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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________ .
COMMISSION FILE NUMBER: 000-24647
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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)
--------------
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 21,817,441 at November 8, 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 19 through 23, among other things,
should be considered in evaluating our prospects and future financial
performance.
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998
Condensed Consolidated Statements of Operations - Three and Nine
Months Ended September 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows -- Nine Months
Ended September 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
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
24
Item 6. Exhibits and Reports on Form 8-K
Signature
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $23,971 $14,342
Short-term investments........................... 82,287 14,538
Accounts receivable, less allowance for doubtful
accounts of $1,258 in 1999 and $594 in 1998..... 9,323 2,090
Accounts receivable from related party........... 2,705 1,549
Inventory........................................ 5,530 3,950
Other current assets............................. 2,662 1,856
------------ ------------
Total current assets............................... 126,478 38,325
Property and equipment, net........................ 5,798 3,593
Officer note receivable............................ -- 100
Intangibles and other assets...................... 98,464 128
------------ ------------
Total assets....................................... $230,740 $42,146
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $14,708 $8,600
Accrued payroll and related expenses............. 3,751 2,475
Other accrued liabilities........................ 9,626 2,799
Current portion of capital lease obligations..... 5 29
------------ ------------
Total current liabilities...................... 28,090 13,903
Long-term portion of capital lease obligations..... 8 10
Deferred rent...................................... 126 130
Commitments and contingencies
Common stock, $.001 par value.................... 22 16
Additional paid-in capital....................... 333,635 114,594
Accumulated deficit.............................. (129,424) (84,301)
Deferred compensation............................ (1,711) (2,184)
Stockholders' notes receivable................... (6) (22)
------------ ------------
Total stockholders' equity......................... 202,516 28,103
------------ ------------
Total liabilities and stockholders' equity......... $230,740 $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 Nine Months Ended
September 30, September 30,
------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product revenues.................... $17,625 $5,853 $42,073 $10,131
Related party product revenues...... 5,764 3,547 16,271 8,645
--------- --------- --------- ----------
Total revenues............... 23,389 9,400 58,344 18,776
--------- --------- --------- ----------
Cost of goods sold:
Cost of product revenues............ 13,674 7,327 35,692 14,196
Cost of related party product
revenues........................... 3,272 3,179 10,483 7,827
--------- --------- --------- ----------
Total cost of goods sold..... 16,946 10,506 46,175 22,023
--------- --------- --------- ----------
Gross profit (loss).................... 6,443 (1,106) 12,169 (3,247)
--------- --------- --------- ----------
Operating expenses:
Research and development............ 4,563 2,779 11,669 7,702
Cost of product development assistance
agreement........................ 11,178 -- 23,971 --
Sales and marketing................. 3,242 1,846 9,094 4,815
General and administrative.......... 1,977 813 4,689 2,095
In-process research and development. 11,000 -- 11,000 --
Amortization of goodwill............. 443 -- 443 --
--------- --------- --------- ----------
Total operating expenses..... 32,403 5,438 60,866 14,612
--------- --------- --------- ----------
Loss from operations.................. (25,960) (6,544) (48,697) (17,859)
Net interest income.................. 1,377 58 3,575 26
--------- --------- --------- ----------
Net loss.............................. (24,583) (6,486) (45,122) (17,833)
Series F convertible preferred
stock dividend....................... -- -- -- (23,910)
--------- --------- --------- ----------
Net loss applicable to common
stockholders......................... ($24,583) ($6,486) ($45,122) ($41,743)
========= ========= ========= ==========
Historical basic and diluted net
loss per share applicable to common
stockholders......................... ($1.18) ($0.63) ($2.27) ($6.39)
========= ========= ========= ==========
Shares used in computing historical
basic and diluted net loss per share
applicable to common stockholders.... 20,876 10,306 19,915 6,530
========= ========= ========= ==========
Pro forma basic and diluted net
loss per share applicable to common
stockholders......................... ($0.44) ($3.21)
========= ==========
Shares used in computing pro forma
basic and diluted net loss per share
applicable to common stockholders.... 14,631 12,991
========= ==========
</TABLE>
See accompanying notes
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash Used in Operating Activities................... ($4,943) ($15,030)
---------- ----------
Investing Activities:
Purchase of short-term investments................ (189,273) (2,948)
Proceeds from sales and maturities of
short-term investments.......................... 121,387 418
Purchase of property and equipment................ (2,618) (1,221)
Purchase of developed technology................. (750) --
Purchase of other assets.......................... (177) 0
Pre-acquisition loans to Imedia................... (1,800) 0
Cash received from Imedia acquisition............. 202 0
---------- ----------
Net cash used in investing activities............ (73,029) (3,751)
---------- ----------
Financing Activities:
Principal payments on capital leases.............. (26) (54)
Principal payments on long-term debt.............. -- (2,812)
Exercise of options and warrant to purchase
common stock................................... 11,316 623
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............ 76,295 35,144
---------- ----------
Net cash provided by financing activities.......... 87,601 46,848
---------- ----------
Net increase in cash and cash
equivalents...................................... 9,629 28,067
Cash and cash equivalents at beginning
of period........................................ 14,342 1,569
---------- ----------
Cash and cash equivalents at end of period......... $23,971 $29,636
========== ==========
</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 September 30, 1999 and for the three and nine month periods
ended September 30, 1999 and 1998 have been included.
The unaudited condensed consolidated financial statements include the
accounts of Terayon Communication Systems, Inc. (the "Company") and its
majority owned subsidiaries, Terayon Communication Systems Europe and
Terayon do Brasil. The Company completed its acquisition of Imedia
Corporation on September 16, 1999. The acquisition was accounted for under
the purchase method of accounting and, accordingly, the unaudited combined
consolidated financial statements include the results of Imedia for the
period following September 16, 1999. As a result, the information contained
herein may not be comparable to results in previous quarters. 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 nine months ended September 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 such instruments are classified as available-for-sale and can be
readily liquidated to meet current operational needs. At September 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>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Finished goods.................... $4,140 $3,355
Work-in-process................... 787 170
Raw materials..................... 603 425
------------ ------------
$5,530 $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 Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss applicable to common
stockholders..................... ($24,583) ($6,486) ($45,122) ($41,743)
========= ========= ========= =========
Shares used in computing
historical basic and diluted net
loss per share applicable to common
stockholders..................... 20,876 10,306 19,915 6,530
======== ======== ======== ========
Historical basic and diluted net
loss per share applicable to
common stockholders.............. ($1.18) ($0.63) ($2.27) ($6.39)
======== ======== ======== ========
Shares used in computing
historical basic and diluted net
loss per share applicable to
common stockholders.............. 10,306 6,530
Adjustment to reflect the effect
of the assumed conversion of
weighted average shares of
convertible preferred stock
outstanding to common stock..... 4,325 6,461
--------- ---------
Shares used in computing pro
forma basic and diluted net loss
per share applicable to common
stockholders..................... 14,631 12,991
======== ========
Pro forma basic and diluted net
loss per share applicable to
common stockholders.............. ($0.44) ($3.21)
========= =========
</TABLE>
Comprehensive Net Loss
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). 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 nine months ended September 30, 1999 and 1998.
Segments of an Enterprise and Related Information
The Company operates principally 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 September 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 September 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 cost of goods sold of approximately $140,000 and $440,000 for the
three and nine months ended September 30, 1999, respectively, relating to
shares issuable pursuant to the Anti-Dilution Warrant (none during the three
and nine month period ended September 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 -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 March 31, 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 nine months ended
September 30, 1999, the Company incurred approximately $11,200,000 and
$24,000,000, 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. Under the terms of the Supply Agreement, Rogers retains
the right to return to the Company all product purchased until certain
conditions are met by the Company. Accordingly, the Company does not
recognize revenue on shipments to Rogers until the milestones have been
achieved or Rogers has waived the right to return the product. For the
three and nine months ended September 30, 1999, Rogers waived their right to
return certain product purchased and the Company recognized approximately
$5.0 million in revenues from sales to Rogers.
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. Business Combination
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. The Imedia acquisition was
completed on September 16, 1999 (the "Closing Date").
In accordance with the Agreement, the shareholders, vested optionholders
and warrantholders are entitled to receive shares of the Company's common
stock in varying amounts in a series of three stock payments, the last of
which will occur on or before the 18-month anniversary of the Closing Date.
The aggregate number of shares of the Company's common stock issued under
the Agreement will depend, among other things, on the performance of the
Company's common stock over the period during which the payments are to be
made. In no event, shall the number of shares issued exceed 3,000,000
shares, adjusted for any splits, combinations, stock dividends and the like.
The Agreement also provides for the payment by the Company of certain
Additional Consideration in the form of cash or additional shares of the
Company's common stock in the event that certain pricing conditions are not
satisfied. The total value of the consideration that will ultimately be
paid, as measured by certain valuation formulae and based upon an average of
the price of the Company's common stock as reported on the Nasdaq National
Market, is not to exceed $99,000,000 nor be less than $69,000,000. The
holders of unvested Imedia options also will receive options to purchase the
Company's common stock, the fair value of which will be included in the
purchase price. The Company issued 827,407 shares of common stock on the
Closing Date.
The acquisition was accounted for under the purchase method of
accounting. The purchase price was allocated to the assets acquired and
liabilities assumed based on a determination from an independent appraisal
of their respective fair values. The approximate purchase price was
determined using $99,000,000 as the value of the consideration based on the
market value of the Company's common stock when the acquisition was
announced. The Company may be required to issue additional consideration
should the market value of the Company's common stock decline between the
Closing and the 18-month anniversary. The issuance of additional
consideration will not impact the determination of the purchase price. The
consolidation of the assets and liabilities significantly affected the
Company's balance sheet at September 30, 1999, as depicted in the following
tables:
The approximate purchase price (in thousands):
<TABLE>
<S> <C>
Purchase Price......................... $107,738
Estimated transaction and other direct
acquisition costs..................... 1,240
------------
$108,978
============
</TABLE>
The allocation of the approximate purchase price was determined as
follows (in thousands):
<TABLE>
<S> <C>
Historical net tangible assets of Imedia
at September 16, 1999............... ($355)
Forgivenss of Imedia note payable...... $1,000
------------
$645
Intangible assets acquired:
Developed technology................... $27,000
Assembled workforce.................... $2,500
Trademark.............................. $4,000
In-process research and development.... $11,000
Goodwill............................... $63,833
------------
Total.................................. $108,978
============
</TABLE>
Tangible assets of Imedia principally include cash, accounts receivable
and property and equipment. Liabilities principally include accounts
payable and accrued liabilities. At the Closing Date, the Company forgave
Imedia's note payable obligation of $1.0 million.
To determine the value of the developed technology, the expected future
cash flow attributed to all existing technology was discounted, taking into
account risks related to the characteristics and application of the
technology, existing and future markets and assessments of the life cycle
stage of the technology. The analysis resulted in a valuation of
approximately $27.0 million for developed technology which had reached
technological feasibility and therefore was capitalizable. The developed
technology is being amortized on a straight line basis over a six year
period.
The value of the assembled workforce was derived by estimating the costs
to replace the existing employees, including recruiting and hiring costs and
training costs for each category of employee. The analysis yielded a
valuation of approximately $2.5 million for the assembled workforce. The
asset is being amortized on a straight line basis over a two year period.
The projects identified as in-process are those that were underway at
Imedia at the time of the acquisition and will, after the Closing Date,
require additional effort in order to establish technological feasibility.
These projects have identifiable technological risk factors which indicate
that even though successful completion is expected, it is not assured. The
preliminary estimate of in-process research and development is $11.0
million.
In-process technology acquired consists primarily of major additions to
Imedia's core technology, which is related to Imedia's planned development
of new features. The majority of the intended functionality of these new
features is not supported by Imedia's current technology. Intended new
features include offering high quality video service over the Internet and
multiplexing data with video. The Company expects that in-process
technology will be successfully developed and that initial benefits from
these projects will begin in calendar 2001. Notwithstanding the Company's
expectations, there remain significant technical challenges that must be
resolved in order to complete the in-process technology.
The following selected unaudited pro forma combined results of operations
of the Company and Imedia for the nine months ended September 30, 1999 and
1998 have been prepared assuming that the acquisition occurred at the
beginning of the period presented. The following selected unaudited pro
forma financial information is not necessarily indicative of the results
that would have occurred had the acquisition been completed at the beginning
of the period indicated nor is it indicative of future operating results (in
thousands, except per share data):
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30
------------- ------------
1999 1998
------------- ------------
<S> <C> <C>
Revenues............................... $61,911 $18,776
Net loss applicable to common
stockholders (1) .................... ($52,634) ($60,609)
Net loss per share applicable to common
stockholders (1)..................... ($2.44) ($8.24)
Shares used in calculation of net loss
per share applicable to common
stockholders......................... 21,576 7,357
</TABLE>
(1) The net loss and net loss per share does not include the $11.0
million in-process research and development charge.
6. Subsequent Events
In October 1999, the Company entered into a Share Purchase Agreement to
acquire Telegate Ltd (the "Telegate Agreement"), an Israeli company.
Telegate produces telephony and data access platforms that are deployed by
service providers to deliver efficient carrier-class voice services over
cable. Telegate also provides in-home networking capability for telephony
and data, based on the Digital Enhanced Cordless Telephony (DECT) standard.
In general, the Telegate shareholders and vested optionholders will receive
a total of 2,200,000 shares and options to purchase shares of the Company's
common stock and a cash payment equal to Telegate's net cash balance at
closing minus $2,000,000. The Telegate Agreement also provides for the
payment by the Company of certain Additional Consideration in the form of
cash or additional shares of the Company's common stock (at the Company's
sole discretion) on or before the nine month anniversary of the Closing, in
the event that certain pricing conditions are not satisfied. The total
purchase price is estimated to be approximately $107,000,000. The
transaction is subject to customary closing conditions and is expected to
close late in the fourth quarter of 1999. The Company expects to account
for the acquisition as a purchase transaction.
In October 1999, the Company also entered into a Share Purchase Agreement
to acquire Radwiz Ltd (the "Radwiz Agreement"), an Israeli company. Radwiz
produces communication access systems based on high-speed IP routing,
integrated with telephony. Radwiz's systems include both central office
Digital Subscriber Line Access Multiplexers (DSLAMs) and customer premises
equipment for small office, home office (SOHO) business broadband services.
In general, the Radwiz shareholders and vested optionholders will receive a
total of 1,000,000 shares and options to purchase shares of the Company's
common stock. The Radwiz Agreement also provides for the payment by the
Company of certain Additional Consideration in the form of cash or
additional shares of the Company's common stock (at the Company's sole
discretion) on or before the one year anniversary of the Closing, in the
event that certain pricing conditions are not satisfied. The holders of
unvested Radwiz warrants also will receive options to purchase the Company's
common stock, the fair value of which will be included in the purchase
price. The total purchase price is estimated to be approximately
$52,000,000. The transaction is subject to customary closing conditions and
is expected to close late in the fourth 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
Our core line of business is to 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 September 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 $23.4 million for three months ended September 30, 1999 and
$58.3 million for the nine months ended September 30, 1999. This compares
to revenues of $9.4 million for the three months ended September 30, 1998
and $18.8 million for the nine months ended September 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 TV, Inc. (a subsidiary of Cox Communications,
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 the majority 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 addition, we
anticipate that the timing and maturity of these customers' deployments of
the TeraComm system will result in variations in the quarterly revenues
generated from these customers. In the three months ended September 30,
1999, sales to Shaw represented approximately 25% of our revenues, sales to
Rogers represented approximately 21% of our revenues, sales to UPC
represented approximately 16% of our revenues and sales to Sumitomo
represented approximately 13% of our revenues. This is compared to
approximately 28% of revenues from sales to Cablevision, approximately 24%
of our revenues from sales to Shaw and approximately 14% of revenues from
sales to Sumitomo in the three months ended September 30, 1998. In the nine
months ended September 30, 1999, sales to Shaw represented approximately 28%
of our revenues, sales to Sumitomo represented approximately 15% of our
revenues and sales to UPC represented approximately 11% of our revenues.
This compares to 32% of revenues from sales to Shaw, 19% of revenues from
sales to Cablevision and 14% of revenues from sales to Sumitomo in the nine
months ended September 30, 1998.
The market for broadband access products and services is characterized by
rapid technological change, new product development, 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. Since then
CableLabs has reaffirmed its intention to add advanced upstream physical
layer ("PHY") capabilities to the DOCSIS specifications as enhancements;
however, CableLabs has modified its plans for how the specifications will be
created. In September 1999, CableLabs indicated that it wants to proceed
with the advanced PHY work on two parallel tracks; one for the inclusion of
Terayon S-CDMA technology, as proposed by Terayon, and one for the inclusion
of Advanced TDMA technology, as proposed by other companies. CableLabs
wants work to proceed in parallel on these two complementary technologies,
but the intention remains to include both as operating modes in a future
version of the DOCSIS specification, consistent with the original plans for
DOCSIS 1.2. As part of the new plan to add advanced physical layer
capabilities to DOCSIS, CableLabs has dropped reference to DOCSIS 1.2, the
name given in November 1998 by CableLabs to the specification that includes
advanced PHY. In order to advance the standardization of cable modem
technology, we have given CableLabs assurances that we will 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 standards
compliant and are actively participating in the development of additional
industry standards. As part of our efforts to offer standards compliant
products we introduced a CableLabs certified DOCSIS 1.0 cable modem to the
market in the third quarter of 1999.
The rapid evolution of broadband has resulted in cable television
operators seeking to leverage the cable infrastructure to provide a bundle
of voice, data and video services to their subscribers. Consistent with our
objective to be a leading provider of broadband access systems to cable
operators seeking to provide broadband access services to residential and
commercial end users, we plan to offer a complete broadband portfolio to
support high-speed delivery of voice, data and video services over cable.
In support of this objective, we recently announced our acquisition of
Imedia Corporation and our agreements to acquire Telegate Ltd. and Radwiz
Ltd. Each of these acquisitions brings to us technology necessary to develop
a common multimedia platform to deliver current and advanced broadband
services.
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 as a result of our execution of cost reduction
strategies. 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.
Subsequent to the introduction of the single-board design, we have
successfully introduced additional cost reduction programs that have allowed
us to continue to improve gross margin performance despite ongoing ASP
declines. We intend to continue to engage in and implement cost reduction
efforts, including the further integration of ASIC components, other design
changes and manufacturing efficiencies.
We sustained net losses applicable to common stockholders of $24.6
million for the three months ended September 30, 1999 and $6.5 million for
the same period of 1998. For the nine months ended September 30, 1999, we
sustained net losses applicable to common stockholders of $45.1 million
compared to $41.7 million for the same period of 1998. As a result, we had
an accumulated deficit of $129.4 million as of September 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 $6.5 million on capital
expenditures and approximately $22.6 million on research and development
during the 12 months ended September 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.
Acquisition of Imedia Corporation
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. The Imedia acquisition was completed on
September 16, 1999 (the "Closing Date"). The acquisition was accounted for
under the purchase method of accounting and, accordingly, this Report on
Form 10-Q presents our financial results through the entire period and
combined results with Imedia for the portion of the period following
September 16, 1999. As a result, the information contained herein may not
be comparable to results in previous quarters.
Recent Developments
In October 1999, we entered into a Share Purchase Agreement to acquire
Telegate Ltd (the "Telegate Agreement"), an Israeli company. Telegate
produces advanced and highly integrated telephony and data access platforms
that are deployed by leading service providers to deliver efficient carrier-
class voice services over cable. Telegate also provides in-home networking
capability for telephony and data, based on the Digital Enhanced Cordless
Telephony (DECT) standard. In general, the Telegate shareholders and vested
optionholders will receive a total of 2.2 million shares and options to
purchase shares of our common stock and a cash payment equal to Telegate's
net cash balance at closing minus $2.0 million. The Telegate Agreement also
provides for the payment of certain Additional Consideration in the form of
cash or additional shares of our common stock (at our sole discretion) on or
before the nine month anniversary of the Closing, in the event that certain
pricing conditions are not satisfied. The total purchase price is estimated
to be approximately $107.0 million. The transaction is subject to customary
closing conditions and is expected to close late in the fourth quarter of
1999. We expect to account for the acquisition as a purchase transaction.
In October 1999, we also entered into a Share Purchase Agreement to
acquire Radwiz Ltd (the "Radwiz Agreement"), an Israeli company. Radwiz
produces communication access systems based on high-speed IP routing,
integrated with telephony. Radwiz's systems include both central office
Digital Subscriber Line Access Multiplexers (DSLAMs) and customer premises
equipment for small office, home office (SOHO) business broadband services.
In general, the Radwiz shareholders and vested optionholders will receive a
total of 1.0 million shares and options to purchase shares of our common
stock. The Radwiz Agreement also provides for the payment of certain
Additional Consideration in the form of cash or additional shares of our
common stock (at our sole discretion) on or before the one year anniversary
of the Closing, in the event that certain pricing conditions are not
satisfied. The holders of unvested Radwiz warrants also will receive
options to purchase our common stock, the fair value of which will be
included in the purchase price. The total purchase price is estimated to be
approximately $52.0 million. The transaction is subject to customary closing
conditions and is expected to close late in the fourth quarter of 1999. We
expect to account for the acquisition as a purchase transaction.
Results of Operations
Three and Nine months Ended September 30, 1999 and 1998
Revenues. Revenues consist primarily of sales of broadband access
systems consisting 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 $23.4 million for the three months
ended September 30, 1999 from $9.4 million for the same period in 1998. For
the nine months ended September 30, 1999, our revenues increased to $58.3
million from $18.8 million for the same period in 1998. Our revenues
increased during the three and nine months ended September 30, 1999,
compared to the same periods in 1998, due to shipments to new customers,
such as UPC and Rogers, as well as increased shipments to existing
customers, such as Shaw and Sumitomo. Cable modem and headend equipment are
sold together as part of an entire broadband access system and, accordingly,
we do not report revenues derived from each component.
On March 18, 1999, we entered into a Supply Agreement with Rogers
Cablevision Limited ("Rogers Cablevision"), a subsidiary of Rogers
Communications. Under the Supply Agreement, we agreed to make available to
Rogers Cablevision our current TeraLink Gateway and TeraLink 1000 Master
Controller, and TeraPro Cable Modems and specified software. We also
committed to certain product pricing and specifications. Under the terms of
the Supply Agreement, Rogers retains the right to return to us all product
purchased until we meet certain conditions. Accordingly, we do not
recognize revenue on shipments to Rogers until the milestones have been
achieved or Rogers has waived the right to return the product. For the
three and nine months ended September 30, 1999, Rogers waived their right to
return certain product purchased and we recognized approximately $5.0
million in revenues from sales to Rogers. There is no guarantee that we will
be able to achieve the condition specified in the Supply Agreement or obtain
waivers from Rogers in future quarters.
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 September 30, 1999, we incurred cost
of goods sold of $16.9 million compared to $10.5 million for the three
months ended September 30, 1998. We incurred cost of goods sold of $46.2
million for the nine months ended September 30, 1999 compared to $22.0
million for the same period in 1998. Our cost of goods sold increased during
the three and nine months ended September 30, 1999, compared to the same
periods, in 1998 primarily due to increased product shipments. Cost of
goods sold for the nine months ended September 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 $6.4 million for the
three months ended September 30, 1999 compared to a gross loss of $1.1
million for the same period in 1998. Gross profit for the nine months ended
September 30, 1999 was $12.2 million compared to a gross loss of $3.2
million for the six month period ended September 30, 1998. The gross profit
for the three months ended September 30, 1999 represents the fourth
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,
primarily cable modems. 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 $4.6 million for the three months ended
September 30, 1999, from $2.8 million for the three months ended September
30, 1998, primarily due to increased personnel. For the nine months ended
September 30, 1999, research and development expenses were $11.7 million
compared to $7.7 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 1.0
million 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 March 31,
2000. The fair value of the two warrants is estimated to be approximately
$45.0 million 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 September 30,
1999 include a noncash charge of $11.2 million and our results for the nine
months ended September 30, 1999 include a noncash charge of $24.0 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 $3.2 million for the three months
ended September 30, 1999 from $1.8 million for the three months ended
September 30, 1998. For the nine months ended September 30, 1999, sales and
marketing expenses increased to $9.1 million from $4.8 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 $2.0 million for the three months
ended September 30, 1999 from $800,000 for the three months ended September
30, 1998. General and administrative expenses increased to $4.7 million for
the nine months ended September 30, 1999 from $2.1 million for the nine
months ended September 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.
In-Process Research and Development. We incurred charges of $11.0
million for the three and nine months ended September 30, 1999 related to
research and development projects in process at Imedia at the time of the
acquisition. The projects identified as in-process will, after the Closing
Date, require additional effort in order to establish technological
feasibility. These projects have identifiable technological risk factors
which indicate that even though successful completion is expected, it is not
assured.
In-process technology acquired consists primarily of major additions to
Imedia's core technology, which is related to Imedia's planned development
of new features. The majority of the intended functionality of these new
features is not supported by Imedia's current technology. Intended new
features include offering high quality video service over the Internet and
multiplexing data with video. We expect that in-process technology will be
successfully developed and that initial benefits from these projects will
begin in calendar 2001. However, there remain significant technical
challenges that must be resolved in order to complete the in-process
technology.
Amortization of Goodwill. The Imedia acquisition was completed on
September 16, 1999 and was accounted for as a purchase transaction. The
total purchase price, representing the fair value of our shares issued and
transaction and direct acquisition costs, was approximately $109.0 million.
The purchase price was allocated based on an independent appraisal between
the net tangible assets of Imedia on the date of acquisition (approximately
$700,000), in-process research and development (approximately $11.0 million)
and intangible assets acquired (approximately $97.3 million). Intangible
assets consist of developed technology (approximately $27.0 million),
assembled workforce (approximately $2.5 million), trademark (approximately
$4.0 million) and goodwill (approximately $63.8 million). The intangible
assets will be amortized straight line over lives ranging from 2 to 6 years.
The amortization of developed technology will impact cost of goods sold in
future periods. The amortization of the other intangibles will principally
impact operating expenses in future periods. We expect amortization of
goodwill and other intangibles related to the acquisition Imedia, as well as
subsequent acquisitions, to increase in future periods.
Series F Convertible Preferred Stock Dividend. We recorded a dividend of
$23.9 million in the nine months ended September 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 $1.4 million for
the three months ended September 30, 1999 compared to $58,000 for the three
months ended September 30, 1998. Net interest income was $3.6 million for
the nine months ended September 30, 1999 compared to $26,000 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 September 30, 1999, we had approximately $24.0 million in cash and
cash equivalents, $82.3 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 $3.5 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 nine months of 1999 was
$4.9 million compared to $15.0 million in the first nine months of 1998.
Cash used in operating activities declined in the first nine months of 1999
primarily due to a decrease in the net loss. Cash used in investing
activities was $73.0 million in the first nine months of 1999 compared to
$3.8 in the first nine 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 $87.6 million for the nine months ended September 30, 1999 compared to
$46.9 million for the nine months ended September 30, 1998. Financing
activities consisted primarily of proceeds from the issuance of common stock
in 1999 and from the issuance of common stock and preferred stock in 1998.
As of September 30, 1999, we had approximately $24.5 million of
unconditional purchase obligations. We anticipate that we will pay
approximately $18.7 million of these obligations by December 31, 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 established an internal task force to evaluate those areas of our
business that may be affected by the Year 2000 Issue. The task force
developed and implemented a plan for timely Year 2000 compliance (the
"Plan"). The Plan consisted of four identifiable activities.
* Inventory and Assessment. This activity involved 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 included 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 involved testing our products
and internal systems and upgrading and replacement of non-compliant products
and systems.
* Contingency Planning. This activity involved 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 ongoing activity involves assuring complete and
continued compliance of our products and systems.
The Plan has been implemented and has been substantially 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.
The inventory, assessment and remediation of Terayon's internal systems
in finance, operations, manufacturing and service should allow our business
processes to operate uninterrupted into and beyond the turn of the century.
Based on the testing and remediation performed, we believe our internal
systems are Year 2000 compliant and we will continue to conduct procedures
to ensure ongoing readiness. In some instance we achieved Year 2000
compliance through standard upgrades to our existing systems. There is a
potential that some or all of the upgrades will not effectively address the
Year 200 issue. If the upgrades are not 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 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 our customers. We have
contacted all of our critical suppliers. Most of the suppliers have
responded to our inquiries and confirmed that they are Year 2000 compliant.
We will continue our efforts to determine the Year 2000 compliance of our
customers and suppliers. 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.
Contingency planning takes a risk management approach to assess
potential problems and to develop workable, operational capabilities to
effectively mitigate and work around various failure scenarios. The focus
of our Plan is preparedness; therefore, we have developed contingency plans
that will allow us to continue to conduct critical business operations in
the event of an interruption. We will continue to monitor these plans on a
regular basis.
Recent Financial Accounting Pronouncement
In September 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 September 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 September 1997. We have only
been shipping products in volume since the first quarter of 1998. As of
September 30, 1999, we had an accumulated deficit of $129.4 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 54% of our revenues in the
first nine months of 1999 and for approximately 65% of our revenues in the
first nine 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.
Acquisitions of Other Companies 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 September 1999, we acquired Imedia Corporation. In October
1999, we signed agreements to acquire Telegate Ltd. and Radwiz Ltd. The
process of integrating an acquired business into our business and operations
may result in unforeseen operating difficulties and expenditures.
Integrating any 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 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 nine 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 the Establishment
of Advanced Physical Layer specifications to be added to DOCSIS.
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. Since then, CableLabs has
reaffirmed its intention to add advanced upstream physical layer ("PHY")
capabilities to the DOCSIS specifications as enhancements; however,
CableLabs has modified its plans for how the specifications will be
created. In September, 1999, CableLabs indicated that it wants to proceed
with the advanced PHY work on two parallel tracks: one for the inclusion of
our S-CDMA technology, as proposed by Terayon; and, one for the inclusion of
Advanced TDMA technology, as proposed by other companies. CableLabs wants
work to proceed in parallel on these two complementary technologies, but the
intention remains to include both as operating modes in a future version of
the DOCSIS specification, consistent with the original plans for DOCSIS 1.2.
As part of the new plan to add advanced PHY capabilities to DOCSIS,
CableLabs has dropped reference to what was formerly called DOCSIS 1.2, the
name given in November to the specification that includes advanced PHY.
CableLabs has requested that we submit a prototype of a DOCSIS system
that incorporates an S-CDMA advanced PHY capability for testing. CableLabs
has stated that if the testing of this prototype reveals that the S-CDMA
advanced PHY works as claimed, and if the costs for adding S-CDMA to DOCSIS
products are in line with estimates, then it is highly likely that it will
add S-CDMA advanced PHY capabilities to a future version of the DOCSIS
specification. There can be no guarantee that the prototype we submit to
CableLabs will demonstrate the level of performance that CableLabs seeks,
or, that even if it does meet performance expectations that CableLabs will
incorporate the technology into a future version of DOCSIS specifications.
In addition, if CableLabs does proceed to include S-CDMA in a future DOCSIS
specification, there can be no guarantee that the DOCSIS S-CDMA
specification will be the same as the specification we incorporated in the
prototype submitted for tests.
If CableLabs does not adopt an enhancement to the DOCSIS specifications
based on S-CDMA technology, or if it adopts a version that is substantially
different than what we propose, it is likely our future revenues and
operating results will be adversely affected. It may also cause us to incur
substantial additional research and development expenditures to adapt our
specifications to the version adopted by CableLabs.
CableLabs has not established a schedule for adding either the S-CDMA or
Advanced TDMA capabilities to the DOCSIS specifications; although, CableLabs
has indicated that they want to proceed expeditiously. Delays in the
establishment of a firm specification for S-CDMA in DOCSIS could harm our
plans to sell DOCSIS compatible modems and headend equipment. In
particular, if the final DOCSIS S-CMDA specification is not approved prior
to the time when the company is ready to ship DOCSIS products with S-CDMA
features included, then we could face two choices. The first would be to
delay the introduction of those products until the DOCSIS S-CDMA
specification is released. The second would be to introduce the S-CDMA
features as proprietary enhancements on top of a standard DOCSIS product.
Either one of the choices could harm revenues and operating results.
We have already given CableLabs assurances that we will contribute some
aspects of our proprietary S-CDMA technology to a royalty-free intellective
property pool, if S-CDMA is included in a future version of DOCSIS
specifications.. This royalty-free pool has been established by CableLabs
to facilitate the participation of as many vendors as possible in providing
equipment that is compatible with the DOCSIS specifications. As a result,
any of our competitors who join the DOCSIS intellectual property pool would
have access to some aspects of our technology and will not be required to
pay us any royalties or other compensation. 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
which could harm our future revenues and operating results.
We believe the addition of advanced upstream PHY capabilities to DOCSIS
will increase the overall market for DOCSIS-compatible products, and as such
will result in increased competition in the cable modem market. This
competition could come from existing competitors or from new competitors who
enter the market as a result of the enhancements to the specifications. This
increased competition is likely to result in lower ASPs of cable modem
systems and could harm revenues and gross margins. Because our competitors
will be able to incorporate some aspects of our technology into their
products, our current customers may choose alternate suppliers or choose to
purchase DOCSIS-compliant cable modems with advanced PHY capabilities from
multiple suppliers. We may be unable to produce DOCSIS compliant cable
modems with advanced PHY capabilities more quickly or at lower cost than our
competitors. The inclusion of our S-CDMA technology in DOCSIS 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. We would also
be faced with the additional challenge of convincing additional standards
bodies that an advanced PHY based on S-CDMA technology should be included in
those standards. There is no guarantee that we would be successful in
convincing them of this. Even if we were able to successfully redesign our
products to implement standards other than DOCSIS, this would likely
adversely affect our sales and gross margin results outside of the North
America.
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 S-CDMA products are not DOCSIS-compliant, and we do
not expect to sell our DOCSIS compliant products with advanced PHY based on
S-CDMA until the Year 2000. As the Year 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 standard. In addition,
potential new customers could decide to purchase DOCSIS compliant products
from one or more of our competitors rather than from us. As a result our
product sales in the first half of the Year 2000 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 specifications that include
specifications for advanced PHY 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 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
reductionsin 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 widespread industry standards also 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 widespread
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
products through redesign and engineering changes. We may not be. 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 ASPs 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 broadband access systems for 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.
ITEM III: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk disclosures set forth in Item 7A of our Annual Report on
Form 10-K for the year ended December 31, 1998 have not changed
signficantly.
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 September 30, 1999,
approximately $12.0 million had been used to fund operating activities, $1.5
million had been used for payments on long-term debt and capital lease
obligations, $3.6 million had been used to purchase property and equipment
and $1.0 million had been used to purchase other assets. The use of proceeds
described in our Registration Statement. At September 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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
<S> <C>
10.26 Lease Agreement dated April 20, 1998 between Imedia Corporation
and Martin CL Associate, L.P.
10.27 Sublease Agreement dated November 15, 1999 between Imedia
Corporation and ISP Channel, Inc.
27.1 Financial Data Schedule
</TABLE>
(b) Reports of Form 8-K
1. Terayon filed a current report on Form 8-K dated September
16, 1999 on October 1, 1999 reporting Terayon's acquisition of Imedia
Corporation. The current report was amended on October 4, 19999 to include
the financial statements of Imedia and the pro forma financial information
reflecting the purchase combination of Terayon and Imedia.
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: November 15, 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 NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 23,971
<SECURITIES> 82,287
<RECEIVABLES> 13,286
<ALLOWANCES> 1,258
<INVENTORY> 5,530
<CURRENT-ASSETS> 126,478
<PP&E> 5,798
<DEPRECIATION> 0
<TOTAL-ASSETS> 230,740
<CURRENT-LIABILITIES> 28,090
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 202,494
<TOTAL-LIABILITY-AND-EQUITY> 230,740
<SALES> 58,344
<TOTAL-REVENUES> 58,344
<CGS> 46,175
<TOTAL-COSTS> 46,175
<OTHER-EXPENSES> 60,866
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> (45,122)
<INCOME-TAX> 0
<INCOME-CONTINUING> (45,122)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,122)
<EPS-BASIC> (2.27)
<EPS-DILUTED> (2.27)
</TABLE>
LEASE
DATED APRIL 20,1998
BY AND BETWEEN
MARTIN CL ASSOCIATES, L.P.
as Landlord
and
IMEDIA CORPORATION
as Tenant
AFFECTING PREMISES COMMONLY KNOWN AS
510 Clyde Avenue
Mountain View, California
MOUNTAIN VIEW TECHNOLOGY PARK
SUMMARY OF BASIC LEASE TERMS
1. Definitions
1.1 General
1.2 Additional Rent
1.3 Address for Notices
1.4 Agents
1.5 Agreed Interest Rate
1.6 Base Monthly Rate
1.7 Building
1.8 Commencement Date
1.9 Common Area
1.10 Common Operating Expenses
1.11 CPI
1.12 Effective Date
1.13 Event of Tenant's Default
1.14 Hazardous Materials
1.15 Insured and Uninsured Peril
1.16 Law
1.17 Lease
1.18 Lease Term
1.19 Lender
1.20 Permitted Use
1.21 Premises
1.22 Project
1.23 Private Restrictions
1.24 Real Property Taxes
1.25 Scheduled Commencement Date
1.26 Security Instrument
1.27 Summary
1.28 Tenant's Alterations
1.29 Tenant's Share
1.30 Trade Fixtures
2. Demise, Construction and Acceptance
2.1 Denise of Premises
2.2 Commencement Date
2.3 Constructions of Improvements
2.4 Delivery and Acceptance of Possession
2.5 Early Occupancy
3. Rent
3.1 Base Monthly Rent
3.2 Additional Rent
3.3 Payment of Rent
3.4 Late Charge and Interest on Rent in Default
3.5 Security Deposit
4. Use of Premises
4.1 Limitations on Use
4.2 Compliance with Regulations
4.3 Outside Areas
4.4 Signs
4.5 Parking
4.6 Rules and Regulations
5. Trade Fixtures and Alterations
5.1 Trade Fixtures
5.2 Tenant's Alterations
5.3 Alterations Required by Law
5.4 Amortization of Certain Capitol Improvements
5.5 Mechanic's Liens
5.6 Taxes on Tenant's Property
6. Repair and Maintenance
6.1 Tenant's Obligation to Maintain
6.2 Landlord's Obligation to Maintain
6.3 Control of Common Area
7. Waste Disposal and Utilities
7.1 Waste Disposal
7.2 Hazardous Materials
7.3 Utilities
7.4 Compliance with Governmental Regulations
8. Common Operating Expenses
8.1 Tenant's Obligation to Reimburse
8.2 Common Operating Expenses Defined
8.3 Real Property Taxes Defined
9. Insurance
9.1 Tenants Insurance
9.2 Landlord's Insurance
9.3 Tenant's Obligation to Reimburse
9.4 Release and Waiver of Subrogation
10. Limitation on Landlord's Liability and Indemnity
10.1 Limitation of Landlord's Liability
10.2 Limitation on Tenant's Recourse
10.3 Indemnification of Landlord
11. Damage to Premises
11.1 Landlord's Duty to Restore
11.2 Landlord's Right to Terminate
11.3 Tenant's Right to Terminate
11.4 Abatement of Rent
12. Condemnation
12.1 Landlord's Termination Right
12.2 Tenant's Termination Right
12.3 Restoration and Abatement of Rent
12.4 Temporary Taking
12.5 Division of Condemnation Award
13. Default and Remedies
13.1 Events of Tenant's Default
13.2 Landlord's Remedies
13.3 Waiver
13.4 Limitation on Exercise of Rights
13.5 Waiver by Tenant of Certain Remedies
14. Assignment and Subletting
14.1 Transfer by Tenant
14.2 Transfer by Landlord
15. General Provisions
15.1 Landlord's Right to Enter
15.2 Surrender of the Premises
15.3 Holding Over
15.4 Subordination
15.5 Mortgagee Protection and Attornment
15.6 Estoppel Certificates and Financial Statements
15.7 Reasonable Consent
15.8 Notices
15.9 Attorneys' Fees
15.10 Corporate Authority
15.11 Miscellaneous
15.12 Termination by Exercise of Right
15.13 Brokerage Commissions
15.14 Force Majeure
15.15 Entire Agreement
SUMMARY OF BASIC LEASE TERMS
SECTION TERMS
(LEASE REFERENCE)
A. Lease Reference Date: April 20, 1998
(Introduction)
B. Landlord: Martin CL Associates, L.P.
(Introduction)
C. Tenant: Imedia Corporation
(Introduction)
D. Premises: That area consisting of
approximately 9,400 square
feet of gross leasable area,
the address of which is 510
Clyde Avenue, Mountain View,
California, and which is
shown on Exhibit A.
E. Project: The land and improvements
shown on
(1.22) Exhibit A consisting of
seven buildings, the
aggregate gross leasable
area of which is 134.866
square feet.
F. Building: The building in which the
Premises are
(1.7) located containing 23,800
square feet of gross
leasable area.
G. Tenant's Share: 39.5%
H. Tenant's Allocated Parking Stalls: 33
stalls
(4.5)
I. Scheduled Commencement Date: May 15,
1998
(1.26)
J. Lease Term: Sixty (60) calendar months
(1.18)
K. Base Monthly Rent -
(3.1)
Time Period Monthly Rent
Months 1 - 12 $17.860
Months 13 - 24 $18,330
Months 25 - 36 $18,800
Months 37 - 48 $19,270
Months 49 - 60 $19.740
L. Prepaid Rent: $17,390
(3.4)
M. Security Deposit: #364.730
(3.6)
N. Permitted Use: General office, software
development
(4.1) and light manufacturing
O. Tenant's Liability Insurance Minimum:
$3,000,000
(9.1)
P. Landlord's Address: 100 Bush Street,
26th Floor
(1.3) San Francisco, CA
94104
Q. Tenant's Address: 188
Embaracadero
(1.3) San Francisco, CA
94105
R. Retained Real Estate Brokers:
Cornish &
Carey
(15.13) Commercial
S. Lease: This Lease includes the
summary of the Basic
(1.17) Lease Terms, the Lease, and the
following exhibits: Exhibit A
(site plan of the Project
containing description of the
Premises), Exhibit B (Improvement
Agreement), Exhibit C (Approved
Specifications), Exhibit D
(commencement Memorandum), Exhibit
E (sign criteria), Exhibit F (form
of subordination agreement) and
Exhibit G (Hazardous Materials
questionnaire), and:
The foregoing Summary is hereby incorporated into and made a part
of this Lease. Each reference in this Lease to any term of the Summary
shall mean the respective information set forth above and shall be
construed to incorporate all of the terms provided under the particular
paragraph pertaining to such information. In the event of any conflict
between the Summary and the Lease, the Summary shall control.
LEASE
THIS LEASE is dated as of the lease reference date
specified in Section A of the Summary and is made by and between the
party identified as Landlord in Section B of the Summary and the party
identified as Tenant in Section C of the Summary.
1. Definitions.
1.1. General. Any initially capitalized term that is
given a special meaning by this Article 1. the Summary, or by any other
provision of this Lease (including the exhibits attached hereto) shall
have such meaning when used in this Lease or any addendum or amendment
hereto unless otherwise clearly indicated by the context.
1.2 Additional Rent. The term "Additional Rent" is
defined in 3.2.
1.3 Address for Notices. The term "Address for Notices"
shall mean the addresses set forth in Sections P and Q of the Summary.
1.4. Agents. The term "Agents" shall mean the following:
(i) with respect to Landlord or Tenant, the agents, employees,
contractors, and invitees of such party; and (ii) in addition with
respect to Tenant, Tenant's subtenants and their respective agents,
employees, contractors, and invitees.
1.5 Agreed Interest Rate. The term "Agreed Interest Rate"
shall mean that interest rate determined as of the time it is to be
applied that is equal to the lesser of (i) five percent (5%) in excess
of the reference rate (or prime rate) of the Bank of America, N.T. & S.
A. as it may be adjusted from time to time, or (ii) the maximum
interest rate permitted by law.
1.6 Base Monthly Rent. The term "Base Monthly Rent"
shall mean the fixed monthly rent payable by Tenant pursuant to 3.1
which is specified in Section K of the Summary.
1.7 Building. The term "Building" shall mean the building
in which the Premises are located which Building is identified in
Section F of the Summary, the gross leasable area of which is referred
to herein as the "Building Gross Leasable Area."
1.8 Commencement Date: The term "Commencement Date" is
the date the Lease Term commences, which term is defined in 2.2.
1.9 Common Area. The term "Common Area" shall mean all
areas and facilities within the Project that are not designated by
Landlord for the exclusive use of Tenant or any other lessee or other
occupant of the Project, including the parking areas, access and
perimeter roads, pedestrian sidewalks, landscaped areas, trash
enclosures, recreation areas and the like.
1.10 Common Operating Expenses: The Term "Common
Operating Expenses" is defined in 8.2.
1.11 CPI. The term "CPI" shall refer to the Consumer
Price Index, All Urban Consumers, Subgroup "All Items," for the San
Francisco-Oakland-San Jose metropolitan area (base year 1982-84 equals
100), which is presently being published monthly by the United States
Department of Labor, Bureau of Labor Statistics. However, if this
Consumer Price Index is changed so that the base year is altered from
that used as the Commencement Date, the Consumer Price Index shall be
converted in acorance with the conversion factor published by the
United States Department of Labor, Bureau of Labor Statistics to obtain
the same results that would have been obtained had the base year not
been changed. If no conversion factor is available, or if the Consumer
Price Index is otherwise changed, revised or discontinued for any
reason, there shall be substituted in lieu thereof and the term
"Consumer Price Index" shall thereafter refer to the most nearly
comparable official price index of the United States government in
order to obtain substantially the same result as would have been
obtained had the original Consumer Price Index not been discontinued,
revised or changed, which alternative index shall be selected by
Landlord and shall be subject to Tenant's written approval.
1.12 Effective Date. The term "Effective Date" shall mean
the date the last signatory to this Lease whose execution is required
to make it binding on the parties hereto shall have executed this
Lease.
1.13 Event of Tenant's Default. The term "Event of
Tenant's Default" is defined in 13.1.
1.14 Hazardous Materials. The terms "Hazardous Materials"
and "Hazardous Materials Laws" are defined in 7.2E.
1.15 Insured and Uninsured Peril. The terms "Insured
Peril" and "Uninsured Peril" are defined in 11.2E.
1.16 Law. The term "Law" shall man any judicial decision,
statute, constitution, ordinance, resolution, regulation, rule,
administrative order, or other requirement of any municipal, county,
state, federal or other government agency or authority having
jurisdiction over the parties to this Lease or the Premises, or both,
in effect either at the Effective Date or any time during the Lease
Term.
1.17 Lease. The term "Lease" shall mean the Summary and
all elements of this Lease identified in Section S of the Summary, all
of which are attached hereto and incorporated herein by this reference.
1.18 Lease Term. The term "Lease Term" shall mean the
term of this Lease which shall commence on the Commencement Date and
continue for the period specified in Section J of the Summary.
1.19 Lender. The term "Lender" shall mean any
beneficiary, mortgagee, secured party, lessor, or other holder of any
Security Instrument.
1.20 Permitted Use. The term "Permitted Use" shall mean
the use specified in Section N of the Summary.
1.21 Premises. The term "Premises" shall mean that
building area described in Section D of the Summary that is within the
Building.
1.22 Project. The term "Project" shall mean that real
property and the improvements thereon which are specified in Section E
of the Summary, the aggregate gross leasable area of which is referred
to herein as the "Project Gross Leasable Area."
1.23 Private Restrictions. The term "Private
Restrictions" shall mean all recorded covenants, conditions and
restrictions, private agreements, reciprocal easement agreements, and
any other recorded instruments affecting the use of the Premises which
are recorded after the Effective Date and are approved by Tenant.
1.24 Real Property Taxes. The term "Real Property Taxes"
is defined in 8.3.
1.25 Scheduled Commencement Date. The term "Scheduled
Commencement Date" shall mean the date specified in Section I of the
Summary.
1.26 Security Instrument. The term "Security Instrument"
shall mean any underlying lease, mortgage or deed of trust which now or
hereafter affects the Project, and any renewal, modification,
consolidation, replacement or extension thereof.
1.27 Summary: The term "Summary" shall mean the Summary
of Basic Lease Terms executed by Landlord and Tenant that is part of
this Lease.
1.28 Tenant's Alterations. The term "Tenant's
Alterations" shall mean al improvements, additions, alterations, and
fixtures installed in the Premises by Tenant at its expense which are
not Trade Fixtures.
1.29 Tenant's Share. The term "Tenant's Share" shall mean
the percentage obtained by dividing Tenant's Gross Leasable Area by the
Building Gross Leasable Area, which as of the Effective Data is the
percentage identified in Section G of the Summary.
1.30 Trade Fixtures. The term "Trade Fixtures" shall mean
(i) Tenant's inventory, furniture, signs, and business equipment, and
(ii) anything affixed to the Premises by Tenant at its expense for
purposes of trade, manufacture, ornament or domestic use (except
replacement of similar work or material originally installed by
Landlord) which can be removed without material injury to the Premises
unless such thing has, by the manner in which it is affixed, become an
integral part of the Premises.
2. Demise, Construction, and Acceptance.
2.1 Demise of Premises. Landlord hereby leases to Tenant,
and Tenant leases from Landlord, for the Lease Term upon the terms and
conditions of this Lease, the Premises for Tenant's own use in the
conduct of Tenant's business together with (i) the non-exclusive right
to use the number of Tenant's Allocated Parking Stalls within the
Common Area (subject to the limitations set forth in 4.5, and (ii) the
non-exclusive right to use the Common Area for ingress to and egress
from the Premises. Landlord reserves the use of the exterior walls,
the roof and the area beneath and above the Premises, together with the
right to install, maintain, use, and replace ducts, wires, conduits and
pipes leading through the Premises in locations which will not
materially interfere with Tenant's use of the Premises.
2.2 Commencement Date. The Scheduled Commencement Date
shall be an estimate of the actual commencement Date, and the term of
this Lease shall begin on the first to occur of the following, which
shall be the "Commencement Date": (i) the date Landlord offers to
deliver possession of the Premises to Tenant following substantial
completion of al improvements to be constructed by Landlord pursuant to
2.3 except for punchlist items which do not prevent Tenant from using
the Premises for the Permitted Use and such work as Landlord is
required to perform but cannot complete until Tenant performs necessary
portions of construction work it has elected or is required to do; or
(ii) the date Tenant enters into occupancy of the Premises.
Notwithstanding the foregoing, if the date described in the foregoing
item (i) (the "Delivery Date") is delayed as a result of any Tenant
Delay, defined below, then the Delivery Date shall be deemed to be the
date on which the Delivery Date would have occurred but for such Tenant
Delay, as reasonably determined by Landlord. The term "Tenant Delay"
shall mean any delay in the completion of construction fo improvements
by Landlord pursuant to 2.3 caused by any action or omission of
Tenant, or Tenant's employees, agents, contractors, including without
limitation, the following: (i) Tenant's failure to furnish information
to Landlord for the preparation of plans and drawings for such
construction; (ii) Tenant's request for special materials, finishes or
installations which are not readily available, (iii) Tenant's failure
to reasonably approve plans and working drawings in accordance with the
terms of Exhibit B and Exhibit C; (iv) Tenant's change requests
pursuant to Exhibit B and Exhibit C; and (v) interference with
Landlord's work caused by Tenant or Tenant's employees, agents or
contractors.
2.3 Construction of Improvements. Prior to the
Commencement Date, Landlord shall construct certain improvements that
shall constitute or become part of the Premises if required by, and
then in accordance with, the terms of Exhibit B and Exhibit C.
2.4 Delivery and Acceptance of Possession. If Landlord is
unable to deliver possession of the Premises to Tenant on or before the
Scheduled Commencement Date for any reason whatsoever, this Lease shall
not be void or voidable for a period of ninety (90) days thereafter,
and Landlord shall not be liable to Tenant for any loss or damage
resulting therefrom. Tenant shall accept possession and enter into
good faith occupancy of the entire Premises and commence the operation
of its business therein within thirty (30) days after the Commencement
Date. Tenant acknowledges that it has had an opportunity to conduct,
and has conducted, such inspections of the Premises as it deems
necessary to evaluate its condition. Tenant agrees to accept
possession of the Premises in its then existing condition, "as is;"
provided, however, Tenant may notify Landlord in writing within thirty
(30) days after Tenant takes possession of the Premises of any defects
in the Premises claimed by Tenant. Except for defects stated in such
notice, Tenant shall be conclusively presumed to have accepted the
Premises in the condition existing on the ate Tenant first takes
possession, and to have waived all claims relating to the condition of
the Premises. Except as to improvements to be constructed by Landlord
pursuant to 2.3, Landlord makes no representation that the Premises as
of the date hereof and as of the commencement Date does or will comply
with the Americans with Disabilities Act of 1990 (42 U.S.C. Sections
12101 - 12213), or any regulations promulgated thereunder (the "ADA").
At the time Landlord delivers possession of the Premises to Tenant,
Landlord and Tenant shall together execute a commencement memorandum in
the form attached as Exhibit D, appropriately completed. Landlord
shall have no obligation to deliver possession, nor shall Tenant be
entitled to take occupancy, of the Premises until such commencement
memorandum has been executed, and Tenant's obligation to pay Base
Monthly Rent and Additional Rent shall not be excused or delayed
because of Tenant's failure to exercise such commencement memorandum.
2.5 Early Occupancy. If Tenant enters or permits its
contractors to enter the Premises prior to the Commencement Date with
the written permission of Landlord, it shall do so upon all of the
terms of this Lease (including its obligations regarding indemnity and
insurance) except those regarding the obligation to pay rent, which
shall commence on the Commencement Date.
3. Rent.
3.1 Base Monthly Rent. Commencing on the Commencement
Date and continuing throughout the Lease Term, Tenant shall pay to
Landlord the Base Monthly Rent set forth in Section K of the Summary.
3.2 Additional Rent. Commencing on the Commencement date
and continuing throughout the Lease Term, Tenant shall pay the
following as additional rent (the "Additional Rent"): (i) any late
charges or interest due Landlord pursuant to 3.4; (ii) Tenant's Share
of common Operating Expenses as provided in 8.1; (iii) Landlord's
share of any Subrent received by Tenant upon certain assignments and
sublettings as required by 14.1; (iv) any legal fees and costs due
Landlord pursuant to 15.9; and (v) any other charges due Landlord
pursuant to this Lease.
3.3 Payment of Rent. Concurrently with the execution of
this Lease by both parties, Tenant shall pay to Landlord the amount set
forth in Section L of the Summary as prepayment of rent for credit
against the first installment(s) of Base Monthly Rent. All rent
required to be paid in monthly installments shall be paid in advance on
the first day of each calendar month during the Lease Term. If Section
K of the Summary provides that the Base Monthly Rent is to be increased
during the Lease Term and if the date of such increase does not fall on
the first day of a calendar month, such increase shal become effective
on the first day of the next calendar month. All rent shall be paid in
lawful money of the United States, without any abatement, deduction or
offset whatsoever (except as specifically provided in 11.4 and 12.3),
and without any prior demand therefor. Rent shall be paid to Landlord
at its address set forth in Section P of the Summary, or at such other
place as Landlord may designate from time to time. Tenant's obligation
to pay Base Monthly Rent and Tenant's Share of Common Operating
Expenses shall be prorated at the commencement and expiration of the
Lease Term.
3.4 Late Charge and Interest on Rent in Default. If any
Base Monthly Rent or Additional Rent is not received by Landlord from
Tenant within five (5) days after the due date for such payment, then
Tenant shall immediately pay to Landlord a late charge equal to five
percent (5%) of such delinquent rent as liquidated damages for Tenant's
failure to make timely payment. In no event shall this provision for a
late charge be deemed to grant to Tenant a grace period or extension of
time within which to pay any rent or prevent Landlord from exercising
any right or remedy available to Landlord upon Tenant's failure to pay
any rent due under this Lease in a timely fashion, including any right
to terminate this Lease pursuant to 13.2B. If any rent remains
delinquent for a period in excess of 30 days then, in addition to such
late charge, Tenant shall pay to Landlord interest on any rent that is
not paid when due tat the Agreed Interest Rate following the date such
amount became due until paid.
3.5 Security Deposit
A. On the Effective Date, Tenant shall deposit with
Landlord the amount set forth in Section M of the Summary as security
for the performance by Tenant of its obligations under this Lease, and
not as prepayment of rent (the "Security Deposit"). At Tenant's
option, the Security Deposit may be in the form of an irrevocable
standby letter of credit ("L-C"). Landlord may from time to time apply
such portion of the Security Deposit as is reasonably necessary for the
following purposes: (i) to remedy any default by Tenant in the payment
of rent; (ii) to repair damage to the Premises caused by Tenant; (iii)
to clean the Premises upon termination of the lease; and (iv) to remedy
any other default of Tenant to the extent permitted by Law and, in this
regard, Tenant hereby waives any restriction on the uses to which the
Security Deposit may be put contained in California Civil Code Section
1950.7. In the event the Security Deposit or any portion thereof is so
used, Tenant agrees to pay to Landlord promptly upon demand an amount
in cash sufficient to restore the Security Deposit to the full original
amount. Landlord shall not be deemed a trustee of the Security
Deposit, may use the Security Deposit in business, and shall not be
required to segregate it from its general accounts. Tenant shall not
be entitled to any interest on the Security Deposit to any transferee
of Landlord's interest in conformity with the provisions of California
Civil Code Section 1950.7 and/or any successor statute, in which event
the transferring Landlord will be released from all liability for the
return of the Security Deposit.
B. So long as there has not occurred any Event of
Tenant's Default under this Lease, the Security Deposit shall be
reduced by $30,082 on the first anniversary of the Commencement Date
and on each anniversary thereafter (each, a "Reduction Date"). If the
Security Deposit is in the form of cash, Landlord shall pay to Tenant
the excess amount of the
Security Deposit within fifteen (15) days after the Reduction Date or
if the Security Deposit is in the form of an L-C, then Tenant may, not
less than fifteen (15) days after the Reduction Date, replace the L-C
with an L-C in an amount equal to the reduced amount of the Security
Deposit.
C. If at any time Tenant elects to deposit an L-C as
the Security Deposit, the L-C shall be issued by a bank reasonably
acceptable to Landlord, shall be issued for a term of at least twelve
(12) months and shall be in a form and with such content reasonably
acceptable to Landlord. Tenant shall either replace the expiring L-C
with an L-C in an amount equal to the original L-C or renew the
expiring L-C, in any event no later than thirty (30) days prior to the
expiration of the term of the L-C then in effect. If Tenant fails to
deposit a replacement L-C or renew the expiring L-C, Landlord shall
have the right to draw upon the expiring L-C for the full amount
thereof and hold the same as the Security Deposit; provided, however,
that if Tenant provides a replacement L-C that meets the requirements
of this 3.6C, then Landlord shall return to Tenant promptly in cash
the amount of the L-C that had been drawn upon by Landlord. If
Landlord draws upon the L-C as a result of an Event of Tenant's Default
and Tenant subsequently provides a replacement L-C, Landlord shall
return to Tenant promptly in cash that amount of the L-C that had been
drawn upon by Landlord and not used. The L-C shall not be mortgaged,
assigned or encumbered in any manner whatsoever by Tenant without the
prior written consent of Landlord. The use, application or retention
of the L-C, or any portion thereof, by Landlord shall not prevent
Landlord from exercising any other right or remedy provided by this
Lease or by Law, it being intended that Landlord shall not first be
required to proceed against the L-C, and such use, application or
retention shall not operate as a limitation on any recovery to which
Landlord may otherwise be entitled. The L-C shall be payable at sight
upon presentation of a signed statement by a duly appointed
representative of Landlord certifying that an Event of Tenant's Default
under the Lease exists and continues Landlord shall return the L-C (or
cash held by Landlord as the Security Deposit) to Tenant on the
expiration of the Lease provided no Event of Tenant's Default then
exists and continues.
4. Use of Premises
4.1 Limitation on Use. Tenant shall use the Premises
solely for the Permitted Use specified in Section N of the Summary.
Tenant shall not do anything in or about the Premises which will (i)
cause structural injury to the Building, or (ii) cause damage to any
part of the Building except to the extent reasonably necessary for the
installation of Tenant's Trade Fixtures and Tenant's Alterations, and
then only in a manner which has been first approved by Landlord in
writing. Tenant shall not operate any equipment within the Premises
which will (i) materially damage the Building or the Common Area, (ii)
overload existing electrical systems or other mechanical equipment
servicing the Building, (iii) impair the efficient operation of the
sprinkler System or the heating, ventilating or air conditioning
("HVAC") equipment within or servicing the Building, or (iv) damage,
overload or corrode the sanitary sewer system. Tenant shall not
attach, hang or suspend anything from the ceiling, roof, walls or
columns of the Building or set any load on the floor in excess of the
load limits for which such items are designated not operate hard wheel
forklifts within the Premises. Any dust, fumes, or waste products
generated by Tenant's use of the Premises shall be contained and
disposed so that they do not (i) create an unreasonable fire or health
hazard, (ii) damage the Premises, or (iii) result in the violation of
any Law. Except as approved by Landlord, Tenant shall not change the
exterior of the Building or install any equipment or antennas on or
make any penetrations of the exterior or roof or the Building. Tenant
shall not commit any waste in or about the Premises, and Tenant shall
keep the Premises in a neat, clean, attractive and orderly condition,
free of any nuisances. If Landlord designates a standard window
covering for use throughout the Building, Tenant shall use this
standard window covering to cover all windows in the Premises. Tenant
shall not conduct on any portion of the Premises or the Project any
sale of any kind, including any public or private auction, fire sale,
going out-of-business sale, distress sale or other liquidation sale.
4.2 Compliance with Regulations. Tenant shall not use
the Premises in any manner which violates any Laws or Private
Restrictions which affect the Premises. Tenant shall abide by and
promptly observe and comply with al Laws and Private Restrictions.
Tenant shall not use the Premises in any manner which will cause a
cancellation of any insurance policy covering Tenant's Alterations or
any improvements installed by Landlord at its expense or which poses an
unreasonable risk of damage or injury to the Premises. Tenant shall
not sell, or permit to be kept, used, or sold in or about the Premises
any article which may be prohibited by the standard form of fire
insurance policy. Tenant shall comply with all reasonable requirements
of any insurance company, insurance underwriter, or Board of Fire
Underwriters which are necessary to maintain the insurance coverage
carried by either Landlord or Tenant pursuant to this Lease.
4.3 Outside Areas. No materials, supplies, tanks or
containers, equipment, finished products or semi-finished products, raw
materials, inoperable vehicles or articles of any nature shall be
stored upon or permitted to remain outside of the Premises except in
fully fenced and screened areas outside the Building which have been
designed for such purpose and have been approved in writing by Landlord
for such use by Tenant
4.4 Signs. Tenant shall not place on any portion of
the Premises any sign, placard, lettering in or on windows, banner,
displays or other advertising or communicative material which is
visible from the exterior of the Building without the prior written
approval of Landlord. all such approved signs shall strictly conform
to all Laws, Private Restrictions, and Landlord's sign criteria
attached as Exhibit E and shall be installed at the expense of Tenant.
Tenant shall maintain such signs in good condition and repair.
4.5 Parking. Tenant is allocated and shall have the
non-exclusive right to use not more than the number of Tenant's
Allocated Parking Stalls contained within the Project described in
Section H of the Summary for its use and the use of Tenant's Agents,
the location of which may be designated from time to time by Landlord.
Tenant shall not at any time use more parking spaces than the number so
allocated to Tenant or park its vehicles or the vehicles of others in
any portion of the Project not designated by Landlord as a non-
exclusive parking area. Tenant shall not have the exclusive right to
use any specific parking space. Landlord reserves the right, after
having given Tenant reasonable notice, to have any vehicles owned by
Tenant or Tenant's Agents utilizing parking spaces in excess of the
parking spaces allowed for Tenant's use to be towed away at Tenant's
cost. All trucks and delivery vehicles shall be (i) parked at the rear
of the Building, (ii) loaded and unloaded in a manner which does not
interfere with the business of other occupants of the Project, and
(iii) permitted to remain on the Project, only so long as is reasonably
necessary to complete loading and unloading. In the event Landlord
elects or is required by any Law to limit or control parking in the
Project, whether by validation of parking tickets or any other method
of assessment, Tenant agrees to participate in such validation or
assessment program under such reasonable rules and regulations as are
from time to time established by Landlord. Landlord shall have no
obligation to monitor or enforce any rules regarding the use of parking
stalls in the Project.
4.6 Rules and Regulations. Landlord may from time to
time promulgate reasonable and nondiscriminatory rules and regulations
applicable to all occupants of the Project for the care and orderly
management of the Project and the safety of its tenants and invitees.
Such rules and regulations shall be binding upon Tenant upon delivery
of a copy thereof to Tenant, and Tenant agrees to abide by such rules
and regulations. If there is a conflict between the rules and
regulations and any of the provisions of this Lease, the provisions of
this Lease shall prevail. Landlord shall not be responsible for the
violation by any other tenant of the Project of any such rules and
regulations.
5. Trade Fixtures and Alterations
5.1 Trade Fixtures. Throughout the Lease Term, Tenant
may provide and install, and shall maintain in good condition, any
Trade Fixtures requires in the conduct of its business in the Premises.
All Trade Fixtures shall remain Tenant's property.
5.2 Tenant's Alterations. Construction by Tenant of
Tenant's Alterations shall be governed by the following:
A. Tenant shall not construct any Tenant's
Alterations or otherwise alter the Premises without Landlord's prior
written approval. Tenant shall not construct any Tenant's Alterations
until Landlord has approved in writing the plans and specifications
therefor, and such Tenant's Alterations shall be constructed
substantially in compliance with such approved plans and specifications
by a licensed contractor first approved by Landlord. Tenant shall pay
to Landlord on demand all costs and expenses incurred by Landlord in
connection with the review of such plans and specifications. All
Tenant's Alterations construction by Tenant shall be constructed by a
licensed contractor in accordance with all Laws using new materials of
good quality.
B. Tenant shall not commence construction of any
Tenant's Alterations until(i) al required governmental approvals and
permits have been obtains, (ii) all requirements regarding insurance
imposed by this Lease have been satisfied, (iii) Tenant has given
Landlord at least five days' prior written notice of its intention to
commence such construction, and (iv) if reasonably requested by
Landlord, Tenant has obtained contingent liability and broad form
builders' risk insurance in an amount reasonable satisfactory to
Landlord if there are any perils relating to the proposed construction
not covered by insurance carried pursuant to Article 9.
C. All Tenant's Alterations shall remain the
property of Tenant during the Lease Term but shall not be altered or
removed from the Premises. At the expiration or sooner termination of
the Lease Term, all Tenant's Alterations shall be surrendered to
Landlord as part of the realty and shall then become Landlord's
property, and Landlord shall have no obligation to reimburse Tenant for
al or any portion of the value or cost thereof; provided, however, that
if Landlord requires Tenant to remove any Tenant's Alterations, Tenant
shall so remove such Tenant's Alterations prior to the expiration or
sooner termination of the Lease Term. Notwithstanding the foregoing,
Tenant shall not be obligated to remove any Tenant's Alterations with
respect to which the following is true: (i) Tenant was required, or
elected, to obtain the approval of Landlord to the installation of the
Leasehold Improvement in question; (ii) at the time Tenant requested
Landlord's approval, Tenant requested of Landlord in writing that
Landlord inform Tenant of whether or not Landlord would require Tenant
to remove such Leasehold Improvement at the expiration of the Lease
Term; and (iii) at the time Landlord granted its approval, it did not
inform Tenant that it would require Tenant to remove such Leasehold
Improvement at the expiration of the Lease Term.
5.3 Alterations Required by Law. Tenant shall make any
alteration, addition or change of any sort to the Premises that is
required by any Law because of (i) Tenant's particular use or change of
use of the Premises; (ii) Tenant's application for any permit or
governmental approval; or (iii) Tenant's construction or installation
of any Tenant's Alterations or Trade Fixtures. Any other alteration,
addition, or change required by Law which is not the responsibility of
Tenant pursuant to the foregoing shall be made by Landlord (subject to
Landlord's right to reimbursement from Tenant specified in 5.4).
5.4 Amortization of Certain Capital Improvements. Tenant
shall pay Additional Rent in the event Landlord reasonably elects or is
required to make any of the following kinds of capital improvements to
the Project and the cost thereof is not reimbursable as a Common
Operating Expense: (i) capital improvements required to be constructed
in order to comply with any law (excluding any Hazardous Materials Law)
not in effect or applicable to the Project as of the Effective Date,
(ii) modification of exiting or construction of additional capital
improvements or building service equipment for the purpose of reducing
the consumption of utility services or Common Operating Expenses of the
Project; (iii) replacement of capital improvements or building service
equipment existing as of the Effective Date when required because of
normal wear and tear; and (iv) restoration of any part of the Project
that has been damaged by any peril to the extent the cost thereof is
not covered by insurance proceeds actually recovered by landlord up to
a maximum amount per occurrence of ten percent (10%) of the then
replacement cost of the Project. The amount of Additional Rent Tenant
is to pay with respect to each such capital improvement shall be
determined as follows:
A. All costs paid by Landlord to construct such
improvements (including financing costs) shall be amortized over the
useful life of such improvement (as reasonably determined by Landlord
in accordance with generally accepted accounting principles) with
interest on the unamortized balance at the then prevailing market rate
Landlord would pay if it borrowed funds to construct such improvements
from an institutional lender, and Landlord shall inform Tenant of the
monthly amortization payment required to so amortize such costs, and
shall also provide Tenant with the information upon which such
determination is made.
B. As Additional Rent, Tenant shall pay at the same
time the Base Monthly Rent is due an amount equal to Tenant's Share of
that portion of such monthly amortization payment fairly allocable to
the Building (as reasonably determined by Landlord) for each month
after such improvements are completed until the first to occur of (i)
the expiration of the Lease Term (as it may be extended), or (ii) the
end of the term over which such costs were amortized.
5.5 Mechanic's Liens. Tenant shall keep the Project free
from any liens and shall pay when due all bills arising out of any work
performed, materials furnished, or obligations incurred by Tenant or
Tenant's Agents relating to the Project. If any claims of lien is
recorded (except those caused by Landlord or Landlord's Agents), Tenant
shall bond against or discharge the same within ten (10) days after the
same has been recorded against the Project. Should any lien be filed
against the Project or any action be commenced affecting title to the
Project, the party receiving notice of such lien or action shall
immediately give the other party written notice thereof.
5.6 Taxes on Tenant's Property. Tenant shall pay before
delinquency any and all taxes, assessments, license fees and public
charges levied, assessed or imposed against Tenant or Tenant's estate
in this Lease or the property of Tenant situated within the Premises
which become due during the Lease Term. If any tax or other charge is
assessed by any governmental agency because of the execution of this
Lease, such tax shall be paid by Tenant. On demand by Landlord, Tenant
shal furnish Landlord with satisfactory evidence of these payments.
6. Repair and Maintenance.
6.1 Tenant's Obligation to Maintain. Except as otherwise
provided in 6.2, 11.1, and 12.3, Tenant shall be responsible for the
following during the Lease Term:
A. Tenant shall clean and maintain in good order,
condition, and repair and replace when necessary the Premises and every
part thereof, through regular inspections and servicing, including, but
not limited to: (i) all plumbing and sewage facilities (including all
sinks, toilets, faucets and drains), and all ducts, pipes, vents or
other parts of the HVAC or plumbing system; (ii) all fixtures, interior
walls, floors, carpets and ceilings; (iii) all windows, doors,
entrances, plate glass, showcases and skylights (including cleaning
both interior and exterior surfaces); (iv) all electrical facilities
and all equipment (including all lighting fixtures, lamps, bulbs,
tubes, fans, vents, exhaust equipment and systems); (v) any automatic
fire extinguisher equipment in the Premises.
B. With respect to utility facilities serving the
Premises (including electrical wiring and conduits, gas lines, water
pipes, and plumbing and sewage fixtures and pipes), Tenant shall be
responsible for the maintenance and repair of any such facilities which
serve only the Premises, including all such facilities that are within
the walls or floor, or on the roof of the Premises, and any part of
such facility that is not within the Premises, but only up to the point
where such facilities join a main or other junction (e.g., sewer main
or electrical transformer) from which such utility services are
distributed to other parts of the Project as well as to the Premises.
Tenant shall replace any damaged or broken glass in the Premises
(including all interior and exterior doors and windows) with glass of
the same kind, size and quality. Tenant shall repair any damage to the
Premises (including exterior doors and windows) caused by vandalism or
any unauthorized entry.
C. Tenant shall maintain continuously throughout the
Lease Term a service contract for the washing of all windows (both
interior and exterior surfaces) in the Premises with a contractor
approved by Landlord, which contract provides for the periodic washing
of all such windows at least once every sixty (60) days during the
Lease Term. Tenant shall furnish Landlord with a copy of such service
contract, which shall provide it they may not be canceled or changed
without at least thirty (30) days' prior written notice to Landlord.
D. All repairs and replacements required of Tenant
shall be promptly made with new materials of like kind and quality. If
the work affects the structural parts of the Building or if the
estimated cost of any item of repair or replacement is in excess of the
Permitted Tenant's Alterations Limit, the Tenant shall first obtain
Landlord's written approval of the scope of the work, plans therefor,
materials to be used, and the contractor.
6.2 Landlord's Obligation to Maintain.
A. Landlord shall repair, maintain and operate the
Common Area and repair and maintain the roof, exterior and structural
parts of the building(s) located on the Project so that the same are
kept in good order and repair. If there is central HVAC or other
building service equipment and/or utility facilities serving portions
of the Common Area and/or both the Premises and other parts of the
Building, Landlord shall maintain and operate (and replace when
necessary) such equipment. Landlord shall not be responsible for
repairs required by an accident, fire or other peril or for damage
caused to any part of the Project by any act or omission of Tenant or
Tenant's Agents except as otherwise required by Article 11. Landlord
may engage contractors of its choice to perform the obligations
required of it by this Article, and the necessity of any expenditure to
perform such obligations shall be at the sole discretion of Landlord.
B. Landlord shall also (i) maintain, repair and replace
when necessary all HVAC equipment which services only the Premises, and
shall keep the same in good condition through regular inspection and
servicing, and (ii) maintain continuously throughout the Lease Term a
service contract for the maintenance of al such HVAC equipment with a
licensed HVAC repair and maintenance contractor, which contract shall
provide for the periodic inspection and servicing of the HVAC equipment
at least once every ninety (90) days during the Lease Term.
6.3 Control of Common Area. Landlord shall at all times
have exclusive control of the Common Area. Landlord shall have the
right, without the same constituting an actual or constructive eviction
and without entitling Tenant to any abatement of rent, to: (i) close
any part of the Common Area to whatever extent required in the opinion
of Landlord's counsel to prevent a dedication thereof or the accrual of
any prescriptive rights therein; (ii) temporarily close the Common Area
to perform maintenance or for any other reason deemed sufficient by
Landlord; (iii) change the shape, size, location and extent of the
Common Area; (iv) eliminate from or add to the Project any land or
improvement, including multi-deck parking structures; (v) make changes
to the Common Area including, without limitation, changes in the
location of driveways, entrances, passageways, doors and doorways,
elevators, stairs, restrooms, exits, parking spaces, parking areas,
sidewalks or the direction of the flow of traffic and the site of the
Common Area; (vi) remove unauthorized persons from the Project; and/or
(vii) change the name or address of the Building or Project. Tenant
shall keep the Common Area clear of al obstructions created or
permitted by Tenant. If in the opinion of Landlord unauthorized
persons are using any of the Common Area by reason of the presence of
Tenant in the Building, Tenant, upon demand of Landlord, shall restrain
such unauthorized use by appropriate proceedings. In exercising any
such rights regarding the Common Area, (i) Landlord shall make a
reasonable effort to minimize any disruption to Tenant's business, and
(ii) Landlord shall not exercise its rights to control the Common Area
in a manner that would materially interfere with Tenant's use of the
Premises without first obtaining Tenant's consent. Landlord shall have
no obligation to provide guard services or other security measures for
the benefit of the Project. Tenant assumes all responsibility for the
protection of Tenant and Tenant's Agents from acts of third parties;
provided, however, that nothing contained herein shall prevent
Landlord, as its sole option, from providing security measures for the
Project.
7. Waste Disposal and Utilities
7.1 Waste Disposal. Tenant shall stores its waste either
inside the Premises or within outside trash enclosures that are fully
fenced and screened in compliance with all Private Restrictions, and
designed for such purpose. All entrance to such outside trash
enclosures shall be kept closed, and waste shall be stored in such
manner as not to be visible from the exterior of such outside
enclosures. Tenant shall cause all of its waste to be regularly
removed from the Premises at Tenant's sole cost. Tenant shall keep all
fire corridors and mechanical equipment rooms in the Premises free and
clear of all obstructions at all times.
7.2 Hazardous Materials. Landlord and Tenant agree as
follows with respect to the existence or use of Hazardous Materials on
the Project:
A. Any handling, transportation, storage, treatment,
disposal or use of Hazardous Materials by Tenant and Tenant's Agents
after the Effective Date in or about the Project shall strictly comply
with all applicable Hazardous Materials Laws Tenant shall indemnify,,
defend upon demand with counsel reasonably acceptable to Landlord, and
hold harmless Landlord from and against any liabilities, losses,
claims, damages, lost profits, consequential damages, interest,
penalties, fines, monetary sanctions, attorneys' fees, experts' fees,
court costs, remediation costs, investigation costs, and other expenses
which result from or arise in any manner whatsoever out of the use,
storage, treatment, transportation, release, or disposal of Hazardous
Materials on or about the Project by Tenant or Tenant's Agents after
the Effective Date.
B. If the presence of Hazardous Materials on the
Project caused or permitted by Tenant or Tenant's Agents after the
Effective Date results in contamination or deterioration of water or
soil resulting in a level of contamination greater than the levels
established as acceptable by any governmental agency having
jurisdiction over such contamination, then Tenant shall promptly take
any and all action necessary to investigate and remediate such
contamination if required by Law or as a condition to the issuance or
continuing effectiveness of any governmental approval which relates to
the use of the Project or any part thereof. Tenant shall further be
solely responsible for, and shall defend, indemnify and hold Landlord
and its Agents harmless from and against, all claims, costs, and
liabilities, including attorneys' fees and costs, arising out of or in
connection with any investigation and remediation required hereunder to
return the Project to its condition existing prior to the appearance of
such Hazardous Materials.
C. Landlord and Tenant shall each given written notice
to the other as soon as reasonably practicable of (i) any communication
received from any governmental authority concerning Hazardous Materials
which relates to the Project, and (ii) any contamination of the Project
by Hazardous Materials which constitutes a violation of any Hazardous
Materials Law. Tenant may use small quantities of household chemicals
such as adhesives, lubricants, and cleaning fluids in order to conduct
its business at the Premises and such other Hazardous Materials as are
necessary for the operation of Tenant's business of which Landlord
receives notice prior to such Hazardous Materials being brought onto
the Premises and which Landlord consents in writing may be brought onto
the Premises. At any time during the Lease Term, Tenant shall, within
five (5) days after written request therefor received from Landlord,
disclose in writing all Hazardous Materials that are being used by
Tenant on the Project, the nature of such use, and the manner of
storage and disposal.
D. Landlord may cause testing wells to be installed
on the Project, and may cause the ground water to be tested to detect
the presence of Hazardous Material by the use of such tests as are then
customarily used for such purposes. If Tenant so requests, Landlord
shall supply Tenant with copies of such test results. The cost of such
tests and the installation, maintenance, repair and replacement of such
wells shall be paid by Tenant if such tests disclose the existence of
facts which give rise to liability of Tenant pursuant to its indemnity
given in 7.2A and/or 7.2B.
E. As used herein, the term "Hazardous Material," means
any hazardous or toxic substance, material or waste which is or becomes
regulated by any local governmental authority, the State of California
or the United States Government. The term "Hazardous Material,'
includes, without limitation, petroleum products, asbestos, PCB's, and
any material or substance which is (i) listed under Article 9 or
defined as hazardous or extremely hazardous pursuant to Article 11 of
Title 22 of the California Administrative Code, Division 4, Chapter 20,
(ii) defined as a "hazardous waste" pursuant to Section 1004 of the
Federal Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq.
(42 US.C. 6903), or (iii) defined as a "hazardous substance" pursuant
to Section 101 of the Comprehensive Environmental Response;
Compensation and Liability Act, 42 U.S.C. 9601 et seq. (42 U.S.C.
9601). As used herein, the term "Hazardous Material Law" shall mean
any statute, law, ordinance, or regulation of any
governmental body or agency (including the U.S. Environmental
Protection Agency, the California Regional Water Quality Control Board,
and the California Department of Health Services) which regulates the
use, storage, release or disposal of any Hazardous Material.
F. The obligation of Landlord and Tenant under this
7.2 shall survive the expiration of earlier termination of the Lease
Term. The rights and obligations of Landlord and Tenant with respect
to issues relating to Hazardous Materials are exclusively established
by this 7.2. In the event of any inconsistency between any other part
of this Lease and this 7.2, the terms of this 7.2 shall control.
7.3 Utilities. Tenant shall promptly pay, as the same
become due, all charges for water, gas, electricity, telephone, sewer
service, waste pickup and any other utilities, materials or services
furnished directly to or used by Tenant on or about the Premises during
the Lease Term, including, without limitation, (i) meter, use and/or
connection fees, hook-up fees or standby fee (excluding any connection
fees or hook-up fees which relate to making the existing electrical,
gas, and water service available to the Premises as of the Commencement
Date), and (ii) penalities for discontinued or interrupted service. If
any utility service is not separately metered to the Premises, then
Tenant shall pay its pro rata share of the cost of such utility service
with all others served by the service not separately metered. However,
if Landlord determines that Tenant is using a disproportionate amount
of any utility service not separately metered, then Landlord at its
election may (i) periodically charge Tenant, as Additional Rent, a sum
equal to Landlord's reasonable estimate of the cost of Tenant's excess
use of such utility service, or (ii) install a separate meter (at
Tenant's expense) to measure the utility service supplied to the
Premises.
7.4 Compliance with Governmental Regulations. Landlord
and Tenant shall comply with all rules, regulations and requirements
promulgated by national, state or local governmental agencies or
utility suppliers concerning the use of utility services, including any
rationing, limitation or other control. Tenant shall not be entitled
to terminate this Lease nor to any abatement in rent by reason of such
compliance.
8. Common Operating Expenses.
8.1 Tenant's Obligation to Reimburse. As Additional Rent,
Tenant shall pay Tenant's Share (specified in Section G of the Summary)
of all Common Operating Expenses; provided, however, if the Project
contains more than one building, then Tenant shall pay Tenant's Share
of all Common Operating Expenses fairly allocable to the Building,
including (i) all Common Operating Expenses paid with respect to the
maintenance, repair, replacement and use of the Building, and (ii) a
proportionate share (based on the Building Gross Leasable Area as a
percentage of the Project Gross Leasable Area) of all Common Operating
Expenses which relate to the Project in general and which are not
fairly allocable to any one building that is part of the Project.
Tenant shall pay such share of the actual Common Operating Expenses
incurred or paid by Landlord but not theretofore billed to Tenant
within ten (10) days after receipt of a written bill therefor from
Landlord, on such periodic basis as Landlord shall designate, but in no
event more frequently than once a month. Alternatively, Landlord may
from time to time require that Tenant pay Tenant's Share of Common
Operating Expenses in advance in estimated monthly installments, in
accordance with the following: (i) Landlord shall deliver to Tenant
Landlord's reasonable estimate of the Common Operating expenses it
anticipates will be paid or incurred for the Landlord's fiscal year in
question; (ii) during such Landlord's fiscal year Tenant shall pay such
share of the estimated Common Operating Expenses in advance in monthly
installments as required by Landlord due with the installments of Base
Monthly Rent; and (iii) within 90 days after the end of each Landlord's
fiscal year, or such later date selected by Landlord, Landlord shall
furnish to Tenant a statement in reasonable detail of the actual common
Operating Expenses paid or incurred by landlord during the just ended
Landlord's fiscal year and thereupon there shall be an adjustment
between Landlord and Tenant, with payment to Landlord or credit by
Landlord against the next installment of Base Monthly Rent, as the case
may require, within ten (10) days after delivery by Landlord tio Tenant
of said statement, so that Landlord shall receive the entire amount of
Tenant's Share of all Common Operating Expenses for such Landlord's
fiscal year and no more. Tenant shall have the right at its expense,
exercisable upon reasonable prior written notice to Landlord, to
inspect at Landlord's office during normal business hours Landlord's
books and records as they relate to common Operating Expenses. Such
inspection must be within sixty (60) days of Tenant's receipt of
Landlord's annual statement for the same, and shall be limited to
verification of the charges contained in such statement. Tenant may
not withhold payment of such bill pending completion of such
inspection.
8.2 Common Operating Expenses Defined. The term "Common
Operating Expenses' shall mean the following:
A. All costs and expenses paid or incurred by Landlord
in doing the following (including payments to independent contractors
providing services related to the performance of the following): (i)
maintaining, cleaning, repairing and resurfacing the roof (including
repair of leaks) and the exterior surfaces (including painting) of all
buildings located on the Project; (ii) maintenance of the liability,
fire and property damage insurance covering the Project carried by
Landlord pursuant to 9.2 (including the prepayment of premiums for
coverage of up to one year); (iii) maintaining, repairing, operating
and replacing when necessary HVAC equipment, utility facilities and
other building service equipment; (iv) providing utilities to the
Common Area (including lighting, trash removal and water for
landscaping irrigation); (v) complying with all applicable Laws and
Private Restrictions; (vi) operating, maintaining, repairing, cleaning,
painting, restriping and resurfacing the Common Area; (vii) replacement
or installation of lighting fixtures, directional or other signs and
signals, irrigation systems, trees, shrubs, ground cover and other
plant materials, and all landscaping in the Common Area; and (viii)
providing security;
B. The following costs: (i) Real Property Taxes as
defined in 8.3; (ii) the amount of any "deductible" paid by Landlord
with respect to damage caused by an Insured Peril, (iii) the cost to
repair damage caused by an Uninsured Peril up to maximum amount in any
12-month period equal to two percent (2%) of the replacement cost of
the buildings or other improvements damaged; (iv) legal, accounting and
other professional service for the Project, including costs, fees and
expenses of contesting the validity or applicability of any law;
ordinance, rule, regulation or order relating to the Project; and (v)
that portion of all compensation (including benefits and premiums for
workers' compensation and other insurance) paid to or on behalf of
employees of Landlord but only to the extent they are involved in the
performance of the work described by 8.2A that is fairly allocable to
the Project;
C. Fees for management services rendered by either
Landlord or a third party manager engaged by Landlord (which may be a
party affiliated with Landlord), except that the total amount charged
for management services and included in Tenant's Share of Common
Operating Expenses shall not exceed the monthly rate of five percent
(5%) of the Base Monthly Rent.;
D. All additional costs and expenses incurred by
landlord with respect to the operation, protection, maintenance, repair
and replacement of the Project which would be considered a current
expense (and not a capital expenditure) pursuant to generally accepted
accounting principles; provided, however, that Common Operating
Expenses shall not include any of the following: (i) payments on any
loans or ground leases affecting the Project; (ii) depreciation of any
buildings or any major systems of building service equipment within the
Project; (iii) leasing commissions; (iv) the cost of tenant
improvements installed for the exclusive use of other tenants of the
Project; and (v) any cost incurred in complying with Hazardous
Materials Laws, which subject is governed exclusively by 7.2.
8.3 Real Property Taxes Defined. The term "Real Property
Taxes" shall mean all taxes, assessments, levies, and other charges of
any kind or nature whatsoever, general and special, foreseen and
unforeseen (including all installments of principal and interest
required to pay any existing or future general or special assessments
for public improvements, services or benefits, and any increases
resulting from reassessments resulting from a change in ownership, new
construction, or any other cause), now or hereafter imposed 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 Project (as now constructed or as may
at any time hereafter be constructed, altered, or otherwise changed) or
Landlord's interest therein, the fixtures, equipment and other property
of Landlord, real or personal, that are an integral pat of and located
on the Project, the gross receipts, income, or rentals from the
Project, or the use of parking areas, public utilities, or energy
within the Project, or Landlord's business of leasing the Project. If
at any time during the Lease Term the method of taxation or assessment
of the Project prevailing as of the Effective Date 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 Project or Landlord's
interest therein, or (ii) on or measured by the gross receipts, income
or rentals from the Project, on Landlord's business of leasing the
Project, or computed in any manner with respect to the operation of the
Project, 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 Project, then only that part of such
Real Property Tax that is fairly allocable to the Project 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,
transfer, gift or franchise taxes of Landlord or the federal or state
net income tax imposed on Landlord's income from all sources:
9. Insurance.
9.1 Tenant's Insurance. Tenant shall maintain insurance
complying with all of the following:
A. Tenant shall procure, pay for and keep in full force
and effect the following:
(1) Commercial general liability insurance,
including property damage, against liability for personal injury,
bodily injury, death and damage to property occurring in or about, or
resulting from an occurrence in or about, the Premises with combined
single limit coverage of not less than the amount of Tenant's Liability
Insurance Minimum specified in Section O of the Summary, which
insurance shall contain a "contractual liability" endorsement insuring
Tenant's performance of Tenant's obligation to indemnify Landlord
contained in 10.3;
(2) Fire and property damage insurance in so-called
"all risk" form insuring Tenant's Trade Fixtures and Tenant's
Alterations for the full actual replacement cost thereof;
(3) Such other insurance that is either (i)
required by any Lender, or (ii) reasonably required by Landlord and
customarily carried by tenants of similar property in similar
businesses..
B. Where applicable and required by Landlord, each
policy of insurance required to be carried by Tenant pursuant to this
9.1: (i) shall name Landlord and such other parties in interest as
Landlord reasonably designates as additional insured; (ii) shall be
primary insurance which provides that the insurer shall be liable for
the full amount of the loss up to and including the total amount of
liability set forth in the declarations without the right of
contribution from any other insurance coverage of Landlord; (iii) shall
be in a form satisfactory to Landlord; (iv) shall be carried with
companies reasonably acceptable to Landlord; (v) shall provide that
such policy shall not be subject to cancellation, lapse or change
except after at least thirty (30) days prior written notice to Landlord
so long as such provision of thirty (30) days notice is reasonably
obtainable, but in any event not less than ten (10) days prior written
notice; (vi) shall not have a "deductible" in excess of such amount as
is approved by Landlord; (vii) shall contain a cross liability
endorsement; and (viii) shall contain a "severability" clause. If
Tenant has in full force and effect a blanket policy of liability
insurance with the same coverage for the Premises as described above,
as well as other coverage premises and properties of Tenant, or in
which Tenant has some interest, such blanket insurance shall satisfy
the requirements of this 9.1.
C. A copy of each paid-up policy evidencing the
insurance required to be carried by Tenant pursuant to this 9.1
(appropriately authenticated by the insurer) or a certificate of the
insurer, certifying that such policy has been issued, providing the
coverage required by this 9.1, and containing the provisions specified
herein, shall be delivered to Landlord prior to the time Tenant or any
of its Agents enters the Premises and upon renewal of such policies,
but not less than five (5) days prior to the expiration of the term of
such coverage. Landlord may, at any time, and from time to time,
inspect and/or copy any and all insurance policies required to be
procured by Tenant pursuant to this 9.1. If Landlord or any Lender
reasonably determines at any time that the amount of coverage required
for any policy of insurance Tenant is to obtain pursuant to this 9.1
is not adequate, then Tenant shall increase such coverage for such
insurance to such amount as such Lender or insurance advisor reasonably
deems adequate, not to exceed the level of coverage for such insurance
commonly carried by comparable businesses similarly situated.
9.2 Landlord's Insurance. Landlord shall have the
following obligations and options regarding insurance:
A. Landlord shall maintain a policy or policies of fire
and property damage insurance in so-called "at-risk" form insuring
Landlord (and such others as Landlord may designate) against loss of
rents for a period of not less than twelve (12) months and from
physical damage to the Project with coverage of not less than the full
replacement cost thereof. Landlord may so insure the Project
separately, or may insure the Project with other property owned by
Landlord which Landlord elects to insure together under the same policy
or policies. Such fire and property damage insurance (i) may be
endorsed to cover loss caused by such additional perils against which
Landlord may elect to insure, including earthquake and/or flood, and to
provide such additional coverage as Landlord reasonably requires, and
(ii) shall contain reasonable "deductibles" which, in the case of
earthquake and flood insurance, may be up to ten percent (10%) of the
replacement value of the property insured or such higher amount as is
then commercially reasonable. Landlord shall not be required to cause
such insurance to cover any Trade Fixtures or Tenant's Alterations of
Tenant.
B. Landlord may maintain a policy or policies of
commercial general liability insurance insuring Landlord (or such
others as are designated by Landlord) against liability for personal
injury, bodily injury, death and damage to property occurring or
resulting from an occurrence in, on or about the Project, with combined
single limit coverage in such amount as Landlord from time to time
determines is reasonably necessary for its protection.
9.3 Tenant's Obligation to Reimburse. If Landlord's
insurance rates for the Building are increased at any time during the
Lease Term as a result of the nature of Tenant's use of the Premises,
Tenant shall reimburse Landlord for the full amount of such increase
immediately upon receipt of a bill from Landlord therefor.
9.4 Release and Waiver of Subrogation. The parties hereto
release each other, and their respective Agents, from any liability for
injury to any person or damage to property that is caused by or results
from any risk insured against under any valid and collectible insurance
policy carried by either of the parties which contains a waiver of
subrogation by the insurer and is in force at the time of such injury
or damage; subject to the following limitations: (i) the foregoing
provision shall not apply to the commercial general liability insurance
described by subparagraphs 9.1A and 9.2B; (ii) such release shall
apply to liability resulting from any risk insured against or covered
by self-insurance maintained or provided by Tenant to satisfy the
requirements of 9.1 to the extent permitted by this Lease; and (iii)
Tenant shall not be released from any such liability to the extent any
damages resulting from such injury or damage are not covered by the
recovery obtained by Landlord from such insurance, but only if the
insurance in question permits such partial release in connection with
obtaining a waiver of subrogation from the insurer. This release shall
be in effect only so long as the applicable insurance policy contains a
clause to the effect that this release shall not affect the right of
the insured to recover under such policy. Each party shall use
reasonable efforts to cause each insurance policy obtained by it to
provide that the insurer waives al right of recovery by way of
subrogation against the other party and its agents and employees in
connection with any injury or damage covered by such policy. Howeer,
if any insurance policy cannot be obtained with such a waiver of
subrogation, or if such waiver of subrogation is only available at
additional cost and the party for whose benefit the waiver is to be
obtained does not pay such addition cost, then the party obtaining such
insurance shall notify the other party of that fact and thereupon shall
be relieved of the obligation to obtain such waiver of subrogation
rights from the insurer with respect to the particular insurance
involved.
10. Limitation on Landlord's Liability and Indemnity
10.1 Limitation on Landlord's Liability. Landlord shall
not be liable to Tenant, nor shall Tenant be entitled to terminate this
Lease or to any abatement of rent (except as expressly provided
otherwise herein), for any injury to Tenant or Tenant's Agents, damage
to the property of Tenant or Tenant's Agents, or loss to Tenant's
business resulting from any cause, including without limitation any:
(i) failure, interruption or installation of any HVAC or other utility
system or service, (ii) failure to furnish or delay in furnishing any
utilities or services when such failure or delay is caused by fire or
other peril, the elements, labor disturbances of any character, or any
other accidents or other conditions beyond the reasonable control of
Landlord, (iii) limitation, curtailment, rationing or restriction on
the use of water or electricity, gas or any other form of energy or any
services or utility serving the Project; (iv) vandalism or forcible
entry by unauthorized persons or the criminal act of any person; or (v)
penetration of water into or onto any portion of the Premises or the
Building through roof leaks or otherwise. Notwithstanding the foregoing
but subject to 9.4, (a) Landlord shall be liable for any such injury,
damage or loss which is proximately caused by Landlord's willful
misconduct or gross negligence, and (b) if the failure or interruption
of any HVAC or other utility services continues for more than thirty
(30) consecutive days and such failure or interruption Tenant from
using the Premises, then commencing upon the expiration of such thirty
(30) day period, Base Monthly Rate shall abate until beneficial use of
the Premises is restored.
10.2 Limitation on Tenant's Recourse: If Landlord is a
corporation, trust, partnership, joint venture, unincorporated
association or other form of business entity: (i) the obligations of
Landlord shall not constitute personal obligations of the officers,
directors, trustees, partners, joint venturers, members, owners,
stockholders, or other principals or representatives of such business
entity; and (ii) Tenant shall not have recourse to the assets of such
officers, directors, trustees, partners, joint venturers, members,
owners, stockholders, principals or representatives except to the
extent of their interest in the Project. Teantn shall have recourse
only to the interest of Landlord in the Project for the satisfaction of
the obligations of Landlord and shall not have recourse to any other
assets of Landlord for the satisfaction of such obligations.
10.3 Indemnification of Landlord. Tenant shall hold
harmless, indemnify and defend Landlord, and its employees, agents and
contractors, with competent counsel reasonably satisfactory to Landlord
(and Landlord agrees to accept counsel that any insurer requires be
used), from all liability, penalties, losses, damages, costs, expenses,
causes of action, claims and/or judgements arising by reason fo any
death, bodily injury, personal injury or property damage resulting from
(i) any cause or causes whatsoever (other than the willful misconduct
or gross negligence of Landlord) occurring in or about the Premises
during the Lease Term, (ii) the negligence or willful misconduct of
Tenant or its Agents, wherever the same may occur, or (iii) an Event of
Tenant's Default. The provisions of this 10.3 shall survive the
expiration or sooner termination of this Lease.
11. Damage to Premises
11.1 Landlord's Duty to Restore. If the Premises are
damaged by any peril after the Effective Date, Landlord shall restore
the Premises (including the improvements to be constructed by Landlord
pursuant to 2.3) unless the Lease is terminated by Landlord pursuant
to 11.2 or by Tenant pursuant to 11.3. All insurance proceeds
available from the fire and property damage insurance carried by
Landlord pursuant to 9.2 shall be paid to and become the property of
Landlord. If this Lease is terminated pursuant to either 11.2 or
11.3, then all insurance proceeds available from insurance carried by
Tenant which covers loss to property that is Landlord's property or
would become Landlord's property on termination of this Lease shall be
paid to and become the property of Landlord. If this Lease is not so
terminated, then upon receipt of the insurance proceeds (if the loss is
covered by insurance) and the issuance of all necessary governmental
permits, Landlord shall commence restoration of the Premises, to the
extent then allowed by Law, to substantially the same condition in
which the Premises were immediately prior to such damage. Landlord's
obligation to restore shall be limited to the Premises and interior
improvements constructed by Landlord as they existed as of the
Commencement Date, excluding any Tenant's Alterations, Trade Fixtures
and/or personal property constructed or installed by Tenant in the
Premises. Tenant shall forthwith replace or fully repair all Tenant's
Alterations installed by Tenant and existing at the time of such damage
or destruction, and all insurance proceeds received by Tenant from the
insurance carried by it pursuant to 9.1A(2) shall be used for such
purpose.
11.2 Landlord's Right to Terminate. Landlord shall have
the right to terminate this Lease in the event any of the following
occurs, which right may be exercised only by delivery to Tenant of a
written notice of election to terminate within thirty (30) days after
the date of such damage:
A. Either the Project or the Building is damaged by an
Insured Peril to such an extent that the estimated cost to restore
exceeds thirty-three percent (33%) of the then actual replacement cost
thereof;
B. Either the Project or the Building is damaged by
an Uninsured Peril to such an extent that the estimated cost to restore
exceeds two percent (2%) of the then actual replacement cost thereof;
provided, however, that Landlord may not terminate this Lease pursuant
to this 11.2B if one or more tenants of the Project agree in writing
to pay the amount by which the cost to restore the damage exceeds such
amount and subsequently deposit such amount with Landlord within thirty
(30) days after Landlord has notified Tenant of its election to
terminate this Lease;
C. The Premises are damaged by any peril within twelve
(12) months of the last day of the Lease Term to such an extent that
the estimated cost to restore equals or exceeds an amount equal to six
(6) times the Base Monthly Rent then due; or
D. Either the Project or the Building is damaged by any
peril and, because of the Laws then in force, (i) cannot be restored at
reasonable cost to substantially the same condition in which it was
prior to such damage, or (ii) cannot be used for the same use being
made thereof before such damage if restored as required by this
Article.
As used herein, the following terms shall have the following meanings:
(i) the term "Insured Peril" shall mean a peril actually insured
against for which the insurance proceeds actually received by Landlord
are sufficient (except for any "deductible" amount specified by such
insurance) to restore the Project under then existing building codes to
the condition existing immediately prior to the damage, and (ii) the
term "Uninsured Peril" shall mean any peril which is not an Insured
Peril. Notwithstanding the foregoing, if the "deductible" for
earthquake or flood insurance exceeds two percent (2%) of the
replacement cost of the improvements insured, such peril shall be
deemed an "Uninsured Peril."
11.3 Tenant's Right to Terminate. If the Premises are
damaged by any peril and Landlord does not elect to terminate this
Lease or is not entitled to terminate this Lease pursuant to 11.2,
then as soon as reasonably practicable, Landlord shall furnish Tenant
with the written opinion of Landlord's architect or construction
consultant as to when the restoration work required of Landlord may be
completed. Tenant shall have the right to terminate this Lease in the
event any of the following occurs, which right may be exercised only by
delivery to Landlord of a written notice of election to terminate
within fifteen (15) days after Tenant receives from Landlord the
estimate of the time needed to complete such restoration.
A. The Premises are damaged by any peril and, in the
reasonable opinion of Landlord's architect or construction consultant,
the restoration of the Premises cannot be substantially completed
within two hundred seventy (270) days after the date of such damage.
B. The Premises are damaged by any peril within twelve
(12) months of the last day of the Lease Term and, in the reasonable
opinion of Landlord's architect or construction consultant, the
restoration of the Premises cannot be substantially completed within
ninety (90) days after the date of such damage and such damage renders
unusable more than 30% of the Premises.
11.4 Abatement of Rent. In the event of damage to the
Premises which does not result in the termination of this Lease, the
Base Monthly Rent and the Additional Rent shall be temporarily abated
during the period of restoration in proportion to the degree to which
Tenant's use of the Premises is impaired by such damage. Tenant shall
not be entitled to any compensation or damaged from Landlord for loss
of Tenant's business or property or for any inconvenience or annoyance
caused by such damage or restoration. Tenant hereby waives the
provisions of California Civil Code Sections 1932(2) and 1933(4) and
the provisions of any similar law hereinafter enacted.
12. Condemnation.
12.1 Landlord's Termination Right. Landlord shall have
the right to terminate this Lease if, as a result of a taking by means
of the exercise of the power of eminent domain (including a voluntary
sale or transfer by Landlord to a condemnor under threat of
condemnation), (i) all or any part of the Premises is so taken, (ii)
more than 10% of the Building Leasable Area is so taken, or (iii) more
than 50% of the Common Area is so taken. Any such right to terminate
by Landlord must be exercised within a reasonable period of time, to be
effective as of the date possession is taken by the condemnor.
12.2 Tenant's Termination Right. Tenant shall have the
right to terminate this Lease if, as a result of any taking by means of
the exercise of the power of eminent domain (including any voluntary
sale or transfer by Landlord to any condemnor under threat of
condemnation), (i) ten percent (10%) or more of the Premises is so
taken and that part of the Premises that remains cannot be restored
within a reasonable period of time and thereby made reasonably suitable
for the continued operation of the Tenant's business, or (ii) there is
a taking affecting the Common Area and, as a result of such taking,
Landlord cannot provide parking spaces within reasonable walking
distance of the Premises equal in number to at least eighty percent
(80%) of the number of spaces allocated to Tenant by 2.1, whether by
rearrangement of the remaining parking areas in the Common Area
(including construction of multi-deck parking structures or restriping
for compact cars where permitted by Law) or by alternative parking
facilities on other land. Tenant must exercise such right within a
reasonable period of time, to be effective on the date that possession
of that portion of the Premises of Common Area that is condemned is
taken by the condemnor.
12.3 Restoration and Abatement of Rent. If any part of
the Premises or the Common Area is taken by condemnation and this Lease
is not terminated, then Landlord shall restore the remaining portion of
the Premises and Common Area and interior improvements constructed by
Landlord as they existed as of the Commencement Date, excluding any
Tenant's Alterations, Trade Fixtures and/or personal property
constructed or installed by Tenant. Thereafter, except in the case of
a temporary taking, as of the date possession is taken the Base Monthly
Rent shall be reduced in the same proportion that the floor area of
that part of the Premises so taken (less any addition thereto by reason
of any reconstruction) bears to the original floor area of the
Premises.
12.4 Temporary Taking. If any portion of the Premises is
temporarily taken for one year or less, this Lease shall remain in
effect. If any portion of the premises is temporarily taken by
condemnation for a period which exceeds one (1) year or which extends
beyond the natural aspiration of the Lease Term, and such taking
materially and adversely affects Tenant's ability to use the Premises
for the Permitted Use, then Tenant shall have the right to terminate
this Lease, effective on the date possession is taken by the condemnor.
12.5 Division of Condemnation Award. Any award made as a
result of any condemnation of the Premises or the Common Area shall
belong to and be paid to Landlord, and Tenant hereby assigns to
Landlord all of its right, title and interest in any such award;
provided, however, that Tenant shall be entitled to receive any
condemnation award that is made directly to Tenant for the following so
long as the aware made to Landlord is not thereby reduced; (i) for the
taking of personal property or Trade Fixtures belonging to Tenant, (ii)
for the interruption of Tenant's business or its moving costs, (iii)
for loss of Tenant's goodwill; or (iv) for any temporary taking where
this Lease is not terminated as a result of such taking. The rights of
Landlord and Tenant regarding any condemnation shall be determined as
provided in this Article, and each party hereby waives the provisions
of California Code of Civil Procedure Section 1265.130 enacted allowing
either party to petition the Superior Court to terminate this Lease in
the event of a partial taking of the Premises.
13. Default and Remedies.
13.1 Events of Tenant's Default. Tenant shall be in
default of its obligations under this Lease if any of the following
events occurs (an "Event of Tenant's Default"):
A. Tenant shall have failed to pay Base Monthly Rent or
Additional Rent when due, and such failure is not cured within five (5)
days after delivery of written notice from Landlord specifying such
failure to pay; or
B. Tenant shall have failed to perform any term,
covenant, or condition of this Lease except those requiring the payment
of Base Monthly Rent or Additional Rent, and Tenant shall have failed
to cure such breach within thirty (30) days after written notice from
Landlord specifying the nature of such breach where such breach could
reasonable be cured within said thirty-day period, or if such breach
could not be reasonably cured within said 30-day period, Tenant shall
have failed to commence such cure within said thirty-day period and
thereafter continue with due diligence to prosecute such cure to
completion within such time period as is reasonable needed but not to
exceed ninety (90) days from the date of Landlord's notice; or
C. Tenant shall have sublet the Premises or assigned
its interest in the Lease in violation of the provisions in Article 14;
or
D. Tenant shall have abandoned the Premises or left the
Premises substantially vacant; or
E. The occurrence of the following: (i) the making
by Tenant of any general arrangements or assignments for the benefit of
creditors; (ii) Tenant becomes a "debtor" as defined in 11 U.S.C. 101
or any successor statute thereto (unless, in the case of a petition
filed against Tenant, the same is dismissed within sixty (60) days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located at the Premises or of
Tenant's interest in this Lease, where possession is not restored to
Tenant within thirty (30 ) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Tenant's assets located
at the Premises or of Tenant's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however,
in the event that any provision of this Section 13.E is contrary to any
applicable Law, such provision shall be of no force or effect; or
F. Tenant shall have failed to deliver documents
required of it pursuant to 15.4 or 15.6 within the time periods
specified therein.
13.2 Landlord's Remedies. If an Event of Tenant's Default
occurs, Landlord shall have the following remedies, in addition to all
other rights and remedies provided by any Law or otherwise provided in
this Lease, to which Landlord may resort cumulatively or in the
alternative:
A. Landlord may keep this Lease in effect and enforce
by an action at law or in equity all of its right and remedies under
this Lease, including (i) the right to recover the rent and other sums
as they become due by appropriate legal action, (ii) the right to make
payments required of Tenant or perform Tenant's obligations and be
reimbursed by Tenant for the cost thereof with interest at the Agreed
Interest Rate from the date the sum is paid by Landlord until Landlord
is reimbursed by Tenant, and (iii) the remedies of injunctive relief
and specific performance to compel Tenant to Perform its obligations
under this Lease. Notwithstanding anything contained in this Lease, in
the event of a breach of an obligation by Tenant which results in a
condition which poses an imminent danger to safety of persons or damage
to property, an unsightly condition visible from the exterior of the
Building, or a threat to insurance coverage, then if Tenant does not
cure such breach within three (3) days after delivery to it of written
notice from Landlord identifying the breach, Landlord may cure the
breach of Tenant and be reimbursed by Tenant for the cost thereof with
interest at the Agreed Interest Rate from the date the sum is paid by
Landlord until Landlord is reimbursed by Tenant.
B. Landlord may enter the Premises and release them to
third parties for Tenant's account for any period, whether shorter or
loner than the remaining Lease Term. Tenant shall be liable
immediately to Landlord for all costs Landlord incurs in releasing the
Premises, including brokers' commissions, expenses of altering and
preparing the Premises required by the releasing. Tenant shall pay to
Landlord the rent and other sums due under this Lease on the Date the
rent is due, less the rent and other sums Landlord received from any
releasing. No act by Landlord allowed by this subparagraph shall
terminate this Lease unless Landlord notifies Tenant in writing that
Landlord elects to terminate this Lease. Notwithstanding any releasing
without termination, Landlord may later elect to terminate this Lease
because of the default by Tenant.
C. Landlord may terminate this Lease by giving
Tenant written notice of termination, in which event this Lease shall
terminate on the date set forth for termination in such notice. Any
termination under this 13.2C shall not relieve Tenant from its
obligation to pay sums then due Landlord or from any claim against
Tenant for damages or rent previously accrued or then accruing. In no
event shall any one or more of the following actions by Landlord, in
the absence of a written election by Landlord to terminate this Lease,
constitute a termination of this Lease: (i) appointment of a receiver
or keeper in order to protect Landlord's interest hereunder; (ii)
consent to any subletting of the Premises or assignment of this Lease
by Tenant, whether pursuant to the provisions hereof or otherwise; or
(iii) any other action by Landlord or Landlord's Agents intended to
mitigate the adverse effects of any breach of this Lease by Tenant,
including without limitation any action taken to maintain and preserve
the Premises or any action taken to relet the Premises or any portions
thereof to the extent such actions to not affect a termination of
Tenant's right to possession of the Premises.
D. In the event Tenant breaches this Lease and
abandons the Premises, this Lease shall not terminate unless Landlord
gives Tenant written notice of its election to so terminate this Lease.
No act by or on behalf of Landlord intended to mitigate the adverse
effect of such breach, including those described by 13.C, shall
constitute a termination of Tenant's right to possession unless
Landlord gives Tenant written notice of termination. Should Landlord
not terminate this Lease by giving Tenant written notice, Landlord may
enforce all its rights and remedies under this Lease, including the
right to recover the rent as it becomes due under the Lease as provided
in California Civil Code Section 1951.4.
E. In the event Landlord terminates this Lease,
Landlord shall be entitled, at Landlord's election, to damages in an
amount as set forth in California Civil Code Section 1951.2 as in
effect on the effective date. For purposes of computing damages
pursuant to California Civil Code Section 1951.2, (i) an interest rate
equal to the Agreed Interest Rate shall be used where permitted, and
(ii) the term "rent" includes Base Monthly Rent and Additional Rent.
Such damages shall include:
(1) The worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that Tenant proves could
be reasonable avoided, computed by discontinuing such amount at
the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%); and
(2) Any other amount necessary to compensate
Landlord for all detriment proximately caused by Tenant's failure to
perform Tenant's obligations under this Lease, or which in the ordinary
course of things would be likely to result therefrom, including the
following: (i) expenses for cleaning, repairing or restoring the
Premises; (ii) expenses for altering, remodeling or otherwise improving
the Premises for the purpose of reletting, including installation of
leasehold improvements (whether such installation be funded by a
reduction of rent, direct payment or allowance to a new tenant, or
otherwise); (iii) broker's fees, advertising costs and other expenses
of reletting the Premises; (iv) costs of carrying the Premises, such as
taxes, insurance premiums, utilities and security precuations; (v)
expenses in retaking possession of the Premises; and (vi) attorneys'
fees and court costs incurred by Landlord in retaking possession of the
Premises and in releasing the Premises or otherwise incurred as a
result of Tenant's default.
F. Nothing in this 13.2 shall limit Landlord's right
to indemnification from Tenant as provided in 7.2 and 10.3. Any
notice given by Landlord in order to satisfy the requirements of
13.1A or 13.1B above shall also satisfy the notice requirements of
California Code of Civil Procedure Section 1161 regarding unlawful
detainer proceedings.
13.3 Waiver. One party's consent to or approval of any
act by the other party requiring the first party's consent or approval
shall not be deemed to waive or render unnecessary the first party's
consent to or approval of any subsequent similar act by the other
party. The receipt by Landlord of any rent or payment with or without
knowledge of the breach of any other provision hereof shall not be
deemed a waiver of any such breach unless such waiver is in writing and
signed by Landlord. No delay or omission in the exercise of any right
or remedy accruing to either party upon any breach by the other party
under this Lease shall impair such right or remedy or be construed as a
waiver of any such breach theretofore or thereafter occurring. The
waiver by either party of any breach of any provision of this Lease
shall not be deemed to be a waiver of any subsequent breach of the same
or of any other provisions herein contained.
13.4 Limitation on Exercise of Rights. At any time that
an Event of Tenant's Default has occurred and remains uncured, (i) it
shall not be unreasonable for Landlord to deny or withhold any consent
or approval requested of it by Tenant which Landlord would otherwise be
obligated to give, and (ii) Tenant may not exercise any right to
terminate this Lease or other right granted to it by this Lease which
would otherwise be available to it.
13.5 Waiver by Tenant of Certain Remedies. Tenant waives
the provisions of Sections 1932(1), 1941 and 1942 of the California
Civil Code and any similar or successor law regarding Tenant's right to
terminate this Lease or to make repairs and deduct the expenses of such
repairs from the rent due under this Lease. Tenant hereby waives any
right of redemption or relief from forfeiture under the laws of the
State of California, or under any other present or future law,
including the provisions of Sections 1174 and 1179 of the California
Code of Civil Procedures.
14. Assignment and Subletting.
14.1 Transfer by Tenant. The following provisions shall
apply to any assignment, subletting or other transfer by Tenant or any
subtenant or assignee or other successor in interest of the original
Tenant (collectively referred to in this 14.1 as "Tenant"):
A. Tenant shall not do any of the following
(collectively referred to herein as a "Transfer"), whether voluntarily,
involuntarily or by operation of law, without the prior written consent
of Landlord, which consent shall not be unreasonably withheld or
delayed: (i) sublet all or any part of the Premises or allow it to be
sublet, occupied or used by any person or entity other than Tenant;
(ii) assign its interest in this Lease; (iii) mortgage or encumber the
Lease (or otherwise use the Lease as a security device) in any manner,
or (iv) materially amend or modify an assignment, sublease or other
transfer that has been previously approved by Landlord. Tenant shall
reimburse Landlord for all reasonable costs and attorneys' fees
incurred by Landlord in connection with the evaluation, processing,
and/or documentation of any requested Transfer, whether or not
Landlord's consent is granted. Landlord's reasonable costs shall
include the cost of any review or investigation performed by Landlord
or consultant acting on Landlord's behalf of (i) Hazardous Materials
(as defined in Section 7.2E of this Lease) used, stored, released, or
disposed of by the potential subtenant or assignee, and/or (ii)
violations of Hazardous Materials law (as defined in Section 7.2E of
this Lease) by the tenant or the proposed Subtenant or Assignee. Any
Transfer so approved by Landlord shall not be effective until Tenant
has delivered to Landlord an executed counterpart of the document
evidencing the Transfer which (i) is in a form reasonably approved by
Landlord, (ii) contains the same terms and conditions as stated in
Tenant's notice given to Landlord pursuant to 14.1B, and (iii) in the
case of an assignment of the Lease, contains the agreement of the
proposed transferee to assume all obligations of Tenant under this
Lease arising after the effective date of such Transfer and to remain
jointly and severally liable therefor with Tenant. any attempted
Transfer without Landlord's consent shall constitute an Event of
Tenant's Default and shall be voidable at Landlord's option.
Landlord's consent to any one Transfer shall not constitute a waiver of
the provisions of this 14.1 as to any subsequent Transfer or a
consent to any subsequent Transfer. No Transfer even with the consent
of Landlord, shall relieve Tenant of its personal and primary
obligation to pay the rent and to perform all of the other obligations
to be performed by Tenant hereunder. The acceptance of rent by
Landlord from any person shall not be deemed to be a waiver by Landlord
of any provision of this Lease nor to be a consent to any Transfer.
B. At least thirty (30) days before a proposed Transfer
is to become effective, Tenant shall give Landlord written notice of
the proposed terms of such Transfer and request Landlord's approval,
which notice shall include the following: (i) the name and legal
composition of the proposed transferee; (ii) a current financial
statement of the transferee, financial statements of the transferee
covering the preceding three years if the same exist, and (if
available) an audited financial statement of the transferee for a
period ending not more than one (1) year prior to the proposed
effective date of the Transfer, all of which statements are prepared in
accordance with generally accepted accounting principles: (iii) the
nature of the proposed transferee's business to be carried on in the
Premises; (iv) all consideration to be given on account of the
Transfer, (v) a current financial statement of Tenant; and (vi) an
accurately filled out response to Landlord's standard Hazardous
Materials Questionnaire. Tenant shall provide to Landlord such other
information as may be reasonably requested by Landlord within seven (7)
days after Landlord's receipt of such notice from Tenant. Landlord
shall respond in writing to Tenants request for Landlord's consent to a
Transfer within the later of (i) fifteen (15) days of receipt of such
request together with the required accompanying documentation, or (ii)
seven (7) days after landlord's receipt of all information which
Landlord reasonably requests within seven (7) days after it receives
Tenant's first notice regarding the Transfer in question. If Landlord
fails to respond in writing within said period, Landlord will be deemed
to have withheld consent to such Transfer. Tenant shall immediately
notify Landlord of any material modification to the proposed terms of
such Transfer.
C. In the event that Tenant seeks to make any Transfer,
Landlord shall have the right to terminate this Lease or, in the case
of a sublease of less than all of the Premises, terminate this Lease as
to that part of the Premises proposed to be so sublet, either (i) on
the condition that the proposed transferee immediately enter into a
direct lease of the Premises with Landlord (or, in the case of a
partial sublease, a lease for the portion proposed to be so sublet) on
the same terms and conditions contained in Tenant's notice, or (ii) so
that Landlord is thereafter free to lease the Premises (or, in the case
of a partial sublease, the portion proposed to be so sublet) to
whomever it pleases on whatever terms are acceptable to Landlord. In
the event Landlord elects to so terminate this Lease, then (i) if such
termination is conditioned upon the execution of a lease between
Landlord and the proposed transferee, Tenant's obligations under this
Lease shall not be terminated until such transferee executes a new
lease with Landlord, enters into possession and commences the payment
of rent, and (ii) if Landlord elects simply to terminate this Lease
(or, in the case of a partial sublease, terminate this Lease as to the
portion to be so sublet), the Lease shall so terminate in its entirety
(or as to the space to be so sublet) fifteen (15) days after Landlord
has notified Tenant in writing of such election. Upon such
termination, Tenant shall be released from any further obligation under
this Lease if it is terminated in its entirely, or shall be released
from any further obligation under the Lease with respect to the space
proposed to be sublet in the case of a proposed partial sublease. In
the case of a partial termination of the lease, the Base Monthly Rent
and Tenant's Share shall be reduced to an amount which bears the same
relationship to the original amount thereof as the area of that part of
the premises which remains subject to the Lease bears to the original
area of the premises. Landlord and Tenant shall execute a cancellation
and release with respect to the Lease to effect such termination.
D. If Landlord consents to a Transfer proposed by
Tenant, Tenant may enter into such Transfer, and if Tenant does so, the
following shall apply:
(1) Tenant shall not be released of its liability
for the performance of all of its obligations under the Lease.
(2) If Tenant assigns its interest in this
Lease, then Tenant shall pay to Landlord eighty percent (80%) of all
Subrent (as defined in 14.1D(5)) received by Tenant over the above
(i) the assignee's agreement to assume the obligations of Tenant under
this Lease, and (ii) all Permitted Transfer Costs related to such
assignment. In the Case of Assignment, the amount of Subrent owed to
Landlord shall be paid to Landlord on the same basis, either periodic
or in lump sum, that such Subrent is paid to Tenant by the assignee.
(3) IfTenant sublets any part of the Premises, then
with respect to the space so subleased, Tenant shall pay to Landlord
eighty percent (80%) of the positive difference, if any, between (i)
all Subrent paid by the subtenant to Tenant, less (ii) the sum of all
Base Monthly Rent and Additional Rent allocable to the space sublet and
all Permitted Transfer Costs related to such sublease. Such amount
shall be paid to Landlord on the same basis, whether periodic or in
lump sum, that such Subrent is paid to Tenant by its subtenant. In
calculating Landlord's share of any periodic payments, all Permitted
Transfer Costs shall be first recovered by Tenant.
(4) Tenant's obligations under this 14.1D
shall survive Transfer, and Tenant's lure to perform its obligations
hereunder shall be an Event of Tenant's Default. At the time Tenant
makes any payment to Landlord required by this 14.1D, Tenant shall
deliver an itemized statement of the method by which the amount of
which Landlord is entitled was calculated, certified by Tenant as true
and correct. Landlord shall have the right at reasonable intervals to
inspect Tenant's books and records relating to the payments due
hereunder. Upon request therefor, Tenant shall deliver to Landlord
copies of all bills, invoices or other documents upon which its
calculations are based. Landlord may condition its approval of any
Transfer upon obtaining a certification from both Tenant and the
proposed transferee of all Subrent and other amounts that are to be
paid to Tenant in connection with such Transfer.
(5) As used in this 14.1D, the term "Subrent"
shall mean any consideration of any kind received, or to be received,
by Tenant as a result of the Transfer, if such sums are related to
Tenant's interest in this Lease or in the Premises, including payments
from or on behalf of the transferee (in excess of the book value
thereof) for Tenant's assets, fixtures, leasehold improvements,
inventory, accounts, goodwill, equipment, furniture, and general
intangibles. As used in this 14.1D, the term "Permitted Transfer
Costs" shall mean (i) all reasonable leasing commissions paid to third
parties not affiliated with Tenant in order to obtain the Transfer in
question, (ii) all reasonable attorneys' fees incurred by Tenant with
respect to the Transfer in question and (iii) all reasonable costs
incurred in cleaning and/or painting the Premises as required by the
assignee or subtenant in connection with the Transfer.
E. If Tenant is a corporation, the following shall be
deemed a voluntary assignment of Tenant's interest in this Lease: (i)
any dissolution, merger, consolidation, or other reorganization of or
affecting Tenant, whether or not Tenant is the surviving corporation;
and (ii) if the capital stock of Tenant is not publicly traded, the
sale or transfer to one person or entity (or to any group of related
persons or entities) stock possessing more than fifty percent (50%) of
the total combined voting power of all classes of Tenant's capital
stock issued, outstanding and entitled to vote for the election of
directors. If Tenant is a partnership, any withdrawal or substitution
(whether voluntary, involuntary or by operation of law, and whether
occurring at one time or over a period of time) of any partner owning
twenty-five percent (25%) or more (cumulatively) of any interest in the
capital or profits of the partnership, or the dissolution of the
partnership, shall be deemed a voluntary assignment of Tenant's
interest in this Lease.
F. Notwithstanding anything contained in14.1, so
long as Tenant otherwise complies with the provisions of 14.1 Tenant
may enter into any of the following Transfers without first obtaining
Landlord's prior written consent, and Landlord shall not be entitled to
terminate the Lease to 14.1C or to receive any part of any Subrent
resulting therefrom that would otherwise be due it pursuant to
14.1D:
(1) Tenant may sublease all or part of the Premises
or assign its interest in this Lease to any corporation which controls,
is controlled by, or is under common control with the original Tenant
to this Lease by means of an ownership interest of more than fifty
percent (50%).;
(2) Tenant may assign its interest in the lease to
a corporation which results from a merger, consolidation or other
reorganization in which Tenant is not the surviving corporation, so
long as the surviving corporation has a net worth at the time of such
assignment that is equal to or greater than the net worth of Tenant
immediately prior to such transaction; and
(3) Tenant may assign this Lease to a corporation
which purchases or otherwise acquires all or substantially all of the
assets of Tenant, so long as such acquiring corporation has a net worth
at the time of such assignment that is equal to or greater than the net
worth of Tenant immediately prior to such transaction.
14.2 Transfer by Landlord. Landlord and its successors
in interest shall have the right to transfer their interest in this
Lease and the Project at any time and to any person or entity. In the
event of any such transfer, the Landlord originally named herein (and,
in the case of any subsequent transfer, the transferor) from the date
of such transfer, shall be automatically relieved, without any further
act by any person or entity, of all liability for the performance or
the obligations of the Landlord hereunder which may accrue after the
date of such transfer. After the date of any such transfer, the term
"Landlord" as used herein shall mean the transferee of such interest in
the Premises.
15. General Provisions.
15.1 Landlord's Right to Enter. Landlord and its Agents
may enter the Premises at any reasonable time after giving at least
twenty-four (24) hours' prior notice to Tenant (and immediately in the
case of emergency) for the purpose of: (i) inspecting the same; (ii)
posting notices of non-responsibility; (iii) supplying any service to
be provided by Landlord to Tenant; (iv) showing the Premises to
prospective purchasers, mortgagees or tenants; (v) making necessary
alterations, additions of repairs, (vi) performing Tenant's obligations
when Tenant has failed to do so after written notice from Landlord;
(vii) placing upon the Premises ordinary "for lease" signs or "for
sale" signs; and (viii) responding to an emergency. Landlord shall
have the right to use any and all means Landlord may deem necessary and
proper to enter the Premises in an emergency. Any entry into the
Premises obtained by Landlord in accordance with this 15.1 shall not
be a forcible or unlawful entry into, or a detainer of, the Premises,
or an eviction, actual or constructive, of Tenant from the Premises.
15.2 Surrender of the Premises: Upon the expiration or
sooner termination of this Lease, Tenant shall vacate an surrender the
Premises to Landlord broom clean and in the same condition as existed
at the Commencement Date, except for (i) reasonable wear and tear, (ii)
damage caused by any peril or condemnation, and (iii) contamination by
Hazardous Materials for which Tenant is not responsible pursuant to
7.2A or 7.2B. In this regard, reasonable wear and tear shall be
construed to mean wear and tear caused to the Premises by the natural
aging process which occurs in spite of prudent application of the best
standards for maintenance, repair and janitorial practices, and does
not include items of neglected or deferred maintenance. If Landlord so
requests, Tenant shall, prior to the expiration or sooner termination
of this Lease, (i) remove any Tenant's Alterations which Tenant is
required to remove pursuant to 5.2 and repair all damage caused by
such removal, and (ii) return the Premises or any part thereof to its
original configuration existing as of the time the Premises were
delivered to Tenant. If the Premises are not so surrendered at the
termination of this Lease, Tenant shall be liable to Landlord for all
costs incurred by Landlord in returning the Premises to the required
condition, plus interest on all costs incurred at the Agreed Interest
Rate. Tenant shall indemnify Landlord against loss or liability
resulting from delay by Tenant in so surrendering the Premises,
including, without limitation, any losses to Landlord due to lost
opportunities to lease to succeeding tenants.
15.3 Holding Over. This Lease shall terminate without
further notice at the expiration of the Lease Term. Any holding over
by Tenant after expiration of the Lease Term shall not constitute a
renewal or extension of the Lease or give Tenant any rights in or to
the Premises except as expressly provided in this Lease. Any holding
over after such expiration with the written consent of Landlord shall
be construed to be a tenancy from mouth to mouth on the same terms and
conditions herein specified insofar as applicable except that Base
Monthly Rent shall be increased to an amount equal to one hundred fifty
percent (150%) of the Base Monthly Rent payable during the last full
calendar month of the Lease Term.
15.4 Subordination. The following provisions shall govern
the relationship of this Lease to any Security Instrument:
A. The Lease is subject and subordinate to all Security
Instruments existing as of the Effective Date. However, if any Lender
so requires, this Lease shall become prior and superior to any such
Security Instrument.
B. At Landlord's election, this Lease shall become
subject and subordinate to any Security Instrument created after the
Effective Date. Notwithstanding such subordination, Tenant's right to
quiet possession of the Premises shall not be disturbed so long
as Tenant is not in default and performs all of its obligations under
this Lease, unless this Lease is otherwise terminated pursuant to its
terms.
C. Tenant shall upon request execute any document or
instrument reasonably required by any Lender to make this Lease either
prior or subordinate to a Security Instrument, which may include such
other matters as the Lender customarily and reasonably requires in
connection with such agreements, including provisions that the Lender
not be liable for (i) the return of any security deposit unless the
Lender receives it from Landlord, and (ii) any defaults on the part of
Landlord occurring prior to the time the Lender takes possession of the
Project in connection with the enforcement of its Security Instrument.
Tenant's failure to execute any such document or instrument within ten
(10) days after written demand therefor shall constitute an Event of
Tenant's Default. Tenant approves as reasonable the form of
subordination agreement attached to this Lease as Exhibit F.
15.5 Mortgagee Protection and Attornment. In the event of
any default on the part of the Landlord, Tenant will use reasonable
efforts to give notice by registered mail to any Lender whose name has
been provided to Tenant and shall offer such Lender a reasonable
Opportunity to cure the default, including time to obtain possession of
the Premises by power of sale or judicial foreclosure or other
appropriate legal proceedings, if such should prove necessary to effect
a cure. Tenant shall attorn to any purchaser of the Premises at any
foreclosure sale or private sale conducted pursuant to any Security
Instrument encumbering the Premises, or to any grantee or transferee
designated in any deed given in lieu of foreclosure.
15.6 Estoppel Certificates and Financial Statements. At
all times during the Lease Term, each party agrees, following any
request by the other party, promptly to execute and deliver to the
requesting party within ten (10) days following delivery of such
request an estoppel certificate: (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, (ii) stating the date to which
the rent and other charges are paid in advanced, if any, (iii)
acknowledging that there are not, to the certifying party's knowledge,
any uncured defaults on the part of any party hereunder or, if there
are uncured defaults, specifying the nature of such defaults, and (iv)
certifying such other information about the Lease as may be reasonably
required by the requesting party. A failure to deliver an estoppel
certificate within fifteen (15) days after delivery of a request
therefor shall be a conclusive admission that, as of the date of the
request for such statement: (i) this Lease is unmodified except as may
be represented by the requesting party in said request and is in full
force and effect, (ii) there are no uncured defaults in the requesting
party's performance, and (iii) no rent has been paid more than thirty
(30) days in advance. At any time during the Lease Term (but not more
often than once in any twelve (12) calendar month period) Tenant shall,
upon fifteen (15) days' prior written notice from Landlord, provide
Tenant's most recent financial statement and financial statements
covering the twenty-four (24) month period prior to the date of such
most recent financial statement to any existing Lender or to any
potential Lender or buyer of the Premises. Such statements shall be
prepared in accordance with generally accepted accounting principles
and, if such is the normal practice of Tenant, shall be audited by an
independent certified public accountant.
15.7 Reasonable Consent. Whenever any party's approval or
consent is required by this Lease before an action may be taken by the
other party, such approval or consent shall not be unreasonably
withheld or delayed.
15.8 Notices. Any notice required or desired to be given
regarding this Lease shall be in writing and may be given by personal
delivery, by facsimile telecopy, by courier service, or by mail. a
notice shall be deemed to have been given (i) on the third business day
after mailing if such notice was deposited in the United States mail,
certified or registered, postage prepaid, addressed to the party to be
served at its Address for Notices specified in Section P or Section Q
of the Summary (as applicable), (ii) when delivered if given by
personal delivery, and (iii) in all other cases when actually received
at the party's Address for Notices. Either party may change its
address by giving notice of the same in accordance with this 15.8,
provided, however, that any address to which notices may be sent must
be a California address.
15.9 Attorneys' Fees. In the event either Landlord or
Tenant shall bring any action or legal proceeding for an alleged breach
of any provision of this Lease, to recover rent, to terminate this
Lease or otherwise to enforce, protect or establish any term or
covenant of this Lease, the prevailing party shall be entitled to
recover as a part of such action or proceeding, or in a separate action
brought for that purpose, reasonable attorneys' fees, court costs, and
experts' fees as may be fixed by the court.
15.10. Corporate Authority. If Tenant is a corporation
(or partnership), each individual executing this Lease on behalf of
Tenant represents and warrants that he is duly authorized to execute
and deliver this Lease on behalf of such corporation in accordance with
the by-laws of such corporation (or partnership in accordance with the
partnership agreement of such partnership) and that this Lease is
binding upon such corporation (or partnership) in accordance with its
terms. Each of the persons executing this Lease on behalf of a
corporation does hereby covenant and warrant that the party for whom it
is executing this lease is a duly authorized and existing corporation,
that it is qualified to do business in California, and that the
corporation has full right and authority to enter into this Lease.
15.11 Miscellaneous. Should any provision of this Lease
prove to be invalid or illegal, such invalidity or illegality shall in
no way affect, impair or invalidate any other provision hereof, and
such remaining provisions shall remain in full force and effect. Time
is of the essence with respect to the performance of every provision of
this Lease in which time of performance is a factor. The captions used
in this Lease are for convenience only and shall not be considered in
the construction or interpretation of any provision hereof. any
executed copy of this Lease shall be deemed an original for all
purposes. This Lease shall, subject to the provisions regarding
assignment, apply to and bind the respective heirs, successors,
executors, administrators and assigns of Landlord and Tenant. "Party"
shall mean Landlord or Tenant, as the context implies. This Lease
shall be construed and enforced in accordance with the laws of the
State of California. The language in all parts of this Lease shall in
all cases be construed as a whole according to its fair meaning, and
not strictly for or against either Landlord or Tenant. When the
context of this Lease requires, the neuter gender includes the
masculine the feminine, a partnership or corporation or joint venture,
and the singular includes the plural. The terms "shall," "will" and
"agree" are mandatory. The term "may" is permissive. When a party is
required to do something by this Lease, it shall do so at its sole cost
and expense without right of reimbursement from the other party unless
a provision of this Lease expressly requires reimbursement. Landlord
and Tenant agree that (i) Tenant's Gross Leasable Area of the Premises
includes any atriums, depressed loading docks, covered entrances or
egresses, and covered loading areas, (ii) each has had an opportunity
to determine to its satisfaction the actual area of the Project and the
Premises, (iii) all measurements of area contained in this Lease are
conclusively agreed to be correct and binding upon the parties, even if
a subsequent measurement of any one of these areas determines that it
is more or less than the amount of area reflected in this Lease, and
(iv) any such subsequent determination that the area is more or less
than shown in this Lease shall not result in a change in any of the
computations of rent, improvement allowances, or other matters
described in this Lease where area is a factor. Where a party hereto
is obligated not to perform any act, such party is also obligated to
restrain any others within its control from performing said act,
including the Agents of such party. Landlord shall not become or be
deemed a partner or a joint venturer with Tenant by reason of the
provisions of this Lease.
15.12 Termination by Exercise of Right. If this Lease is
terminated pursuant to its terms by the proper exercise of a right to
terminate specifically granted to Landlord or Tenant by this Lease,
then this Lease, then this Lease shall terminate thirty (30) days after
the date the right to terminate is properly exercised (unless another
date is specified in that part of the Lease creating the right, in
which event the date so specified for termination shall prevail), the
rent and all other charges due hereunder shall be prorated as of the
date of termination, and neither Landlord nor Tenant shall have any
further rights or obligations under this Lease except for those that
have accrued prior to the date of termination or those obligations
which this Lease specifically provides are to survive termination.
This 15.12 does not apply to a termination of this Lease by Landlord
as a result of an Event of Tenant's Default.
15.13 Brokerage Commissions. Each party hereto (i)
represents and warrants to the other that it has not had any dealings
with any real estate brokers, leasing agents or salesmen, or incurred
any obligations for the payment of real estate brokerage commissions or
finder's fees which would be earned or due and payable by reason of the
execution of this Lease, other than to the Retained Real Estate Brokers
described in Section R of the Summary, and (ii) agrees to indemnify,
defend, and hold harmless the other party from any claim for any such
commission or fees which result from the actions of the indemnifying
party. Landlord shall be responsible for the payment of any commission
owned to the Retained Real Estate Brokers if there is a separate
written commission agreement between Landlord and the Retained Real
Estate Brokers for the payment of a commission as a result of the
execution of this Lease.
15.14 Force Majeure. Any prevention, delay or stoppage
due to strikes, lockouts, inclement weather, labor disputes, inability
to obtain labor, materials, fuels or reasonable substitutes therefor,
governmental restrictions, regulations, controls, action or inaction,
civil commotion, fire or other acts of God, and other causes beyond the
reasonable control of the party obligated to perform (except financial
inability) shall excuse the performance, for a period equal to the
period of any said prevention, delay or stoppage, of any obligation
hereunder except the obligation of Tenant to pay rent to any other sums
due hereunder.
15.15 Entire Agreement. This Lease constitutes the entire
agreement between the parties, and there are no binding agreements or
representations between the parties except as expressed herein. Tenant
acknowledged that neither Landlord nor Landlord's Agents has made any
legally binding representation or warranty as to any matter except
those expressly set forth herein, including any warranty as to (i)
whether the Premises may be used for Tenant's intended use under
existing Law, (ii) the suitability of the premises or the Project for
the conduct of Tenant's business, or (iii) the condition of any
improvements. There are no oral agreements between Landlord and Tenant
affecting this Lease, and this Lease supersedes and cancels any and all
previous negotiations, arrangements, brochures, agreements and
understandings, if any, between Landlord and Tenant or displayed by
Landlord to Tenant with respect to the subject matter of this Lease.
This instrument shall not be legally binding until it is executed by
both Landlord and Tenant. No subsequent change or addition to this
Lease shall be binding unless in writing and signed by Landlord and
Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this
Lease with the intent to be legally bound thereby, to be effective as
of the Effective Date.
LANDLORD:
MARTIN CL ASSOCIATES, L.P.,
a Delaware limited partnership
By: Martin CL Company, LLC,
a California limited liability
company
Its: General Partner
By: The Martin Group of
Companies, Inc.,
a California corporation
Its: Managing Member
By:
Michael A. Covarrubias
Its: President
TENANT:
IMEDIA CORPORATION,
A California Corporation
By:
<PAGE>
SUBLEASE
THIS SUBLEASE ("Sublease"), dated November 15, 1999 for reference
purposes only, is entered into by and between IMEDIA CORPORATION, a
California corporation ("Sublandlord") and ISP CHANNEL, INC., a Delaware
corporation ("Subtenant").
RECITALS
A. Sublandlord leases certain premises consisting of an
industrial building containing approximately 9,400 square feet, located
at 510 Clyde Avenue, Mountain View, California, pursuant to that
certain Lease dated April 20, 1998, between MV Technology Park
Investors LLC, successor-in-interest to Martin CL Associates, L.P., as
landlord (the "Master Landlord") and Sublandlord, as tenant (the
"Master Lease"), as more particularly described therein (the
"Premises"). Capitalized terms used but not defined herein have the
same meanings as they have in the Master Lease.
B. Sublandlord desires to sublease the Premises to Subtenant,
and Subtenant desires to sublease the Premises from Sublandlord on the
terms and provisions hereof.
NOW, THEREFORE, in consideration of the mutual covenants and
conditions contained herein, Sublandlord and Subtenant covenant and
agree as follows:
AGREEMENT
1. Premises. On and subject to the terms and conditions
below, Sublandlord hereby leases to Subtenant, and Subtenant hereby
leases from Sublandlord, the Premises.
2. Term. This Sublease shall commence on October 15, 1999
(the "Commencement Date"), provided Sublandlord has theretofore
obtained the consent of Master Landlord, and shall expire June 21,
2003, unless sooner terminated pursuant to any provision hereof.
3. Possession. If for any reason Sublandlord cannot deliver
possession of the Premises to Subtenant within fifteen (15) days of the
execution of this Sublease, Sublandlord shall not be subject to any
liability therefor, nor shall such failure affect the validity of this
Sublease or the obligations of Subtenant hereunder or extend the term
hereof, provided that no rent shall be due hereunder until possession
of the Premises has been delivered to Subtenant.
4. Rent.
(a) Commencing on the Commencement Date and continuing
throughout the term of this Sublease, Subtenant shall pay monthly rent
to Sublandlord in the following amounts:
(i) Base Rent. Starting on the Commencement Date,
Sublessee shall pay as base rent ("Base Rent") for the Premises monthly
rent in the amounts set forth below. Base Rent and Additional Rent
shall collectively be referred to herein as "Rent."
Amount Per
Months Square Foot NNN Monthly Rental
10/15/1999-10/14/2000 $2.15 $20,210
10/15/2000-10/14/2001 $2.20 $20,680
10/15/2001-10/14/2002 $2.25 $21,150
10/15/2002-06/21/2003 $2.30 $21,620
(ii) Additional Rent. In addition to Base Rent,
Subtenant shall also pay to Sublandlord, all Subtenant's Share of
Common Operating Expenses (as that term is defined in Section 8.1 of
the Master Lease) and all other costs payable by Sublandlord under
Section 3.2 of the Master Lease ("Additional Rent"). If Sublandlord
receives monthly invoices for such Additional Rent from the Master
Landlord, under Section 8.1 of the Master Lease, Sublandlord shall
immediately forward same to Subtenant for payment. Alternatively, if
Sublandlord currently pays an estimated monthly installment for such
Additional Rent, under Section 8.1 of the Master Lease, Sublandlord
shall each month prepare and send to Subtenant an invoice for such
Additional Rent due on the first day of the following month. Subtenant
shall pay each invoice for Additional Rent within five (5) days of
receipt of same from Sublandlord.
(iii) Payment of Rent. If the Commencement Date does
not fall on the first day of a calendar month, Rent for the first month
shall be prorated on a daily basis based upon a calendar month. Rent
shall be payable to Sublandlord in lawful money of the United States,
in advance, without prior notice, demand, or offset, on or before the
first day of each calendar month during the term hereof. All Rent
shall be paid to Sublandlord at the address specified for notices to
Sublandlord in Section 14, below.
(b) Subtenant recognizes that late payment of any Rent
will result in administrative expenses to Sublandlord, the extent of
which additional expenses are extremely difficult and economically
impractical to ascertain. Subtenant therefore agrees that if any Rent
shall remain unpaid five (5) days after such amounts are due, the
amount of such Rent shall be increased by a late charge to be paid to
Sublandlord by Subtenant in an amount equal to ten (10) percent of the
amount of the delinquent Rent.
(c) Upon execution of this Sublease, Subtenant shall
deliver to Sublandlord the sum of Twenty Thousand Two Hundred Ten
Dollars ($20,210), representing the first month's Base Rent.
(d) In the event of any casualty or condemnation
affecting the Premises, Rent payable by Subtenant shall be abated
hereunder, but only to the extent that Rent under the Master Lease is
abated, and Subtenant waives any right to terminate this Sublease in
connection with such casualty or condemnation except to the extent the
Master Lease is also terminated as to the Premises or any portion
thereof.
5. Security Deposit. Upon execution of this Sublease,
Subtenant shall deposit with Sublandlord the sum of Twenty-One Thousand
Six Hundred Twenty Dollars ($21,620) as a security deposit ("Security
Deposit"). If Subtenant fails to pay Rent or other charges when due
under this Sublease, or fails to perform any of its other obligations
hereunder, Sublandlord may use or apply all or any portion of the
Security Deposit for the payment of any Rent or other amount then due
hereunder and unpaid, for the payment of any other sum for which
Sublandlord may become obligated by reason of Subtenant's default or
breach, or for any loss or damage sustained by Sublandlord as a result
of Subtenant's default or breach. If Sublandlord so uses any portion
of the Security Deposit, Subtenant shall restore the Security Deposit
to the full amount originally deposited within ten (10) days after
Sublandlord's written demand. Sublandlord shall not be required to
keep the Security Deposit separate from its general accounts, and shall
have no obligation or liability for payment of interest on the Security
Deposit. The Security Deposit, or so much thereof as had not
theretofore been applied by Sublandlord, shall be returned to Subtenant
within thirty (30) days of the expiration or earlier termination of
this Sublease, provided Subtenant has vacated the Premises according to
the terms of this Sublease.
6. Assignment and Subletting. Subtenant may not assign,
sublet, transfer, pledge, hypothecate or otherwise encumber the
Premises, in whole or in part, or permit the use or occupancy of the
Premises by anyone other than Subtenant, unless Subtenant has obtained
Sublandlord's consent thereto (which shall not be unreasonably
withheld) and the consent of Master Landlord. Regardless of
Sublandlord's consent, no subletting or assignment shall release
Subtenant of its obligations hereunder. Any rent or other
consideration payable to Subtenant pursuant to any sublease or
assignment permitted by this paragraph which is in excess of the Rent
payable to Sublandlord pursuant hereto ("Sublease Bonus Rent") shall be
divided equally between Sublandlord and Subtenant. Sublandlord
specifically agrees, however, that Subtenant may freely assign,
transfer or sublease this Sublease to any subsidiary, parent company,
or related entity, according to the terms of Section 14.1(F) of the
Master Lease, including such relationship established through the sale
or transfer of stock, provided that such subsidiary, company or entity
assumes all obligations and duties of this Sublease, and provided
further that Subtenant shall remain obligated for the performance of
all the terms and conditions of this Sublease, regardless of to whom
this Sublease is assigned, transferred or subleased.
7. Condition of Premises. Subtenant has used due diligence in
inspecting the Premises and agrees to accept the Premises in "as-is"
condition and with all faults without any representation or warranty of
any kind or nature whatsoever, or any obligation on the part of
Sublandlord to modify, improve or otherwise prepare the Premises for
Subtenant's occupancy.
8. Use. Subtenant may use the Premises only for the purposes
as allowed in the Master Lease, and for no other purpose. Subtenant
shall promptly comply with all applicable statutes, ordinances, rules,
regulations, orders, restrictions of record, and requirements in effect
during the term of this Sublease governing, affecting and regulating
the Premises, including but not limited to the use thereof. Subtenant
shall not use or permit the use of the Premises in a manner that will
create waste or a nuisance, interfere with or disturb other tenants in
the Building or violate the provisions of the Master Lease.
9. Parking. Subtenant shall have such parking rights as
Sublandlord may have in connection with the Premises pursuant to
Section 4.5 of the Master Lease.
10. Incorporation of Sublease.
(a) All of the terms and provisions of the Master Lease,
except as provided in subsection (b) below, are incorporated into and
made a part of this Sublease and the rights and obligations of the
parties under the Master Lease are hereby imposed upon the parties
hereto with respect to the Premises, Sublandlord being substituted for
the "Landlord" in the Master Lease, and Subtenant being substituted for
the "Tenant" in the Master Lease. It is further understood that where
reference is made in the Master Lease to the "Premises," the same shall
mean the Premises as defined herein; where reference is made to the
"Commencement Date," the same shall mean the Commencement Date as
defined herein; and where reference is made to the "Lease," the same
shall mean this Sublease.
(b) The following Paragraphs of the Master Lease are not
incorporated herein: Summary of Basic Lease Terms: A, B, C, I, J, K,
L, M, P, Q, R, 1.3, 1.6, 1.8, 1.12, 1.18, 2.2, 2.3, 3.1, 3.3, 3.5,
15.8, 15.13, and Exhibit B.
(c) Subtenant hereby assumes and agrees to perform for
Sublandlord's benefit, during the term of this Sublease, all of
Sublandlord's obligations with respect to the Premises under the Master
Lease, except as otherwise provided herein. Subtenant shall not commit
or permit to be committed any act or omission which violates any term
or condition of the Master Lease. Except as otherwise provided herein,
this Sublease shall be subject and subordinate to all of the terms of
the Master Lease.
11. Insurance. Subtenant shall be responsible for compliance
with the insurance provisions of Section 9 of the Master Lease. Such
insurance shall insure the performance by Subtenant of its
indemnification obligations hereunder and shall name Master Landlord
and Sublandlord as additional insureds. All insurance required under
this Sublease shall contain an endorsement requiring thirty (30) days
written notice from the insurance company to Subtenant and Sublandlord
before cancellation or change in the coverage, insureds or amount of
any policy. Subtenant shall provide Sublandlord with certificates of
insurance evidencing such coverage prior to the commencement of this
Sublease.
12. Default. In addition to defaults contained in the Master
Lease, failure of Subtenant to make any payment of Rent when due
hereunder shall constitute an event of default hereunder.
13. Notices. The addresses specified in the Master Lease for
receipt of notices to each of the parties are deleted and replaced with
the following:
To Sublandlord at: 2952 Bunker Hill Lane
Santa Clara, CA 95054
Attn: Operations Controller
To Subtenant at: At the Premises
14. Sublandlord's Obligations.
(a) To the extent that the provision of any services or
the performance of any maintenance or any other act respecting the
Premises or Building is the responsibility of Master Landlord
(collectively "Master Landlord Obligations"), upon Subtenant's request,
Sublandlord shall make reasonable efforts to cause Master Landlord to
perform such Master Landlord Obligations, provided, however, that in no
event shall Sublandlord be liable to Subtenant for any liability, loss
or damage whatsoever in the event that Master Landlord should fail to
perform the same, nor shall Subtenant be entitled to withhold the
payment of Rent or terminate this Sublease. It is expressly understood
that the services and repairs which are incorporated herein by
reference, including but not limited to the maintenance of exterior
walls, structural portions of the roof, foundations, walls and floors,
will in fact be furnished by Master Landlord and not by Sublandlord,
except to the extent otherwise provided in the Master Lease. In
addition, Sublandlord shall not be liable for any maintenance,
restoration (following casualty or destruction) or repairs in or to the
Building or Premises, other than its obligation hereunder to use
reasonable efforts to cause Master Landlord to perform its obligations
under the Master Lease. With respect to any maintenance or repair to
be performed by Master Landlord respecting the Premises, the parties
expressly agree that Subtenant shall have the right to contact Master
Landlord directly to cause it to so perform.
(b) Except as otherwise provided herein, Sublandlord
shall have no other obligations to Subtenant with respect to the
Premises or the performance of the Master Landlord Obligations.
15. Early Termination of Sublease. If, without the fault of
Sublandlord, the Master Lease should terminate prior to the expiration
of this Sublease, Sublandlord shall have no liability to Subtenant on
account of such termination. To the extent that the Master Lease
grants Sublandlord any discretionary right to terminate the Master
Lease, whether due to casualty, condemnation, or otherwise, Sublandlord
shall be entitled to exercise or not exercise such right in its
complete and absolute discretion.
16. Consent of Master Landlord and Sublandlord. If Subtenant
desires to take any action which requires the consent or approval of
Sublandlord pursuant to the terms of this Sublease, prior to taking
such action, including, without limitation, making any alterations,
then, notwithstanding anything to the contrary herein, (a) Sublandlord
shall have the same rights of approval or disapproval as Master
Landlord has under the Master Lease, and (b) Subtenant shall not take
any such action until it obtains the consent of Sublandlord and Master
Landlord, as may be required under this Sublease or the Master Lease.
This Sublease shall not be effective unless and until any required
written consent of the Master Landlord shall have been obtained.
17. Indemnity. Subtenant shall indemnify, defend, protect, and
hold Sublandlord and Master Landlord harmless from and against all
actions, claims, demands, costs liabilities, losses, reasonable
attorneys' fees, damages, penalties, and expenses (collectively
"Claims") which may be brought or made against Sublandlord or which
Sublandlord may pay or incur to the extent of such claims caused by (i)
a breach of this Sublease by Subtenant, (ii) any violation of law by
Subtenant or its employees, agents, contractors or invitees
(collectively, "Agents") relating to the use or occupancy of the
Premises, (iii) any act or omission by Subtenant or its Agents
resulting in contamination of any part or all of the Premises by
Hazardous Materials, or (iv) the negligence or willful misconduct of
Subtenant or its Agents.
18. Brokers. Each party hereto represents and warrants that it
has dealt with no broker in connection with this Sublease and the
transactions contemplated herein, except Cornish & Carey Commercial and
Cupertino Capital. Each party shall indemnify, protect, defend and
hold the other party harmless from all costs and expenses (including
reasonable attorneys' fees) arising from or relating to a breach of the
foregoing representation and warranty.
19. Surrender of Premises. Upon the expiration or earlier
termination of this Sublease, Subtenant shall surrender the Premises in
the same condition as they were in on the Commencement Date, except for
ordinary wear and tear.
20. No Third Party Rights. The benefit of the provisions of
this Sublease is expressly limited to Sublandlord and Subtenant and
their respective permitted successors and assigns. Under no
circumstances will any third party be construed to have any rights as a
third party beneficiary with respect to any of said provisions.
21. Counterparts. This Sublease may be signed in two or more
counterparts, each of which shall be deemed an original and all of
which shall constitute one agreement.
22. Representations and Warranties. Sublandlord represents and
warrants that the Master Lease is the entire agreement between Master
Landlord and Sublandlord relating to the Premises and is in full force
and effect, and that to Sublandlord's knowledge neither Sublandlord nor
Master Landlord is in default beyond applicable cure periods under the
Master Lease.
IN WITNESS WHEREOF, the parties have executed this Sublease as of
the date first written above.
IMEDIA CORPORATION ISP CHANNEL, INC.
By: By:
Its: Its:
CONSENT OF MASTER LANDLORD
MV Technology Park Investors LLC, the Master Landlord under the
Master Lease hereby consents to the Sublease attached hereto, and all
of the terms and conditions contained therein.
MV TECHNOLOGY PARK INVESTORS LLC
a
By:
Its:
Date:
<PAGE>
