Landlord s option,
constitute a breach of this Lease by Tenant. If the trustee or receiver
appointed to serve during a bankruptcy, liquidation, reorganization
insolvency or similar action elects to reject Tenant's unexpired Lease,
the trustee or receiver shall notify Landlord in writing of its election
within thirty (30) days after an order for relief in a liquidation
action or within thirty (30) days after the commencement of any action.
Within thirty (30) days after court approval of the assumption of
this Case, the trustee or receiver shall cure (or provide adequate
assurance to the reasonable satisfaction of Landlord that the trustee or
receiver shall cure) any and all previous defaults under the unexpired
Lease and shall compensate Landlord for all actual pecuniary loss and
shall provide adequate assurance of future performance under said Lease
to the reasonable satisfaction of Landlord. Adequate assurance of future
performance, as used herein, includes, but shall not be limited to: (i)
assurance of source and payment of rent. and other consideration due
under this Lease; (ii) assurance that the assumption or assignment of
this Lease will not breach substantially any provision, such as radius,
location, use, or exclusivity provision, in any agreement relating to
the above described Premises.
Nothing contained in this section shall affect the existing right of
Landlord to refuse to accept an assignment upon commencement of or in
connection with a bankruptcy, liquidation, reorganization or insolvency
action or an assignment of Tenant for the benefit of creditors or other
similar act. Nothing contained in this Lease shall be construed as
giving or granting or creating an equity in the demised Premises to
Tenant. In no event shall the leasehold estate under this Lease, or any
interest therein, be assigned by voluntary or involuntary bankruptcy
proceeding without the prior written consent of Landlord. In no event
shall this Lease or any rights or privileges hereunder be an asset of
Tenant under any bankruptcy, insolvency or reorganization proceedings.
The failure to perform or honor any covenant, condition or
representation made under this Lease shall Constitute a default
hereunder by Tenant upon expiration of the appropriate grace period
hereinafter provided. Tenant shall have a period of five (5)days from
the date of written notice from Landlord within which to cure any
default in the payment of rental or adjustment thereto. Tenant shall I
have a period of thirty (30) days from the date of written notice from
Landlord within which to cure any other default under this Lease;
provided, however, that if the nature of Tenant's failure is such that
more than thirty (30) days is reasonably required to cure the same,
Tenant shall not be in default so long as Tenant commences performance
within such thirty (30) day period and thereafter prosecute the same to
completion.. Upon an uncured default of this Lease by Tenant, Landlord
shall have the following rights and remedies in addition to any other
rights or remedies available to Landlord at law or in equity;
(a). The rights and remedies provided for by California Civil Code
Section 1951.2, including but not limited to, recovery of the worth at
the time of award of the amount by which the unpaid rent for the balance
of the term after the time of award exceeds the amount of rental loss
for the same period that Tenant proves could be reasonably avoided, as
computed pursuant to subsection (b) of said Section 1951.2. Any proof
by Tenant under subparagraphs (2) and (3) of Section 1951.2 of the
California Civil Code of the amount of rental loss that could be
reasonably avoided shall be made in the following manner: Landlord and
Tenant shall each select a licensed real estate broker in the business
of renting property of the same type and up as the Premises and in the
same geographic vicinity. Such two real estate brokers shall select a
third licensed real estate broker, and the three licensed real estate
brokers so Elected shall determine the amount of the rental loss that
could be reasonably avoided from the balance of the term of this Lease
after the time of award. The decision of the majority of said licensed
real estate brokers shall be final and binding upon the parties hereto.
(b). The rights and remedies provided by California Civil Code
Section which allows Landlord to continue the Lease in effect and to
enforce all of its rights and remedies under this Lease, including the
right to recover rent as it becomes due, for so long as Landlord does
not terminate Tenant's right to possession: acts of maintenance or
preservation efforts to relet the Premises, or the appointment of a
receiver upon Landlord's initiative to protect its interest under this
Lease shall not constitute a termination of Tenant's right to
possession.
(c). The right to terminate this Lease by giving notice to Tenant in
accordance with applicable law
(d) To the extent permitted by law, the right and power, to enter the
Premises and remove therefrom all persons and property, to store such
property in a public warehouse or elsewhere at the cost of and for the
account of Tenant, and to sell such property and apply such proceeds
therefrom pursuant to applicable California law. Landlord may from, time
to time, sublet the Premises or any part thereof for such term or terms
(which may extend beyond the term of this Lease) and at such rent and
such other terms as Landlord in its sole discretion may deem advisable,
with the right to make alterations and repairs to the Premises. Upon
each subletting, (I) Tenant shall be immediately liable to pay Landlord,
in addition to indebtedness other than rent due hereunder, the cost of
such subletting, including, but not limited to, reasonable attorneys
fees,and any real estate commissions actually paid, and the cost of such
alterations and repairs incurred by Landlord and the amount, if any, by
which the rent hereunder for the period of such subletting to the extent
such period does not exceed the term hereon exceeds the amount to be
paid as rent for the Premises for such period or (ii) at the option of
Landlord, rents received from such subletting shall be applied first to
payment of indebtedness other than rent due hereunder from Tenant to
Landlord; second, to the payment of any costs of such subletting and of
such alterations and repairs; third to payment of rent due and unpaid
hereunder; and the residue, if any, shall be held by Landlord and
applied in payment of future rent as the same becomes due hereunder. If
Tenant has been credited with any rent to be received by such subletting
under option ( i ) and such rent shall not be promptly paid to Landlord
by the subtenant( s ), or if such rentals received from such subletting
under option ( ii ) during any month be less than that to be paid during
that month by Tenant hereunder, Tenant shall pay any such deficiency to
Landlord. Such deficiency shall be calculated and paid monthly. No
taking of possession by Landlord shall be construed as an election on
its part to terminate this Lease unless a written notice of such
intention be given to Tenant. Notwithstanding any such subletting
without termination, Landlord may at any time hereafter elect to
terminate this Lease for such previous breach.
( c) The right to have receiver appointed for Tenant upon application
by Landlord, to lake possession of the Premise and to apply any rental
collected from the Premises and to exercise all other rights and
remedies granted to Landlord pursuant to subparagragh above (except that
Tenant may vacate so long as it pays rent, provides an on-site security
guard during normal business hours from Monday through Friday, and
otherwise performs its obligations hereunder).
24. DESTRUCTION
In the event the Premises are destroyed in whole or in pan from any
cause, except for routine maintenance and repairs and incidental damage
and destruction caused from vandalism and accidents for which Tenant is
responsible for under Paragraph 10, Landlord may, at its option:
(a) Rebuild or restore the Premises to their condition prior to the
damage or destruction, or
(b) Terminate this Lease, (providing that the Premises is damaged to the
extent of 33 1/3% of the replacement cost).
If Landlord does not give Tenant notice in writing within thirty (30)
days from the destruction of the Premises of its election to either
rebuild and restore them, or to terminate this Lease, Landlord shall be
deemed to have elected to rebuild or restore them, in which event
Landlord agrees, at its expense, promptly to rebuild or restore the
Premises to their condition prior to the damage or destruction. Tenant
shall be entitled to a reduction in rent while such repair is being made
in the propotion that the area of the Premises rendered untenantable by
such damage bears to the total area at the Premises. If Landlord
initially estimates that the rebuilding or restoration will exceed 180
days or if Landlord does not complete the rebuilding or restoration
within one hundred eighty ( 180) days following the date of destruction
(such period of time to be extended for delays caused by the fault or
neglect of Tenant or because of Acts of God, acts of public agencies,
labor disputes. strikes, fires, freight embargoes, rainy or stormy
weather, inability to obtain materials, supplies or fuels, acts of
contractors or subcontractors, or delay of the contractors or
subcontractors due to such causes or other contingencies beyond the
control of Landlord then Tenant shall have the right to terminate this
Lease by giving f fifteen ( 15 ) days prior written notice to Landlord.
Notwithstanding anything here in to the contrary, Landlord's obligation
to rebuild or restore shall be limited to the building and interior
improvements constructed by Landlord as they existed as of the
commencement date of the Lease and shall not include restoration of
Tenant's trade fixtures, equipment, merchandise, or any improvements,
alterations or additions made by Tenant to the Premises, which Tenant
shall forthwith replace or fully repair at Tenant's sole cost and
expense provided this Lease is not cancelled according to the provisions
above.
Unless this Lease is terminated pursuant to the foregoing provisions,
this Lease shall remain in full force and effect. Tenant hereby
expressly waives the provisions of Section 1932, Subdivision 2, in
Section 1933. Subdivision 4 of the California Civil Code.
In the event that the building in which the Premises are situated is
damaged or destroyed to the extent of not less than33% of the
replacement cost thereof, Landlord may elect to terminate this Lease,
whether the Premises be injured or not . Notwithstanding anything to the
contrary herein, Landlord may terminate this Lease in the event of an
uninsured event or if insurance proceeds are insufficient to cover one
hundred percent of the rebuilding costs net of the deductible.
25. EMINENT DOMAIN
If all or any part of the Premises shall be taken by any public or
quasi-public authority under the power of eminent domain or conveyance
in lieu thereof, this Lease shall terminate as to any portion of the
Premises so taken or conveyed on the date when title vests in the
condemnor, and Landlord shall be entitled to any and all payment,
income, rent, award, or any interest therein whatsoever which may be
paid or made in Connection with such taking or conveyance, and Tenant
shall have no claim against Landlord or otherwise for the value of any
unexpired term of this Lease. Notwithstanding the foregoing paragraph,
any compensation specifically awarded Tenant for loss of business,
Tenant's personal property, moving cost or loss of goodwill, shall be
and remain the property of Tenant.
If (i ) any action or proceeding is commenced for such taking of the
Premises or any part thereof, or if Landlord is advised in writing by
any entity or body having the right or power of condemnation of its
intention to condemn the premises or any portion thereof, or(ii) any of
the foregoing events occur with respect to the taking of any space in
the Complex not leased hereby, or if any such spaces so taken or
conveyed in lieu of such taking and Landlord shall decide to discontinue
the use and operation of the Complex, or decide to demolish, alter or
rebuild the Complex, then, in any of such events Landlord shall have the
right to terminate this Lease by giving Tenant written notice thereof
within sixty (60) days of the date of receipt of said written advice, or
commencement of said action or proceeding, or taking conveyance, which
termination shall lake place as of the first to occur on the last day of
the calendar month next following the month in which such notice is
given or the date on which title to the Premises shall vest in the
condemnor.
In the event of such a partial taking or conveyance of the Premises,
if the portion of the Premises taken or conveyed is so substantial that
the Tenant can no longer reasonably conduct its business. Tenant shall
have the privilege of terminating this Lease within sixty (60) days from
the date of such taking or conveyance, upon written notice to Landlord
of its intention so to do, and upon giving of such notice this Lease
shall terminate on the last day of the calendar month next following the
month in which such notice is given, upon payment by Tenant of the rent
from the date of such taking or conveyance to the date of termination.
If a portion of the Premises be taken by condemnation or conveyance
in lieu thereof and neither Landlord nor Tenant shall terminate this
Lease as provided herein, this Lease shall continue in full force and
effect as to the part of the Premises not so taken or conveyed, and the
rent herein shall be apportioned as of the date of such taking or
conveyance so that thereafter the rent to be paid by Tenant shall be in
the ratio that the area that the portion of the Premises not so taken or
conveyed bears to the total area of the premises prior to such taking.
26. SALE OR CONVEYANCE BY LANDLORD
In the event of a sale or conveyance of the Complex or any interest
therein, by any owner of the reversion then constituting Landlord, the
transferor shall thereby be released from any further liability upon any
of the terms, covenants or conditions (express or implied) herein
contained in favor of Tenant, and in such event, insofar as such
transfer is concerned, Tenant agrees to look solely to the
responsibility of the successor in interest of such transferor in and to
the Complex and this Lease. This Lease shall not be affected by any
such sale or conveyance, and Tenant agrees to attorn to the successor in
interest of such transferor.
27. ATTORNMENT TO LENDER OR THIRD PARTY
In the event the interest of Landlord in the land and buildings in
which the leased Premises are located (whether such interest of Landlord
is a fee title interest or a leasehold interest) is encumbered by deed
of trust, and such interest is acquired by the lender or any third party
through judicial foreclosure or by exercise of a power of sale at
private trustees (or foreclosure sale, Tenant hereby agrees to attorn to
the purchaser at any such foreclosure sale and to recognize such
purchaser as the Landlord under this Lease. In the event the lien of the
deed of trust securing the loan from a Lender to landlord is poor and
paramount to the Lease, this Lease shall nonetheless continue in full
force and effect for the remainder of the unexpired term hereof, at the
same rental herein reserved and upon all the other terms, conditions and
covenants herein contained.
28. HOLDING OVER
Any holding over by Tenant after expiration or other termination of the
term of this Lease with the written consent of Landlord delivered to
Tenant shall not constitute a renewal or extension of the Lease or give
Tenant any rights in or to the leased Premises except as expressly
provided in this Lease. Any holding over after the expiration or other
termination of the team of this Lease, with the consent of Landlord
shall be construed to be a tenancy from month to month, on the same
terms and conditions herein specified insofar as applicable except that
the monthly Basic Rent shall be increased to an amount equal to one
hundred fifty ( 150% ) percent of the monthly Basic Rent required during
the last month of the Lease teem.
29. CERTIFICATE OF ESTOPPEL
Tenant shall at any lime upon not less than ten (10) days prior
written notice to Landlord execute, acknowledge and deliver to Landlord
a statement in writing (i) certifying that this Lease is unmodified and
in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full
force and effect) and the dale to which the rent and other charges are
paid in advance, if any, and (ii) acknowledging that there are not, to
Tenant's knowledge, any uncured defaults on the part of Landlord
hereunder, or specifying such defaults, if any, are claimed. Any such
statement may be conclusively relied upon by any prospective purchaser
or encumbrances of the Premises Tenant's failure to deliver such
statement within such time shall be conclusive upon Tenant that this
Lease is in full force and effect, without modification except as may be
represented by Landlord; that there are no uncured defaults in
Landlord's performance, and that not more than one month's rent has been
paid in advance.
30. CONSTRUCTION CHANGES
It is understood that the description of the Premixes and the
location of ductwork, plumbing and other facilities therein are subject
to such minor changes as Landlord or Landlord's architect determines to
be desirable in the course of construction of the Premises, and no such
changes, or any changes in plans for any other portions of the Complex
shall affect this Lease or entitle Tenant to any reduction of rent
hereunder or result in my liability of Landlord to Tenant. Landlord does
not guarantee the accuracy of any drawings supplied to Tenant and
verification of the accuracy of such drawings rests with Tenant.
31. RIGHT OF LANDLORD TO PERFORM
All terms, covenants and conditions of this Lease to be performed or
observed by Tenant shall be observed by Tenant at Tenant's sole cost and
expense and without any reduction of rent. If Tenant shall fail to pay
any sum of money, or other rent, required to be paid by it hereunder or
shall fail to perform any other term or covenant hereunder on its part
to be performed, and such failure shall continue for thirty (30) days
after written notice thereof by Landlord. Landlord, without waiving or
releasing Tenant from any obligation of Tenant hereunder, may, but shall
not be obligated to, make any such payment or perform any such other
term or covenant on Tenant's part to be performed. All sums so paid by
Landlord and all necessary costs of such performance by Landlord
together with interest thereon at the rate of the prime rate of interest
per annum as quoted by the Bank of America from the date of such payment
or performance by Landlord, shall be paid (and Tenant covenants to make
such payment) to Landlord on demand by Landlord, and Landlord shall have
(in additiontlo any other right or remedy of Landlord) the same rights
and remedies in the event of nonpayment by Tenant in the case of failure
by Tenant in the payment of rent hereunder.
32. ATTORNEYS' FEES.
(A) In the event that either Landlord or Tenant should bring suit
for the possession of the Premises, for the recovery of any sum due
under this Lease, or because of the breach of any provision of this
Lease, or for any other relief against the other party hereunder, then
all costs and expenses, including reasonable attorneys' fees, incurred
by the prevailing party therein shall be paid by the other party, which
obligation on the part of the other party shall be deemed to have
accrued on the date of the commencement of such action and shall be
enforceable whether or not the action is prosecuted to judgement.
(B) Should Landlord be named as a defendant in any suit brought
against Tenant in connection with or arising out of Tenant's occupancy
hereunder, Tenant shall pay to Landlord its costs and expenses incurred
in such suit, including a reasonable attorney's fee.
33. WAIVER
The waiver by either party of the other party's failure to perform or
observe any term, covenant or condition herein contained to be performed
or observed by such waiving party shall not be deemed to be a waiver of
such term, covenant or condition or of any subsequent failure of the
party failing to perform or observe the same or any other such term,
covenant or condition therein contained, and no custom or practice which
may develop between the panics hereto during the term hereof shall be
deemed a waiver of, or in any way affect, the right of either party to
insist upon performance and observance by the other party in strict
accordance with the terms hereof.
34. NOTICES
All notices, demands, requests, advices or designations which may be
or are required to be given by either party to the other hereunder shall
be in writing. All notices, demands, requests, advices or designations
by Landlord to Tenant shall be sufficiently given, made or delivered if
personally served on Tenant by leaving the same at the Premises or if
sent by United States certified or registered mail, postage prepaid,
addressed to Tenant at the Premises. All notices demands, requests,
advices or designations by Tenant to Landlord shall be sent by United
States certified or registered mail, postage prepaid, addressed to
Landlord at its of offices at Peery/Arrilla, 2560 Mission College Blvd.,
Suite 101, Santa Clara, CA 95054 or designation referred to in this
paragraph shall be deemed received on the date of the personal service
or ailing thereof in the manner herein provided, as the case may be.
35. EXAMINATION OF LEASE
Submission of this instrument for examination or signature by Tenant
does not constitute a reservation of or option for a lease, and this
instrument is not effective as a lease or otherwise until its execution
and delivery by both Landlord and Tenant.
36. DEFAULT BY LANDLORD
Landlord shall not be in default unless Landlord fails to perform
obligations required of Landlord within a reasonable time, but in no
event earlier than thirty (30) days after written notice by Tenant to
Landlord and to the holder of any first mortgage or deed of trust
covering the Premises whose name and address shall have heretofore been
furnished to Tenant in writing, specifying wherein Landlord has failed
to perform such obligations; provided, however, that if the nature of
Landlord's obligations is such that more than thirty (30) days are
required for performance, then Landlord shall not be in default if
Landlord commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
37. CORPORATE AUTHORITY
If Tenant is a corporation, (or u partnership) each individual
executing this Lease on behalf of such corporation (or partnership
represents and warrants that he is duly authorized to execute and
deliver this Lease on behalf of said corporation or partnership) in
accordance with the by-laws of said corporation (or partnership in
accordance with the partnership agreement) and that this Lease is
binding upon said corporation (or partnership)in accordance with its
terms. If Tenant is a corporation, Tenant shall, within thirty (30) days
alter execution of this Lease, deliver to Landlord a certified copy of
the resolution of the Board of Directors of said corporation authorizing
or ratifying the execution of this Lease.
38. Deleted
39. LIMITATION OF LIABILITY
In consideration at the benefits accruing hereunder, Tenant and all
successors and assigns covenant and agree that, in the event of any
actual or alleged failure, breach or default hereunder by Landlord:
(i) the sole end exclusive remedy shall be against Landlord's interest
in the Premises leased herein;
(ii) no partner of Landlord shall be sued or named as a party in any
suit or action (except as may be necessary to secure jurisdiction of the
partnership)
(iii) no service of process shall be made against any partner of
Landlord (except as may be necessary to secure jurisdiction of the
partnership)
(iv) no partner of Landlord shall be required to answer or otherwise
plead to any service of process;
(v) no judgment will be taken against any partner of Landlord:
(vi) any judgment taken against any partner of Landlord may be vacated
and set aside at any time without hearing;
(vii) no writ of execution will ever be levied against the assets of any
partner of Landlord:
( viii ) these covenants and agreements are enforceable both by Landlord
and also by any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements
shall be applicable to any covenant or agreement either expressly
contained in this Lease or imposed by statute or at common law.
40. MISCELLANEOUS AND GENERAL PROVISIONS
a. Tenant shall not, without the written consent of Landlord, use the
name of the building for any purpose other than as the address of the
business conducted by Tenant in the Premises.
b. This Lease shall in all respects be governed by and construed in
accordance with the laws of the State of California. If any provision of
this Lease shall be invalid, unenforceable or ineffective for any reason
whatsoever, all other provisions hereof shall be and remain in full
force and effect.
c. The term ''Premises'' includes the space leased hereby and any
improvements now or hereafter installed therein or attached thereto. The
team ''Landlord'' or any pronoun used in place thereof includes the
plural as well as the singular and the successors and assigns of
Landlord The term Tenant or any pronoun used in place thereof includes
the plural as well as the singular and individuals, firms, associations,
partnerships and corporations, and their and each of their respective
heirs, executors, administrators, successors and permitted assigns,
according to the context hereof, and the provisions of this Lease shall
inure to the benefit of and bind such heirs, executors, administrators,
successors and permitted assigns.
The term person includes the plural as well as the singular and
individuals, firms, associations, partnerships and corporations. Words
used in any gender include other genders. If there be more than one
Tenant the obligations of Tenant hereunder are joint and several. The
paragraph headings of this Lease are for convenience of reference only
and shall have no effect upon the construction or interpretation of any
provision hereof.
e. At the expiration or curlier al this Lease, Tenant shall execute,
acknowledge and deliver to Landlord. within ten(10) days after written
demand from Landlord to Tenant, any quick claim deed or other document
required by any reputable title company, licensed to operate in the
State of California, to remove the cloud or encumbrance created by this
Lease from the real property of which Tenant's Premises are a part.
f, This instrument along with any exhibits and attachments hereto
constitutes the entire agreement between Landlord and Tenant relative to
the Premises and this agreement and the exhibits and attachments may be
altered, amended or revoked only by an instrument in writing signed by
both Landlord and Tenant. Landlord and Tenant agree hereby that all
prior or contemporaneous oral agreements between and among themselves
and their agents or representatives relative to the leasing of the
Premises are merged in or revoked by this agreement.
g. Neither Landlord nor Tenant shall record this Lease or a short
form memorandum hereof without the consent of the other.
h. Tenant further agrees to execute any amendments required by a
lender to enable Landlord to obtain financing, so long as Tenant's
rights hereunder are not substantially effected and such amendments do
not increase Tenant's monetary obligations under said Lease.
i. Paragraphs 43 through 57 are added hereto and are included us a part
of this lease.
j. Clauses, plats and riders, if any, signed by Landlord and Tenant
and endorsed on or affixed to this Lease are a part hereof.
k. Tenant covenants and agrees that no diminution or shutting off of
light, air or view by any structure which may be hereafter erected
(whether or not by Landlord) shall in any way affect his Lease, entitle
Tenant to any reduction of rent hereunder or result in any liability of
Landlord to Tenant.
41. BROKERS
Tenant warrants that it had dealings with only the following real
estate brokers or agents in connection with the negotiation of this
Lease: none and that it knows of no other real estate broker or agent
who is entitled to a commission m connection with this Lease
42. SIGNS
No sign, placard, picture, advertisement. name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the
outside of the Premises or any exterior windows of the Premises without
the written consent of Landlord first had and obtained and Landlord
shall have the right to remove any such sign, placard, picture,
advertisement name or notice without notice to and at the expense of
Tenant. If Tenant is allowed to print or affix or in any way place a
sign in, on, or about the Premises, upon expiration or other sooner
termination of this Lease, Tenant at Tenant's sole cost and expense
shall both remove such sign and repair all damage in such a manner as to
restore all aspects of the appearance of the Premises to the condition
prior to the placement of said sign.
All approved signs or lettering on outside doors shall be printed,
painted. affixed or inscribed al the expense of Tenant by a person
approved of by Landlord.
Tenant shall not place anything or allow anything to be placed near
the glass of any window, door partition or wall which may appear
unsightly from outside the Premises.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Lease as of the day and year 1ast written be1ow.
LANDLORD:
JOHN ARRILLAGA SURVIVOR' S TRUST
By____________________________________
John Arrillaga, Trustee
Date: June 14, 1999
RICHARD T. PEERY SEPARATE TRUST
By _________________________________
Richard T. Peery, Trustee
Date: June 15, 1999
TENANT:
TERAYON COMMUNICATION SYSTEMS, INC., a Delaware corporation
By______________________________
Zaki Rakib, CEO
Date: May 21, 1999
Paragraphs 43 through 58 to Lease Agreement dated April 8, 1999, By and
Between the John Arrillaga Survivor's Trust and the Richard T. Peery
Separate Property Trust, as Landlord, and Terayon Communication Systems,
Inc., a Delaware corporation, as Tenant for 30,745+ Square Feet of Space
Located at 5150 Great America Parkway, Santa Clara, California.
43. BASIC RENT: In accordance with Paragraph 4A herein, the total
aggregate sum of ONE MILLION FIVE HUNDRED NINETY FIVE THOUSAND SIX
HUNDRED SIXTY FIVE AND 50/100 DOLLARS ($1,595,665.50), shall be payable
as follows:
On June 19, 1999, the sum of EIGHTEEN THOUSAND FOUR HUNDRED FORTY
SEVEN AND NO/100 DOLLARS ($18,447.00) shall be due, representing the
rental for the period of June 19, 1999 through June 30, 1999.
On July 1, 1999, the sum of FORTY SIX THOUSAND ONE HUNDRED
SEVENTEEN AND 50/100 DOLLARS ($46,117.50) shall be due, and a like sum
due on the first day of each month thereafter, through and including
March 1, 2000.
On April 1, 2000, the sum of FORTY SEVEN THOUSAND SIX HUNDRED
FIFTY FOUR AND 75/100 DOLLARS ($47,654.75) shall be due, and a like sum
due on the first day of each month thereafter, through and including
March 1, 2001.
On April 1, 2001, the sum of FORTY NINE THOUSAND ONE HUNDRED
NINETY TWO AND NO/100 DOLLARS ($49,192.00) shall he due, and a like sum
due on the first day of each month thereafter, through and including
March 1, 2002; or until the entire aggregate sum of ONE MILLION FIVE
HUNDRED NINETY FIVE THOUSAND SIX HUNDRED SIXTY FIVE AND 50/100 DOLLARS
($1,595,665.50) has been paid.
44. "AS-IS" BASIS: It is hereby agreed that the Premises leased
hereunder is leased strictly on an "as-is" basis and in its present
condition, in the configuration as shown on Exhibit B attached hereto,
and subject to those alterations completed by the previous tenant (as
shown on Exhibit C attached hereto) and by reference made a part hereof.
It is specifically agreed between the parties that Landlord shall not be
required to make, nor be responsible for any cost, in connection with
any repair, restoration, and/or improvement to the Premises in order for
this Lease to commence, or thereafter, throughout the Term of this
Lease. Notwithstanding anything to the contrary within this Lease,
Landlord makes no warranty or representation of any kind or nature
whatsoever as to the condition or repair of the Premises, nor as to the
use or occupancy which may be made thereof.
45. PREVIOUS TENANT'S ALTERATIONS: Notwithstanding anything to the
contrary herein, Tenant agrees that it is leasing the Premises subject
to the alterations (as shown on Exhibit C) made by the previous tenant,
ZeitNet, Inc., and Tenant specifically agrees to assume the
responsibility to restore said alterations at the end of the Lease Term,
pursuant to Lease Paragraph 8 ("Acceptance and Surrender of Premises"),
to the configuration shown on Exhibit B (subject to the terms of
Paragraph 58 below and those Alterations shown on Exhibit D).
46. PARKING: Tenant shall have the right to use the parking spaces of
the Complex as outlined in Orange on Exhibit A. Tenant agrees that
Tenant, Tenant's employees, agents, representatives, and/or invitees
shall not use any other or additional parking spaces except for those
parking spaces allocated to Tenant hereunder. Landlord shall have the
right, at Landlord's sole discretion, to redesignate the location of
Tenant's parking spaces within the Complex. Said parking spaces may be
relocated by Landlord al any time, and from time lo time. Landlord
reserves the right, at Landlord's sole discretion, to rescind any
specific designation of parking spaces, thereby returning Tenant's
parking spaces to a common parking area. Landlord shall give Tenant
written notice of any change in Tenant's parking spaces. Tenant shall
not, at any time, park, or permit to be parked, any trucks and other
vehicles or the trucks and vehicles of Tenant's suppliers or others, in
any portion of the common areas not designated by the Landlord for such
use. Tenant shall not park or permit to be parked any inoperative
vehicles or equipment on any portion of the common parking area or other
common areas of the Complex. Tenant agrees to assume responsibility for
compliance by its employees with the parking provision contained herein.
If Tenant or its employees park in other than designated parking areas,
then Landlord may charge Tenant, as an additional charge, and Tenant
agrees to pay Ten Dollars ($ I ().00) per day for each day or partial
day each such vehicle is parking in any area other than that designated.
Tenant hereby authorizes Landlord, at Tenant's sole expense, to tow away
from the Complex any vehicle belonging to Tenant or Tenant's employees
parked in violation of these provisions, or to attach violation stickers
or notices to such vehicles. Tenant shall use the parking area for
vehicle parking only and shall not use the parking areas for storage.
47. CONSENT: Whenever the consent of one party to the other is required
hereunder, such consent shall not be unreasonably withheld.
48. CHOICE OF LAW: SEVERABILITY. This Lease shall in all respects be
governed by and construed in accordance with the laws of the State of
California. If any provisions of this Lease shall he invalid,
unenforceable, or ineffective for any reason whatsoever, all other
provisions hereof shall be and remain in full force and effect.
49. AUTHORITY TO EXECUTE. The parties executing this Lease Agreement
hereby warrant and represent that they are properly authorized to
execute this Lease Agreement and bind the parties on behalf of whom they
execute this Lease Agreement and to all of the terms, covenants and
conditions of this Lease Agreement as they relate to the respective
parties hereto.
50. ASSESSMENT CREDITS: The demised property herein may be subject to a
special assessment levied by the City of Santa Clara as part of an
Improvement District. As a part of said special assessment proceedings
(if any), additional bonds were or may be sold and assessments were or
may be levied to provide for construction contingencies and reserve
funds. Interest shall be earned on such funds created for contingencies
and on reserve funds which will be credited for the benefit of said
assessment district. To the extent surpluses are created in said
district through unused contingency funds, interest earnings or reserve
funds, such surpluses shall be deemed the property of Landlord.
Notwithstanding that such surpluses may be credited on assessments
otherwise due against the Leased Premises, Tenant shall pay to Landlord,
as additional rent if, and at the time of any such credit of surpluses,
an amount equal to all such surpluses so credited. For example: if (i)
the property is subject to an annual assessment of $1,000.00, and (ii) a
surplus of $200.00 is credited towards the current year's assessment
which reduces the assessment amount shown on the property tax hill from
$1,000.00 to $800.00, Tenant shall, upon receipt of notice from
Landlord, pay to Landlord said $200.00 credit as Additional Rent.
51. ASSIGNMENT AND SUBLETTING (CONTINUED):
A. Notwithstanding the foregoing, Landlord and Tenant agree that
it shall not be unreasonable for Landlord to refuse to consent to a
proposed assignment, sublease or other transfer ("Proposed Transfer") if
the Premises or any other portion of the Property would become subject
to additional or different Government Requirements as a direct or
indirect consequence of the Proposed Transfer and/or the Proposed
Transferee's use and occupancy of the Premises and the Property.
However, Landlord may, in its sole discretion, consent to such a
Proposed Transfer where Landlord is indemnified by Tenant and (i)
Subtenant or (ii) Assignee, in form and substance satisfactory to
Landlord's counsel, by Tenant and/or the Proposed Transferee from and
against any and all costs, expenses, obligations and liability arising
out of the Proposed Transfer and/or the Proposed Transferee's use and
occupancy of the Premises and the Property.
B. Any and all sublease agreement(s) between Tenant and any and
all subtenant(s) (which agreements must be consented to by Landlord,
pursuant to the requirements of this Lease) shall contain the following
language:
"If Landlord and Tenant jointly and voluntarily elect, for any reason
whatsoever, to terminate the Master Lease prior to the scheduled Master
Lease termination date, then this Sublease (if then still in effect)
shall terminate concurrently with the termination of the Master Lease.
Subtenant expressly acknowledges and agrees that (1) the voluntary
termination of the Master Lease by Landlord and Tenant and the resulting
termination of this Sublease shall not give Subtenant any right or power
to make any legal or equitable claim against Landlord, including without
limitation any claim for interference with contract or interference with
prospective economic advantage, and (2) Subtenant hereby waives any and
all rights it may have under law or at equity against Landlord to
challenge such an early termination of the Sublease, and unconditionally
releases and relieves Landlord, and its officers, directors, employees
and agents, from any and all claims, demands, and/or causes of action
whatsoever (collectively, "Claims"), whether such matters are known or
unknown, latent or apparent, suspected or unsuspected, foreseeable or
unforeseeable, which Subtenant may have arising out of or in connection
with any such early termination of this Sublease. Subtenant knowingly
and intentionally waives any and all protection which is or maybe given
by Section 1542 of the California Civil Code which provides as follows:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with debtor.
The term of this Sublease is therefore subject to early
termination. Subtenant's initials here below evidence (a) Subtenant's
consideration of and agreement to this early termination provision, (b)
Subtenant's acknowledgment that, in determining the net benefits to be
derived by Subtenant under the terms of this Sublease, Subtenant has
anticipated the potential for early termination, and (c) Subtenant's
agreement to the general waiver and release off Claims above.
Initials: Subtenant Tenant
C. In addition to and notwithstanding anything to the contrary
in Paragraph 19 of this Lease, Landlord hereby agrees to consent to
Tenant's assigning or subletting said Lease to: (i) any parent or
subsidiary corporation, affiliate, or corporation with which Tenant
merges or consolidates, provided that the net worth of said parent or
subsidiary corporation, affiliate, or said corporation has a net worth
equal to or greater than the net worth of Tenant (a) at the time of
Lease execution or (b) at the time of such assignment, merger, or
consolidation (whichever is greater); or (ii) any third party or entity
to whom Tenant sells all or substantially all of its assets; provided,
that the net worth of the resulting or acquiring corporation has a net
worth after the merger, consolidation or acquisition equal to or greater
than the net worth of Tenant (a) at the time of Lease execution or (b)
at the time of such merger, consolidation or acquisition (whichever is
greater). No such assignment or subletting will release the Tenant from
its liability and responsibility under this Lease to the extent Tenant
continues in existence following such transaction. Notwithstanding the
above, Tenant shall he required to (a) give Landlord written notice
prior to such assignment or subletting to any party as described in (i)
and (ii) above, (b) execute Landlord's consent document prepared by
Landlord reflecting the assignment or subletting and (c) pay Landlord's
costs for processing said Consent prior to the effective date of said
assignment or sublease.
D. Excess Sublease Rent. Notwithstanding anything to the contrary
in Paragraph 19, Landlord agrees that that before sharing any excess
rent, Tenant shall first be entitled to recover from such excess rent
the amount of any reasonable leasing commissions related to said
transaction paid by Tenant to third parties not affiliated with Tenant.
52. BANKRUPTCY AND DEFAULT: Paragraph 22 is modified to provide that
with respect to non-monetary defaults not involving Tenant's failure to
pay Basic Rent or Additional Rent, Tenant shall not he in default of any
non-monetary obligation if (i) more than thirty (30) days is required to
cure such non-monetary default, and (ii) Tenant commences cure of such
default as soon as reasonably practicable after receiving written notice
of such default from Landlord and thereafter continuously and with due
diligence prosecutes such cure to completion.
S3. ABANDONMENT: Paragraph 23 is modified to provide that Tenant shall
not be in default under the Lease if it leaves all or any part of
Premises vacant so long as (i) Tenant is performing all of its other
obligations under the Lease including the obligation to pay Basic Rent
and Additional Rent (ii) Tenant provides on-site security during normal
business hours for those parts of the Premises left vacant, (iii) such
vacancy does not materially and adversely affect the validity or
coverage of any policy of insurance carried by Landlord with respect to
the Premises, and (iv) the utilities and heating and ventilation system
are operated and maintained to the extent necessary to prevent damage to
the Premises or its systems
54. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with
respect to the existence or use of "Hazardous Materials" (as defined
herein) on, in, under or about the Premises and real property located
beneath said Premises and the common areas of the Complex (hereinafter
collectively referred to as the "Property"):
A. As used herein, the term "Hazardous Materials" shall mean any
material, waste, chemical, mixture or byproduct which is or hereafter is
defined, listed or designated under Environmental Laws (defined below)
as a pollutant, or as a contaminant, or as a toxic or hazardous
substance, waste or material, or any other unwholesome, hazardous,
toxic, biohazardous, or radioactive material, waste, chemical, mixture
or byproduct, or which is listed, regulated or estricted by any
Environmental Law (including, without limitation, petroleum hydrocarbons
or any distillates or derivatives or fractions thereof, polychlorinated
biphenyls, or asbestos). As used herein, the term "Environmental Laws"
shall mean any applicable Federal, State of California or local
government law (including common law), statute, regulation, rule,
ordinance, permit, license, order, requirement, agreement, or approval,
or any determination, judgment, directive, or order of any executive or
judicial authority at any level of Federal, State of California or local
government (whether now existing or subsequently adopted or promulgated)
relating to pollution or the protection of the environment, ecology,
natural resources, or public health and safety.
B. Tenant shall obtain Landlord's written consent, which may be
withheld in Landlord's discretion, prior to the occurrence of any
Tenant's Hazardous Materials Activities (defined below); provided,
however, that Landlord's consent shall not be required for normal use in
compliance with applicable Environmental Laws of customary household and
office supplies, such as mild cleaners, lubricants and copier toner. As
used herein, the term "Tenant's Hazardous Materials Activities" shall
mean any and all use, handling, generation, storage, disposal,
treatment, transportation, release, discharge, or emission of any
Hazardous Materials on, in, beneath, to, from, at or about the Property,
in connection with Tenant's use of the Property, or by Tenant or by any
of Tenant's agents, employees, contractors, vendors, invitees, visitors
or its future subtenants or assignees. Tenant agrees that any and all
Tenant's Hazardous Materials Activities shall be conducted in strict,
full compliance with applicable Environmental Laws at Tenant's expense,
and shall not result in any contamination of the Property or the
environment. Tenant agrees to provide Landlord with prompt written
notice of any spill or release of Hazardous Materials at the Property
during the term of the Lease of which Tenant becomes aware, and further
agrees to provide landlord with prompt written notice of any violation
of Environmental Laws in connection with Tenant's Hazardous Materials
Activities of which Tenant becomes aware. If Tenant's Hazardous
Materials Activities involve Hazardous Materials other than normal use
of customary household and office supplies, Tenant also agrees at
Tenant's expense: (i) to install such Hazardous Materials monitoring,
storage and containment devices as Landlord reasonably deems necessary
(Landlord shall have no obligation to evaluate the need for any such
installation or to require any such installation); (ii) provide Landlord
with a written inventory of such Hazardous Materials, including an
update of same each year upon the anniversary date of the Commencement
Date of the Lease ("Anniversary Date"); and (iii) on each Anniversary
Date, to retain a qualified environmental consultant, acceptable to
Landlord, to evaluate whether Tenant is in compliance with all
applicable Environmental Laws with respect to Tenant's Hazardous
Materials Activities. Tenant, at its expense, shall submit to Landlord a
report from such environmental consultant which discusses the
environmental consultant's findings within two (2) months of each
Anniversary Date. Tenant, at its expense, shall promptly undertake and
complete any and all steps necessary, and in full compliance with
applicable Environmental Laws, to fully correct any and all problems or
deficiencies identified by the environmental consultant, and promptly
provide Landlord with documentation of all such corrections.
C. Prior to termination or expiration of the Lease, Tenant, at its
expense, shall (i) properly remove from the Property all Hazardous
Materials which come to be located at the Property in connection with
Tenant's Hazardous Materials Activities, and (ii) fully comply with and
complete all facility closure requirements of applicable Environmental
Laws regarding Tenant's Hazardous Materials Activities, including but
not limited to (x) properly restoring and repairing the Property to the
extent damaged by such closure activities, and (y) obtaining from the
local Fire Department or other appropriate governmental authority with
jurisdiction a written concurrence that closure has been completed in
compliance with applicable Environmental Laws. Tenant shall promptly
provide Landlord with copies of any claims, notices, work plans, data
and reports prepared, received or submitted in connection with any such
closure activities.
D. If Landlord, in its sole discretion, believes that the Property
has become contaminated as a result of Tenant's Hazardous Materials
Activities, Landlord in addition to any other rights it may have under
this Lease or under Environmental Laws or other laws, may enter upon the
Property and conduct inspection, sampling and analysis, including but
not limited to obtaining and analyzing samples of soil and groundwater,
for the purpose of determining the nature and extent of such
contamination. Tenant shall promptly reimburse Landlord for the costs of
such an investigation, including but not limited to reasonable
attorneys' fees Landlord incurs with respect to such investigation, that
discloses Hazardous Materials contamination for which Tenant is liable
under this Lease. Notwithstanding the above, Landlord may, at its option
and in its sole and absolute discretion, choose to perform remediation
and obtain reimbursement for cleanup costs as set forth herein from
Tenant. Any cleanup costs incurred by Landlord as the result of Tenant's
Hazardous Materials Activities shall be reimbursed by Tenant within
thirty (30) days of presentation of written documentation of the expense
to Tenant by Landlord. Such reimbursable costs shall include, but not be
limited to, any reasonable consultant and attorney fees incurred
Landlord.
Tenant shall take all actions necessary to preserve any claims it has
against third parties, including, hut not limited to, its insurers, for
claims related to its operation, management of Hazardous Materials or
contamination of the Property. Except as may be required of Tenant by
applicable Environmental Laws, Tenant shall not perform any sampling,
testing, or drilling to identify the presence of any Hazardous Materials
at the Property, without Landlord's prior written consent which may be
withheld in Landlord's discretion. Tenant shall promptly provide
Landlord with copies of any claims, notices, work plans, data and
reports prepared, received or submitted in connection with any sampling,
testing or drilling performed pursuant to the preceding sentence.
E. Tenant shall indemnify, defend (with legal counsel acceptable
to Landlord, whose consent shall not unreasonably be withheld) and hold
harmless Landlord, its employees, assigns, successors,
successors-in-interest, agents and representatives from and against any
and all claims (including hut not limited to third party claims from a
private party or a government authority), liabilities, obligations,
losses, causes of action, demands, governmental proceedings or
directives, fines, penalties, expenses, costs (including but not limited
to reasonable attorneys', consultants' and other experts' fees and
costs), and damages, which arise from or relate to: (i) Tenant's
Hazardous Materials Activities; (ii) any Hazardous Materials
contamination caused by Tenant prior to the Commencement Date of the
Lease; or (iii) the breach of any obligation of Tenant under this
Paragraph 54 (collectively, "Tenant's Environmental Indemnification").
Tenant's Environmental Indemnification shall include but is not limited
to the obligation to promptly and fully reimburse Landlord for losses in
or reductions to rental income, and diminution in fair market value of
the Property. Tenant's Environmental Indemnification shall further
include but is not limited to the obligation to diligently and properly
implement to completion, at Tenant's expense, any and all environmental
investigation, removal, remediation, monitoring, reporting, closure
activities, or other environmental response action (collectively,
"Response Actions"). Tenant shall promptly provide Landlord with copies
of any claims, notices, work plans, data and reports prepared, received
or submitted in connection with any Response Actions.
It is agreed that the Tenant's responsibilities related to Hazardous
Materials will survive the expiration or termination of this Lease and
that Landlord may obtain specific performance of Tenant's
responsibilities under this Paragraph 54.
55. LEASE TERMS CO-TERMINOUS: It is acknowledged that (i) concurrently
with the execution of this Lease, Landlord and Tenant are also executing
an Amendment dated April 8, 1999 to Lease Agreement dated January 23,
1996 (hereinafter referred to as the "Existing Lease") affecting ad
jacent property located at 2952 Bunker Hill Lane, Santa Clara,
California, and (ii) it is the intention of the parties that the term of
this Lease be co-terminous with the term of the Existing Lease such that
the terms of both leases expire on the same date; provided, however, the
termination of this Lease resulting from the terms and conditions stated
under Paragraph 22 "Bankruptcy and Default" (subject to Landlord's
option as stated in the respective leases' "Cross Default" Paragraph) or
Paragraph 24 "Destruction" or Paragraph 25 "Eminent Domain" shall not
result in a termination of said Existing Lease, unless Landlord elects,
at its sole and absolute discretion, to terminate both of the leases.
56. CROSS DEFAULT: As a material part of the consideration for the
execution of this Lease by Landlord, it is agreed between Landlord and
Tenant that a default under this Lease, or a default under said Existing
Lease may, at the option of Landlord, be considered a default under both
leases, in which event Landlord shall be entitled (but in no event
required) to apply all rights and remedies of Landlord under the terms
of one lease to both leases including, but not limited to, the right to
terminate one or both of said leases by reason of a default under said
Existing Lease or hereunder.
57. LEASE CONTINGENT UPON LANDLORD OBTAINING TERMINATION AGREEMENT WITH
CURRENT TENANT: This Lease is subject to and conditional upon Landlord
obtaining from ZeitNet, Inc. ("ZeitNet"), the current tenant occupying
the Premises leased hereunder, a Termination Agreement satisfactory to
Landlord on or before June 18, 1999. In the event Landlord is unable to
obtain said satisfactory Termination Agreement on or before June 18,
1999, this Lease Agreement shall, at Landlord's option (a) be rescinded,
or (b) the Commencement Date hereof shall be modified to reflect the
date Landlord so obtains said satisfactory Termination Agreement and
receives possession of the Premises hereunder free and clear of
ZeitNet's occupancy; provided, however, that said period of delay caused
by ZeitNet shall not extend beyond July 31, 1999. In the event this
Lease does not commence by August 1, 1999 (subject only to the delays
covered in Paragraph 3) this Lease shall be automatically rescinded.
58. ALTERATIONS (CONTINUED): Landlord agrees to allow Tenant to
construct those improvements shown in Green and Purple on Exhibit D
attached hereto (the "Alterations"), provided Tenant uses Landlord's
standard demountable partition walls and ten-foot doors. Those
Alterations shown in Green must be removed by Tenant prior to Lease
termination pursuant to the provisions of Paragraph 8 ("Acceptance and
Surrender of Premises") and Paragraph 9 ("Alterations and Additions");
however upon Lease termination, Landlord shall not require Tenant to
remove those Alterations shown in Purple on Exhibit D.
Landlord's approval of such Alterations hereunder shall not be construed
as approval of any construction detail with respect to conformance to
any applicable City or governmental ordinance or code, and by approving
such Alterations. Landlord assumes no liability or responsibility
therefor, or for any defect in any of the Alterations constructed by
Tenant. Tenant shall be responsible for (i) obtaining any and all
permits required by the governing agencies for said Alterations, (ii)
insuring that the Alterations meet current building codes, and (iii) for
one hundred percent of all costs and expenses related thereto.
Notwithstanding anything to the contrary in said Lease, Tenant shall
comply (i) with and shall be one hundred percent responsible for all
costs and expenses related to complying with any and all city or
governmental permits, codes and/or ordinances that may be required at
the time the approved Alicrations are made and (ii) the teems of this
Agreement.
Tenant shall fully and completely indemnify and hold Landlord
harmless from any cost or expense, or claim, damage' or liability of any
kind or nature whatsoever which occurs as a result of, in connection
with, or in any way relating to said Alterations to the Leased Premises
as set forth herein.
