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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
_________
Commission File Number 0-24707
INET TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2269056
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
1255 WEST 15TH STREET, SUITE 600 75075
PLANO, TEXAS (Zip code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (972) 578-6100
_________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
COMMON STOCK, $0.001 PAR VALUE NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
NONE
_________
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER
PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS
BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO __
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THE FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. YES /X/ NO __
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT ON MARCH 1, 2000 WAS $423,565,349.
THE NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT OUTSTANDING ON
MARCH 1, 1999 WAS 46,048,910
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN INFORMATION REQUIRED BY PART III OF THIS ANNUAL REPORT IS
INCORPORATED BY REFERENCE FROM THE REGISTRANT'S DEFINITIVE PROXY STATEMENT
FOR ITS ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 16, 2000.
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INET TECHNOLOGIES, INC.
FORM 10-K
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business ...................................................................... 2
Item 2. Properties .................................................................... 15
Item 3. Legal Proceedings ............................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders ........................... 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ......... 15
Item 6. Selected Financial Data ....................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................... 28
Item 8. Financial Statements and Supplementary Data ................................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................................... 28
PART III
Item 10. Directors and Executive Officers of the Registrant ........................... 29
Item 11. Executive Compensation ....................................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and Management ............... 29
Item 13. Certain Relationships and Related Transactions ............................... 29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .............. 30
Signatures ............................................................................. 32
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Inet Technologies, Inc. (the "Company" or "Inet") provides
communications software solutions that enable carriers to more effectively
design, deploy, diagnose, monitor and manage communications networks that
carry signaling information used to manage communications sessions which
include phone calls, dial-up Internet access and other service transactions
("sessions"). Inet's products also address the fundamental business needs of
communications carriers, such as improved billing, targeted sales and
marketing, fraud prevention and enhanced routing. Inet provides these
comprehensive solutions primarily through its GeoProbe and Spectra product
offerings.
The GeoProbe system provides real-time monitoring of Common Channel
Signaling System #7 ("SS7") networks and serves as an open platform for
business applications developed by Inet, its customers or third parties.
GeoProbe's network-wide monitoring applications enable early warning of
network faults, collection of statistics for performance evaluation,
real-time session tracing and troubleshooting. The GeoProbe-based IT:seven
suite of business applications provides reconciliation of billing between
carriers, service quality reports and marketing data. The Spectra product can
be integrated within the GeoProbe platform or used on a stand-alone basis to
provide diagnostic, emulation and load generation capabilities for use by
service providers or equipment manufacturers in the design, deployment,
commissioning and diagnosis of signaling networks.
Inet's objective is to be a leading provider of communications software
solutions for next-generation networks worldwide. Key elements of Inet's
strategy to achieve this objective include: expanding its global market
share; increasing its domestic sales and penetration of its existing customer
base; enhancing its technological leadership position; expanding its product
offerings by leveraging its core competencies in SS7, Internet Protocol
("IP") and broadband communications protocols; and building relationships
with strategic partners.
As of December 31, 1999, the Company had sold its solutions to over 400
customers in more than 50 countries. The Company's target customers include
traditional wireline, wireless and next-generation communications carriers as
well as equipment manufacturers throughout North America, Latin America,
Europe, Middle East, and Africa ("EMEA") and the Asia/Pacific region. A
partial list of the Company's carrier customers include AT&T, Bell South,
British Telecom, Deutsche Telekom, Global Crossing, KPN Telecom, MCI
WorldCom, Nextel, Sprint, Swisscom, Telia, Telkom South Africa and Williams
Communications, and a partial list of its equipment manufacturer customers
include Alcatel, Cisco, Lucent, Motorola and Nortel. These customers
collectively accounted for approximately 60% of the Company's revenues in
1999.
INDUSTRY BACKGROUND
THE TELECOMMUNICATIONS INDUSTRY
Historically, telecommunications carriers operated in a highly regulated
environment with little or no competition. But recently, governments
worldwide have begun to deregulate the telecommunications industry.
Deregulation has increased the competitive landscape by allowing the
emergence of a new
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breed of communications carriers that are focused on serving a specific
market segment. New entrants to the global communications landscape include
competitive long distance and local exchange carriers; IP or
"next-generation" network providers; Internet Service Providers ("ISPs");
Internet Telephony Service Providers ("ITSPs"); competitors to government
post, telephone and telegraph companies ("PTTs") and other licensed operators
("OLOs") outside the U.S.; wireless carriers; and resellers such as prepaid
calling card providers. The combination of deregulation, the growth of the
Internet and the emergence of next-generation carriers is putting pressure on
the traditional telecommunications carriers to reduce costs, improve service
performance levels and offer a number of new and enhanced services.
The increased level of competition is forcing communications carriers to
differentiate themselves by providing advanced, value-added services and
features. Examples of these services include toll-free "800" numbers, prepaid
calling cards, Caller ID, customized routing and billing, voice messaging,
Local Number Portability ("LNP"), and Internet access.
The predominant form of Internet access today, and we believe in the
foreseeable future, will be via dial-up over the Public Switched Telephone
Network ("PSTN"). The dial-up method of access causes congestion in the
carrier's current networks which are engineered and optimized for voice call
delivery. As a result, carriers have the need to direct the Internet traffic
off of their voice trunk lines and divert it directly to the IP network. This
"enhanced routing" will result in network optimization for the carrier and
will help maximize the carrier's revenue opportunities by freeing up the
trunks for voice calls.
Competition is also forcing carriers to look closer at their network
cost structures. They must be able to provision, monitor and bill for
multiple services, including voice-over-packet service, in an efficient
manner to both manage costs and increase service to their customers. Although
the newer packet-based next-generation networks promise a lower life cycle
cost structure, they pose different risks that have not been an immediate
issue with traditional networks such as security and voice quality issues.
Traditional carriers must be able to secure their networks against potential
intrusion from the newer, more hacker-prone, IP networks. As a result,
current and new networks are being integrated and carriers need end-to-end
management and interoperability solutions without compromising service
quality or network security.
The growth of intelligent networks, coupled with a significant worldwide
increase in demand for communications and Internet-related data services, has
resulted in corresponding demand for communications infrastructure and
advanced networking technologies, including network management,
interoperability and diagnostic systems. Communications networks operate in
real time and are mission-critical to their end users. Thus, communications
carriers must provide the very highest quality and reliability of service to
remain competitive. This competition forces carriers to closely examine the
services they are providing in terms of performance and customer
satisfaction. The ability to provide high performance services to customers
is key to minimizing customer turnover, or "churn," in a carrier's customer
base.
SS7 AND MODERN COMMUNICATIONS NETWORK ARCHITECTURES
A communications network not only must convey information between
points, it must also determine the best routes for connections, control the
allocation of resources used to transfer the information and keep transaction
records for billing and measurement purposes. A simple communications
session, or other multi-service sessions, involves two types of information:
the session content (voice, computer data or video) and information about the
session (such as the party initiating the session and the destination party
identity) which is required to connect, manage and bill for the session. This
information about a communications session or other services is generally
referred to as "signaling."
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The first generation of telephone networks was designed to pass both
call content and signaling over a single internal network path, called a
"trunk," from the source of the call to the called destination. Signaling
information was passed via audio tones or voltage changes on the telephone
line or trunk connection. It became apparent, however, that the "single path"
method of transferring both call content and signaling was inefficient and
unreliable as network traffic grew, leading to network congestion and service
quality problems. Single path signaling also lacks flexibility because the
control information cannot be separated easily from the call content flowing
over a trunk. As a result, advanced services cannot be offered in networks in
which single path signaling is used.
These problems were first recognized during the 1960s and were
subsequently resolved through the development and deployment of "Common
Channel Signaling." In Common Channel Signaling, the call content is
separated from the signaling information. The signaling information is then
passed over an entirely separate path through the carrier's network, while
the call content is passed over a trunk. Signaling paths in the network are
connected to a set of systems that control and monitor the progress of calls
and other transactions and route the signaling information as required. The
signaling paths, or "links," and signaling network control systems comprise a
separate network infrastructure, called a "signaling network," that operates
in parallel with the network of trunks used to convey call content. The
technique is called Common Channel Signaling because signaling information
for multiple calls passes over a shared, or "common," set of signaling
channels. This method of combining signaling information for multiple calls
results in much higher overall network efficiency.
Modern signaling networks are based on a globally standardized
architecture and set of protocols called SS7, or sometimes referred to
internationally as "C7." Since the mid-1980s, SS7 has been implemented by
telecommunications carriers worldwide, including incumbent carriers, emerging
competitive service providers, Internet service providers and wireless
carriers. SS7 utilizes digital packet-switching technology and is designed to
be robust, flexible, and scalable, enabling telecommunications carriers to
provide new services quickly and to optimize the network bandwidth used for
trunk connections. When a call is placed, the originating location's call
switching equipment uses the SS7 network to "look ahead" and determine
whether the destination is busy or otherwise unavailable before allocating a
trunk to the call and connecting both parties. The look ahead operation also
enables information such as Caller ID to be passed before the call is
actually connected. The SS7 network's speed and power allow these operations
to occur almost instantly, which significantly reduces the time required to
process each call and improves service to the end user.
The increase in Internet usage has further complicated communications
networks. The widespread acceptance of the Internet is making possible a new
breed of services that combine voice, data and video. These service
applications integrate the use of existing voice or voice-over-packet
networks and data networks in a seamless manner. The use of SS7, along with
other signaling protocols, is making the implementation of these new services
possible.
The principal components of integrated communications networks are:
- SIGNALING SERVICE POINT ("SSP"). A subsystem of a telephone switch that
connects to the SS7 network and processes signaling information
associated with that particular switch. SSPs are the origination and
termination points for SS7 messages in the network. SSPs exchange
messages with other SSPs, STPs, and SCPs throughout the network.
- SIGNAL TRANSFER POINT ("STP"). A router that controls the flow of
messages among the other elements in the SS7 network. An STP may include
additional functionality that allows it to access external databases in
addition to performing simple routing based on the source and
destination address information included in network messages.
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- SERVICE CONTROL POINT ("SCP"). A database server that provides
additional information for call routing, billing and other services.
- LINKS. A set of dedicated digital channels through which the SS7
messages flow among SSPs, STPs, SCPs and other devices throughout the
signaling network. These are typically 56 or 64 kilobits-per-second
("kbps") standard digital connections.
- MEDIA GATEWAY. A hardware element at the edge of next-generation IP
networks that provides the media mapping and/or transcoding functions
between dissimilar networks (e.g. PSTN versus an IP network).
- MEDIA GATEWAY CONTROLLER. A software element within next-generation IP
networks that is physically separate from the Media Gateway elements but
provides the call processing and control functions for such gateways.
- SS7/IP SIGNALING GATEWAY. Typically a hardware and software element at
the edge of next-generation IP signaling networks that serves as the
portal between traditional PSTN SS7 signaling and signaling in IP
networks.
- GATEKEEPER: A software element within next-generation IP telephony
networks that sets up the communications path between originating and
terminating Media Gateways based on the destination IP address or phone
number.
- SOFTSWITCH. A software element that resides on standard computing
platforms and/or high-capacity/high-availability special purpose
platforms at the edge of next-generation IP networks. The softswitch
separates the call control functions of a phone call to handle call
routing, session connection control, service delivery and signaling
interworking within IP networks.
NETWORK INTEROPERABILITY: AN EXAMPLE
In order to better illustrate the critical role of signaling in the
convergence of communications networks, and to demonstrate the complexity of
inter-networking, consider the theoretical example of a person in New York
that is placing a call from an IP terminal/phone to a telephone number in
Dallas that is within the traditional PSTN. Furthermore, lets assume that the
dialed number may be ported as a result of Local Number Portability.
The dialed digits are first transported from the IP terminal/phone via
IP packets to the originating Gatekeeper within the IP telephony network. The
originating Gatekeeper examines the dialed digits (972-578-6100) and
determines that the exchange (578) has some numbers that have been ported to
another circuit switch within the PSTN. To determine this for sure regarding
the exact number that is being dialed, the originating Gatekeeper must launch
a query from the IP telephony network to the Intelligent Network of the PSTN.
The first step in accomplishing this is for the originating Gatekeeper to
send a LNP query to the SS7/IP Signaling Gateway within the IP telephony
network. The SS7/IP Signaling Gateway correctly reformats and routes the
originating Gatekeeper's query to the PSTN SS7 network. The PSTN SCP, which
receives the query, responds with the appropriate LNP information. This
response is routed back through the SS7 network via STPs, to the SS7/IP
Signaling Gateway. The Signaling Gateway then correctly reformats and routes
the response to the originating Gatekeeper in the IP network.
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With the LNP information, the originating Gatekeeper is now able to
determine the destination Gatekeeper in the IP telephony network that is able
to route the call to the true geographical location of the dialed number
within the PSTN. With this, the original Gatekeeper signals the destination
Gatekeeper and asks if there is availability on the destination Media Gateway
to handle the call. The destination Gatekeeper signals back with availability
status and information regarding what the correct IP address should be for
the call to reach the desired Media Gateway in the IP telephony network. The
original Gatekeeper now sends this information back to the originating IP
terminal/phone.
The originating IP terminal/phone now establishes a virtual circuit via
the IP network with the desired Media Gateway. The virtual circuit is
identified by certain references that will then be used by both the IP
terminal/phone and the Media Gateway to identify all IP packets flowing
between the two for the duration of the call. Concurrently with this, the
Media Gateway Controller orchestrates the connectivity of the Media Gateway
with the PSTN circuit switch. This is done (via the Signaling Gateway) by
sending a call setup message to the appropriate circuit switch via the PSTN's
SS7 STP routers. The Media gateway is then connected to a "trunk circuit" of
the PSTN's switch, and the PSTN signals back to the SS7/IP Signaling Gateway
that the call has been successfully established. Subsequently, the Signaling
Gateway sends the same indication of call establishment back to the
originating Gatekeeper. The exchange of IP packets proceeds until either
party terminates the call.
THE NEED FOR SIGNALING NETWORK MANAGEMENT AND OPTIMIZATION SOLUTIONS FOR
CONVERGING NETWORKS
As the example above illustrates, even a relatively simple transaction
like an LNP call requires a sophisticated series of signaling network
operations. Long-distance authorization codes, prepaid calling cards,
cellular phones, "800" and other advanced services increase the number of
signaling messages required for each network transaction, which in turn tends
to increase the number of elements and links required in the network.
Each signaling network typically contains equipment and software
manufactured by multiple vendors. Moreover, multiple signaling networks are
connected between carriers, often spanning international boundaries. The
entire "network of networks" must operate as a seamless whole, in real time,
with a minimal number of errors. Any indication of trouble in the network
must be detected and diagnosed as quickly as possible. Network capacity
utilization must be monitored continuously for "bottlenecks" and other
conditions. To maintain reliability, each new connection between two
carriers' networks must be certified and approved by the engineering staffs
at both carriers before traffic is allowed to flow through the connection.
In the past, when signaling was used exclusively on wireline networks to
complete standard telephone calls, it was sufficient for carriers to employ
localized diagnostic equipment and a large number of technicians who could be
dispatched in a reasonable timeframe to any point where trouble was suspected
or where new connections were being installed. However, this approach is not
readily scalable. It requires a significant number of people with specialized
domain expertise and does not adequately provide for diagnosis of
network-wide, interrelated conditions that tend to arise in complex
environments. The combination of new and different types of interconnected
signaling networks (such as satellite, cellular and packetized networks),
increased traffic levels and complexity within each signaling network, and
strict performance requirements has led to an increased need for systems and
software that enable carriers to get a complete picture of all signaling
network facilities and monitor any or all signaling message traffic in real
time. Comprehensive network management solutions are required to enable
advanced intelligent networks to reach their full potential.
There is also a growing need for signaling network management systems to
be fully integrated into the overall collection of systems that manage all
aspects of a carrier's operations, such as billing, service
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order entry, provisioning, repair, and service definition. Seamless
integration of signaling management with applications that enable a carrier
to use and leverage the information gathered in its signaling network allows
a carrier to improve its customer service, reduce costs, increase operational
efficiency and realize revenues where otherwise not possible. To provide a
carrier with these advantages, a signaling network management system must
offer a suite of software applications above and beyond more traditional
management functions such as monitoring and diagnostics.
THE INET SOLUTION
Inet provides communications software solutions that enable carriers to
more effectively design, deploy, diagnose, monitor and manage communications
networks that carry signaling information used to manage communications
sessions. Inet's products also address the fundamental business needs of
communications carriers, such as improved billing, targeted sales and
marketing, fraud prevention and enhanced routing. Inet provides these
comprehensive solutions through its network optimization and diagnostic
product offerings.
Inet's network optimization products are based on an open, real-time
platform upon which Inet, its customers or third parties can develop advanced
applications. Inet's flagship network optimization product currently is the
GeoProbe. The GeoProbe's network-wide monitoring applications enable early
warning of network faults, collection of statistics for service performance
evaluations, real-time session tracing and troubleshooting. The
GeoProbe-based IT:seven suite of business applications (GeoBill, GeoConnect
and GeoCare), provides reconciliation of billing between carriers, service
quality reports and marketing data. The GeoProbe provides many advantages,
including:
- GLOBAL NETWORK VIEW. GeoProbe is designed to provide a comprehensive
view of a carrier's entire signaling network. This design ensures that
all relevant events and/or signaling throughout the carrier's network,
regardless of their point of origin, path and termination point, are
properly correlated and processed for presentation to network management
systems or personnel. In the absence of such a global approach, carriers
must rely on a patchwork of systems scattered throughout their networks
in order to diagnose problems. Inet's proprietary tracking technology
enables a carrier to reconstruct an entire session and its related
transactions at any time during or after the session. Traditional
sampling techniques, by contrast, tend to produce erroneous and
inaccurate results because collected data is usually incomplete and only
local in scope.
- REAL-TIME FUNCTIONALITY. GeoProbe is designed to collect, process and
present data in real time, even under extreme network load conditions.
This key attribute makes real-time management and operation of signaling
networks possible. Without a real-time monitoring system, carrier
networks are more vulnerable to overloads, fraud and delayed problem
resolution, which can lead to customer dissatisfaction and compromised
network integrity.
- ADVANCED ENGINEERING AND PLANNING CAPABILITIES. GeoProbe continuously
provides an accurate and detailed view of real-time and historical
statistics on a carrier's signaling network usage and the service
applications delivered through the network. This allows carriers to
implement network designs optimized for cost and performance, and to
refine network configuration over time based on changes in demand. For
example, a carrier can use data collected by GeoProbe to identify a
point in the network that is constricting traffic flow. The carrier can
then install additional equipment at that point, increasing the
throughput of its entire network.
- FAST, COST-EFFECTIVE DIAGNOSTICS. GeoProbe's software applications
rapidly isolate problems between interconnected signaling elements and
networks, enabling communications carriers to reduce downtime,
maintenance and costs.
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- REDUNDANCY AND RELIABILITY. GeoProbe is available with various levels of
redundancy in order to guard against data loss and help ensure that
critical applications remain operational. Available redundancy features
include power, interfaces, processors, storage devices and transport
network access, and certain business applications such as billing.
- VENDOR INDEPENDENCE. All GeoProbe applications are based on data
captured directly from the signaling network, as opposed to information
provided in vendor-specific format by individual network elements such
as STPs, SCPs or next-generation network elements. As a result, carriers
can use GeoProbe regardless of which vendors' equipment is deployed in
their signaling network.
Inet's diagnostic products are vendor-independent tools that provide
diagnostic, emulation and load generation capabilities for use in the design,
deployment, commissioning and diagnosis of signaling networks as well as
quality of service measurement in voice-over-packet networks. Currently,
Inet's diagnostic products include Spectra and the Spectra Trunk Tester. These
can be integrated within the GeoProbe platform or used on a stand-alone basis
with a carrier's own equipment. These products also can be used by equipment
manufacturers to design and test signaling and next-generation network
equipment. Key benefits of Inet's diagnostic products are:
- EASE OF USE. These products provide a multitude of easy-to-access
emulation and diagnostic functions. These capabilities allow testing and
troubleshooting personnel to quickly and effectively perform tasks that
would otherwise require lengthy set-up times and programming efforts.
- COMPREHENSIVE CAPABILITIES. The diagnostic product line provides
customers with the ability to monitor, emulate and generate signaling
data for use in troubleshooting, validation, conformance and regression
testing of switches and other network equipment. The load generation
capabilities and multiple emulation functions can test the various
layers of the signaling protocol, up to and including the signaling
information involved with complex applications, such as LNP.
- MULTIPLE PROTOCOL SUPPORT. The diagnostic products enable network
equipment manufacturers and communications carriers to perform
end-to-end testing of applications utilizing multiple signaling
protocols, such as country-specific variations of signaling. They
alleviate the need to use multiple diagnostic tools and provide easy and
consolidated access to test results.
- VERSATILE CONFIGURATION AND COMPATIBILITY WITH GEOPROBE. Inet offers
these products in a rack-mounted version that supports up to 16 links
and a portable version that supports up to eight links. The versatility
is enhanced by the product's portability as well as the ability to
integrate with the GeoProbe system.
Together, Inet's network optimization and diagnostic products represent
an integrated and comprehensive set of solutions for signaling network
design, monitoring, management, testing and diagnosis.
THE INET STRATEGY
Inet's objective is to be a leading provider of communications software
solutions for next-generation networks worldwide. Key elements of Inet's
strategy to achieve this objective include:
EXPAND GLOBAL MARKET SHARE. The Company is pursuing business in markets
throughout the world that are in the process of being deregulated or privatized.
The percentage of the Company's revenues attributable to international markets
were approximately 52% in 1999 and is expected to remain a
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substantial portion of the Company's revenues going forward. The Company
believes that its future growth and profitability require continued expansion
in international markets. Inet also selectively pursues incumbent carriers in
newly emerging markets and in advanced but monopolistic markets in order to
establish its presence in these markets prior to the time at which such a
market is deregulated or privatized. The Company intends to expand its
international presence by adding offices or distributors in key global
markets.
ACCELERATE DOMESTIC SALES AND INCREASE PENETRATION OF EXISTING CUSTOMER
BASE. Inet intends to seek additional revenue opportunities by working
closely with its installed customer base to identify opportunities for the
sale of additional GeoProbe systems, add-on business applications and other
new products. Based on experience with its existing customers, the Company
believes that achieving early widespread deployment of the GeoProbe in a
particular carrier's network provides significant ongoing opportunities for
sales of additional GeoProbe systems, add-on applications and new products.
The Company is expanding its domestic sales force in order to pursue
opportunities with its installed customer base, as well as first-time sales
to new customers.
ENHANCE TECHNOLOGY LEADERSHIP POSITION. The Company intends to maintain
its position as a technological leader in signaling network management and
associated business solutions. To accomplish this objective, the Company
intends to, among other things, continue investing in research and
development for both new product development and enhancements to its current
products.
EXPAND PRODUCT OFFERINGS. Inet believes that it has gained significant
expertise in signaling, Internet Protocol and broadband communications
technologies in the course of the design, development and implementation of
its current product offerings and through its work with its existing customer
base. The Company intends to leverage its core competency in signaling to
expand its current product offerings and to develop new product offerings for
complementary signaling environments such as IP, Asynchronous Transfer Mode
("ATM") and Internet telephony.
BUILD RELATIONSHIPS WITH STRATEGIC PARTNERS. Inet intends to build
strategic relationships with complementary software vendors and signaling
equipment manufacturers worldwide in order to integrate the Company's product
offerings with others' products and/or to create joint-marketing
opportunities. In addition, the Company intends to augment its sales efforts
by establishing and expanding relationships with other communications
equipment vendors, systems consulting and integration firms and network
management providers.
PRODUCTS
NETWORK OPTIMIZATION PRODUCTS
Inet's flagship product in the network optimization area is currently
the GeoProbe. The GeoProbe system contains the following key elements:
- A core hardware platform designed as a scalable, distributed, RISC-based
multi-processing data input/output platform, which captures network data
traffic and processes that data through multiple software applications.
- Advanced signaling network monitoring software applications.
- The Company's OpenSeven application programming interface ("API"), which
enables customers and third-party developers to customize and extend the
features of the system.
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- A suite of business software applications (called IT:seven) which enable
a carrier to leverage the data collected by the GeoProbe system to
achieve minutes-of-use interconnect billing, usage measurement billing,
customer quality assurance and service level performance monitoring. The
applications, which were introduced in late 1999, include GeoBill,
GeoConnect and GeoCare. The raw signaling data gathered from a carrier's
network is taken a step further via these applications to provide
support for potential revenue generating opportunities such as improved
interconnect billing or marketing/customer care information.
The GeoProbe system provides a network-wide view regardless of topology
or number of protocols in use. GeoProbe passively (i.e., non-intrusively)
monitors all messages that flow over each signaling link and can
automatically correlate these messages to reconstruct every session in a
carrier's network. This capability provides comprehensive session analysis
for troubleshooting, problem detection, and network integrity assurance. In
addition, the information collected by GeoProbe improves a carrier's ability
to optimize its network and provide enhanced services to its customers.
GeoProbe provides session data and network status information to users
via a graphical user interface ("GUI") and through Web-based reporting
applications. GeoProbe displays maps that represent network elements (e.g.,
SSPs, STPs, SCPs and Gateways). When failures or user-specified events occur,
an icon representing the affected network element changes to alert the user
to potential trouble or the occurrence of the failure or event. GeoProbe also
provides users with the flexibility to configure their system to set up
triggers (i.e., event detection), filters, alarms and statistics based on
their specific needs.
The GeoProbe platform contains three elements: SpIprobes, SpIstations
and SpIservers. This modular design accommodates growth in a carrier's
network and facilitates the implementation of enhanced features simply by
adding processor cards to the SpIprobes or deploying additional SpIstations.
GEOPROBE SOFTWARE APPLICATIONS. Inet has developed a number of software
applications for use with GeoProbe. These applications incorporate Oracle's
relational database and the X-Windows OSF/Motif toolkit. In addition, Inet's
OpenSeven API provides the carrier's personnel or a third-party software
developer with the ability to expand or customize existing applications or
develop new applications to meet their needs. Some of the applications
include:
- NETWORK SURVEILLANCE. Enables detection of faults, alarming, mass call
onset detection and other network related performance measurements.
- NETWORK MONITORING AND TROUBLESHOOTING. Provides network wide protocol
analysis and call trace functions for use in troubleshooting call and
transaction-related failures.
- SERVICE PERFORMANCE MONITORING. Provides performance measurement of a
number of services such as "800," freephone, LNP, roaming and other
Intelligent Network applications.
-IT:SEVEN GEOBILL. Interconnect billing application that presents data in
the form of Call Detail Records ("CDRs") and Usage Measurement ("UM") data
and feeds the data to the carrier's revenue center and/or billing system.
Also provides capability for special studies.
-IT:SEVEN GEOCONNECT. Interconnect billing application for auditing and
invoicing. Organizes data from CDRs into user-friendly reports that can be
used to support invoices received from other carriers.
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<PAGE>
-IT:SEVEN GEOCARE. Marketing and customer care application for dynamic
service and real-time customer management. Provides service level metrics
as well as data regarding interconnect performance and traffic management.
-FRAUD MANAGEMENT. Collects data and feeds it to real-time fraud detection
systems.
Pricing for a GeoProbe system varies based on a number of factors, such
as the amount of network traffic, network size, network configuration, number
of protocols present, and number and type of add-on applications. GeoProbe
system add-ons are priced according to similar metrics. Prices for GeoProbe
systems have ranged from approximately $350,000 to approximately $13 million.
Since 1995, the Company has sold GeoProbe systems to over 50 customers
worldwide.
DIAGNOSTIC PRODUCTS
Inet's diagnostic products, designed to serve either as stand-alone
tools or to be integrated with GeoProbe, provide communications carriers with
the ability to quickly and cost-effectively design, deploy and maintain their
networks. Currently, Inet's diagnostic products include Spectra and the
Spectra Trunk Tester. These products offer a wide array of filters, traps,
traces and other diagnostic capabilities. They also can be used by equipment
manufacturers in the design of new products through the extensive emulation
and conformance packages and their ability to simulate network conditions.
These multi-protocol diagnostic tools are targeted to the needs of
advanced IP, SS7/C7, PCS, GSM, IS-41, X.25 and ISDN networks and development
environments. They are designed for ease-of-use, with an intuitive user
interface featuring pop-up menus and single-keystroke commands. They can be
configured by the user to change message text and monitoring scenarios and to
save commonly used configurations, filters, tests and other settings for
quick setup. They translate complex signaling messages into plain language,
and the display format shows network statistics and test results in an
easy-to-understand format.
These products can be purchased in either a portable version, capable of
monitoring up to eight full-duplex links, or in a rack-mounted configuration
that can monitor up to 16 full-duplex links. Depending on configuration and
enhancements, prices for a unit generally have ranged from approximately
$15,000 to $150,000. Since the first diagnostic sale in 1990, over 3,000
units have been sold to over 400 customers worldwide.
PRODUCTS UNDER DEVELOPMENT
The Company utilizes a common standards-based open architecture approach
in the design of its products. This approach facilitates and accelerates the
development of new applications and products and permits the Company to
enhance existing products by substituting new hardware or software modules.
This modular approach also helps to extend the life cycles of the Company's
products, ensure compatibility among successive generations of products and
simplify the manufacturing process.
In terms of current product enhancements for the GeoProbe, the Company's
current and planned product development efforts include a high-speed link
interface module as well as the capability to monitor signaling in IP
networks. One of the enhancements being developed for the diagnostic product
line is a high-speed link interface.
In the area of new products, the Company has on-going product
development efforts to provide network optimization and interoperability
solutions between SS7 and IP networks in the form of the GeoGate platform and
associated applications. Initial applications on the GeoGate platform, which
will be
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<PAGE>
introduced in 2000, include an Internet Access softswitch solution that will
divert Internet traffic from the PSTN directly to the IP network as well as a
"security gateway" application that will ensure secure passage of information
between current and next-generation networks. The GeoGate is expected to
target applications that provide seamless communications software solutions
for integrated networks.
Products as complex as those currently under development by the Company
frequently are subject to delays, and there can be no assurance that the
Company will not encounter difficulties that could delay or prevent the
successful and timely development, introduction and marketing of these
potential new products. Moreover, even if such potential new products are
developed and introduced, there can be no assurance that they will achieve
any significant degree of market acceptance. Failure to release these or any
other potential new products on a timely basis, or failure of these or any
other potential new products, if and when released, to achieve any
significant degree of market acceptance, could have a material adverse effect
on the Company's business, financial condition and results of operations.
CUSTOMERS
As of December 31, 1999, the Company had sold versions of its products
to over 400 customers in more than 50 countries. In 1997, British Telecom
accounted for approximately 14% of the Company's revenues. Other than British
Telecom in 1997, no individual customer accounted for 10% or more of the
Company's revenues in 1999, 1998 or 1997. The Company's target customers
include communications carriers and equipment manufacturers throughout North
America, Latin America, EMEA and the Asia/Pacific region.
The following is a representative list of customers in various market
segments which have purchased in excess of $250,000 worth of the Company's
products since 1997. These customers collectively accounted for approximately
71%, 69% and 66% of the Company's revenues in 1999, 1998 and 1997,
respectively.
<TABLE>
<CAPTION>
LONG DISTANCE CARRIERS (IXCs) WIRELESS CARRIERS PTTs EQUIPMENT MANUFACTURERS
----------------------------- --------------------- ---------------- ------------------------
<S> <C> <C> <C>
AT&T Airtouch British Telecom Alcatel
MCI WorldCom Alltel Cable & Wireless Telcordia (Bellcore)
Sprint AT&T Wireless Deutsche Telekom Cisco
LOCAL EXCHANGE CARRIERS Bell Atlantic Mobile Eircom Ericsson
----------------------- Bell South Mobility KPN Telecom Lucent
Bell Atlantic CellularOne-Maryland Latvia PTT Motorola
Brooks Fiber Entel-Chile o.tel.o Nortel
Cincinnati Bell LA Cellular Portugal Telecom
Intermedia Communications Nextel Singapore Telecom
LDI PrimeCo SPT Telecom
NEXT GENERATION CARRIERS Startel Telecom Italia
------------------------ Swisscom Telia
Global Crossing Telebahia Telkom So. Africa
Williams Communications Western Wireless Telstra
</TABLE>
SALES, MARKETING AND SUPPORT
SALES AND MARKETING
The Company sells its products to communications carriers and equipment
manufacturers globally through both direct and indirect channels.
Domestically, the direct channel is used for all product lines with the
Company's sales force which is structured around a two-tier model: strategic
accounts and geographic areas. Internationally, the Company uses both
channels. GeoProbe is sold directly and in cooperation with system
integrators, distributors and consultants, while the diagnostic products are
sold primarily via distributors. The Company maintains six sales offices in
the U.S. and sales support facilities outside London, England and in
Frankfurt, Germany and Roissey, France.
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<PAGE>
Sales of the Company's products are made predominately to large
communications service providers and involve significant capital expenditures
and lengthy implementation processes. Prospective customers generally commit
significant resources to an evaluation of the Company's and its competitors'
products and require each vendor to expend substantial time, effort and money
educating the prospective customer about the value of the vendor's solutions.
Consequently, sales to this type of customer generally require an extensive
sales effort throughout the customer's organization and final approval by an
executive officer or other senior level employee. The Company frequently
experiences delays following initial contact with a prospective customer and
expends substantial funds and management effort pursuing these sales.
Additionally, delays associated with potential customers' internal approval
and contracting procedures, procurement practices, testing and acceptance
processes are common and may cause potential sales to be delayed or foregone.
As a result of these or other factors, the sales cycle for the Company's
products is long, typically ranging from six to 12 months for GeoProbe sales
(excluding the cycle for subsequent applications and enhancements, which
varies widely) and up to six months for occasional, large diagnostic product
sales. Accordingly, the Company's ability to forecast the timing and amount
of specific sales is limited, and the deferral or loss of one or more
significant sales could materially adversely affect operating results in a
particular quarter, particularly if there are significant sales and marketing
expenses associated with any deferred or lost sales.
The Company's primary marketing activities include raising potential
customer awareness of the benefits of actively managed signaling networks and
interoperability benefits as well as identification of new opportunities with
existing customers. To accomplish these tasks, Inet uses direct sales and
marketing efforts, advertising in trade magazines, exhibitions at industry
trade shows and presence on the Internet via the Company's website. These
activities focus on generating qualified sales leads and demonstration
opportunities for the Company's products.
The Company provides extensive training and support for its direct sales
force and its worldwide distributors, including classroom training, product
brochures, demonstration systems and promotional literature.
SERVICES, SUPPORT AND WARRANTY
The Company believes that customer service, support and training are
important to building and maintaining strong customer relationships. The
Company services, repairs and provides technical support for its products.
Support services include 24-hour technical support, remote access diagnostic
and servicing capabilities, installation support and advance replacements for
emergency situations. The extent and nature of customer interaction with the
support organization are shared with the sales organization via a common
database.
The Company maintains an in-house repair facility and provides on-going
telephone assistance to customers from its support center in Plano, Texas. In
addition, the Company services its customers in EMEA from product support
offices located outside London, England and in Frankfurt, Germany. As Inet's
customers become more geographically diverse, the Company may open service
centers in other key locations.
The Company typically warrants its products against defects in materials
and workmanship for one year after the sale and thereafter offers extended
service warranties.
The Company also provides varying levels of extended product support
under support services agreements. Support services agreements are typically
sold to customers for a one-year term and may be renewed for additional
one-year periods. Customers that do not renew their support services
agreements
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<PAGE>
but wish to obtain product updates and new version releases generally are
required to purchase such items from the Company at market prices.
RESEARCH AND DEVELOPMENT
The Company's product development efforts include expenditures for
research and development, new product design and enhancement of existing
products. Research and development expenses were $21.8 million, $15.7 million
and $9.7 million in 1999, 1998, and 1997, respectively.
The Company's primary development facilities are located at its Plano,
Texas headquarters. The Company believes that recruiting and retaining
highly-skilled, engineering personnel is essential to its success. To the
extent that the Company is not successful in attracting and retaining
qualified technical personnel, its business, financial condition and results
of operations could be materially adversely affected.
The Company's products are designed to comply with a significant number
of standards and regulations, some of which are evolving as new technologies
are deployed. For sales to customers in the U.S., the Company's products must
comply with various standards established by Telcordia (formerly Bellcore)
and the American National Standards Institute. Internationally, the Company's
products must comply with standards established by telecommunications
authorities in various countries as well as with recommendations of the
International Telecommunications Union and the European Telephone Standards
Institute. The failure of the Company's products to comply, or delays in
compliance, with the various existing and evolving standards could have a
material adverse effect on the Company's business and operating results.
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<PAGE>
MANUFACTURING
Inet's production process consists of procurement and inspection of
components, final assembly, burn-in, quality control testing and packaging.
Inet outsources the manufacturing of its hardware to a number of Texas-based
contract manufacturers. The Company has obtained ISO 9001 certification for
in-house processes and has obtained the CE certification for shipments to the
European Community.
Inet generally uses industry-standard components for its products which
are available from multiple sources. However, the Company's products
currently utilize certain semiconductors that are available from only one
manufacturer and other components that are available from a limited number of
suppliers. The Company attempts to minimize the need for sole and limited
source components by performing design reviews, prior to the manufacture of
any new product, during which the Company seeks to eliminate sole source
components. During manufacture, Inet forecasts annual parts usage and meets
with key vendors to obtain their commitment to meet forecast supply needs.
The Company periodically reevaluates the sources of components identified as
having potential delivery problems and the costs and benefits of redesigning
the Company's products to incorporate alternative components. If any sole or
limited source components should become unavailable, Inet believes that it
could design similar functionality into its product using other components.
COMPETITION
The market for signaling-based communications network management
applications is relatively new, intensely competitive, both in the U.S. and
internationally, and subject to rapid technological change, evolving industry
standards and regulatory developments. Competition is expected to persist,
intensify and increase in the future. The Company competes with a number of
U.S. and international suppliers that vary in size and in the scope and
breadth of the products and services offered. GeoProbe principally competes
with products offered by Agilent Technologies, a subsidiary of
Hewlett-Packard Company. The diagnostic tools principally compete with
products offered by Agilent Technologies, Tekelec and Tektronix, Inc. There
have been new entrants in both the network optimization and diagnostic
product areas, but to date they do not comprise a significant portion of the
market. Certain of the Company's competitors have, in relation to the
Company, longer operating histories, larger installed customer bases,
longer-standing relationships with customers, greater name recognition and
significantly greater financial, technical, marketing, customer service,
public relations, distribution and other resources.
The Company believes that its ability to compete successfully depends on
numerous factors, both within and outside the Company's control, including:
responsiveness to communications service providers' needs; the Company's
ability to support existing and new industry standards; the development of
technical innovations; the attraction and retention of qualified personnel;
regulatory changes; the quality, reliability and security of the Company's
and its competitors' products and services; sufficient market presence by the
Company; the ability to execute a strategy of rapid expansion; ease of use of
the Company's products; the pricing policies of the Company's competitors and
suppliers; the timing of introductions of new products and services by the
Company and its competitors; and general market and economic conditions.
PROPRIETARY RIGHTS
The Company's continued success is dependent in part upon its
proprietary technology. To protect its proprietary technology, the Company
relies on a combination of technical innovation, trade secret, copyright and
trademark laws, non-disclosure agreements and, to a lesser extent, patents,
each of which affords only limited protection. In addition, the laws of some
foreign countries do not protect the
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<PAGE>
Company's proprietary rights in the products to the same extent as do the
laws of the U.S. Moreover, although the Company holds two U.S. patents, has
additional patent applications pending and is in the process of preparing
additional patent applications for filing, there can be no assurance that the
Company will receive additional patents. Despite the measures taken by the
Company, it may be possible for a third party to copy or otherwise obtain and
use the Company's proprietary technology and information without
authorization. Policing unauthorized use of the Company's products is
difficult, and litigation may be necessary in the future to enforce the
Company's intellectual property rights. Any such litigation could be time
consuming and expensive to prosecute or resolve, result in substantial
diversion of management resources, and have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that the Company will be successful in protecting its
proprietary technology or that the Company's proprietary rights will provide
a meaningful competitive advantage to the Company.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in its products to perform key functions.
EMPLOYEES
As of December 31, 1999, the Company had 457 employees, of whom 236 were
engaged in research and development, 58 were engaged in sales and marketing,
63 were engaged in customer support services, 50 were engaged in
manufacturing and 50 were engaged in administrative and other business
support functions. The Company believes it has experienced good employee
relations to date.
ITEM 2. PROPERTIES.
The Company is headquartered in Plano, Texas, where it currently leases
approximately 109,000 square feet of office space. On January 27, 2000, the
Company signed a lease to replace the existing leases for its operations. The
new lease agreement expires on June 30, 2010. Beginning in July 2000, the
Company will occupy approximately 190,000 square feet of office space in
Richardson, Texas. The Company also leases sales offices in Colorado,
Georgia, Illinois, Maryland, Pennsylvania and Washington. Additionally, the
Company leases four international offices, two outside of London, England
which provide product and sales support, and sales support facilities in
Frankfurt, Germany and Roissey, France.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
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<PAGE>
The Company effected its initial public offering on May 26, 1999 at a
price of $16.00 per share. Since that date, the Company's common stock has
traded on the Nasdaq National Market under the symbol "INTI." Prior to May
26, 1999, there was no established public trading market for any of the
Company's securities.
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<PAGE>
The following table sets forth, for the periods indicated, the range of
high and low closing sales prices for the common stock as reported on the
Nasdaq National Market.
<TABLE>
<CAPTION>
FISCAL 1999 HIGH LOW
----------- ---- ---
<S> <C> <C>
Second Quarter (from May 26, 1999) $ 24.00 $ 16.00
Third Quarter 39.91 23.25
Fourth Quarter 70.25 32.75
</TABLE>
On March 1, 2000, the last reported sales price of the common stock was
$49.63 per share. As of March 1, 2000, there were approximately 174
stockholders of record (not including beneficial holders of stock held in
street name) of the Company's common stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its common stock and does
not intend to pay cash dividends on its common stock in the foreseeable
future. The Company's revolving credit facility restricts the payment of cash
dividends without the bank's consent. Future dividends, if any, will be
determined by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data below should be read in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Item 8, "Financial Statements and
Supplementary Data," included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues...............................................$ 109,983 $ 77,428 $ 57,701 $ 42,041 $ 17,531
Income from operations.................................. 34,752 24,153 19,096 13,288 2,239
Income before provision for income taxes................ 44,663 24,980 19,112 13,260 2,303
Net income.............................................. 29,701 17,085 12,714 8,936 1,659
Earnings per share (1):
Basic........................................$ 0.68 $ 0.42 $ 0.31 $ 0.22 $ 0.04
Diluted....................................... 0.66 0.40 0.30 0.22 0.04
Weighted average shares outstanding (1):
Basic......................................... 43,449 40,879 40,855 40,615 39,600
Diluted....................................... 45,037 42,452 41,722 41,069 41,207
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $127,903 $ 21,914 $ 3,386 $ 742 $ 181
Working capital......................................... 123,909 38,313 24,290 15,101 6,130
Total assets............................................ 169,917 65,508 38,758 27,105 18,641
Stockholders' equity.................................... 133,423 46,813 29,386 16,614 7,629
</TABLE>
- ----------
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<PAGE>
(1) See Note 1 in Notes to Consolidated Financial Statements for the
determination of shares used in computing basic and diluted earnings per
share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL
STATEMENTS OTHER THAN HISTORICAL FACT, INCLUDING, WITHOUT LIMITATION,
STATEMENTS ABOUT THE BUSINESS, FINANCIAL CONDITION, BUSINESS STRATEGY, PLANS
AND OBJECTIVES OF MANAGEMENT, AND PROSPECTS OF THE COMPANY ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE,
SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THESE EXPECTATIONS. SUCH
RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, FLUCTUATIONS IN
QUARTERLY FINANCIAL RESULTS, DEPENDENCE ON THE TELECOMMUNICATIONS INDUSTRY,
LENGTHY SALES CYCLES, PRODUCT CONCENTRATION, RELIANCE ON SIGNALING NETWORKS,
REGULATORY UNCERTAINTY, COMPETITION, DEPENDENCE ON KEY PERSONNEL, RAPID
TECHNOLOGICAL CHANGE, DEPENDENCE ON NEW PRODUCTS, INTERNATIONAL OPERATIONS,
POTENTIAL ACQUISITIONS, PROPRIETARY RIGHTS, PRODUCT LIABILITY, AND OTHER
RISKS INDICATED IN THIS FILING. THESE RISKS AND UNCERTAINTIES ARE BEYOND THE
ABILITY OF THE COMPANY TO CONTROL, AND IN MANY CASES, THE COMPANY CANNOT
PREDICT THE RISKS AND UNCERTAINTIES THAT COULD CAUSE ITS ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE INDICATED BY THE FORWARD-LOOKING STATEMENTS.
WHEN USED IN THIS DOCUMENT, THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE,"
"INTEND," "CONTINUE," "MAY," "WILL," "COULD" OR THE NEGATIVE OF SUCH TERMS
AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
OVERVIEW
Inet was founded in 1989, and during the early stages of its operations
it focused primarily on developing and selling diagnostic tools that
addressed a predecessor to the SS7 signaling protocol. As the
telecommunications industry increasingly adopted SS7, the Company shifted its
focus to developing and deploying SS7-based solutions as well as broadening
its product offerings. The diagnostic tool Spectra was first introduced in
December 1990 and is currently in its tenth generation release. Beginning in
1993, the Company focused a significant portion of its product development
efforts on developing a complete monitoring and surveillance solution for SS7
networks, culminating in the introduction of the GeoProbe in late 1995. The
Company continues to focus significant resources on the development of
enhancements to Spectra, enhancements and add-on applications to GeoProbe as
well as new products in the network optimization and interoperability areas
of next-generation networks.
Historically, the Company has generated substantially all of its
revenues from Spectra and GeoProbe. Revenues attributable to GeoProbe
represented a majority of total revenues in 1999 and 1998. Revenues
attributable to Spectra represented a majority of total revenues in 1997.
Although Inet expects Spectra revenues to continue to represent a significant
portion of total revenues for the foreseeable future, Spectra sales are
expected to continue to decline as a percentage of total revenues as a result
of increasing sales of GeoProbe and new products. The remaining revenues are
derived from sales of other products and training, warranty and support
services related to the Company's products.
Product revenues are generally recognized in the period the Company has
completed all hardware manufacturing and/or software development to
contractual specifications, factory testing has been completed, the product
has been shipped to the customer, the fee is fixed and determinable and
collection is considered probable by the Company's management. When the
Company has significant obligations subsequent to shipment (e.g.,
installation and system integration), revenues are not recognized prior to
the time the system has been delivered and installed at the customer's
premises and there are no significant
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<PAGE>
unfulfilled obligations. Revenues from arrangements that include significant
acceptance terms are not recognized until acceptance has occurred. Revenues
from product support services, including product support services included in
initial licensing fees, are recognized ratably over the contract period.
Post-contract support services included in the initial licensing fee are
allocated from the total contract amount based on the relative fair value
determined using vendor-specific objective evidence.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of revenues represented by certain items reflected in the
Company's consolidated statements of income:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues....................................... 100.0% 100.0% 100.0%
Cost of revenues............................... 28.9 28.9 27.4
----- ----- -----
Gross profit................................. 71.1 71.1 72.6
Operating expenses:
Research and development..................... 19.8 20.3 16.7
Sales and marketing.......................... 11.5 11.1 13.4
General and administrative................... 8.2 8.5 9.4
---- ----- -----
Total operating expenses............. 39.5 39.9 39.5
----- ----- -----
Income from operations......................... 31.6 31.2 33.1
Other income................................... 9.0 1.1 0.0
----- ----- -----
Income before provision for income taxes....... 40.6 32.3 33.1
Provision for income taxes..................... 13.6 10.2 11.1
----- ----- -----
Net income..................................... 27.0% 22.1% 22.0%
===== ===== =====
</TABLE>
REVENUES
Revenues increased 42.1% to $110.0 million in 1999 from $77.4 million in
1998, and increased 34.2% in 1998 from $57.7 million in 1997. The increases
were primarily due to increased unit sales of GeoProbe and Spectra during
both 1999 and 1998. Revenues from products other than Spectra and GeoProbe
collectively accounted for less than 10% of total revenues in all three
years. International revenues were 51.7%, 52.2% and 52.6% in 1999, 1998 and
1997, respectively. No individual country, other than the United States,
accounted for 10% or more of total revenues in 1999 and 1998. During 1997,
revenue from customers in the United Kingdom accounted for approximately 14%
of total revenues. No individual customer accounted for 10% or more of total
revenues in 1999 and 1998. During 1997, revenues from British Telecom
accounted for approximately 14% of total revenues. The Company anticipates
that in the future, individual, large transactions may represent a large
percentage of revenues, particularly on a quarterly basis.
COST OF REVENUES
Cost of revenues consists primarily of hardware expenses and personnel
costs related to the manufacturing, installation and support of the Company's
products. Cost of revenues were $31.8 million, $22.4 million, and $15.8
million, representing 28.9%, 28.9% and 27.4% of revenues in 1999, 1998, and
1997, respectively. The increase in absolute dollars during both 1999 and
1998 primarily resulted from additional hardware costs associated with
increased unit sales, related installation expenses, and additional support
costs. New product offerings or changes in the Company's product mix can
affect the cost of revenues as a percentage of revenues. The Company believes
that at least through 2000 cost of revenues should not vary significantly as
a percentage of revenues from the level experienced in 1999.
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<PAGE>
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
primarily consist of salaries and other related expenses associated with the
Company's research and development activities. Such expenses were $21.8
million, $15.7 million, and $9.7 million, representing 19.8%, 20.3% and 16.7%
of revenues in 1999, 1998, and 1997, respectively. The increase in absolute
dollars in 1999 compared to 1998 was primarily related to increased staffing
dedicated to research and development activities and increased expenses
associated with materials and equipment used in research and development
activities. The decrease as a percentage of revenues in 1999 compared to 1998
was partially attributable to the decrease in research and development
expenses associated with the wireless data asset product line, which was sold
in September 1999, as well as relatively higher revenues of the Company. The
increases in absolute dollars and as a percentage of revenues in 1998
compared to 1997 were primarily attributable to increased staffing dedicated
to research and development activities. The Company expects that research and
development expenses in future periods will increase in absolute dollars and
as a percentage of revenues as these investments are crucial to the Company's
ability to evolve its technologies and expand its product offerings to meet
its customers' needs.
Software development costs are expensed as incurred until technological
feasibility has been established, at which time subsequent costs are
capitalized until the product is available for general release to customers.
To date, either the establishment of technological feasibility of the
Company`s products and their general release have substantially coincided or
costs incurred subsequent to the achievement of technological feasibility
have not been material. As a result, software development costs qualifying
for capitalization have been insignificant, and the Company has not
capitalized any software development costs.
SALES AND MARKETING EXPENSES. Sales and marketing expenses primarily
consist of personnel and travel expenses related to sales and marketing,
distributor commissions and expenses of trade shows and advertising. Such
expenses were $12.6 million, $8.6 million, and $7.7 million, representing
11.5%, 11.1% and 13.4% of revenues in 1999, 1998, and 1997, respectively. The
increase in absolute dollars in 1999 compared to 1998 was attributable to the
continued expansion of the Company's direct sales force, continued investment
in expansion of international sales activities, and increased marketing and
promotion activities. The increase in absolute dollars in 1998 compared to
1997 was primarily attributable to increased staffing and related expenses as
the Company established new domestic sales offices and increased marketing
and promotional activities. The decrease as a percentage of revenues during
1998 was primarily attributable to relatively higher revenues. The Company
believes that sales and marketing expenses will continue to increase in
absolute dollars and as a percentage of sales at least through 2000 due to
planned expansion of its domestic and international sales and marketing
efforts and related expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
primarily consist of personnel, facilities and other costs of the finance,
administrative and executive departments of the Company as well as fees and
expenses associated with legal and accounting requirements. Such expenses
were $9.0 million, $6.6 million, and $5.4 million, representing 8.2%, 8.5%
and 9.4% of revenues in 1999, 1998, and 1997, respectively. The increase in
absolute dollars in 1999 compared to 1998 was primarily attributable to
increased staffing costs associated with the growth of the Company and
increased accounting and professional fees related to being a public company.
The increase in absolute dollars in 1998 compared to 1997 was primarily
attributable to increased staffing costs. General and administrative expenses
decreased as a percentage of revenues during 1999 and 1998 primarily due to
relatively higher revenues and the Company's ability to leverage its base of
resources to support a larger organization. The Company anticipates that
general and administrative expenses will continue to increase in absolute
dollars as the Company continues to support its growth by adding necessary
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infrastructure. However, the Company does not expect general and
administrative expenses to grow at the same rate as revenues.
OTHER INCOME
Other income was $9.9 million, $827,000 and $16,000 in 1999, 1998 and
1997, respectively. For 1999, the increase primarily resulted from two
factors, a $5.9 million gain on the sale of the Company's wireless data
assets and an increase in interest income due to higher balances of cash and
cash equivalents. In general, the increase in cash and cash equivalents
resulted from proceeds from the Company's initial public offering completed
in June 1999, increased cash flows from operations, and proceeds from the
sale of the Company's wireless data assets. Proceeds from the offering were
approximately $55.7 million in cash, net of underwriting discounts,
commissions and other offering costs. For 1998, the increase resulted from
increased interest income due to higher balances of cash and cash equivalents
resulting from increased cash flow from operations.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $15.0 million, $7.9 million
and $6.4 million in 1999, 1998 and 1997, respectively. The Company's
effective income tax rates were 33.5%, 31.6% and 33.5% in 1999, 1998 and
1997, respectively. The lower effective tax rate in 1998 was primarily the
result of state tax benefits realized in 1998.
SALE OF WIRELESS DATA ASSETS
In September 1999, the Company sold its wireless data product line and
related assets to Nextcell, Inc., an entity controlled by a related party,
for a cash purchase price of $7.0 million. The Company recorded a pre-tax
gain of $5.9 million and an after-tax gain of $3.9 million, or $0.09 per
share on a diluted basis, for 1999. Without the gain on the sale of the
wireless data assets, the Company's diluted earnings per share were $0.57 for
1999 compared to $0.40 for 1998. Revenues from the wireless data product line
were approximately $1.7 million for the year ended December 31, 1999.
SALE OF INET GLOBAL RESEARCH, L.L.C.
Effective January 1, 2000, the Company sold its membership interest in
Inet Global Research, L.L.C., to an entity controlled by a related party, for
a cash purchase price of $82,000. No gain or loss was recorded for the sale.
The Company intends to enter into an agreement whereby this entity will
perform contract services for the Company.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations and met its
capital expenditure requirements primarily through cash flows from operations
and bank borrowings. The Company had working capital of $123.9 million at
December 31, 1999, compared with $38.3 million at December 31, 1998. At
December 31, 1999, the Company had $127.9 million in cash and cash
equivalents, an increase of $106.0 million from $21.9 million in cash and
cash equivalents at December 31, 1998. In June 1999, the Company completed
the initial public offering of its common stock. The Company issued 3,841,479
shares of its common stock at an initial public offering price of $16.00 per
share. Net proceeds to the Company, after deduction of the underwriting
discount and expenses, were approximately $55.7 million. The increase in cash
and cash equivalents is also partially attributable to higher levels of
income from operations, proceeds from the sale of its wireless data assets,
and increased deferred revenue.
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The Company has available a line of credit facility with a bank
providing for borrowings of up to $10.0 million which expires June 15, 2000.
Up to $5.0 million may be utilized to support letters of credit. The per
annum usage fee on unused portions of the line is 0.125%. Borrowings under
this facility bear interest payable quarterly at LIBOR plus 1.5% (7.5% at
December 31, 1999) and are collateralized by the Company's accounts
receivable, inventories, and property and equipment. The credit facility
includes covenants requiring the Company to maintain certain financial ratios
and restricts the payment of cash dividends without the bank's consent. At
December 31, 1999, no letters of credit or borrowings were outstanding under
the credit facility, and the amount available to the Company was $10.0
million.
Cash provided by operating activities was $48.1 million, $24.5 million
and $7.8 million in 1999, 1998 and 1997, respectively. Operating cash flows
in 1999 increased primarily due to increased levels of net income, an
increase in deferred revenue and an increase in accrued compensation and
benefits. Operating cash flows in 1998 increased primarily due to increased
levels of net income, an increase in deferred revenue and a decrease in
unbilled receivables, partially offset by an increase in trade accounts
receivable. Cash provided by investing activities was $1.8 million in 1999
compared to cash used in investing activities of $6.0 million and $3.8
million 1998 and 1997, respectively. Net cash provided by investing
activities in 1999 resulted from proceeds from the sale of the Company's
wireless data assets of $7.0 million less cash used to purchase property and
equipment of $5.2 million. Net cash used in investing activities in 1998 and
1997 was primarily related to purchases of property and equipment. Financing
activities provided cash of $56.1 million and $9,000 in 1999 and 1998,
respectively. Net cash used in financing activities was $1.4 million in 1997,
which was attributable to repayments of borrowings under the Company's line
of credit facility. The increase in net cash provided by financing activities
in 1999 resulted primarily from proceeds from the Company's initial public
offering.
The Company may in the future pursue acquisitions of businesses,
products or technologies, or enter into joint venture arrangements, that
could complement or expand the Company's business and product offerings. Any
material acquisition or joint venture could result in a decrease in the
Company's working capital depending on the amount, timing and nature of the
consideration to be paid.
The Company believes that current cash balances, potential cash flows
from operations and available borrowings under its line of credit facility
will be sufficient to meet its anticipated cash needs for working capital,
capital expenditures and other activities for at least the next 12 months.
Thereafter, if current sources are not sufficient to meet the Company's
needs, it may seek additional equity or debt financing. In addition, any
material acquisition of complementary businesses, products or technologies or
material joint venture could require the Company to obtain additional equity
or debt financing. There can be no assurance that such additional financing
would be available on acceptable terms, if at all.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its Year
2000 project. As a result of the Company's efforts, the Company experienced
no significant disruptions related to Year 2000. The Company is not aware of
any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of suppliers.
The incremental costs related to the Year 2000 project were not material to
the Company's results of operations, financial position or cash flows. The
Company will continue to monitor throughout the year 2000 its critical
computer applications, and those of its suppliers, to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
RISK FACTORS
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THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND THE TIMING OF
CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN OR
CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS,
INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH BELOW AND ELSEWHERE IN THIS
REPORT. IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING
FACTORS, WHICH MAY AFFECT THE COMPANY'S CURRENT POSITION AND FUTURE
PROSPECTS, SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND AN
INVESTMENT IN ITS COMMON STOCK.
FLUCTUATIONS IN QUARTERLY FINANCIAL RESULTS
The Company's quarterly operating results have varied significantly in
the past and are likely to vary significantly from quarter to quarter in the
future based on a number of factors, many of which are outside the Company's
control. Such factors include the size and timing of specific orders by
customers; competition; the market acceptance of new products and
technologies by the Company and its competitors; the mix of products and
services sold by the Company; the timing of product shipments and product
installations by the Company; in limited circumstances, customer product
acceptance; the capital spending patterns of the Company's customers; the mix
of domestic and international sales; changes in the timing and level of
expenses; the relative percentages of products sold through the Company's
direct and indirect sales channels; customer order deferrals in anticipation
of enhancements or new products; the Company's timing of and investments in
research and development activities; changes in and the Company's ability to
implement its strategy; changes in the availability of materials needed to
produce the Company's products; the progress and timing of the privatization
of telecommunications markets and the worldwide deregulation of the
international telecommunications industry; defects and product quality
problems; intellectual property disputes; expansion of and risks associated
with the Company's international operations; and changes in general economic
conditions. Furthermore, a large portion of the Company's operating expenses,
including rent and salaries, are set based upon expected future revenues.
Accordingly, if revenues are below expectations, the Company's operating
results are likely to be adversely and disproportionately affected because
such operating expenses are not variable in the short term, and cannot be
quickly reduced to respond to unanticipated decreases in revenues.
The amount of revenues associated with particular product sales can vary
significantly. The deferral or loss of one or more individually significant
sales could materially adversely affect operating results in a particular
quarter.
The Company's operating results are also likely to fluctuate due to
factors which impact prospective customers of the Company. Expenditures by
prospective customers tend to vary in cycles that reflect overall economic
conditions and individual budgeting and buying patterns. The Company's
business would be adversely affected by a decline in the economic prospects
of its customers or the economy generally, which could alter current or
prospective customers' capital spending priorities or budget cycles or extend
the Company's sales cycle with respect to certain customers. In addition, the
Company's operating results historically have been influenced by certain
seasonal fluctuations, with revenues tending to be strongest in the fourth
quarter of each year. The Company believes that this seasonality has been due
to the capital appropriation practices of many of its customers. The Company
expects that in future periods this seasonal trend may cause first quarter
revenues to remain consistent with, or decrease from, the level achieved in
the preceding quarter.
As a result of all of the foregoing, the Company believes that future
operating results are likely to vary significantly from quarter to quarter,
and historical operating results should not be relied upon as any indication
of future performance. Moreover, there can be no assurance that the Company's
revenues will grow in future periods or that the Company will remain
profitable. In addition, in some future quarters the Company's operating
results may be below the expectations of public market analysts. In such
event, the market price of the common stock could likely be materially and
adversely affected.
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DEPENDENCE ON TELECOMMUNICATIONS INDUSTRY
The Company has derived substantially all of its revenues from sales of
products and related services to the telecommunications industry. The
telecommunications industry has undergone a period of rapid growth and
consolidation during the past few years. The Company's business, financial
condition and results of operations could be materially adversely affected in
the event of a significant slowdown in the growth of this industry. Further,
consolidations of prospective customers of the Company may delay or cause
cancellations of significant sales of the Company's products, which could
materially adversely affect the Company's operating results in a particular
period.
REGULATORY UNCERTAINTIES
Future growth in the markets for the Company's products will depend in
part on privatization and deregulation of certain telecommunications markets
worldwide. Any reversal or slowdown in the pace of this privatization or
deregulation could have a material adverse effect on the markets for the
Company's products. Moreover, the consequences of deregulation are subject to
many uncertainties, including judicial and administrative proceedings that
affect the pace at which the changes contemplated by deregulation occur, and
other regulatory, economic and political factors. Any invalidation, repeal or
modification of the requirements imposed by the Telecommunications Act of
1996 or the local telephone competition rules adopted by the U.S. Federal
Communications Commission to implement that Act could have a material adverse
effect on the Company's business, financial condition and results of
operations. Furthermore, the uncertainties associated with deregulation have
in the past and could in the future cause customers of the Company to delay
purchasing decisions pending the resolution of such uncertainties.
LENGTHY SALES CYCLE
The sales cycle for the Company's products is long, typically ranging
from six to 12 months for GeoProbe sales (excluding the cycle for subsequent
applications and enhancements, which varies widely) and up to six months for
occasional, large Spectra sales. Accordingly, the Company's ability to
forecast the timing and amount of specific sales is limited, and the deferral
or loss of one or more significant sales could materially adversely affect
operating results in a quarter, particularly if there are significant sales
and marketing expenses associated with the deferred or lost sales.
PRODUCT CONCENTRATION; RELIANCE ON SIGNALING NETWORKS
The Company's two principal products, GeoProbe and Spectra, generated
substantially all of the Company's revenues in 1999, 1998, and 1997 and are
expected to continue to account for a substantial majority of the Company's
revenues for the foreseeable future. Any downturn in the demand for either or
both of such products could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, there can
be no assurance that the Company will be successful in developing any other
products or taking any other steps to reduce the risk associated with any
slowdown in demand for GeoProbe and Spectra.
Inet's future operating results are dependent in significant part on the
continued viability and expansion of SS7 signaling networks and the
convergence of the IP networks and the PSTN. The Company's business,
financial condition and results of operations could be materially adversely
affected if the market for SS7 and converging network solutions fails to grow
or grows more slowly than the Company currently anticipates.
COMPETITION
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The market for signaling-based communications network management
applications is relatively new, intensely competitive, both in the U.S. and
internationally, and subject to rapid technological change, evolving industry
standards and regulatory developments. Competition is expected to persist,
intensify and increase in the future. The Company competes with a number of
U.S. and international suppliers that vary in size and in the scope and
breadth of the products and services offered. GeoProbe principally competes
with products offered by Agilent Technologies, a subsidiary of
Hewlett-Packard Company. The diagnostic tools principally compete with
products offered by Agilent Technologies, Tekelec and Tektronix, Inc. There
have been new entrants in both the network optimization and diagnostic
product areas, but to date they do not comprise a significant portion of the
market. Certain of the Company's competitors have, in relation to the
Company, longer operating histories, larger installed customer bases,
longer-standing relationships with customers, greater name recognition and
significantly greater financial, technical, marketing, customer service,
public relations, distribution and other resources. Additionally, it is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share. As a result, such competitors may
be able to more quickly develop or adapt to new or emerging technologies and
changes in customer requirements, or devote greater resources to the
development, promotion and sale of their products. Increased competition is
likely to result in price reductions, reduced margins and loss of market
share. There can be no assurance that competitive pressures faced by the
Company will not materially adversely affect its business, financial
condition and results of operations.
NEED TO MANAGE GROWTH AND EXPANSION
The Company has experienced rapid and significant growth that has
placed, and is expected to continue to place, a significant strain on the
Company's management, information systems and operations. For example, the
Company's revenues have increased from $17.5 million in 1995 to $110.0
million in 1999. The number of employees has increased from 116 at December
31, 1995 to 457 at December 31, 1999. The Company's ability to effectively
manage significant additional growth will require it to improve its
financial, operational and management information and control systems and
procedures and to effectively attract, train, motivate and manage its
employees. The failure to manage growth effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company anticipates that continued growth, if any, will require it
to recruit and hire a substantial number of new employees, particularly sales
and marketing personnel and technical personnel with signaling and IP
knowledge and experience, both in the U.S. and internationally. Competition
for such personnel is intense, and the Company has at times experienced
difficulty in recruiting qualified personnel. The Company historically has
filled a portion of its new personnel needs with non-U.S. citizens holding
temporary work visas that allow such persons to work in the U.S. for only a
limited period of time. Accordingly, any change in U.S. immigration policy
limiting the issuance of temporary work visas could adversely affect the
Company's ability to recruit new personnel. Furthermore, the addition of
significant numbers of new personnel requires the Company to incur
significant start-up expenses, including procurement of office space and
equipment, initial training costs and low utilization rates of new personnel.
There can be no assurance that the Company will successfully recruit
additional personnel as needed or that the start-up expenses incurred in
connection with the hiring of additional personnel could not materially
adversely affect the Company's future operating results.
DEPENDENCE ON KEY PERSONNEL
The Company's future success will depend to a significant extent upon
the continued service and performance of a relatively small number of key
senior management, technical personnel, sales and
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marketing personnel, none of whom is bound by an employment agreement. The
Company's success also depends upon its ability to continue to attract,
motivate and retain other highly qualified personnel, particularly personnel
with signaling and IP knowledge and experience. The loss of any existing key
personnel or the inability to attract, motivate and retain additional
qualified personnel could have a material adverse effect on the Company's
business, financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON NEW PRODUCTS
The market for the Company's products is characterized by rapid
technological advances, evolving industry and customer-specific protocol
standards, changes in customer requirements and frequent new product
introductions and enhancements. The introduction of communications network
management products involving superior technologies or the evolution of
alternative technologies or new industry protocol standards could render the
Company's existing products, as well as products currently under development,
obsolete and unmarketable. The Company believes its future success will
depend in part upon its ability, on a timely and cost-effective basis, to
continue to: enhance the network optimization and diagnostic products;
develop and introduce new products for the communications network management
market and other markets; address evolving industry protocol standards and
changing customer needs; and achieve broad market acceptance for its
products. There can be no assurance the Company will achieve these objectives.
The Company's future success will also depend in part on the Company's
ability to develop solutions for networks based on emerging technologies
(e.g., Asynchronous Transfer Mode and Internet telephony) which are likely to
be characterized by continuing technological developments, evolving industry
standards and changing customer requirements. There can be no assurance that
the Company will successfully develop competitive products for these emerging
technologies, and the failure to do so could have a material adverse effect
on the Company's business, financial condition and results of operations.
INTERNATIONAL OPERATIONS
Revenues from customers located outside of the U.S. represented 51.7%,
52.2% and 52.6% of the Company's revenues in 1999, 1998 and 1997,
respectively. Inet believes that continued growth and profitability will
require expansion of its sales efforts in international markets. This
expansion may be costly and time-consuming and may not generate returns for a
significant period of time, if at all. The Company's international operations
are subject to various risks inherent in international operations, including:
management of geographically dispersed operations; longer accounts receivable
payment cycles; the ability to establish relationships with government-owned
or subsidized communications providers; general economic conditions in each
country; currency controls and exchange rate fluctuations; seasonal
reductions in business activity particular to certain markets; loss of
revenues, property and equipment from expropriation, nationalization, war,
insurrection, terrorism and other political risks; foreign taxes and the
overlap of different tax structures; greater difficulty in safeguarding
intellectual property; import and export licensing requirements; trade
restrictions; and involuntary renegotiation of contracts with foreign
governments and communications carriers. International expansion of the
Company's business will require significant management attention and
financial resources. Moreover, in order to further expand internationally,
the Company may be required to establish relationships with additional
distributors and third-party integrators. There can be no assurance that the
Company will effectively establish such relationships. If international
revenues are not adequate to offset the additional expense of expanding
international operations, the Company's business, financial condition and
results of operations could be materially adversely affected.
To date, international sales have been denominated solely in U.S.
dollars, and accordingly the Company has not been exposed to fluctuations in
non-U.S. currency exchange rates. As a result, the
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Company's revenues in international markets may be adversely affected by a
strengthening U.S. dollar. However, the Company expects that in future
periods a portion of international sales may be denominated in currencies
other than U.S. dollars, thereby exposing the Company to gains and losses on
non-U.S. currency transactions. The Company may choose to limit such exposure
by entering into various hedging strategies. There can be no assurance that
any such hedging strategies undertaken by the Company could be successful in
avoiding exchange-related losses.
DEPENDENCE ON SOLE AND LIMITED SOURCE SUPPLIERS; DEPENDENCE ON SUBCONTRACTORS
AND LICENSED TECHNOLOGY
At present, the Company's products utilize certain semiconductors that
are available from only one manufacturer and other components that are
available from a limited number of suppliers. While alternative suppliers
have been identified for certain key components, those alternative sources
have not been qualified by the Company. The Company's qualification process
could be lengthy, and there can be no assurance that additional sources would
become available to the Company on a timely basis, or if such sources were to
become available, that the components would be comparable in price and
quality to the Company's current components. The Company has no long-term
agreements with its suppliers and generally makes its purchases with purchase
orders on an "as-needed basis." Furthermore, certain components require an
order lead-time of approximately six months. Other components that currently
are readily available may become difficult to obtain in the future.
Accordingly, the Company makes advance purchases of certain components in
relatively large quantities to ensure that it has an adequate and readily
available supply. The Company's failure to order sufficient quantities of
these components sufficiently in advance of product delivery deadlines could
prevent the Company from adequately responding to unanticipated increases in
customer orders. In the past, the Company has experienced delays in the
receipt of certain of its key components, which have resulted in delays in
product deliveries. The inability to obtain sufficient key components as
required or to develop alternative sources if and as required in the future
could result in delays or reductions in product shipments or increases in
product costs, which in turn could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company relies exclusively upon third-party subcontractors to
manufacture its subassemblies. The Company has also retained, from time to
time, third-party design services in the development of application-specific
integrated circuits. The Company's reliance on third-party subcontractors
involves a number of risks, including the potential absence of adequate
capacity, the unavailability of or interruption in access to certain process
technologies, and reduced control over product quality, delivery schedules,
manufacturing yields and costs. Any disruption in the Company's relationships
with third-party subcontractors and the Company's inability to develop
alternative sources if and as required in the future could result in delays
or reductions in product shipments or increases in product costs, which in
turn could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in its products to perform key functions. The
inability to maintain any such software licenses on commercially reasonable
terms could result in shipment delays or reductions until equivalent software
could be developed or licensed and integrated into the Company's products,
which could materially adversely affect the Company's business, financial
condition and results of operations.
POTENTIAL ACQUISITIONS
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The Company may in the future pursue acquisitions of businesses,
products and technologies, or the establishment of joint venture
arrangements, that could expand the Company's business. The negotiation of
potential acquisitions or joint ventures as well as the integration of an
acquired or jointly developed business, technology or product could cause
diversion of management's time and resources. Future acquisitions and joint
ventures by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities,
amortization of goodwill and other intangibles, research and development
write-offs and other acquisition-related expenses. Further, no assurance can
be given that any acquisition or joint venture will be successfully
integrated with the Company's operations. If any such acquisition or joint
venture were to occur, there can be no assurance that the Company will
receive the intended benefits of the acquisition or joint venture.
PROPRIETARY RIGHTS
The communications industry is characterized by the existence of a large
number of patents and frequent allegations of patent infringement. The
Company has received, and may receive in the future, notices from holders of
patents that raise issues as to possible infringement by the Company's
products. As the number of communications network management products
increases and the functionality of these products further overlaps, the
Company believes that it may become increasingly subject to allegations of
infringement. To date, the Company has engaged in correspondence with
third-party holders of patents as a result of two such notices. The Company
believes that its products do not infringe any valid patents cited in the
notices received. However, questions of infringement and the validity of
patents in the field of communications signaling technologies involve highly
technical and subjective analyses. There can be no assurance that any such
patent holders or others will not in the future initiate legal proceedings
against the Company or that, if any such proceedings were initiated, the
Company could be successful in defending against such proceedings. Any such
proceeding could be time consuming and expensive to defend or resolve, result
in substantial diversion of management resources, cause product shipment
delays, or force the Company to enter into royalty or license agreements
rather than dispute the merits of any such proceeding initiated against the
Company. There can be no assurance that any such royalty or license
agreements could be available on terms acceptable to the Company, if at all.
Any such claims against the Company, with or without merit, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's continued success is dependent in part upon its
proprietary technology. To protect its proprietary technology, the Company
relies on a combination of technical innovation, trade secret, copyright and
trademark laws, non-disclosure agreements and, to a lesser extent, patents,
each of which affords only limited protection. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights in the
products to the same extent as do the laws of the U.S. Despite the measures
taken by the Company, it may be possible for a third party to copy or
otherwise obtain and use the Company's proprietary technology and information
without authorization. Policing unauthorized use of the Company's products is
difficult, and litigation may be necessary in the future to enforce the
Company's intellectual property rights. Any such litigation could be time
consuming and expensive to prosecute or resolve, result in substantial
diversion of management resources, and have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that the Company will be successful in protecting its
proprietary technology or that the Company's proprietary rights will provide
a meaningful competitive advantage to the Company.
PRODUCT LIABILITY
Products as complex as those offered by the Company may contain
undetected defects or errors when first introduced or as enhancements are
released that, despite testing by the Company, are not discovered until after
a product has been installed and used by customers, which could result in
delayed market
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acceptance of the product or damage to the Company's reputation and business.
To date, the Company has not been materially adversely affected by products
containing defects or errors. The Company attempts to include provisions in
its agreements with customers that are intended to limit the Company's
exposure to potential liability for damages arising out of defects or errors
in or the use of the Company's products. However, the nature and extent of
such limitations tend to vary from customer to customer and it is possible
that such limitations may not be effective as a result of unfavorable
judicial decisions or laws enacted in the future. Although the Company has
not experienced any product liability suits to date, the sale and support of
the Company's products entails the risk of such claims. Any product liability
claim brought against the Company, regardless of its merit, could result in
material expense to the Company, diversion of management time and attention,
and damage to the Company's business reputation and its ability to retain
existing customers or attract new customers.
CONTROL BY PRINCIPAL STOCKHOLDERS
As of December 31, 1999, the Company's three founders, Samuel S.
Simonian, Elie S. Akilian and Mark A. Weinzierl beneficially owned
approximately 83% of the outstanding shares of common stock. Consequently,
two or more of such individuals, acting together, could control the outcome
of all matters submitted for stockholder action, including the election of
the Board of Directors of the Company and the approval of significant
corporate transactions, and could effectively control the management and
affairs of the Company, which could have the effect of delaying or preventing
a change in control of the Company. In addition, Messrs. Simonian, Akilian
and Weinzierl constitute three of the six members of the Board of Directors
and could have significant influence in directing the actions taken by the
Board.
SECURITY
The Company has included security features in certain of its products
that are intended to protect the privacy and integrity of customer data.
Despite the existence of these security features, the Company's products may
be vulnerable to breaches in security due to defects in the security
mechanisms, as well as vulnerabilities inherent in the operating system or
hardware platform on which the product runs, and/or the networks linked to
that platform. Security vulnerabilities, regardless of origin, could
jeopardize the security of information stored in and transmitted through the
computer systems of the Company's customers. Solving any security problems
may require significant capital expenditures and could adversely affect the
Company's reputation and product acceptance which, in turn, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of discouraging, delaying or preventing a change
in control of the Company or unsolicited acquisition proposals that a
stockholder may consider favorable, including: provisions authorizing the
issuance of "blank check" preferred stock; providing for a classified Board
of Directors with staggered three-year terms; prohibiting cumulative voting
in the election of directors; requiring super-majority voting to effect
certain amendments to the Certificate of Incorporation and Bylaws; limiting
the persons who may call special meetings of stockholders; prohibiting
stockholder action by written consent; and establishing advance notice
requirements for nominations for election to the Board of Directors or for
proposing matters that can be acted upon at stockholders meetings. Certain
provisions of Delaware law and the Company's stock incentive plans may also
have the effect of discouraging, delaying or preventing a change in control
of the Company or unsolicited acquisition proposals.
POSSIBLE VOLATILITY OF STOCK PRICE
Page 30
<PAGE>
The market price of our common stock has been, and is likely to continue
to be, highly volatile and may be significantly affected by factors such as
variations in the Company's results of operations; future sales of common
stock; the announcement of technological innovations or new products by the
Company, its competitors and others; market analysts' estimates of the
Company's performance; and general market conditions. The public markets have
experienced volatility that has particularly affected the market prices of
securities of many technology companies for reasons that have often been
unrelated to operating results. Such volatility may adversely affect the
market price of the common stock and the Company's visibility and credibility
in its markets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to immaterial levels of market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the consolidated financial statements of the Company included herein
and listed under the heading "(a) (1) Consolidated Financial Statements" of
Part IV Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Page 31
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information called for by Item 10 will be set forth under the caption
"ELECTION OF DIRECTORS" in the Company's definitive Proxy Statement for the
2000 Annual Meeting of Stockholders, which will be filed not later than 120
days after the end of the fiscal year ended December 31, 1999, and is
incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information called for by Item 11 will be set forth under the caption
"EXECUTIVE COMPENSATION" in the Company's definitive Proxy Statement for the
2000 Annual Meeting of Stockholders, which will be filed not later than 120
days after the end of the fiscal year ended December 31, 1999, and is
incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information called for by Item 12 will be set forth under the caption
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the
Company's definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders, which will be filed not later than 120 days after the end of
the fiscal year ended December 31, 1999, and is incorporated herein by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by Item 13 will be set forth under the caption
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the Company's definitive
Proxy Statement for the 2000 Annual Meeting of Stockholders, which will be
filed not later than 120 days after the end of the fiscal year ended December
31, 1999, and is incorporated herein by this reference.
Page 32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Consolidated Financial Statements
<TABLE>
<S> <C>
Report of Independent Auditors...................................................................... F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998........................................ F-2
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997.............. F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999,
1998 and 1997.................................................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997.................................................................................... F-5
Notes to Consolidated Financial Statements.......................................................... F-6
Report of Independent Auditors...................................................................... S-1
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1999,
1998 and 1997.................................................................................... S-2
</TABLE>
(2) Financial Statement Schedules
The schedule listed in the Index to Financial Statements and Schedule
included in the Table of Contents on page 1 is filed as part of this
report. Other schedules have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or the notes thereto.
(3) Exhibits
The following Exhibits are incorporated herein by reference or are
filed with this report as indicated below. The exhibits filed with this
report have been included only with the copy filed with the Securities
and Exchange Commission. Copies of exhibits will be furnished, upon
request, subject to payment of a reasonable fee to reimburse Inet
Technologies, Inc. for reproduction costs.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1* Certificate of Incorporation (filed as Exhibit 3.1
to the registrant's Registration Statement on Form
S-1 (Reg. No. 333-59753) (the "Form S-1"))
3.2* Amended and Restated Bylaws (filed as Exhibit 3.2
to the Form S-1)
4.1* Specimen Common Stock certificate (filed as
Exhibit 4.1 to the Form S-1)
4.2* See Exhibits 3.1 and 3.2 for provisions of the
Certificate of Incorporation and Bylaws of the
registrant defining the rights of holders of
common stock
10.1* Lease dated as of May 1, 1996 by and among Pitman
Partners, Ltd., Rosewood Property Company and the
registrant (filed as Exhibit 10.1 to the Form S-1)
10.2* Loan Agreement dated as of June 26, 1997 by and
between NationsBank of Texas, N.A. and the
registrant (filed as Exhibit 10.2 to the Form S-1)
10.3* Inet Technologies, Inc. 1998 Stock Option/Stock
Issuance Plan (filed as Exhibit 10.3 to the Form
S-1)
10.4* Form of Indemnification Agreement between the
registrant and each of its directors and executive
officers (filed as Exhibit 10.4 to the Form S-1)
Page 33
<PAGE>
10.5* Form of Registration Rights Agreement, dated as of
July 17, 1998 by and among the registrant, Samuel
S. Simonian, Elie S. Akilian and Mark A. Weinzierl
(filed as Exhibit 10.5 to the Form S-1)
10.6* Renewal, Extension and First Amendment to Loan
Agreement entered into to be effective as of June
15, 1998 between the the registrant and
NationsBank of Texas, N.A. (filed as Exhibit 10.6
to the Form S-1)
10.7* Fourth Amendment to office lease dated as of July
15, 1998 by and among Pitman Partners, Ltd.,
Rosewood Property Company and the registrant
(filed as Exhibit 10.7 to the Form S-1)
10.8* Assumption and Modification Agreement, dated
effective as of July 16, 1998, between the
registrant and NationsBank of Texas, N.A. (filed
as Exhibit 10.8 to the Form S-1)
10.9 Employee Stock Purchase Plan (filed as Exhibit
99.11 to the registrant's Registration Statement
on Form S-8 (Reg. No. 333-83285)
10.10 Lease dated as of January 27, 2000 by and among
Collins Crossing, LTD., a Texas limited
partnership and the registrant
21.1 Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney, pursuant to which amendments to
this report may be filed, is included on the
signature page contained in Part IV hereof)
27.1 Financial data schedule for the year ended
December 31, 1999
</TABLE>
* Incorporated herein by reference to the indicated filing.
(b) Reports on Form 8-K
Inet Technologies, Inc. did not file any Current Reports on Form 8-K
during the fourth quarter of 1999.
Page 34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INET TECHNOLOGIES, INC.
Date: March 3, 2000 By: /s/ ELIE S. AKILIAN
--------------------------------------
Elie S. Akilian
President and Chief
Executive Officer
and Director
(principal executive officer)
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and
constitutes Elie S. Akilian and Jeffrey A. Kupp, and each of them singly, his
true and lawful attorneys-in-fact with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign and file any and all amendments to this report with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and he hereby ratifies and confirms all
that said attorneys-in-fact or any of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 3, 2000 By: /s/ Samuel S. Simonian
--------------------------------------
Samuel S. Simonian
Chairman of the Board
Date: March 3, 2000 By: /s/ Elie S. Akilian
--------------------------------------
Elie S. Akilian
President and Chief
Executive Officer
and Director
(principal executive officer)
Date: March 3, 2000 By: /s/ Mark A. Weinzierl
--------------------------------------
Mark A. Weinzierl
Secretary and Director
Date: March 3, 2000 By: /s/ William H. Mina
--------------------------------------
William H. Mina
Senior Vice President,
Page 35
<PAGE>
Administration and Legal Affairs
and Director
Date: March 3, 2000 By: /s/ Jeffrey A. Kupp
--------------------------------------
Jeffrey A. Kupp
Vice President and Chief Financial
Officer
(principal financial and accounting
officer)
Date: March 3, 2000 By: /s/ James R. Adams
--------------------------------------
James R. Adams
Director
Date: March 3, 2000 By: /s/ Grant A. Dove
--------------------------------------
Grant A. Dove
Director
Page 36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Inet Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Inet
Technologies, Inc. (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Inet
Technologies, Inc. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Dallas, Texas
January 27, 2000
Page F-1
<PAGE>
INET TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
----------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................. $127,903 $21,914
Trade accounts receivable, net of allowance for doubtful
accounts of $939 and $659 at December 31, 1999
and 1998, respectively............................................................. 20,781 22,073
Unbilled receivables.................................................................. 2,196 1,602
Inventories........................................................................... 5,893 7,592
Deferred income taxes................................................................. 2,318 2,568
Other current assets.................................................................. 1,312 1,248
-------- -------
Total current assets.......................................................... 160,403 56,997
Property and equipment, net............................................................. 9,324 8,394
Deferred income taxes................................................................... 6 --
Other assets............................................................................ 184 117
-------- -------
Total assets.................................................................. $169,917 $65,508
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 2,599 $ 1,858
Accrued compensation and benefits..................................................... 5,252 2,159
Deferred revenue...................................................................... 26,432 13,073
Taxes payable......................................................................... 213 878
Other accrued liabilities............................................................. 1,998 716
-------- -------
Total current liabilities..................................................... 36,494 18,684
Deferred tax liabilities................................................................ -- 11
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares-- 25,000,000
Issued shares-- None............................................................... -- --
Common stock, $.001 par value:
Authorized shares -- 175,000,000
Issued shares -- 45,312,759 at December 31, 1999 and
40,934,422 at December 31, 1998.................................................. 45 41
Additional paid-in capital............................................................ 57,693 1,236
Unearned compensation................................................................. (233) (464)
Retained earnings..................................................................... 75,918 46,217
Treasury stock, no common shares at December 31, 1999,
38,842 common shares at December 31, 1998, at cost................................. -- (217)
-------- -------
Total stockholders' equity.................................................... 133,423 46,813
-------- -------
Total liabilities and stockholders' equity.................................... $169,917 $65,508
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page F-2
<PAGE>
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
---------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues.......................................... $ 109,983 $ 77,428 $ 57,701
Cost of revenues.................................. 31,755 22,404 15,783
--------- --------- ---------
Gross profit............................ 78,228 55,024 41,918
Operating expenses:
Research and development expenses............... 21,793 15,667 9,658
Sales and marketing expenses.................... 12,646 8,612 7,741
General and administrative expenses............. 9,037 6,592 5,423
--------- --------- ---------
43,476 30,871 22,822
--------- --------- ---------
Income from operations.................. 34,752 24,153 19,096
Other income (expense):
Gain (loss) on sale of assets................... 5,924 (7) (8)
Interest income................................. 3,991 833 147
Other income (expense).......................... (4) 1 (123)
---------- --------- ----------
9,911 827 16
--------- --------- ---------
Income before provision for income
taxes................................. 44,663 24,980 19,112
Provision for income taxes........................ 14,962 7,895 6,398
--------- --------- ---------
Net income.............................. $ 29,701 $ 17,085 $ 12,714
========== ========== ==========
Earnings per common share:
Basic................................... $ 0.68 $ 0.42 $ 0.31
========== ========== ==========
Diluted................................. $ 0.66 $ 0.40 $ 0.30
========== ========== ==========
Weighted average shares outstanding:
Basic................................... 43,449 40,879 40,855
========== ========== ========
Diluted................................. 45,037 42,452 41,722
========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page F-3
<PAGE>
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
------------------ PAID-IN UNEARNED RETAINED ------------------ STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS SHARES AMOUNT EQUITY
------ ------ ------- ------------ -------- ------ ------ ------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996... 40,850,422 $41 $ 372 $ -- $16,418 38,842 $(217) $16,614
Issuance of common stock..... 50,000 -- 58 -- -- -- -- 58
Net income................... -- -- -- -- 12,714 -- -- 12,714
---------- ---- ------- ------ ------- ------ ----- -------
Balance at December 31, 1997... 40,900,422 41 430 -- 29,132 38,842 (217) 29,386
Issuance of common stock..... 19,000 -- 106 -- -- -- -- 106
Issuance of common stock upon
exercise of employee stock
options.................... 15,000 -- 9 -- -- -- -- 9
Net income................... -- -- -- -- 17,085 -- -- 17,085
Stock option compensation.... -- -- 691 (464) -- -- -- 227
---------- ---- ------- ------ ------- ------ ----- -------
Balance at December 31, 1998... 40,934,422 $ 41 $ 1,236 $ (464) $46,217 38,842 $(217) $46,813
========== ==== ======= ====== ======= ====== ===== =======
Issuance of common stock for
cash in initial public
offering, net.............. 3,802,637 4 55,478 -- -- (38,842) 217 55,699
Issuance of common stock
upon exercise of employee
stock options.............. 575,700 -- 426 -- -- -- -- 426
Net income................... -- -- -- -- 29,701 -- -- 29,701
Stock option compensation.... -- -- 553 231 -- -- -- 784
---------- ---- ------- ------ ------- ----- ----- --------
Balance at December 31, 1999... 45,312,759 $ 45 $57,693 $ (233) $75,918 -- $ -- $133,423
========== ==== ======= ====== ======= ===== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page F-4
<PAGE>
INET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
----------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 29,701 $ 17,085 $ 12,714
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 3,955 2,752 1,521
(Gain) loss on sale or disposal of assets......... (5,924) 7 8
Deferred income taxes............................. 233 (3,427) 63
Issuance of common stock and stock options charged
to expense....................................... 231 333 58
Change in assets and liabilities:
(Increase) decrease in trade accounts receivable 1,119 (6,241) (2,596)
(Increase) decrease in unbilled receivables.... (594) 4,203 (2,392)
(Increase) decrease in inventories............. 1,669 (629) (450)
(Increase) decrease in other assets............ (139) 245 (1,303)
Increase (decrease) in accounts payable........ 741 529 (2,105)
Increase (decrease) in taxes payable........... (665) 618 121
Increase (decrease) in accrued compensation and
benefits..................................... 3,093 (78) 1,161
Increase in deferred revenue................... 13,359 8,912 1,629
Increase (decrease) in other accrued liabilities 1,282 201 (637)
---------- --------- ---------
Net cash provided by operating activities........... 48,061 24,510 7,792
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................. (5,197) (5,991) (3,798)
Proceeds from sale of assets........................ 7,000 -- --
---------- --------- ---------
Net cash provided by (used in) investing activities. 1,803 (5,991) (3,798)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock in initial
public offering, net............................. 55,699 -- --
Proceeds from issuance of common stock upon exercise
of stock options................................. 426 9 --
Payments of note payable............................ -- -- (7,068)
Proceeds from note payable.......................... -- -- 5,718
---------- --------- ---------
Net cash provided by (used in) financing activities. 56,125 9 (1,350)
---------- --------- ---------
Net increase in cash and cash equivalents........... 105,989 18,528 2,644
Cash and cash equivalents at beginning of period.... 21,914 3,386 742
---------- --------- ---------
Cash and cash equivalents at end of period.......... $ 127,903 $ 21,914 $ 3,386
========== ========= =========
SUPPLEMENTAL DISCLOSURES:
Interest paid.................................... $ -- $ -- $ 123
========== ========= =========
Income taxes paid................................ $ 15,329 $ 9,263 $ 6,390
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
Page F-5
<PAGE>
INET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Inet Technologies, Inc. (the "Company" or "Inet") provides
communications software solutions that enable carriers to more effectively
design, deploy, diagnose, monitor and manage communications networks that
carry signaling information used to manage communications sessions which
include phone calls, dial-up Internet access, and other service transactions.
The Company's products also address the fundamental business needs of
communications carriers, such as improved billing, targeted sales and
marketing, fraud prevention and enhanced routing. The Company currently
provides these comprehensive solutions primarily through its GeoProbe and
Spectra product offerings.
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company's wholly-owned subsidiaries. Intercompany balances and transactions
have been eliminated.
CASH AND CASH EQUIVALENTS
All highly liquid securities with original maturities of three months or
less are classified as cash equivalents. The carrying value of cash
equivalents approximates fair market value.
INVENTORIES
Inventories are valued at the lower of standard cost, which approximates
actual cost determined on a first-in, first-out basis, or market. Inventories
consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
-------- ---------
<S> <C> <C>
Raw materials.................... $ 1,791 $ 1,895
Work-in-process.................. 241 2,289
Finished goods................... 3,861 3,408
-------- ---------
$ 5,893 $ 7,592
======== =========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and amortization and are depreciated on a straight-line basis over their
estimated useful lives, as follows:
<TABLE>
<S> <C>
Computers and other equipment........... 3-5 Years
Software................................ 3 Years
Office furniture and fixtures........... 7 Years
Leasehold improvements.................. Term of lease
</TABLE>
Page F-6
<PAGE>
RESEARCH AND DEVELOPMENT EXPENDITURES
Software development costs are expensed as incurred until technological
feasibility has been established, at which time subsequent costs are
capitalized until the product is available for general release to customers.
To date, either the establishment of technological feasibility of the
Company's products and their general release have substantially coincided or
costs incurred subsequent to the achievement of technological feasibility
have not been material. As a result, software development costs qualifying
for capitalization have been insignificant, and the Company has not
capitalized any software development costs. Research and development
expenditures are charged to expense in the period incurred.
REVENUE RECOGNITION
Effective January 1, 1998, the Company adopted Statement of Position
("SOP") 97-2, SOFTWARE REVENUE RECOGNITION, as amended by SOP 98-4, DEFERRAL
OF THE EFFECTIVE DATE OF CERTAIN PROVISIONS OF SOP 97-2, which did not
require a significant change to the Company's revenue recognition policies.
The Company derives revenues from the sale of products and related
product installation, integration and post-contract support service to the
communications industry. Product revenues are generally recognized in the
period the Company has completed all hardware manufacturing and/or software
development to contractual specifications, factory testing has been
completed, the product has been shipped to the customer, the fee is fixed and
determinable and collection is considered probable by the Company's
management. When the Company has significant obligations subsequent to
shipment (e.g., installation and system integration), revenues are not
recognized prior to the time the system has been delivered and installed at
the customer's premises and there are no significant unfulfilled obligations.
Revenues from arrangements that include significant acceptance terms are not
recognized until acceptance has occurred.
The Company provides its customers with post-contract support services,
which include the correction of software problems, telephone access to the
Company's technical personnel and the right to receive unspecified product
updates, upgrades and enhancements. Revenues from these services, including
product support services included in initial licensing fees, are recognized
ratably over the contract period. Post-contract support services included in
the initial licensing fee are allocated from the total contract amount based
on the relative fair value of these services determined using vendor-specific
objective evidence ("VSOE").
Deferred revenue primarily represents amounts billed to customers
pursuant to terms specified in contracts but for which revenue has not been
recognized.
In December 1998, SOP 98-9, MODIFICATION OF SOP 97-2, `SOFTWARE REVENUE
RECOGNITION' WITH RESPECT TO CERTAIN TRANSACTIONS, was released. SOP 98-9
amends SOP 97-2 to require that an entity recognize revenue for multiple
element arrangements by means of the "residual method" when (1) there is VSOE
of the fair values of all of the undelivered elements that are not accounted
for by means of long-term contract accounting, (2) VSOE of fair value does
not exist for one or more of the delivered elements, and (3) all revenue
recognition criteria of SOP 97-2 (other than the requirement for VSOE of the
fair value of each delivered element) are satisfied.
The provisions of SOP 98-9 that extend the deferral of certain passages
of SOP 97-2 became effective December 15, 1998. All other provisions of SOP
98-9 will be effective for the Company's
Page F-7
<PAGE>
fiscal year beginning January 1, 2000. Retroactive application is prohibited.
SOP 98-9 is not expected to have a material impact on the Company's current
revenue recognition policies.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), in accounting
for its employee stock options. Under APB 25, if the exercise price of an
employee's stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents
and trade accounts receivable. The Company sells products and services to
customers associated with the communications industry, both within the United
States and internationally. The Company continually evaluates the
creditworthiness of its customers' financial condition and generally does not
require collateral. The Company has not experienced significant losses on
uncollectible accounts. All cash equivalents are maintained with nationally
recognized financial institutions.
RISKS AND UNCERTAINTIES
The Company's future results of operations and financial condition could
be impacted by the following factors, among others: dependence on the
communications industry, lengthy sales cycle, product concentration, reliance
on signaling networks, competition, dependence on key personnel, rapid
technological change and dependence on new products, international
operations, potential acquisitions, proprietary rights, and product liability.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
BASIS OF PRESENTATION
Certain prior period amounts have been reclassified to conform to the
current period presentation.
EARNINGS PER SHARE
Basic earnings per common share data is computed using the weighted
average number of common shares outstanding for the relevant period. Diluted
earnings per common share data is computed using the weighted average number
of common shares outstanding plus common share equivalents represented by
stock options and purchase rights, if such stock options and purchase rights
have a dilutive effect in the aggregate.
Page F-8
<PAGE>
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except share and per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income for basic and diluted
earnings per share..................... $29,701 $17,085 $12,714
======= ======= =======
Denominator:
Denominator for basic earnings per
share-- weighted average shares........ 43,449 40,879 40,855
Effect of dilutive securities:
Employee stock options and purchase rights 1,588 1,573 867
------- ------- -------
Dilutive potential common shares......... 1,588 1,573 867
------- ------- -------
Denominator for diluted earnings
per share -- adjusted
weighted-average shares................ 45,037 42,452 41,722
======= ======= =======
Basic earnings per common share............ $ 0.68 $ 0.42 $ 0.31
======= ======= =======
Diluted earnings per common share.......... $ 0.66 $ 0.40 $ 0.30
======= ======= =======
</TABLE>
DERIVATIVES
The Financial Accounting Standards Board ("FASB") recently issued
Statement No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES-DEFERRAL OF EFFECTIVE DATE OF FASB STATEMENT NO. 133. The
Statement defers for one year the effective date of FASB Statement No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The rule now
will apply to all fiscal quarters of all fiscal years beginning after June
15, 2000. FASB Statement No. 133 will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in fair value
will be immediately recognized in earnings. The Company does not expect the
adoption of the Statement to have a material impact on the Company's
financial statements.
2. INITIAL PUBLIC OFFERING
In June 1999, the Company completed the initial public offering of its
common stock. The Company sold 3,841,479 shares of its common stock at an
initial public offering price of $16.00 per share. Net proceeds to the
Company, after deduction of the underwriting discount and expenses, were
approximately $55.7 million.
Page F-9
<PAGE>
3. RELATED PARTY TRANSACTIONS
In September 1999, the Company sold its wireless data assets to
Nextcell, Inc., an entity controlled by a related party, for a total purchase
price of $7.0 million, resulting in a pre-tax gain of $5.9 million. The
Company recognized $553,000 of compensation expense related to the
accelerated vesting of certain stock options for employees affected by the
sale.
Effective January 1, 2000, the Company sold its membership interest in
Inet Global Research, L.L.C., to an entity controlled by a related party for
a cash purchase price of $82,000. No gain or loss was recorded for the sale.
The Company intends to enter into an agreement whereby this entity will
perform contract services for the Company.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------- ----------
1999 1998
---------- ----------
<S> <C> <C>
Computer and other equipment.................................. $ 13,236 $ 9,709
Software...................................................... 3,297 2,990
Office furniture, fixtures, and leasehold improvements........ 2,299 1,768
---------- ----------
18,832 14,467
Less accumulated depreciation and amortization................ 9,508 6,073
---------- ---------
$ 9,324 $ 8,394
========== =========
</TABLE>
5. LINE OF CREDIT FACILITY
The Company has available a line of credit facility with a bank
providing for borrowings of up to $10.0 million which expires June 15, 2000.
Up to $5.0 million may be utilized to support letters of credit. The per
annum usage fee on unused portions of the line is 0.125%. Borrowings under
this facility bear interest payable quarterly at LIBOR plus 1.5% (7.5% at
December 31, 1999) and are collateralized by the Company's accounts
receivable, inventories, and property and equipment. The credit facility
includes covenants requiring the Company to maintain certain financial ratios
and restricts the payment of cash dividends without the bank's consent. At
December 31, 1999, no letters of credit or borrowings were outstanding under
the credit facility, and the amount available to the Company was $10.0
million.
6. INCOME TAXES
Components of the provision for income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Current federal provision................ $ 13,731 $ 10,630 $ 5,706
Current state provision.................. 654 645 616
Deferred federal expense (benefit)....... 118 (2,830) (82)
Current foreign provision................ 344 47 13
Page F-10
<PAGE>
Deferred state expense (benefit)......... 115 (597) 145
--------- --------- -------
Total income tax provision..... $ 14,962 $ 7,895 $ 6,398
========= ========= =======
</TABLE>
The provision for income taxes is reconciled with the federal statutory
rate as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Provision computed at federal statutory rate........ $ 15,632 $ 8,743 $ 6,689
Research and development tax credits............... (836) (342) (305)
Foreign Sales Corporation income exemption.......... (783) (687) (500)
State income taxes, net of federal tax effect....... 639 31 481
Other............................................... 310 150 33
-------- -------- --------
$ 14,962 $ 7,895 $ 6,398
======== ======== ========
</TABLE>
The significant components of the Company's deferred tax assets and
liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
--------- ----------
<S> <C> <C>
Deferred tax assets:
Deferred revenue...................................... $ 837 $ 1,498
Reserves and other accrued expenses not currently
deductible for tax purposes........................ 986 1,160
Research and development tax credit carryover......... 418 --
Other................................................. 259 85
--------- ---------
Total deferred tax assets..................... 2,500 2,743
--------- ---------
Deferred tax liabilities:
Depreciation.......................................... (176) (186)
---------- ----------
Total deferred tax liabilities................ (176) (186)
---------- ---------
Deferred income tax assets, net of deferred income tax
liabilities.......................................... $ 2,324 $ 2,557
========= =========
</TABLE>
7. OPERATING LEASES
The Company leases its corporate office facility as well as certain
equipment under noncancelable operating lease agreements. Rental expense for
these operating leases was $1.9 million, $1.4 million, and $900,000 in 1999,
1998, and 1997, respectively.
At December 31, 1999, future minimum lease payments under noncancelable
operating leases were as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNTS
-------
<S> <C>
2000..... $ 1,209
2001..... 120
2002..... 38
2003..... 7
----------
$ 1,374
==========
</TABLE>
Page F-11
<PAGE>
On January 27, 2000, the Company signed a ten-year lease agreement for
office space to replace its existing leases for the Company's operations.
Future minimum lease payments under the new lease are approximately $1.0
million in 2000 and $4.2 million in each of the following four years.
Page F-12
<PAGE>
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors has the authority to issue up to 25,000,000
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further
vote or action by the stockholders.
EMPLOYEE STOCK OPTION AND STOCK PURCHASE PLANS
The Company's 1998 Stock Option/Stock Issuance Plan (the "1998 Plan") is
the successor equity incentive program to the Company's 1995 Employee Stock
Option Plan (the "1995 Plan"). The 1998 Plan became effective on July 23,
1998 upon adoption by the Board of Directors and was subsequently approved by
the stockholders on July 23, 1998. Common stock authorized for issuance under
the 1998 Plan is 6,750,000 shares. The share reserve will automatically be
increased on the last trading day of January each calendar year, beginning in
January 2000, by a number of shares equal to one percent (1%) of the total
number of shares of common stock outstanding on the last trading day of the
immediately preceding calendar year, but no such annual increase shall exceed
500,000 shares. However, in no event may any one participant in the 1998 Plan
receive option grants or direct stock issuances for more than 1,000,000
shares in the aggregate per calendar year. During the year ended December 31,
1999, all stock options granted were under the 1998 Plan.
The 1998 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee directors and
consultants) may, at the discretion of the plan administrator, be granted
options to purchase shares of common stock at an exercise price determined by
the plan administrator, which is generally the fair market value of those
shares on the grant date, (ii) the Stock Issuance Program under which such
individuals may, in the plan administrator's discretion, be issued shares of
common stock directly, through the purchase of such shares at a price
determined by the plan administrator or as a bonus tied to the performance of
services and (iii) the Automatic Option Grant Program under which option
grants will automatically be made at periodic intervals to eligible
non-employee directors to purchase shares of common stock at an exercise
price equal to 100% of the fair market value of those shares on the grant
date. Generally, options granted under the Discretionary Option Grant Program
become exercisable ratably over a period of four years and expire ten years
from the date of grant. Options granted under the Automatic Option Grant
Program are immediately exercisable, vest ratably over a period of three
years, and expire ten years from the date of grant.
The Company's 1995 Plan provided for incentive options and nonqualified
options that were granted to key employees, officers and directors of the
Company. Options were granted generally at prices not less than the fair
value of the Company's common stock as determined by the Stock Option
Committee of the Company's Board of Directors (the "Committee") at the dates
of grant. Options granted under the 1995 Plan vest at rates established by
the Committee and expire ten years after the date of grant.
Outstanding options under the 1995 Plan have been incorporated into the
1998 Plan, and no further option grants will be made under the 1995 Plan. The
incorporated options will continue to be governed by their existing terms,
unless the plan administrator elects to extend one or more features of the
1998 Plan
Page F-13
<PAGE>
to those options. However, except as otherwise noted below, the outstanding
options under the 1995 Plan contain substantially the same terms and
conditions summarized below for the Discretionary Option Grant Program in
effect under the 1998 Plan.
Options granted in the first quarter of 1998 at $4.20 per share had a
fair market value of $5.57 per share, which resulted in a total of $692,000 of
compensation expense which is being recognized ratably over the vesting period
of three years beginning in the first quarter of 1998. The Company recorded
$231,000 and $227,000 of compensation expense in 1999 and 1998, respectively,
related to these grants. The Company recorded no compensation expense in 1997.
Stock option transactions for the years ended December 31, 1999, 1998,
and 1997, are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------- -------- ------------ -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period:.................. 1,947,000 $ 1.67 1,531,750 $ 0.80 1,220,000 $ 0.64
Granted.................... 489,250 27.88 506,000 4.20 381,750 1.31
Exercised.................. (575,700) 0.74 (15,000) 0.60 -- --
Forfeited.................. (18,600) 11.73 (75,750) 1.16 (70,000) 0.86
------------ ----------- -----------
Outstanding at end of
period................... 1,841,950 8.82 1,947,000 1.67 1,531,750 0.80
=========== =========== ===========
Weighted-average fair value
of options granted during
the period...................$ 17.21 $ 2.12 $ 0.26
=========== =========== ===========
</TABLE>
At December 31, 1999, 700,900 shares were exercisable at a weighted
average exercise price of $1.88 and 6,268,350 shares were available for
future grants to employees under the 1998 Plan.
Information related to options outstanding at December 31, 1999, is
summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -----------------------------------
WEIGHTED AVERAGE
NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
- ------------------ ------------------ ------------------ -------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
$ 0.60 - $ 4.20..... 1,361,900 6.76 $ 2.06 656,650 $ 0.81
$15.00 - $38.25....... 443,750 9.58 25.32 44,250 17.77
$51.63 - $67.00....... 36,300 9.97 60.46 -- --
</TABLE>
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and approved by the stockholders on July 23,
1998. The Purchase Plan provides for the issuance of up to 750,000 shares of
common stock. Eligible employees can have up to 15% of their earnings
withheld, subject to certain limitations, to be used to purchase shares of the
Company's common stock on every January 31st and July 31st. The price of the
common stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the common stock on the commencement date of
the offering period or fair market value of the common stock on the specified
purchase date. The Purchase Plan has been implemented in a series of
successive offering periods, each with a maximum duration of 24 months, except
the initial offering period which will have a duration of 26 months. The
initial offering period began on June 1, 1999 and will end on the last
business day of July 2001. The next offering period will commence on the first
business day in August 2001, and subsequent offering periods will commence as
designated by the plan administrator. At December 31, 1999, no shares had been
issued under the Purchase Plan.
Page F-14
<PAGE>
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK BASED COMPENSATION, ("SFAS 123") requires the disclosure of pro forma
net income and earnings per share information computed as if the Company had
accounted for its employee stock options granted subsequent to December 31,
1994 and the Purchase Plan, under the fair value method set forth in SFAS
123. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1999, 1998, and 1997, respectively:
risk-free interest rates of 5.74%, 5.66%, and 6.29%; a dividend yield of 0%;
and volatility factors of 1.08, 0, and 0. In addition, the fair value of
these options was estimated based on an expected life of one-half year from
the vesting date using the multiple option method. The fair value for the
purchase rights under the Purchase Plan was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1999: a risk-free interest rate of 5.81%, a
dividend yield of 0%; and a volatility factor of 1.08. In addition, the fair
value of these purchase rights was estimated based on an expected life of
0.67 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options and
purchase rights have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options and purchase rights. In addition,
because options vest over several years and additional option grants and
purchase rights are expected, the effects of these hypothetical calculations
are not likely to be representative of similar future calculations.
For purposes of pro forma disclosures, the estimated fair value of the
options and purchase rights is amortized to expense over the options' vesting
period or purchase rights' purchase period. The Company's pro forma
information follows (in thousands except for per share information):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net income................................ $ 26,756 $ 16,679 $ 12,609
Pro forma basic earnings per common share........... $ 0.62 $ 0.41 $ 0.31
Pro forma diluted earnings per common share......... $ 0.59 $ 0.39 $ 0.30
</TABLE>
9. SEGMENT INFORMATION
The Company operates in a single industry segment, providing communications
equipment, software and associated services, and markets its products through
its sales personnel and certain foreign distributors. The distribution of the
Company's revenues as a percent of total revenues is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
United States............................ 48.3% 47.8% 47.4%
Export:
Asia-Pacific........................... 7.0 7.5 17.4
Europe, Middle East and Africa......... 39.9 37.9 31.0
Page F-15
<PAGE>
Other.................................. 4.8 6.8 4.2
------ ------- ------
Total export revenue 51.7 52.2 52.6
------ ------- ------
100.0% 100.0% 100.0%
====== ======= ======
</TABLE>
The Company has no significant long-lived assets deployed outside of the
United States.
In 1997, British Telecom accounted for approximately 14% of total
revenues. No individual customer accounted for 10% or more of total revenues
in 1999 and 1998. Sales to customers in the United Kingdom accounted for
approximately 14% of total revenues during 1997. No individual countries
other than the United States accounted for 10% or more of total revenues in
1999 and 1998.
10. EMPLOYEE BENEFIT PROGRAM
The Company has a retirement savings plan structured under Section
401(k) of the Internal Revenue Code (the "Code"). The plan covers
substantially all employees meeting minimum service requirements. Under the
plan, employees may elect to reduce their current compensation by up to 15%,
subject to certain maximum dollar limitations prescribed by the Code, and
have the amount contributed to the plan as salary deferral contributions. The
Company may make contributions to the plan at the discretion of the Board of
Directors. The Company accrued and paid discretionary contributions to the
plan totaling $1.6 million, $1.2 million, and $1.0 million in 1999, 1998, and
1997, respectively.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables contain selected financial information from unaudited
consolidated statements of income for each quarter of 1999 and 1998.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------
1999 1998
----------------------------------------- -----------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31
---------- --------- -------- ------- ------- --------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......................... $ 31,958 $ 29,010 $25,776 $23,239 $22,792 $ 20,470 $ 18,653 $15,512
Gross profit..................... 23,321 20,656 18,137 16,114 15,960 14,511 13,586 10,966
Net income (2)................... 8,880 10,974 5,493 4,354 5,333 4,503 4,211 3,037
Basic earnings per share (1)
(2)............................ $ 0.20 $ 0.24 $ 0.13 $ 0.11 $ 0.13 $ 0.11 $ 0.10 $ 0.07
Diluted earnings per share
(1) (2) ....................... $ 0.19 $ 0.24 $ 0.12 $ 0.10 $ 0.13 $ 0.11 $ 0.10 $ 0.07
Shares used in computing basic
earnings per share.............. 45,297 45,146 42,389 40,896 40,896 40,886 40,874 40,862
Shares used in computing diluted
earnings per share.............. 46,800 46,589 44,126 42,638 42,640 42,614 42,277 42,277
</TABLE>
(1) Earnings per common share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly earnings per common
share information may not equal the annual earnings per common share due to
rounding differences.
(2) For the quarter ended September 30, 1999, net income and basic and diluted
earnings per share are affected by the one-time pre-tax gain of $5.9
million from the sale of the Company's wireless data assets.
Page F-16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Inet Technologies, Inc.
We have audited the consolidated financial statements of Inet Technologies,
Inc. as of December 31, 1999 and 1998, and for each of the three years in the
period ended December 31, 1999, and have issued our report thereon dated
January 27, 2000. Our audits also included the financial statement schedule
listed in Item 14 of this Form 10-K. This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
January 27, 2000
Page S-1
<PAGE>
INET TECHNOLOGIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1999, 1998, and 1997
(in thousands)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS (1) END OF YEAR
------------ ---------- ------------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Deducted from asset accounts--
Allowance for doubtful accounts.............. $ 659 $ 245 $ 35 $ 939
===== ====== ===== ======
Year ended December 31, 1998:
Deducted from asset accounts--
Allowance for doubtful accounts.............. $ 500 $ 392 $(233) $ 659
===== ====== ====== ======
Year ended December 31, 1997:
Deducted from asset accounts--
Allowance for doubtful accounts.............. $ 50 $ 452 $ (2) $ 500
===== ====== ====== ======
</TABLE>
(1) Activity includes uncollectible accounts written off, net of recoveries.
Page S-2
<PAGE>
<TABLE>
BASIC LEASE INFORMATION
<S> <C>
Lease Date: January ___, 2000
Tenant: INET TECHNOLOGIES, INC., a Delaware corporation
Tenant's Address: Prior to Commencement Date: After the Commencement Date:
1255 West 15th Street, Suite 600 1500 N. Greenville Avenue, Suite 100
Plano, Texas 75075 Richardson, Texas 75081
Contact: William Mina Telephone: 972-578-6100
Landlord: COLLINS CROSSING, LTD., a Texas limited partnership
Landlord's Address: 2200 Ross Avenue, Suite 3700
Dallas, Texas 75201
Contact: Jeff Carter Telephone: 214-979-6100
Premises: Suite Nos. 100, 200, 800, 900, 1000 and 1100 in the office building
(the "BUILDING") located on the land containing approximately
5.3394 acres located in Richardson, Dallas County, Texas, and whose
street address is 1500 N. Greenville Avenue (the "LAND"). The Premises
are outlined on the plan attached to the Lease as EXHIBIT A-1. The
Building, the Land, and the adjoining development site on which
Landlord or Collins Crossing II, Ltd., a Texas limited partnership
("CCII") may hereafter construct a second building (the "DEVELOPMENT
SITE") are depicted on the site plan attached to the Lease as EXHIBIT
A-2. The Land is more particularly described on EXHIBIT A-3 attached
hereto. The Premises contain 162,402 rentable square feet, subject to
adjustment as provided in Section 26(d) below.
Term: One hundred twenty (120) months, commencing on July 1, 2000 (the
"COMMENCEMENT DATE"), except with respect to the Suite 800 as to which
the Term shall commence on August 1, 2000 (the "8TH FLOOR COMMENCEMENT
DATE"), and ending at 5:00 p.m. June 30, 2010, subject to adjustment
and earlier termination as provided in the Lease.
Basic Rental: Basic Rental shall be as follows:
FLOORS 1, 2, 9, 10, AND 11:
07/01/00 - 09/30/00: $0.00
10/01/00 - 06/30/05: an annual Basic Rental of $22.00 per rentable square foot.
07/01/05 - 06/30/10: an annual Basic Rental of $24.00 per rentable square foot.
FLOOR 8:
08/01/00 - 09/30/00: $0.00
10/01/00 - 06/30/05: an annual Basic Rental of $22.00 per rentable square foot.
07/01/05 - 06/30/10: an annual Basic Rental of $24.00 per rentable square foot.
Security Deposit: None
Rent: Basic Rental, Tenant's Proportionate Share of Electrical Costs, Tenant's share of
Excess, and all other sums that Tenant may owe to Landlord under the Lease.
Permitted Use: General office purposes, including, without limitation, use for
training, customer support services, computer integration, computer
labs, light assembly of telecommunications equipment,
telecommunications labs and any other lawful purpose consistent with
the foregoing.
Tenant's Proportionate
Share: 53.9744%, which is the percentage obtained by dividing (a) the 162,402
rentable square feet in the Premises by (b) the 300,887 rentable square
feet in the Building, subject to adjustment as provided in
Section 26(d) below.
Expense Stop: 2000 Base Year.
Initial Liability Insurance
Amount: $5,000,000.00
Maximum Construction
Allowance: $25.00 per rentable square foot, subject to Tenant's right to obtain
and amortize an additional $5.00 per rentable square foot, as described
in EXHIBIT "D" hereto.
</TABLE>
i
<PAGE>
The foregoing Basic Lease Information is incorporated into and made a part of
the Lease identified above. If any conflict exists between any Basic Lease
Information and the Lease, then the Lease shall control.
LANDLORD: COLLINS CROSSING, LTD.,
a Texas limited partnership
By: TCDFW-Collins Crossing, Ltd.,
a Texas limited partnership
By: TCDFW #1, Inc.,
a Delaware corporation,
Its sole general partner
By: _______________________________
Name:_______________________________
Title:______________________________
TENANT: INET TECHNOLOGIES, INC.,
a Delaware corporation
By: _________________________________________
William Mina, Senior Vice President
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
1. DEFINITIONS AND BASIC PROVISIONS........................................................................1
2. LEASE GRANT.............................................................................................1
3. TERM....................................................................................................1
4. RENT....................................................................................................1
(a) Payment........................................................................................1
(b) Consumer Price Index Increases to Basic Rental.................................................2
(c) Electrical Costs...............................................................................2
(d) Annual Cost Statement..........................................................................2
(e) Adjustments to Electrical Costs................................................................2
(f) Inspection Right...............................................................................2
5. DELINQUENT PAYMENT; HANDLING CHARGES....................................................................2
6. SECURITY DEPOSIT........................................................................................2
7. LANDLORD'S OBLIGATIONS..................................................................................2
(a) Services.......................................................................................2
(b) Excess Utility Use.............................................................................3
(c) Governmental Rules and Regulations.............................................................3
(d) Restoration of Services; Abatement.............................................................3
8. IMPROVEMENTS; ALTERATIONS; REPAIRS; MAINTENANCE.........................................................3
(a) Improvements; Alterations......................................................................3
(b) Repairs; Maintenance...........................................................................4
(c) Performance of Work............................................................................4
(d) Mechanic's Liens...............................................................................4
9. USE.....................................................................................................4
10. ASSIGNMENT AND SUBLETTING...............................................................................4
(a) Transfers; Consent.............................................................................4
(b) Cancellation...................................................................................5
(c) Additional Compensation........................................................................5
(d) Permitted Transfers............................................................................5
11. INSURANCE; WAIVERS; SUBROGATION; INDEMNITY..............................................................5
(a) Insurance......................................................................................5
(b) Waiver of Negligence Claims; No Subrogation....................................................6
(c) Indemnity......................................................................................6
12. SUBORDINATION ATTORNMENT; NOTICE TO LANDLORD'S MORTGAGEE................................................6
(a) Subordination..................................................................................6
(b) Attornment.....................................................................................6
(c) Notice to Landlord's Mortgagee.................................................................6
13. RULES AND REGULATIONS...................................................................................6
14. CONDEMNATION............................................................................................6
(a) Taking - Landlord's and Tenant's Rights........................................................6
(b) Taking - Landlord's Rights.....................................................................6
(c) Award..........................................................................................6
15. FIRE OR OTHER CASUALTY..................................................................................7
(a) Repair Estimate................................................................................7
(b) Landlord's and Tenant's Rights.................................................................7
(c) Landlord's Rights..............................................................................7
(d) Repair Obligation..............................................................................7
16. TAXES...................................................................................................7
17. EVENTS OF DEFAULT.......................................................................................7
18. REMEDIES................................................................................................7
19. PAYMENT BY TENANT; NON-WAIVER...........................................................................8
(a) Payment by Tenant..............................................................................8
(b) No Waiver......................................................................................8
(c) Landlord Default...............................................................................8
20. NO LANDLORD'S LIEN......................................................................................8
21. SURRENDER OF PREMISES...................................................................................8
22. HOLDING OVER............................................................................................8
23. CERTAIN RIGHTS RESERVED BY LANDLORD.....................................................................8
24. SUBSTITUTION SPACE......................................................................................9
25. MISCELLANEOUS..........................................................................................10
(a) Landlord Transfer.............................................................................10
(b) Landlord's Liability..........................................................................10
(c) Force Majeure.................................................................................10
(d) Brokerage.....................................................................................10
(e) Estoppel Certificates.........................................................................10
(f) Notices.......................................................................................10
(g) Separability..................................................................................10
(h) Amendments; and Binding Effect................................................................10
(i) Quiet Enjoyment...............................................................................10
(j) Joint and Several Liability...................................................................10
(k) Captions......................................................................................10
(l) No Merger.....................................................................................10
(m) No Offer......................................................................................10
(n) Exhibits......................................................................................10
iii
<PAGE>
(o) Entire Agreement..............................................................................11
26. SPECIAL PROVISIONS.....................................................................................11
(a) Building Name; Signage........................................................................11
(b) Exclusivity...................................................................................11
(c) Roof Rights...................................................................................12
(d) Calculation of Rentable Area..................................................................12
(e) Electric Utility Deregulation.................................................................12
(f) Zoning Variance...............................................................................12
(g) Municipal Incentives..........................................................................12
(h) Consents......................................................................................13
(i) Hazardous Materials...........................................................................13
(j) Offset Rights.................................................................................13
(k) Conditions Precedent..........................................................................13
(1) Delicatessen..................................................................................13
</TABLE>
iv
<PAGE>
LIST OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
2nd Floor Space...................................................................................................1
8th Floor Commencement Date.......................................................................................i
8th Floor Space...................................................................................................1
Additional Space................................................................................................G-1
affiliate.........................................................................................................5
Annual Cost Statement.............................................................................................2
Basic Cost......................................................................................................C-1
Basic Lease Information...........................................................................................1
BOMA Standard....................................................................................................12
Building..........................................................................................................i
Casualty..........................................................................................................7
CCII..............................................................................................................i
Commencement Date.................................................................................................i
Commencement of Construction....................................................................................J-1
Completion Date.................................................................................................D-3
Construction Allowance..........................................................................................D-3
Controllable Basic Cost.........................................................................................C-2
Customary Business Hours..........................................................................................2
Damage Notice.....................................................................................................7
Development Site..................................................................................................i
Disabilities Acts.................................................................................................4
Election Notice.................................................................................................F-1
Electrical Costs..................................................................................................2
Electrical Standard...............................................................................................2
Event of Default..................................................................................................7
Excess..........................................................................................................C-1
Exercise Space..................................................................................................G-1
Expense Stop....................................................................................................C-1
Exterior Signage.................................................................................................11
Fair Market Rental Rate.........................................................................................F-1
First Expansion Area............................................................................................I-1
First First-Year Expansion Option...............................................................................I-1
Fixturing Date..................................................................................................D-3
Holidays..........................................................................................................2
HVAC............................................................................................................D-2
Initial Liability Insurance Amount................................................................................5
Interior Signage.................................................................................................11
Land..............................................................................................................i
Landlord..........................................................................................................1
Landlord's Assessment...........................................................................................F-1
Landlord's Delays...............................................................................................D-3
Landlord's Mortgagee..............................................................................................6
Landlord's Work.................................................................................................D-1
Lease.............................................................................................................1
Listed Competitors...............................................................................................11
Loss..............................................................................................................6
Memorandum......................................................................................................J-1
Monument Signage.................................................................................................11
Mortgage..........................................................................................................6
Move-In Period..................................................................................................D-3
Must-Take Space...................................................................................................1
Naming Rights....................................................................................................11
Objection Notice................................................................................................F-1
Offer Notice....................................................................................................G-1
Offer Space.....................................................................................................G-1
Other Costs.....................................................................................................D-4
Parking Garage..................................................................................................E-1
Permitted HVAC/MEP Alterations....................................................................................3
Permitted Transfer................................................................................................5
Permitted Transferee..............................................................................................5
Purchase Offer Notice...........................................................................................J-1
Qualified Broker................................................................................................F-1
Refusal Notice..................................................................................................G-1
Refusal Space...................................................................................................G-1
Rentable Area....................................................................................................12
Replaced Space....................................................................................................9
Required Parking Spaces.........................................................................................E-1
Satellite Dish...................................................................................................12
Scheduled Completion Date.......................................................................................D-2
Second Expansion Area...........................................................................................I-1
Second First-Year Expansion Option..............................................................................I-1
Secured Area......................................................................................................9
v
<PAGE>
Signage Rights...................................................................................................11
Short-Term Subleases..............................................................................................5
Substantial Completion..........................................................................................D-3
Substantially Completed.........................................................................................D-3
Substitution Effective Date.......................................................................................9
Substitution Notice...............................................................................................9
Substitution Space................................................................................................9
Supplemental HVAC Equipment......................................................................................12
Taking............................................................................................................6
Tangible Net Worth................................................................................................5
Tax Abatement Agreement..........................................................................................12
Taxes...........................................................................................................C-1
Tenant............................................................................................................1
Tenant Election Notice..........................................................................................J-1
Tenant's Delays.................................................................................................D-3
Termination.....................................................................................................J-1
Termination Events..............................................................................................J-1
Total Construction Costs........................................................................................D-3
Transfer..........................................................................................................4
Untenantable......................................................................................................3
Usable Area......................................................................................................12
Work............................................................................................................D-2
Working Drawings................................................................................................D-2
</TABLE>
vi
<PAGE>
LEASE
THIS LEASE AGREEMENT (this "LEASE") is entered into as of January
___, 2000, between COLLINS CROSSING, LTD., a Texas limited partnership
("LANDLORD"), and INET TECHNOLOGIES, INC., a Delaware corporation ("TENANT").
1. DEFINITIONS AND BASIC PROVISIONS. The definitions and basic
provisions set forth in the Basic Lease Information (the "BASIC LEASE
INFORMATION") executed by Landlord and Tenant contemporaneously herewith are
incorporated herein by reference for all purposes.
2. LEASE GRANT. Subject to the terms of this Lease, Landlord leases
to Tenant, and Tenant leases from Landlord, the Premises.
3. TERM. Tenant acknowledges that as of the date of this Lease, the
Premises are not yet ready for occupancy by Tenant and may not be ready for
occupancy by Tenant until after the scheduled Commencement Date of July 1,
2000 (as to floors 1, 2, 9, 10 and 11) or the scheduled 8th Floor
Commencement Date of August 1, 2000 (as to the 8th Floor Space).
Nevertheless, it is the intent of Landlord and Tenant that the Lease Term
(and Tenant's obligation to pay Basic Rental and Tenant's Proportionate Share
of Electrical Costs and Excess) shall commence on the scheduled Commencement
Date of July 1, 2000, except with respect to the 8th Floor Space, as to which
the Lease Term (and Tenant's obligation to pay Basic Rental and Tenant's
Proportionate Share of Electrical Costs and Excess) is intended to commence
on the scheduled 8th Floor Commencement Date of August 1, 2000, except in
each case as hereinafter provided. If the Completion Date (as defined in
EXHIBIT D) has not occurred by the Scheduled Completion Date due to
Landlord's Delays, then (a) Tenant's obligation to pay Rent hereunder shall
be waived for the number of days that the Completion Date is delayed beyond
the Scheduled Completion Date due to Landlord's Delays, (b) the Term shall be
extended for the number of days that the Completion Date is delayed beyond
the Scheduled Completion Date due to Landlord's Delays (and the Commencement
Date and/or 8th Floor Commencement Date will be deemed to have been delayed
by a like number of days), (c) Landlord shall not be in default hereunder or
be liable for damages therefor (except as hereinafter provided), and (d)
Tenant shall accept possession of the Premises when Landlord tenders
possession thereof to Tenant. If the Completion Date shall not have occurred
by the date that is thirty-four (34) weeks after commencement of construction
of the Work, as such date may be extended by Tenant's Delays or Force
Majeure, Tenant shall have the right to elect to terminate this Lease by
written notice to Landlord given at any time prior to the Completion Date.
Tenant may elect, in its sole discretion, to occupy the 2nd
floor (Suite 200) of the Premises (the "2ND FLOOR SPACE") prior to the
scheduled Commencement Date, subject to the following terms and conditions:
(i) the 2nd Floor Space shall be Substantially Complete, (ii) the Term of the
Lease shall be deemed to commence with respect to the 2nd Floor Space (but
not the balance of the Premises) on the date of occupancy of the 2nd Floor
Space by Tenant, and (iii) Tenant's use and occupancy of the 2nd Floor Space
shall be upon and subject in all respects to the terms and conditions of this
Lease, except that (x) the Term of the Lease as to the 2nd Floor Space only
shall be extended by the number of days prior to the Commencement Date that
Tenant occupied the 2nd Floor Space (so as to be coterminous with the Term
for the remainder of the Premises), and (y) Tenant shall have no obligation
to pay Landlord Basic Rental on the 2nd Floor Space prior to the Commencement
Date, provided that to the extent Tenant occupies the 2nd Floor Space prior
to April 1, 2000, Tenant shall pay to Landlord in advance Basic Rental on the
2nd Floor Space for the number of days prior to April 1, 2000 that Tenant
will occupy the 2nd Floor Space at an annual rate of $22.00 per rentable
square foot.
Tenant may elect, in its sole discretion, to occupy the 8th
floor (Suite 800) of the Premises (the "8TH FLOOR SPACE") prior to the
scheduled 8th Floor Commencement Date, subject to the following terms and
conditions: (i) the 8th Floor Space shall be Substantially Complete, (ii) the
Term of the Lease shall be deemed to commence with respect to the 8th Floor
Space (but not the balance of the Premises) on the date of occupancy of the
8th Floor Space by Tenant and shall be coterminous with the Term for the
remainder of the Premises, and (iii) Tenant's use and occupancy of the 8th
Floor Space shall be upon and subject in all respects to the terms and
conditions of this Lease; provided that Tenant's obligation to pay to
Landlord Basic Rental on the 8th Floor Space at an annual rate of $22.00 per
rentable square foot shall in any event, regardless of early occupancy,
commence on October 1, 2000.
By occupying the Premises (or the 2nd Floor Space or the
8th Floor Space, as the case may be), Tenant shall be deemed to have accepted
the Premises (or the 2nd Floor Space or the 8th Floor Space, as the case may
be) in their condition as of the date of such occupancy, subject to the
performance of punch-list items that remain to be performed by Landlord, if
any. Tenant shall execute and deliver to Landlord, within ten (10) days after
Landlord has requested same, a letter confirming (1) the Commencement Date
(or the 2nd Floor Space Commencement Date and/or the 8th Floor Commencement
Date, as the case may be), (2) that Tenant has accepted the Premises (or the
2nd Floor Space or the 8th Floor Space, as the case may be), and (3) that
Landlord has performed all of its obligations with respect to the Premises
(or the 2nd Floor Space or the 8th Floor Space, as the case may be), except
for punch-list items specified in such letter. If the Commencement Date
and/or the 8th Floor Commencement Date is not the first day of a calendar
month, then the Term shall be extended by the time between the Commencement
Date and/or the 8th Floor Commencement Date, as the case may be, and the
first day of the next month.
4. RENT.
(a) PAYMENT. Tenant shall timely pay to Landlord the Basic
Rental and all additional sums to be paid by Tenant to Landlord under this
Lease, including the amounts set forth in EXHIBIT C, without deduction or set
off, at Landlord's Address (or such other address as Landlord may from time
to time designate in writing to Tenant). Basic Rental, adjusted as herein
provided, shall be payable monthly in advance. Monthly installments of Basic
Rental shall be due on the first day of each calendar month during the Term
(provided that the monthly
1
<PAGE>
installments of Basic Rental prior to October 1, 2000 is $0.00, as set forth
in the Basic Lease Information, except as otherwise provided with respect to
the early occupancy of the 2nd Floor Space). Basic Rental for any fractional
month at the beginning of the Term shall be prorated based on 1/365 of the
current annual Basic Rental for each day of the partial month this Lease is
in effect, and shall be due on the Commencement Date.
(b) CONSUMER PRICE INDEX INCREASES TO BASIC RENTAL.
[INTENTIONALLY OMITTED]
(c) ELECTRICAL COSTS. Tenant shall pay to Landlord an
amount equal to the product of (1) the actual cost of all electricity used by
the Building ("ELECTRICAL COSTS"), multiplied by (2) Tenant's Proportionate
Share. Such amount shall be payable monthly based on Landlord's estimate of
the amount due for each month, and shall be due on the Commencement Date and
on the first day of each calendar month thereafter unless Landlord has
theretofore furnished Tenant with information indicating the amount due, in
which event such amount shall be due within thirty (30) days after Landlord
has delivered to Tenant an invoice therefor.
(d) ANNUAL COST STATEMENT. By April 1 of each calendar
year, or as soon thereafter as practicable, Landlord shall furnish to Tenant
a statement of Landlord's actual Electrical Costs and Basic Cost (the "ANNUAL
COST STATEMENT") for the previous year adjusted as provided in Section 4.(e)
and in Paragraph 4 of EXHIBIT D. If the Annual Cost Statement reveals that
Tenant paid more for Electrical Costs than Tenant's Proportionate Share of
Electrical Costs in the year for which such statement was prepared, then
Landlord shall reimburse or credit Tenant for such excess within thirty (30)
days after delivery of the Annual Cost Statement in question; likewise, if
Tenant paid less than Tenant's Proportionate Share of Electrical Costs, then
Tenant shall pay Landlord such deficiency within thirty (30) days after
delivery of the Annual Cost Statement in question.
(e) ADJUSTMENTS TO ELECTRICAL COSTS. With respect to any
calendar year or partial calendar year in which the Building is not occupied
to the extent of ninety-five percent (95%) of the rentable area thereof, the
Electrical Costs for such period shall, for the purposes hereof, be increased
to the amount which would have been incurred had the Building been occupied
to the extent of ninety-five percent (95%) of the rentable area thereof;
provided that in no event shall the aggregate amount of Electrical Costs
charged to all tenants in the Building exceed 100% of the actual Electrical
Costs incurred by Landlord for the period in question.
(f) INSPECTION RIGHT. Tenant may, after giving Landlord
30-days' prior written notice thereof, inspect or have an independent firm of
certified public accountants audit Landlord's records relating to Electrical
Costs and Basic Cost (defined in EXHIBIT C) for any periods of time within
the two-year period before the date of the audit or inspection; however, no
audit or inspection shall extend to periods of time before the Commencement
Date. Tenant's audit or inspection shall be conducted only during business
hours reasonably designated by Landlord. Tenant shall pay the cost of such
audit or inspection, unless the Annual Cost Statement for the time period in
question is determined to be in error by more than five percent (5%), in
which case Landlord shall pay the audit cost. Tenant may not conduct an
inspection or have an audit performed more than once during any calendar
year. If such inspection or audit reveals that an error was made in the
Electrical Costs or Basic Cost previously charged to Tenant, then Landlord
shall refund to Tenant any overpayment of any such costs, or Tenant shall pay
to Landlord any underpayment of any such costs, as the case may be, within
thirty (30) days after notification thereof. Tenant shall maintain the
results of each such audit and inspection confidential and shall not be
permitted to use any third party other than an independent firm of certified
public accountants to perform such audit and inspection unless such third
party or firm is reasonably acceptable to Landlord and agrees with Landlord
in writing to maintain the results of such audit or inspection confidential.
5. DELINQUENT PAYMENT; HANDLING CHARGES. All payments required of
Tenant or Landlord hereunder shall bear interest from the date due until paid
at the maximum lawful rate. Alternatively, Landlord may charge Tenant a fee
equal to five percent (5%) of the delinquent payment to reimburse Landlord
for its cost and inconvenience incurred as a consequence of Tenant's
delinquency. Landlord agrees to waive the default interest and late charges
for late payments hereunder once during any consecutive 12-month period
during the Term, provided such late payment is paid in full within ten (10)
days after receipt of written notice of delinquency. In no event, however,
shall the charges permitted under this Section 5 or elsewhere in this Lease,
to the extent the same are considered to be interest under applicable law,
exceed the maximum lawful rate of interest.
6. SECURITY DEPOSIT. [INTENTIONALLY OMITTED]
7. LANDLORD'S OBLIGATIONS.
(a) SERVICES. Landlord shall use all reasonable efforts to
furnish to Tenant (1) water (hot and cold) at those points of supply provided
for general use of tenants of the Building; (2) heated and refrigerated air
conditioning as appropriate, between the hours of 7:00 a.m. and 7:00 p.m.,
Monday through Friday, and 7:00 a.m. and 1:00 p.m. on Saturdays, Holidays
excepted in each case ("CUSTOMARY BUSINESS HOURS"), at such temperatures and
in such amounts as are set forth in EXHIBIT Q attached hereto; (3) janitorial
service to the Premises on weekdays other than Holidays for Building-standard
installations (Landlord reserves the right to bill Tenant separately for
extra janitorial service required for non-standard installations) and window
washing in accordance with the standards set forth in EXHIBIT R attached
hereto; (4) five (5) elevators, including a freight elevator, for ingress and
egress to the floor on which the Premises are located, in common with other
tenants, provided that Landlord may reasonably limit the number of elevators
to be in operation at times other than during Customary Business Hours and on
Holidays; (5) replacement of Building-standard light bulbs and fluorescent
tubes, provided that Landlord's standard charge for such bulbs and tubes
shall be paid by Tenant; (6) electrical current of up to eight (8) watts per
rentable square foot demand load for lighting and convenience outlets to
operate typewriters, personal computers and other machines of similar low
electrical consumption (the "ELECTRICAL STANDARD"); and (7) on-site security
equipment and personnel for the Building to limit access to the Building
other than during Customary Business Hours in accordance with the Security
Specifications attached hereto as EXHIBIT M. Landlord shall maintain the
common areas of the Building in reasonably good order and condition, except
for damage caused by Tenant, or its employees, agents or invitees. If Tenant
desires any of the services specified in this Section 7.(a) at any time other
than times herein designated, such
2
<PAGE>
services shall be supplied to Tenant upon the written request of Tenant
delivered to Landlord before 3:00 p.m. on the business day preceding such
extra usage, and Tenant shall pay to Landlord the actual incremental
increased cost of such services within ten (10) days after Landlord has
delivered to Tenant an invoice therefor. As used herein, "HOLIDAYS" means
days which are New York Stock Exchange holidays.
(b) EXCESS UTILITY USE. Landlord shall use reasonable
efforts to furnish electrical current for computers, electronic data
processing equipment, special lighting, Liebert units, or other equipment
whose electrical energy consumption exceeds the Electrical Standard through
the then-existing feeders and risers serving the Building and the Premises,
and Tenant shall pay to Landlord the cost of such service within thirty (30)
days after Landlord has delivered to Tenant an invoice therefor. Landlord may
determine the amount of such additional consumption and potential consumption
by either or both: (1) a survey of standard or average tenant usage of
electricity in the Building performed by a reputable consultant selected by
Landlord and paid for by Tenant; or (2) a separate meter in the Premises
installed, maintained, and read by Landlord, at Tenant's expense. Tenant
shall not install any electrical equipment requiring special wiring or
requiring voltage in excess of the Electrical Standard unless approved in
advance by Landlord. The use of electricity in the Premises shall not exceed
the capacity of existing feeders and risers to or wiring in the Premises. Any
risers or wiring required to meet Tenant's excess electrical requirements
shall, upon Tenant's written request, be installed by Landlord, at Tenant's
cost, if, in Landlord's sole and absolute judgment, the same are necessary
and shall not cause permanent damage or injury to the Building or the
Premises, cause or create a dangerous or hazardous condition, entail
excessive or unreasonable alterations, repairs, or expenses, or interfere
with or disturb other tenants of the Building. If Tenant uses machines or
equipment in the Premises which affect the temperature otherwise maintained
by the air conditioning system or otherwise overload any utility, Landlord
may install supplemental air conditioning units or other supplemental
equipment in the Premises, and the cost thereof, including the cost of
installation, operation, use, and maintenance, shall be paid by Tenant to
Landlord within ten (10) days after Landlord has delivered to Tenant an
invoice therefor. Landlord agrees that Tenant may elect to install
supplemental HVAC equipment for the Premises (i) in connection with the
performance of the Work, in accordance with and subject to the terms and
conditions, and the approval rights of Landlord, set forth in EXHIBIT D and
the other provisions of this Lease; or (ii) as permitted under Section 8.(a);
provided that all such supplemental HVAC equipment shall be operated and
maintained by Tenant at Tenant's sole cost and expense and shall be
separately metered for electrical and chilled water consumption, and Tenant
shall pay to Landlord the actual cost for such electrical and chilled water
consumption within thirty (30) days after Landlord has delivered to Tenant an
invoice therefor.
(c) GOVERNMENTAL RULES AND REGULATIONS. Landlord's
obligation to furnish services under Section 7.(a) shall be subject to the
rules and regulations of the supplier of such services and governmental rules
and regulations.
(d) RESTORATION OF SERVICES; ABATEMENT. Landlord shall use
reasonable efforts to restore any service that becomes unavailable; however,
such unavailability shall not render Landlord liable for any damages caused
thereby, be a constructive eviction of Tenant, constitute a breach of any
implied warranty, or, except as provided in the remainder of this paragraph,
entitle Tenant to any abatement of Tenant's obligations hereunder. If there
is a failure to provide electricity, chilled air, water and/or sewer service
to the Premises which makes a material portion of the Premises Untenantable
(as hereinafter defined), then Landlord shall have three (3) business days
within which to provide such interim services as are necessary to remedy the
problem. If Landlord fails to remedy such problem within three (3) business
days, then Tenant may undertake to provide such interim services for itself
by temporary generators, temporary chillers, port-o-lets and/or bottled
water, and Landlord shall cooperate in the provision of temporary services;
provided that Tenant may not assume control of repairs necessary to provide a
long-term repair of the problem, and that Tenant may abate the payment of
Basic Rental for the period of time during which the Premises are
Untenantable if the failure or interruption of services is not due to the
failure or interruption of services by a public or other third party utility
provider. Also, Landlord agrees to use diligent efforts to restore the
delivery of such services or to cause the utility company(ies) to restore
such service(s). Landlord will reimburse Tenant for Tenant's reasonable costs
incurred in supplying and/or operating temporary generators, temporary
chillers, port-o-lets and/or bottled water for the Premises if the failure or
interruption of services is not due to the failure or interruption of
services by a public utility or other third party utility provider. The term
"UNTENANTABLE" shall mean the condition whereby Tenant's use or enjoyment of
the Premises or such portion thereof is disrupted to the degree that Tenant's
employees cannot reasonably use such space for the uses permitted in this
Lease.
8. IMPROVEMENTS; ALTERATIONS; REPAIRS; MAINTENANCE.
(a) IMPROVEMENTS; ALTERATIONS. Improvements to the Premises
shall be installed at the expense of Tenant only in accordance with plans and
specifications which have been previously submitted to and approved in
writing by Landlord, which approval shall not be unreasonably withheld,
conditioned or delayed except to the extent that the subject improvements are
subject to approval in Landlord's sole discretion as hereinafter set forth,
in which event Landlord may withhold approval of such plans and
specifications in its sole discretion. After the initial Tenant improvements
are made, no alterations or physical additions in or to the Premises may be
made without Landlord's prior written consent, which consent shall not be
unreasonably withheld, conditioned or delayed; provided, however, that
Landlord may withhold its consent in its sole and absolute discretion to any
alteration or addition (or plans or specifications therefor) that (i) would
affect the Building's structure, or (ii) would affect the Building's HVAC,
plumbing, electrical, or mechanical systems, except that Permitted HVAC/MEP
Alterations shall only be subject to Landlord's reasonable approval. As used
herein, "PERMITTED HVAC/MEP ALTERATIONS" means (x) any such alterations or
additions (or such plans and specifications) that are limited to changes in
those portions of the HVAC, plumbing, mechanical, or electrical systems that
are located within the Premises and that are limited in function to the
distribution of air, water and electricity within the Premises which changes
cannot reasonably be expected to have an adverse impact on such portions of
the Building systems not located within the Premises or on the delivery of
air, water and electricity to other portions of the Building; and (y) the
installation of supplemental HVAC equipment for the Premises which Tenant
would otherwise have been permitted to install as part of the Work pursuant
to Section 7.(b), provided that such installation shall be subject to the
approval rights of Landlord under, and be performed in accordance with the
terms and provisions of, Section 26.(c), the provisions of EXHIBIT D which
would have been
3
<PAGE>
applicable thereto if such supplemental HVAC equipment had been installed in
connection with the performance of the Work (including, without limitation,
Paragraphs 3, 4, and 5 thereof), and the other provisions of this Lease.
Tenant shall not paint or install lighting or decorations, signs, window or
door lettering, or advertising media of any type on or about the Premises
without the prior written consent of Landlord, which consent shall not be
unreasonably withheld, conditioned or delayed; however, Landlord may withhold
its consent in its sole and absolute discretion to any such painting or
installation which would affect the appearance of the exterior of the
Building or of any common areas or elevator lobby areas of the Building. All
alterations, additions, or improvements (whether temporary or permanent in
character, and including without limitation all air-conditioning equipment
and all other equipment that is in any manner connected to the Building's
plumbing system) made in or upon the Premises, either by Landlord or Tenant,
shall be Landlord's property at the end of the Term and shall remain on the
Premises without compensation to Tenant, except unattached trade fixtures,
furniture and personal property which Tenant is entitled to remove pursuant
to Section 21. Approval by Landlord of any of Tenant's drawings and plans and
specifications prepared in connection with any improvements in the Premises
shall not constitute a representation or warranty of Landlord as to the
adequacy or sufficiency of such drawings, plans and specifications, or the
improvements to which they relate, for any use, purpose, or condition, but
such approval shall merely be the consent of Landlord as required hereunder.
Notwithstanding anything in this Lease to the contrary, as between Landlord
and Tenant, (1) Tenant shall bear the risk of complying with Title III of the
Americans with Disabilities Act of 1990, the Texas Elimination of
Architectural Barriers Act, and all rules, regulations, and guidelines
promulgated under either of such acts, as they may be amended from time to
time (the "DISABILITIES ACTS"), in the Premises, and (2) Landlord shall bear
the risk of complying with the Disabilities Acts in the common areas of the
Building, other than compliance that is necessitated by the use of the
Premises for other than the Permitted Use (which risk and responsibility
shall be borne by Tenant).
(b) REPAIRS; MAINTENANCE. Tenant shall maintain the
Premises in a clean, safe, operable, attractive condition, and shall not
permit or allow to remain any waste or damage to any portion of the Premises.
Tenant shall repair or replace, subject to Landlord's direction and
supervision, any damage to the Building caused by Tenant or Tenant's agents,
contractors, or invitees. If Tenant fails to make such repairs or
replacements within fifteen (15) days after the occurrence of such damage,
then Landlord may make the same at Tenant's cost. In lieu of having Tenant
repair any such damage outside of the Premises, Landlord may repair such
damage at Tenant's cost. The cost of any repair or replacement work performed
by Landlord under this Section 8 shall be paid by Tenant to Landlord within
ten (10) days after Landlord has delivered to Tenant an invoice therefor.
(c) PERFORMANCE OF WORK. All work described in this Section
8 shall be performed only by Landlord or by contractors and subcontractors
reasonably approved in writing by Landlord. Tenant shall cause all
contractors and subcontractors to procure and maintain insurance coverage
against such risks, in such amounts, and with such companies as Landlord may
reasonably require, and to procure payment and performance bonds reasonably
satisfactory to Landlord covering the cost of the work. All such work shall
be performed in accordance with all legal requirements and in a good and
workmanlike manner so as not to damage the Premises, the primary structure or
structural qualities of the Building, or plumbing, electrical lines, or other
utility transmission facility. All such work which may affect the HVAC,
electrical system, or plumbing (including Permitted HVAC/MEP Alterations)
must be approved by the Building's engineer of record.
(d) MECHANIC'S LIENS. Tenant shall not permit any
mechanic's liens to be filed against the Premises or the Building for any
work performed, materials furnished, or obligation incurred by or at the
request of Tenant. If such a lien is filed, then Tenant shall, within ten
days after Landlord has delivered notice of the filing to Tenant, either pay
the amount of the lien or diligently contest such lien and deliver to
Landlord a bond or other security reasonably satisfactory to Landlord. If
Tenant fails to timely take either such action, then Landlord may pay the
lien claim without inquiry as to the validity thereof, and any amounts so
paid, including expenses and interest, shall be paid by Tenant to Landlord
within ten (10) days after Landlord has delivered to Tenant an invoice
therefor.
9. USE. Tenant shall continuously occupy and use the Premises only
for the Permitted Use and shall comply with all laws, orders, rules, and
regulations relating to the use, condition, and occupancy of the Premises.
The Premises shall not be used for any use which is disreputable or creates
extraordinary fire hazards or results in an increased rate of insurance on
the Building or its contents or the storage of any hazardous materials or
substances. If, because of Tenant's acts, the rate of insurance on the
Building or its contents increases, then such acts shall be an Event of
Default, Tenant shall pay to Landlord the amount of such increase on demand,
and acceptance of such payment shall not constitute a waiver of any of
Landlord's other rights. Tenant shall conduct its business and control its
agents, employees, and invitees in such a manner as not to create any
nuisance or interfere with other tenants or Landlord in its management of the
Building.
10. ASSIGNMENT AND SUBLETTING.
(a) TRANSFERS; CONSENT. Except for Permitted Transfers
(defined below), Tenant shall not, without the prior written consent of
Landlord (such consent not to be unreasonably withheld, conditioned or
delayed, except as hereinafter provided), (1) assign, transfer, or encumber
this Lease or any estate or interest herein, whether directly or by operation
of law, (2) permit any entity other than a Permitted Transferee to become
Tenant hereunder by merger, consolidation, or other reorganization, (3) if
Tenant is an entity other than a corporation whose stock is publicly traded,
permit the transfer of an ownership interest in Tenant so as to result in a
change in the current control of Tenant, (4) sublet any portion of the
Premises, (5) grant any license, concession, or other right of occupancy of
any portion of the Premises, or (6) permit the use of the Premises by any
parties other than Tenant (any of the events listed in Sections 10.(a)(1)
through 10.(a)(6) being a "TRANSFER"). Landlord shall not unreasonably
withhold its consent to any assignment or subletting of the Premises to a
party which (A) has a good credit standing and may reasonably be expected to
fulfill the obligations of Tenant hereunder, (B) has a good reputation in the
business community, and (C) will use the Premises for the purposes herein
stated and will not use the Premises in any manner that would conflict with
any exclusive use agreement or other similar agreement entered into by
Landlord with any other tenant of the Building. If Tenant requests Landlord's
consent to a Transfer, then Tenant shall provide Landlord with a written
description of all terms and conditions of the proposed Transfer, copies of
the proposed documentation, and the following information about the proposed
transferee: name and address;
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reasonably satisfactory information about its business and business history;
its proposed use of the Premises; financial and other credit information; and
general references sufficient to enable Landlord to determine the proposed
transferee's creditworthiness and character. Tenant shall reimburse Landlord
for its reasonable attorneys' fees incurred in connection with considering
any request for its consent to a Transfer. If Landlord consents to a proposed
Transfer, then the proposed transferee shall deliver to Landlord a written
agreement whereby it expressly assumes the Tenant's obligations hereunder;
however, any transferee of less than all of the space in the Premises shall
be liable only for obligations under this Lease that are properly allocable
to the space subject to the Transfer, and only to the extent of the rent it
has agreed to pay Tenant therefor. Landlord's consent to a Transfer shall not
release Tenant from performing its obligations under this Lease, but rather
Tenant and its transferee shall be jointly and severally liable therefor.
Landlord's consent to any Transfer shall not waive Landlord's rights as to
any subsequent Transfers. If an Event of Default occurs while the Premises or
any part thereof are subject to a Transfer, then Landlord, in addition to its
other remedies, may collect directly from such transferee all rents becoming
due to Tenant and apply such rents against Rent. Tenant authorizes its
transferees to make payments of rent directly to Landlord upon receipt of
notice from Landlord to do so (and Landlord agrees to provide a copy of any
such notice to Tenant).
(b) CANCELLATION. Within thirty (30) days after submission
of Tenant's written request for Landlord's consent to a Transfer other than
to a Permitted Transferee, Landlord may elect to cancel this Lease as to the
portion of the Premises proposed to be sublet or assigned as of the date the
proposed Transfer was to be effective; provided, however, that the foregoing
cancellation right shall be inapplicable to any sublease which (i) is for a
term of not greater than forty-eight (48) months, and (ii) when aggregated
with all other then outstanding subleases of Tenant, does not result in more
that 60,000 rentable square feet then being subleased by Tenant (any such
subleases meeting the foregoing criteria in effect from time to time being
herein collectively called "SHORT-TERM SUBLEASES"). If Landlord cancels this
Lease as to any portion of the Premises, then this Lease shall terminate as
to such portion of the Premises and Tenant shall pay to Landlord all Rent
accrued through the cancellation date relating to the portion of the Premises
covered by the proposed Transfer. Thereafter, Landlord may lease such portion
of the Premises to the prospective transferee (or to any other person)
without liability to Tenant.
(c) ADDITIONAL COMPENSATION. Tenant shall pay to Landlord,
immediately upon receipt thereof, fifty percent (50%) of all compensation
received by Tenant for a Transfer that exceeds (i) the Basic Rental and
Tenant's share of Electrical Costs and Excess allocable to the portion of the
Premises covered thereby, and (ii) the reasonable out-of-pocket costs
incurred by Tenant and Landlord in connection with such Transfer.
(d) PERMITTED TRANSFERS. Notwithstanding the foregoing,
Tenant may Transfer all or part of its interest in this Lease or all or part
of the Premises to the following types of entities (a "PERMITTED TRANSFEREE")
without the written consent of Landlord (a "PERMITTED TRANSFER"), provided
that the conditions set forth below are satisfied:
(1) any person or entity who or which controls, is
controlled by, or is under common control with Tenant;
(2) any corporation in which or with which Tenant, or
its corporate successors or assigns, is merged or consolidated, in
accordance with applicable statutory provisions governing merger and
consolidation of corporations, so long as (A) Tenant's obligations
hereunder are assumed by the corporation surviving such merger or
created by such consolidation; and (B) the Tangible Net Worth of the
surviving or created corporation is not less than the Tangible Net
Worth of Tenant as of the date hereof; or
(3) any corporation acquiring all or substantially
all of Tenant's assets if such corporation's Tangible Net Worth after
such acquisition is not less than the Tangible Net Worth of Tenant as
of the date hereof.
Tenant shall promptly notify Landlord of any such Permitted Transfer. As a
condition precedent to any Permitted Transfer, the proposed Permitted
Transferee must deliver to Landlord a written agreement whereby it expressly
assumes the Tenant's obligations hereunder; however, any transferee of less
than all of the space in the Premises shall be liable only for obligations
under this Lease that are properly allocable to the space subject to the
Transfer, and only to the extent of the rent it has agreed to pay Tenant
therefor. The occurrence of a Permitted Transfer shall not waive Landlord's
rights as to any subsequent Transfers. As used herein, "TANGIBLE NET WORTH"
shall mean the excess of total assets over total liabilities (in each case,
determined in accordance with GAAP) excluding from the determination of total
assets all assets which would be classified as intangible assets under GAAP,
including, without limitation, goodwill, licenses, patents, trademarks, trade
names, copyrights, and franchises.
11. INSURANCE; WAIVERS; SUBROGATION; INDEMNITY.
(a) INSURANCE. Tenant shall at its expense procure and
maintain throughout the Term the following insurance policies: (1)
comprehensive general liability insurance in amounts of not less than a
combined single limit of $5,000,000 (the "INITIAL LIABILITY INSURANCE
AMOUNT") or such other amounts as Landlord may from time to time reasonably
require, insuring Tenant, Landlord, and Landlord's property management
company against all liability for injury to or death of a person or persons
or damage to property arising from the use and occupancy of the Premises,
including contractual liability insurance coverage sufficient to cover
Tenant's indemnity obligations hereunder, (2) insurance covering the full
value of Tenant's property and improvements, and other property (including
property of others), in the Premises for Tenant's benefit only, and (3)
business interruption insurance for Tenant's benefit only. Tenant's insurance
shall provide primary coverage to Landlord when any policy issued to Landlord
provides duplicate or similar coverage, and in such circumstance Landlord's
policy will be excess over Tenant's policy. Tenant shall furnish certificates
of such insurance and such other evidence satisfactory to Landlord of the
maintenance of all insurance coverages required hereunder, and Tenant shall
obtain a written obligation on the part of each insurance company to notify
Landlord at least thirty (30) days before cancellation or a material change
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of any such insurance. All such insurance policies shall be in form, and
issued by companies, reasonably satisfactory to Landlord. The term
"AFFILIATE" shall mean any person or entity which, directly or indirectly,
controls, is controlled by, or is under common control with the party in
question.
Landlord shall, at its expense, procure and maintain
throughout the Term of this Lease (i) comprehensive general liability
insurance with respect to all common areas of the Building in an amount not
less than that required of Tenant with respect to the Premises, including
contractual liability coverage sufficient to cover Landlord's indemnity
obligations hereunder, and (ii) all risk full replacement cost fire and
extended coverage insurance on the Building and all Improvements therein,
including boiler coverage and a rent loss endorsement for at least twelve
(12) months. Upon Tenant's written request, Landlord shall from time to time
furnish to Tenant certificates evidencing the maintenance of all insurance
coverages required hereunder.
(b) WAIVER OF NEGLIGENCE CLAIMS; NO SUBROGATION. Landlord
shall not be liable to Tenant and Tenant shall not be liable to Landlord or
those claiming by, through, or under Tenant or Landlord (as the case may be)
for any injury to or death of any person or persons or the damage to or
theft, destruction, loss, or loss of use of any property or inconvenience (a
"LOSS") caused by casualty, theft, fire, third parties, or any other matter
(including Losses arising through repair or alteration of any part of the
Building, or failure to make repairs, or from any other cause), for matters
covered by the insurance required to be carried by the respective party
hereunder, REGARDLESS OF WHETHER THE NEGLIGENCE OF EITHER PARTY TO THIS LEASE
CAUSED SUCH LOSS IN WHOLE OR IN PART. Landlord and Tenant each waives any
claim it might have against the other for any damage to or theft,
destruction, loss, or loss of use of any property, to the extent the same is
insured against under any insurance policy that covers the Building, the
Premises, Landlord's or Tenant's fixtures, personal property, leasehold
improvements, or business, or is required to be insured against under the
terms hereof, REGARDLESS OF WHETHER THE NEGLIGENCE OR FAULT OF THE OTHER
PARTY TO THIS LEASE CAUSED SUCH LOSS; HOWEVER, LANDLORD'S AND TENANT'S WAIVER
SHALL NOT INCLUDE ANY DEDUCTIBLE AMOUNTS OF UP TO $50,000.00 ON INSURANCE
POLICIES CARRIED BY LANDLORD OR TENANT (AS THE CASE MAY BE) OR APPLY TO ANY
COINSURANCE PENALTY WHICH LANDLORD OR TENANT (AS THE CASE MAY BE) MIGHT
SUSTAIN OF UP TO $50,000.00. Each party shall cause its insurance carrier to
endorse all applicable policies waiving the carrier's rights of recovery
under subrogation or otherwise against the other party.
(c) INDEMNITY. Subject to Section 11.(b), Tenant shall
defend, indemnify, and hold harmless Landlord and its agents from and against
all claims, demands, liabilities, causes of action, suits, judgments, and
expenses (including reasonable attorneys' fees) for any Loss arising from any
occurrence on the Premises or from Tenant's failure to perform its
obligations under this Lease (other than a Loss arising from the negligence
of Landlord or its agents). Subject to Section 11.(b), Landlord shall defend,
indemnify and hold harmless Tenant and its agents from and against all
claims, demands, liabilities, causes of action, suits, judgments and expenses
(including reasonable attorneys' fees) for any Loss arising from any
occurrence in the Building's common areas (other than a Loss arising from the
negligence of Tenant or its agents). This indemnity provision shall survive
termination or expiration of this Lease.
12. SUBORDINATION ATTORNMENT; NOTICE TO LANDLORD'S MORTGAGEE.
(a) SUBORDINATION. This Lease shall be subordinate to any
deed of trust, mortgage, or other security instrument (a "MORTGAGE") that now
or hereafter covers all or any part of the Premises (the mortgagee under any
Mortgage is referred to herein as "LANDLORD'S MORTGAGEE"). Notwithstanding
the foregoing, this Lease shall only be effective upon delivery of an
executed subordination, non-disturbance and attornment agreement from each
current Landlord's Mortgagee in substantially the forms attached hereto as
EXHIBIT L The subordination of Tenant's rights hereunder to any future
Landlord's Mortgagee under this SECTION 12.(a) shall be conditioned upon such
future Landlord's Mortgagee's execution and delivery of a subordination,
non-disturbance and attornment agreement in a form substantially similar to
either of those attached hereto as EXHIBIT L or otherwise reasonably
satisfactory to Tenant and such future Landlord's Mortgagee.
(b) ATTORNMENT. Tenant shall attorn to any party succeeding
to Landlord's interest in the Premises, whether by purchase, foreclosure,
deed in lieu of foreclosure, power of sale, termination of lease, or
otherwise, upon such party's request, and shall execute such agreements
confirming such attornment as such party may reasonably request.
(c) NOTICE TO LANDLORD'S MORTGAGEE. Tenant shall not seek
to enforce any remedy it may have for any default on the part of the Landlord
without first giving written notice by certified mail, return receipt
requested, specifying the default in reasonable detail, to any Landlord's
Mortgagee whose address has been given to Tenant, and affording such
Landlord's Mortgagee a reasonable opportunity to perform Landlord's
obligations hereunder.
13. RULES AND REGULATIONS. Tenant shall comply with the rules and
regulations of the Building which are attached hereto as EXHIBIT B. Landlord
may, from time to time, change such rules and regulations for the safety,
care, or cleanliness of the Building and related facilities, provided that
such changes are applicable to all tenants of the Building and will not
unreasonably interfere with Tenant's use of the Premises, and provided that
Tenant has received written notice thereof. Tenant shall be responsible for
the compliance with such rules and regulations by its employees, agents, and
invitees.
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14. CONDEMNATION.
(a) TAKING - LANDLORD'S AND TENANT'S RIGHTS. If any part of
the Building is taken by right of eminent domain or conveyed in lieu thereof
(a "TAKING"), and such Taking prevents Tenant from conducting its business in
the Premises in a manner reasonably comparable to that conducted immediately
before such Taking, then Tenant may terminate this Lease as of the date of
such Taking by giving written notice to Landlord within sixty (60) days after
the Taking, and Rent shall be apportioned as of the date of such Taking. If
Tenant does not terminate this Lease, then Rent shall be abated on a
reasonable basis as to that portion of the Premises rendered untenantable by
the Taking.
(b) TAKING - LANDLORD'S RIGHTS. If any material portion,
but less than all, of the Building becomes subject to a Taking, or if
Landlord is required to pay any of the proceeds received for a Taking to
Landlord's Mortgagee, then this Lease, at the option of Landlord, exercised
by written notice to Tenant within thirty (30) days after such Taking, shall
terminate and Rent shall be apportioned as of the date of such Taking. If
Landlord and Tenant do not terminate this Lease, then this Lease will
continue, but if any portion of the Premises has been taken, Basic Rental
shall abate as provided in the last sentence of Section 14.(a).
(c) AWARD. If any Taking occurs, then Landlord shall
receive the entire award or other compensation for the Land, the Building,
and other improvements taken, and Tenant may separately pursue a claim
against the condemnor for the value of Tenant's personal property which
Tenant is entitled to remove under this Lease, moving costs, loss of
business, and other claims it may have.
15. FIRE OR OTHER CASUALTY.
(a) REPAIR ESTIMATE. If the Premises or the Building are
damaged by fire or other casualty (a "CASUALTY"), Landlord shall, within
forty-five (45) days after such Casualty, deliver to Tenant a good faith
estimate (the "DAMAGE NOTICE") of the time needed to repair the damage caused
by such Casualty.
(b) LANDLORD'S AND TENANT'S RIGHTS. If a material portion
of the Premises or the Building is damaged by Casualty such that Tenant is
prevented from conducting its business in the Premises in a manner reasonably
comparable to that conducted immediately before such Casualty and Landlord
estimates that the damage caused thereby cannot be repaired within two
hundred twenty-five (225) days after such Casualty, then Tenant may terminate
this Lease by delivering written notice to Landlord of its election to
terminate within thirty (30) days after the Damage Notice has been delivered
to Tenant. If Tenant does not terminate this Lease, then (subject to
Landlord's rights under Section 15.(c)) Landlord shall repair the Building or
the Premises, as the case may be, as provided below, and Rent for the portion
of the Premises rendered untenantable by the damage shall be abated on a
reasonable basis from the date of damage until the completion of the repair,
unless Tenant caused such damage, in which case, Tenant shall continue to pay
Rent without abatement.
(c) LANDLORD'S RIGHTS. If a Casualty damages a material
portion of the Building, and Landlord makes a good faith determination that
restoring the Premises would be uneconomical, or if Landlord is required to
pay any insurance proceeds arising out of the Casualty to Landlord's
Mortgagee, then Landlord may terminate this Lease by giving written notice of
its election to terminate within thirty (30) days after the Damage Notice has
been delivered to Tenant, and Basic Rental hereunder shall be abated as of
the date of the Casualty.
(d) REPAIR OBLIGATION. If neither party elects to terminate
this Lease following a Casualty, then Landlord shall, within a reasonable
time after such Casualty, commence to repair the Building and the Premises
and shall proceed with reasonable diligence to restore the Building and
Premises to substantially the same condition as they existed immediately
before such Casualty; however, Landlord shall not be required to repair or
replace any part of the furniture, equipment, fixtures, and other
improvements which may have been placed by, or at the request of, Tenant or
other occupants in the Building or the Premises, and Landlord's obligation to
repair or restore the Building or Premises shall be limited to the extent of
the insurance proceeds actually received by Landlord for the Casualty in
question.
16. TAXES. Tenant shall be liable for all taxes levied or assessed
against personal property, furniture, or fixtures placed by Tenant in the
Premises. If any taxes for which Tenant is liable are levied or assessed
against Landlord or Landlord's property and Landlord elects to pay the same,
or if the assessed value of Landlord's property is increased by inclusion of
such personal property, furniture or fixtures and Landlord elects to pay the
taxes based on such increase, then Tenant shall pay to Landlord, upon demand,
that part of such taxes for which Tenant is primarily liable hereunder.
17. EVENTS OF DEFAULT. Each of the following occurrences shall
constitute an "EVENT OF DEFAULT":
(a) Tenant's failure to pay Rent, or any other sums due
from Tenant to Landlord under the Lease (or any other lease executed by
Tenant for space in the Building), when due provided that on the first such
failure to pay during any consecutive 12-month period during the Term, such
failure shall not constitute an Event of Default unless such failure
continues for ten (10) days after the date Landlord delivers to Tenant
written notice thereof;
(b) Tenant's failure to perform, comply with, or observe
any other agreement or obligation of Tenant under this Lease (or any other
lease executed by Tenant for space in the Building) and the continuance of
such failure for a period of thirty (30) days after the date Landlord
delivers to Tenant written notice thereof; however, if such failure cannot be
cured within such 30-day period and Tenant commences to cure such failure
within such 30-day period and thereafter diligently pursues such cure to
completion, then such failure shall not be an Event of Default unless it is
not fully cured within an additional one hundred fifty (150) days after the
expiration of the 30-day period;
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(c) the filing of a petition by or against Tenant (the term
"Tenant" shall include, for the purpose of this Section 17.(c), any guarantor
of the Tenant's obligations hereunder) (1) in any bankruptcy or other
insolvency proceeding; (2) seeking any relief under any state or federal
debtor relief law; (3) for the appointment of a liquidator or receiver for
all or substantially all of Tenant's property or for Tenant's interest in
this Lease; or (4) for the reorganization or modification of Tenant's capital
structure;
(d) [Intentionally Omitted]; and
(e) the admission by Tenant that it cannot meet its
obligations as they become due or the making by Tenant of an assignment for
the benefit of its creditors.
18. REMEDIES. Upon any Event of Default, Landlord may, in addition
to all other rights and remedies afforded Landlord hereunder or by law or
equity, take any of the following actions:
(a) Terminate this Lease by giving Tenant written notice
thereof, in which event, Tenant shall pay to Landlord the sum of (1) all Rent
accrued hereunder through the date of termination, (2) all amounts due under
Section 19.(a), and (3) an amount equal to (A) the total Rent that Tenant
would have been required to pay for the remainder of the Term discounted to
present value at a per annum rate equal to the "Prime Rate" as published on
the date this Lease is terminated by The Wall Street Journal, Southwest
Edition, in its listing of "Money Rates", minus (B) the then present fair
rental value of the Premises for such period, similarly discounted; or
(b) Terminate Tenant's right to possession of the Premises
without terminating this Lease by giving written notice thereof to Tenant, in
which event Tenant shall pay to Landlord (1) all Rent and other amounts
accrued hereunder to the date of termination of possession, (2) all amounts
due from time to time under Section 19.(a), and (3) all Rent and other sums
required hereunder to be paid by Tenant during the remainder of the Term,
diminished by any net sums thereafter received by Landlord through reletting
the Premises during such period. Landlord shall use reasonable efforts to
relet the Premises on such terms and conditions as Landlord in its sole
discretion may determine (including a term different from the Term, rental
concessions, and alterations to, and improvement of, the Premises); however,
Landlord shall not be obligated to relet the Premises before leasing other
portions of the Building. Landlord shall not be liable for, nor shall
Tenant's obligations hereunder be diminished because of, Landlord's failure
to relet the Premises or to collect rent due for such reletting. Tenant shall
not be entitled to the excess of any consideration obtained by reletting over
the Rent due hereunder. Reentry by Landlord in the Premises shall not affect
Tenant's obligations hereunder for the unexpired Term; rather, Landlord may,
from time to time, bring action against Tenant to collect amounts due by
Tenant, without the necessity of Landlord's waiting until the expiration of
the Term. Unless Landlord delivers written notice to Tenant expressly stating
that it has elected to terminate this Lease, all actions taken by Landlord to
exclude or dispossess Tenant of the Premises shall be deemed to be taken
under this Section 18.(b). If Landlord elects to proceed under this Section
18.(b), it may at any time elect to terminate this Lease under Section 18.(a).
19. PAYMENT BY TENANT; NON-WAIVER.
(a) PAYMENT BY TENANT. Upon any Event of Default, Tenant
shall pay to Landlord all costs incurred by Landlord (including court costs
and reasonable attorneys' fees and expenses), to the maximum extent permitted
under applicable law, in (1) obtaining possession of the Premises, (2)
removing and storing Tenant's property or the property of any other person in
the Premises, (3) if Tenant is dispossessed of the Premises and this Lease is
not terminated, reletting the Premises, including the portion of any
brokerage commissions and tenant finish costs incurred which are applicable
to the unexpired Term of this Lease, (4) performing Tenant's obligations
which Tenant failed to perform (other than the obligation to pay Rent, the
recovery of which by Landlord is governed by Section 18 hereof), and (5)
enforcing Landlord's rights and remedies arising out of the Event of Default.
(b) NO WAIVER. Landlord's acceptance of Rent following an
Event of Default shall not waive Landlord's rights regarding such Event of
Default. No waiver by Landlord of any violation or breach of any of the terms
contained herein shall waive Landlord's rights regarding any future violation
of such term or violation of any other term.
(c) LANDLORD DEFAULT. Upon any violation or breach by
Landlord of any of the terms and conditions contained herein (except as
otherwise expressly provided herein and subject to the terms and provisions
of Section 25(b)), which violation or breach is not cured within a reasonable
period of time after written notice thereof by Tenant to Landlord, Landlord
shall pay to Tenant all commercially reasonable costs incurred by Tenant as a
result thereof, including court costs and reasonable attorneys' fees and
expenses.
20. NO LANDLORD'S LIEN. Landlord hereby waives any contractual,
statutory or constitutional landlord's lien rights to which it might
otherwise be entitled in respect of the equipment, fixtures, furnishings,
inventory, chattels, accounts and other personal property of Tenant to secure
performance of Tenant's obligations under this Lease.
21. SURRENDER OF PREMISES. No act by Landlord shall be deemed an
acceptance of a surrender of the Premises, and no agreement to accept a
surrender of the Premises shall be valid unless the same is made in writing
and signed by Landlord. At the expiration or termination of this Lease,
Tenant shall deliver to Landlord the Premises with all improvements located
thereon in good repair and condition, reasonable wear and tear and
condemnation and fire or other casualty (as to which the provisions of
Section 11 shall govern) excepted, and shall deliver to Landlord all keys to
the Premises. Tenant may remove all unattached trade fixtures, furniture, and
personal property placed in the Premises by Tenant (but Tenant shall not
remove any such item which was paid for, in whole or in part, by Landlord).
Additionally, Tenant shall remove such alterations, additions, improvements,
trade fixtures, equipment, wiring, and furniture as Landlord may request;
provided that Tenant shall not be required to remove the alterations,
additions, trade fixtures and equipment installed as part of the Work or any
subsequent alterations, additions, trade fixtures or equipment installed in
accordance with this Lease unless otherwise specified
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by Landlord in writing prior to the construction or installation thereof; and
provided further that Tenant shall repair all damage caused by such removal.
All items not so removed shall be deemed to have been abandoned by Tenant and
may be appropriated, sold, stored, destroyed, or otherwise disposed of by
Landlord without notice to Tenant and without any obligation to account for
such items. The provisions of this Section 21 shall survive the end of the
Term.
22. HOLDING OVER. If Tenant fails to vacate the Premises at the end
of the Term, then Tenant shall be a tenant at will and, in addition to all
other damages and remedies to which Landlord may be entitled for such holding
over, Tenant shall pay, in addition to the other Rent, a daily Basic Rental
equal to one hundred fifty percent (150%) of the daily Basic Rental payable
during the last month of the Term.
23. CERTAIN RIGHTS RESERVED BY LANDLORD. Provided that the exercise
of such rights does not unreasonably interfere with Tenant's occupancy of the
Premises, Landlord shall have the following rights:
(a) to decorate and to make inspections, repairs,
alterations, additions, changes, or improvements, whether structural or
otherwise, in and about the Building, or any part thereof; for such purposes,
to enter upon the Premises and, during the continuance of any such work, to
temporarily close doors, entryways, public space, and corridors in the
Building; to interrupt or temporarily suspend Building services and
facilities; and to change the arrangement and location of entrances or
passageways, doors, and doorways, corridors, elevators, stairs, restrooms, or
other public parts of the Building;
(b) to take such reasonable measures as Landlord deems
advisable for the security of the Building and its occupants, including
without limitation searching all persons entering or leaving the Building;
evacuating the Building for cause, suspected cause, or for drill purposes;
temporarily denying access to the Building; and closing the Building after
Customary Business Hours and on Saturdays, Sundays, and Holidays, subject,
however, to Tenant's right to enter the Building twenty-four (24) hours per
day, seven (7) days per week, under such reasonable regulations as Landlord
may prescribe from time to time which may include by way of example, but not
of limitation, that persons entering or leaving the Building, whether or not
during normal business hours, identify themselves to a security officer by
registration or otherwise and that such persons establish their right to
enter or leave the Building; and
(c) to enter the Premises at all reasonable hours and upon
reasonable notice to Tenant (which may be verbal) at any time during the Term
of the Lease to show the Premises to prospective purchasers and lenders and
during the final year of the initial Term (or, if Tenant shall timely and
validly exercise an extension option as provided in EXHIBIT F, during the
final year of the extended Lease Term) to show the Premises to prospective
tenants; provided that Tenant shall have the right to have a representative
present during such entry if Tenant so elects.
Notwithstanding anything to the contrary contained herein,
Tenant shall be entitled, during the Lease Term to designate a reasonable
portion (or portions) of the Premises as a "SECURED AREA" and to install door
locks or other access control systems as necessary to secure such Secured
Area(s), provided that Tenant gives Landlord prior written notice of Tenant's
designation of such Secured Area(s) and that such Secured Area(s) shall be
used by Tenant solely for the purposes permitted under this Lease. Tenant
hereby agrees and acknowledges that Landlord shall have no obligation to
perform janitorial services in such Secured Area(s) unless Tenant provides
Landlord a written request for same and provides Landlord with access to such
Secured Area(s) (by providing Landlord a key or other device, by scheduling
Landlord's entry with an escort or otherwise). If Tenant does not provide
Landlord with a key or other device to gain access to such Secured Area(s),
Landlord shall have the right to use reasonable force to gain access to such
Secured Area(s) in the case of emergency and Landlord shall have no liability
whatsoever to Tenant in connection therewith. Landlord and Tenant hereby
agree and acknowledge that, except as provided in the immediately preceding
sentence, Landlord shall enter such Secured Area(s) only upon one (1)
business days' prior notice to Tenant and only after providing Tenant with
the opportunity to have a representative of Tenant present as an escort.
Landlord and Tenant hereby agree to use commercially reasonable efforts to
schedule any such entries into the Secured Area(s) by Landlord at times that
are mutually convenient to both Landlord and Tenant, taking into
consideration the nature of Tenant's operations in the Premises. Tenant
agrees that Tenant shall be responsible, at its sole cost and expense, for
complying with all applicable laws regarding such Secured Area(s).
24. SUBSTITUTION SPACE.
(a) From time to time during the Term, Landlord may
substitute for any portion of the Premises which is located on a floor in the
Building (other than the first floor) that is not wholly occupied by Tenant
and which partial floor leased by Tenant contains less than 15,000 rentable
square feet (the "REPLACED SPACE") other space that has an area at least
equal to and is of comparable quality to the Replaced Space and is located in
the Building (the "SUBSTITUTION SPACE").
(b) If Landlord exercises such right by giving Tenant
notice thereof ("SUBSTITUTION NOTICE") at least sixty (60) days before the
effective date of such substitution, then (1) the description of the Premises
shall be amended to reflect the inclusion of the Substitution Space; and (2)
all of the terms and conditions of this Lease shall apply to the Substitution
Space except that if the Substitution Space contains more square footage than
the Replaced Space, then the Basic Rental then in effect shall be increased
proportionately (provided that such increase shall not exceed one hundred
five percent (105%) of the Basic Rental due for the Replaced Space) and shall
be subject to adjustment as herein provided. The effective date of such
substitution (the "SUBSTITUTION EFFECTIVE DATE") shall be the date specified
in the Substitution Notice or, if Landlord is required to perform tenant
finish work to the Substitution Space under Section 24.(c), then the date on
which Landlord substantially completes such tenant finish work. If Landlord
is delayed in performing the tenant finish work by Tenant's actions (either
by Tenant's change in the plans and specifications for such work or
otherwise), then the Substitution Effective Date shall not be extended and
Tenant shall pay Rent for the Substitution Space beginning on the date
specified in the Substitution Notice.
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(c) Tenant may either accept possession of the Substitution
Space in its "as is" condition as of the Substitution Effective Date or
require Landlord to alter the Substitution Space in the same manner as the
Premises were altered or were to be altered. Tenant shall deliver to Landlord
written notice of its election within ten (10) days after the Substitution
Notice has been delivered to Tenant. If Tenant fails to timely deliver notice
of its election or if an Event of Default then exists, then Tenant shall be
deemed to have elected to accept possession of the Substitution Space in its
"as is" condition.
(d) Tenant shall move from the Replaced Space into the
Substitution Space and shall surrender possession of the Replaced Space as
provided in Section 21 by the Substitution Effective Date. If Tenant occupies
the Replaced Space after the Substitution Effective Date, then Tenant's
occupancy of the Replaced Space shall be a tenancy at will (and, without
limiting all other rights and remedies available to Landlord, including
instituting a forcible detainer suit), Tenant shall pay Basic Rental for the
Replaced Space as provided in Section 22 and all other Rent due therefor
until such occupancy ends; such amounts shall be in addition to the Rent due
for the Substitution Space.
(e) If Landlord exercises its substitution right, then
Landlord shall reimburse Tenant for Tenant's reasonable out-of-pocket
expenses for moving Tenant's furniture, equipment, supplies and telephone
equipment from the Replaced Space to the Substitution Space and for
reprinting Tenant's stationery of the same quality and quantity of Tenant's
stationery supply on hand immediately prior to Landlord's notice to Tenant of
the exercise of this relocation right.
25. MISCELLANEOUS.
(a) LANDLORD TRANSFER. Landlord may transfer, in whole or
in part, the Building and any of its rights under this Lease. If Landlord
assigns its rights and obligations under this Lease, then Landlord shall
thereby be released from any further obligations hereunder.
(b) LANDLORD'S LIABILITY. The liability of Landlord to
Tenant for any default by Landlord under the terms of this Lease shall be
limited to Tenant's actual direct, but not consequential, damages therefor
and shall be recoverable from the interest of Landlord in the Building and
the Land, and Landlord shall not be personally liable for any deficiency.
This section shall not be deemed to limit or deny any remedies which Tenant
may have in the event of default by Landlord hereunder which do not involve
the personal liability of Landlord.
(c) FORCE MAJEURE. Other than for Tenant's monetary
obligations under this Lease and obligations which can be cured by the
payment of money (e.g., maintaining insurance), whenever a period of time is
herein prescribed for action to be taken by either party hereto, such party
shall not be liable or responsible for, and there shall be excluded from the
computation for any such period of time, any delays due to strikes, riots,
acts of God, shortages of labor or materials, war, governmental laws,
regulations, or restrictions, or any other causes of any kind whatsoever
which are beyond the control of such party.
(d) BROKERAGE. Landlord and Tenant each warrant to the
other that it has not dealt with any broker or agent in connection with the
negotiation or execution of this Lease other than Trammell Crow Dallas/Fort
Worth and the Staubach Company. Tenant and Landlord shall each indemnify the
other against all costs, expenses, attorneys' fees, and other liability for
commissions or other compensation claimed by any broker or agent claiming the
same by, through, or under the indemnifying party. The commissions of the
Staubach Company shall be paid by Landlord as and when provided in the
commission agreement attached hereto as EXHIBIT N.
(e) ESTOPPEL CERTIFICATES. From time to time, Tenant shall
furnish to any party designated by Landlord, within ten (10) days after
Landlord has made a request therefor, a certificate signed by Tenant
confirming and containing such factual certifications and representations as
to this Lease as Landlord may reasonably request.
(f) NOTICES. All notices and other communications given
pursuant to this Lease shall be in writing and shall be (1) mailed by first
class, United States Mail, postage prepaid, certified, with return receipt
requested, and addressed to the parties hereto at the address specified in
the Basic Lease Information, (2) hand delivered to the intended address, or
(3) sent by prepaid telegram, cable, facsimile transmission, or telex
followed by a confirmatory letter. Notice sent by certified mail, postage
prepaid, shall be effective three (3) business days after being deposited in
the United States Mail; all other notices shall be effective upon delivery to
the address of the addressee. The parties hereto may change their addresses
by giving notice thereof to the other in conformity with this provision.
(g) SEPARABILITY. If any clause or provision of this Lease
is illegal, invalid, or unenforceable under present or future laws, then the
remainder of this Lease shall not be affected thereby and in lieu of such
clause or provision, there shall be added as a part of this Lease a clause or
provision as similar in terms to such illegal, invalid, or unenforceable
clause or provision as may be possible and be legal, valid, and enforceable.
(h) AMENDMENTS; AND BINDING EFFECT. This Lease may not be
amended except by instrument in writing signed by Landlord and Tenant. No
provision of this Lease shall be deemed to have been waived by Landlord
unless such waiver is in writing signed by Landlord, and no custom or
practice which may evolve between the parties in the administration of the
terms hereof shall waive or diminish the right of Landlord to insist upon the
performance by Tenant in strict accordance with the terms hereof. The terms
and conditions contained in this Lease shall inure to the benefit of and be
binding upon the parties hereto, and upon their respective successors in
interest and legal representatives, except as otherwise herein expressly
provided. This Lease is for the sole benefit of Landlord and Tenant, and,
other than Landlord's Mortgagee, no third party shall be deemed a third party
beneficiary hereof.
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(i) QUIET ENJOYMENT. Provided Tenant has performed all of
the terms and conditions of this Lease to be performed by Tenant, Tenant
shall peaceably and quietly hold and enjoy the Premises for the Term, without
hindrance from Landlord or any party claiming by, through, or under Landlord,
subject to the terms and conditions of this Lease.
(j) JOINT AND SEVERAL LIABILITY. If there is more than one
Tenant, then the obligations hereunder imposed upon Tenant shall be joint and
several. If there is a guarantor of Tenant's obligations hereunder, then the
obligations hereunder imposed upon Tenant shall be the joint and several
obligations of Tenant and such guarantor, and Landlord need not first proceed
against Tenant before proceeding against such guarantor nor shall any such
guarantor be released from its guaranty for any reason whatsoever.
(k) CAPTIONS. The captions contained in this Lease are for
convenience of reference only, and do not limit or enlarge the terms and
conditions of this Lease.
(l) NO MERGER. There shall be no merger of the leasehold
estate hereby created with the fee estate in the Premises or any part thereof
if the same person acquires or holds, directly or indirectly, this Lease or
any interest in this Lease and the fee estate in the leasehold Premises or
any interest in such fee estate.
(m) NO OFFER. The submission of this Lease to Tenant shall
not be construed as an offer, nor shall Tenant have any rights under this
Lease unless Landlord executes a copy of this Lease and delivers it to Tenant.
(n) EXHIBITS. All exhibits and attachments attached hereto
are incorporated herein by this reference.
Exhibit A-1- Outline of Premises
Exhibit A-2- Site Plan of Land, Building and Development Site
Exhibit A-3 Legal Description of Land
Exhibit A-4- Outline of Must-Take Space
Exhibit A-5- Outline of Additional Space
Exhibit A-6- Outline of First Expansion Area
Exhibit A-7- Outline of Second Expansion Area
Exhibit B - Building Rules and Regulations
Exhibit C - Operating Expense Escalator
Exhibit D - Tenant Finish-Work; Allowance
Exhibit E - Parking
Exhibit F - Extension Option
Exhibit G - Tenant's Preferential Right to Lease
Exhibit H - Must-Take Expansion Obligation
Exhibit I - Expansion Options
Exhibit J - Right of First Offer - Development Site
Exhibit K - Waiver of Rights Under the Deceptive Trade
Practices-Consumer Protection Act
Exhibit L - Forms of Subordination, Non-Disturbance and
Attornment Agreement
Exhibit M - Security Specifications
Exhibit N - Form of Staubach Company Commission Agreement
Exhibit O - Schedule of Listed Competitors
Exhibit P - [Intentionally Omitted]
Exhibit Q - HVAC Specifications
Exhibit R - Janitorial Specifications
(o) ENTIRE AGREEMENT. This Lease constitutes the entire
agreement between Landlord and Tenant regarding the subject matter hereof and
supersedes all oral statements and prior writings relating thereto. Except
for those set forth in this Lease, no representations, warranties, or
agreements have been made by Landlord or Tenant to the other with respect to
this Lease or the obligations of Landlord or Tenant in connection therewith.
The normal rule of construction that any ambiguities be resolved against the
drafting party shall not apply to the interpretation of this Lease or any
Exhibits or amendments hereto.
26. SPECIAL PROVISIONS.
(a) BUILDING NAME; SIGNAGE. Landlord agrees that Landlord
shall re-name the Building "Inet Technologies Tower" (the "NAMING RIGHTS").
Tenant's Naming Rights are personal to Inet Technologies, Inc. and its
Permitted Transferees, may not be transferred to any entity other than a
Permitted Transferee (and then only at Tenant's sole cost and expense), and
shall terminate if (1) this Lease or Tenant's right to possession of the
Premises expires by its terms or is terminated, (2) Tenant's Signage Rights
terminate or are assigned or transferred other than to a Permitted Transferee
of Inet Technologies, Inc., or (3) during any renewal term of this Lease, if
Inet Technologies, Inc. and its affiliated entities are not the largest
tenant in the Building.
Tenant, at its sole cost and expense, shall have the right
to (i) erect and maintain two (2) illuminated exterior building signs, one of
which shall be located on the eleventh (11th) floor of the North elevation of
the Building, and one of which shall be located on the eleventh (11th) floor
of the South elevation of the Building, in specific locations to be agreed
upon by Landlord and Tenant (the "EXTERIOR SIGNAGE"); (ii) erect and maintain
an exterior monument sign on the West side of the Building in a location to
be agreed upon by Landlord and Tenant, subject to obtaining all required
consents and approvals from the City of Richardson with respect thereto (and
Landlord and Tenant agree to coordinate their respective efforts in obtaining
such consents and approvals (the "MONUMENT SIGNAGE"); and (iii) interior
signage in the elevator lobbies and on the entrance doors of all floors in
which Tenant is in occupancy in specific locations and sizes to be agreed
upon by Landlord and Tenant (the "INTERIOR SIGNAGE"). The Exterior Signage,
Monument Signage, and Interior Signage shall identify "Inet Technologies,
Inc." or a derivative thereof, may contain Tenant's corporate logo, shall be
subject in all respects to Landlord's prior written approval (which
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shall not be unreasonably withheld), and shall comply in all respects with
all governmental rules and regulations. Tenant shall obtain and maintain all
required permits and licenses for the Exterior Signage and Monument Signage
and shall maintain such property and liability insurance as Landlord may
reasonably require with respect thereto. Tenant shall keep the Exterior
Signage, Monument Signage, and Interior Signage in good and first class
operating order and condition.
Tenant's rights to erect and maintain the Exterior Signage,
Monument Signage, and Interior Signage (the "SIGNAGE RIGHTS") are intended to
be personal to Inet Technologies, Inc. and its Permitted Transferees, may not
be assigned or transferred by Inet Technologies, Inc. except as hereinafter
expressly provided, and shall terminate if (x) this Lease or Tenant's right
to possession of the Premises expires by its terms or is terminated, or (y)
as a result of one or more assignments or subleases, neither Inet
Technologies, Inc. nor any one of its Permitted Transferees nor any one of
its other assignees or sublessees which have been approved by Landlord is the
largest occupant in the Building, or (z) during any renewal Term of this
Lease, if Inet Technologies, Inc. and its affiliates are not the largest
tenant in the Building. Upon termination of such Signage Rights as
hereinabove provided, Tenant shall remove the Exterior Signage, Monument
Signage, and Interior Signage and restore the Building surfaces where such
signage was affixed to the Building. The installation and removal of all such
signage shall be pursuant to plans, specifications and procedures approved
by, and under the supervision of, Landlord.
Landlord agrees that Inet Technologies, Inc. may elect, at
its option (but only in connection with a Transfer), by written notice to
Landlord, to assign and transfer the Signage Rights to, and only to, (A) a
Permitted Transferee, so long as such Permitted Transferee is (or upon
completion of the Transfer will be) the largest occupant in the Building,
which assignment and transfer of Signage Rights shall not be subject to
Landlord's consent or approval, or (B) any other assignee or sublessee under
a Transfer which has been approved by Landlord pursuant to Section 10.(a), so
long as such assignee or sublessee is (or upon completion of the Transfer
will be) the largest occupant in the Building, which assignment and transfer
of Signage Rights shall be subject to the prior written approval of Landlord
(in addition to, and independent of, any approval rights which Landlord may
have with respect to the Transfer in question), provided that Landlord agrees
not to unreasonably withhold, condition or delay its consent to such
assignment and transfer of Signage Rights. Tenant expressly acknowledges and
agrees that the identity and nature of the person or entity in which or whom
the Signage Rights are vested may have a material adverse affect upon the
value, marketability and leasability of the Building and the office space
located therein, and that Landlord has only agreed to permit the assignment
and transfer of such Signage Rights with the express stipulation and
agreement of Tenant that Landlord shall not be deemed to have unreasonably
withheld its consent to an assignment and transfer of Signage Rights
(regardless of whether Landlord has consented to the Transfer in question and
regardless of the financial strength of the proposed transferee) if the
proposed transferee of the Signage Rights is a governmental or
quasi-governmental agency or entity, a political, religious, special
interest, or advocacy organization, group, or entity, or is of a reputation
or engaged in a line or type of business which is notorious, disreputable or
controversial or which could reasonably be expected to be the subject of
public protests, picketing or other unfavorable publicity. Notwithstanding
anything contained herein to the contrary, any such permitted transfer of
Signage Rights shall be at Tenant's sole cost and expense, all replacement
signage shall be subject to Landlord's approval rights and otherwise comply
with the requirements and conditions of this Section 26(a), and the Signage
Rights shall at all times be exclusively vested in a single person or entity
and shall name no more than one such person or entity at any given time. No
transferee or assignee of the Signage Rights other than a Permitted
Transferee of Inet Technologies, Inc. shall have the right to further assign
or transfer the Signage Rights in connection with any subsequent Transfer or
otherwise.
During the Term of this Lease, Landlord will not (i) grant
to other tenants in the Building the right to place any signage on the facade
of the Building (provided Landlord reserves the right to grant Monument
Signage to such other tenants); or (ii) name (or permit CCII to name) the
Building (or permit CCII to name), any office building constructed on the
Development Site, or the complex comprising the Building and such other
building after, or grant exterior signage rights on the Building or such
other building to, any person or entity whose primary business competes with
Tenant's primary business of telecommunications network software. If Tenant
leases one-half (1/2) or more of the rentable area in any office building
constructed by Landlord or CCII on the Development Site, then Tenant will
receive the same signage rights on such building as it is entitled to on the
Building pursuant to this Lease.
(b) EXCLUSIVITY. Tenant has designated the four companies
listed on EXHIBIT O attached hereto as its competitors (the "LISTED
COMPETITORS"). On or before January 1 of each year of the Term of this Lease,
Tenant shall deliver written notice to Landlord of the four (4) current
Listed Competitors of Tenant, as determined by Tenant in its sole discretion.
Landlord agrees that so long as Tenant occupies (or, prior to the
Commencement Date, leases) at least 150,000 rentable square feet under this
Lease, Landlord shall not lease any space in the Building to such current
Listed Competitors during the calendar year following delivery of such
notice. In addition, Landlord agrees that it will not lease ground floor
space in the Building to (i) a commercial bank or other entity for the
purpose of accepting deposits and offering retail banking services (other
than an Automated Teller Machine), or (ii) any other entity conducting retail
operations (other than a delicatessen and/or sundry store). Landlord further
agrees that during the Term of this Lease, it will not grant to any such
current Listed Competitors the right to erect or maintain exterior building
signs or exclusive monument signs.
(c) ROOF RIGHTS. Tenant may, at its sole cost and expense,
install on the roof of the Building (i) without any supplemental rental charge
by Landlord, two (2) satellite dishes OR two (2) antennae OR one (1) satellite
dish and one (1) antenna, plus related communications equipment, (ii) subject to
such supplemental rental charges by Landlord as are "market" charges to an
office tenant for the right to install and maintain telecommunications equipment
of the nature, number and size to be installed (but not to exceed $500.00 per
month), such satellite dishes, antennae and related communications equipment in
addition to those contemplated by clause (i) as Landlord shall reasonably
approve (the equipment described in clauses (i) and (ii) being collectively
called the "SATELLITE DISH"), and/or (iii) without any supplemental charge by
Landlord, supplemental HVAC equipment (the "SUPPLEMENTAL HVAC EQUIPMENT"),
subject to the approval by Landlord of the Satellite Dish and Supplemental HVAC
Equipment proposed to be installed by Tenant, such approval not to be
unreasonably withheld or delayed, in each case at a specific location or
locations designated by Landlord and approved by Tenant, which approval shall
not be unreasonably withheld or delayed. Before installing the Satellite Dish
and Supplemental HVAC Equipment, Tenant shall submit to Landlord for
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its approval, which approval shall not be unreasonably withheld, conditioned
or delayed, plans and specifications which specify in detail the design,
location, size, technical specifications, and frequency of the Satellite Dish
and Supplemental HVAC Equipment and are sufficiently detailed to allow for
the installation of the Satellite Dish and Supplemental HVAC Equipment in a
good workmanlike manner and in accordance with all applicable laws and
regulations, including any restrictions applicable to the Building. Following
Landlord's approval of such plans and specifications, Tenant shall install in
a good workmanlike manner, maintain, and use the Satellite Dish and
Supplemental HVAC Equipment in accordance with all applicable laws and
regulations, and shall obtain all permits required for the installation and
operation thereof. At Landlord's option, Tenant shall screen the Satellite
Dish and Supplemental HVAC Equipment with a parapet wall or other screening
device complying with all applicable laws and in a manner reasonably
acceptable to Landlord. Tenant may only use the Satellite Dish in connection
with Tenant's business and may not allow any third party (other than an
affiliated party) to use such Satellite Dish, whether by sublease, license,
occupancy or otherwise, without Landlord's prior written consent. Tenant
shall, at its sole cost and expense, remove the Satellite Dish and
Supplemental HVAC Equipment, exclusive of wiring and cabling, within ten (10)
business days after the occurrence of any of the following events: (i) the
termination of Tenant's right to possess the Premises, (ii) the termination
of the Lease, or (iii) the expiration of the Term. If Tenant fails to do so,
Landlord may remove the Satellite Dish and Supplemental HVAC Equipment and
store or dispose of them in any manner Landlord deems appropriate without
liability to Tenant; Tenant shall reimburse Landlord for all costs incurred
by Landlord in connection therewith within thirty (30) days after Landlord's
request therefor. Tenant shall repair any damage to the Building caused by or
relating to the Satellite Dish and Supplemental HVAC Equipment, including
that which is caused by its installation, maintenance, use or removal, and
shall indemnify Landlord against any and all loss, costs and expense arising
from the installation, maintenance, use or removal of the satellite dish. All
work relating to the Satellite Dish and Supplemental HVAC shall, at Tenant's
sole cost and expense, be coordinated with Landlord's roofing contractor so
as not to affect any warranty for the Building's roof. Tenant shall install,
operate and maintain the Satellite Dish in such a manner so as not to
unreasonably interfere with any other satellite dish, antenna, or other
transmission facility on the Building's roof or in the Building.
(d) CALCULATION OF RENTABLE AREA. "RENTABLE AREA" and
"USABLE AREA" shall mean "Rentable Area" and "Usable Area" (as applicable)
calculated and defined in accordance with the Standard Method For Measuring
Floor Area in Office Buildings ANSI/BOMA Z65.1-1996 ("BOMA STANDARD");
provided, however, that for all purposes under this Lease, the multi-tenant
loss factor shall not be greater than 16.2% and the single-tenant loss factor
shall not be greater than 9.3%. Tenant shall have the right, at its sole cost
and expense, within sixty (60) days after the Commencement Date, to have a
qualified architect or space planner reasonably approved by Landlord verify
the Rentable Area and/or Usable Area of the Premises and the Building in
accordance with the BOMA Standard; provided, however, that such determination
shall be subject to the reasonable review and approval of Landlord and its
designated consultants, surveyors, or engineers. If, as a result of such
verification (and approval by Landlord), it is determined that the Rentable
Area and/or Usable Area of the Premises are different than the amounts set
forth in the Basic Lease Information, all corresponding amounts set forth in
this Lease (including, without limitation, Tenant's Proportionate Share, the
amount of monthly Basic Rental, and the Allowance) shall be retroactively
adjusted and appropriate payments, if applicable, shall be made by Landlord
to Tenant or Tenant to Landlord (as applicable) within ten (10) days after
such determination and approval by Landlord. Both parties agree to execute a
commercially reasonable instrument in order to document such revised amounts.
(e) ELECTRIC UTILITY DEREGULATION. To the extent electric
utilities in the State of Texas have been deregulated so as to allow
competitive retail pricing of electrical power by multiple providers,
Landlord shall secure competitive bids from multiple qualified electrical
providers, promptly deliver copies of such bids to Tenant, and, in such
circumstances, take all reasonable steps to reduce Electrical Costs.
(f) ZONING VARIANCE. To the extent that any of the itemized
supplemental uses specified in the definition of Permitted Use hereunder are
not permitted by applicable zoning ordinances or use restrictions of the City
of Richardson, Texas, Landlord and Tenant agree to cooperate in using their
commercially reasonable efforts to obtain a special use permit or other
zoning as may be necessary to permit such specified supplemental uses.
(g) MUNICIPAL INCENTIVES. Landlord and Tenant have entered
into a Tax Abatement Agreement with the City of Richardson and agree to
diligently pursue a similar tax abatement agreement with the County of Dallas
and the Dallas County Hospital District (the "TAX ABATEMENT AGREEMENT",
whether one or more) pursuant to which such taxing authorities have agreed,
or may agree, in connection with or as a result of the lease of the Premises
to Tenant, to provide certain tax abatements to Tenant with respect to the
Taxable Value of the Tenant's Tangible Personal Property and to Landlord with
respect to the Taxable Value of the Land and the Building (all as described
and defined therein). Pursuant to the Tax Abatement Agreement, any and all
such tax abatements now or hereafter received by Landlord under the Tax
Abatement Agreement are to inure to Tenant's benefit during the Term of this
Lease. Accordingly, for so long as such tax abatement remains in effect (1)
the portion of the taxes on the Building and the Land which are abated under
the Tax Abatement Agreement and which would otherwise be included in Basic
Cost shall for purposes of this Lease be assumed to be included in the
Expense Stop and in Basic Cost, and (2) Tenant shall receive a
dollar-for-dollar reduction in Rent annually in an amount equal to the abated
taxes on the Building and the Land under the Tax Abatement Agreement.
Landlord and Tenant shall perform their respective obligations under the Tax
Abatement Agreement and otherwise cooperate with one another to ensure that
each party completes all requirements to obtain and maintain such tax
abatements including, without limitation, making such periodic fillings or
reports to such municipalities or political subdivisions as necessary to
maintain such tax abatements.
(h) CONSENTS. Any and all consents and approvals required
to be obtained by Tenant from Landlord or by Landlord from Tenant, under this
Lease shall not be unreasonably withheld, conditioned or delayed, except as
otherwise expressly set forth in this Lease.
(i) HAZARDOUS MATERIALS. Each of Landlord and Tenant agrees to
indemnify and hold the other party harmless of and from any and all claims,
liabilities, penalties, damages, expenses and judgments including, without
limitation, reasonable attorneys' fees, caused by environmental contamination or
violation of
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environmental laws resulting from the violating party's own acts or
omissions. No expenses incurred by Landlord in remediating any environmental
condition of the Land or Building not caused by Tenant shall be charged,
directly or indirectly, to Tenant. Landlord will be responsible for, and
shall have full control over, any remediation or removal of hazardous
materials on the Building or the Land, to the extent the same is required by
applicable law (subject to Tenant's and Landlord's indemnification
obligations set forth above). To Landlord's current actual knowledge, and
except as noted in environmental reports or other materials furnished to
Tenant, neither the Land nor the Building contains hazardous materials, other
than office, cleaning and maintenance supplies in commercially reasonable
amounts stored and used in compliance with applicable laws.
(j) OFFSET RIGHTS. If Landlord fails to pay (1) the initial
brokerage commission payable to the Staubach Company upon execution of this
Lease, or (2) the initial Construction Allowance payable under EXHIBIT D, in
each case when due (it being agreed that for such purposes such brokerage
commission or Construction Allowance, as the case may be, shall not be deemed
to be due if a good faith dispute exists between Landlord and Tenant as to
whether all conditions to the payment thereof have been satisfied), Tenant
shall have the right to offset the such brokerage commission or such
Construction Allowance, as applicable, against the Basic Rental next becoming
due under this Lease. Upon payment by Landlord of such initial brokerage
commission and/or such initial Construction Allowance, Tenant agrees to
execute an acknowledgment of payment of such amount(s) and a release of any
offset rights with respect thereto, in form and substance reasonably
satisfactory to Landlord and Tenant.
(k) CONDITIONS PRECEDENT. This Lease is subject to, and
shall not be effective or enforceable until, approval of this Lease by
Tenant's board of directors. This Lease is further subject to, and shall not
be effective or enforceable until, approval of this Lease by Landlord's
Mortgagee.
(l) DELICATESSEN. Landlord shall use commercially
reasonable efforts to lease space on the first floor of the Building to a
tenant that will open a delicatessen in such space on or before September 1,
2000. It is anticipated that the delicatessen will be open from 7:00 a.m. to
2:00 p.m., Monday through Friday, Holidays excluded, and will serve hot and
cold breakfast and lunch items. The delicatessen may also sell items
typically found in sundry shops. If, for any reason, a delicatessen shall not
open by such date or, after opening, shall cease to operate, then during any
time periods during the Term in which a delicatessen is not open and
operating for breakfast and lunch in the Building, Tenant shall have the
right to contract with third parties for the delivery of breakfast and/or
lunch items, as the case may be, to break rooms within the Premises solely
for the benefit of Tenant's employees. In no event shall the failure of such
delicatessen to open or remain open throughout the Term constitute an event
of default hereunder by Landlord; Tenant's sole right with respect thereto
shall be to arrange for a third-party contractor to deliver items to Tenant
as described above.
LANDLORD AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE PREMISES
ARE SUITABLE FOR TENANT'S INTENDED COMMERCIAL PURPOSE, AND TENANT'S
OBLIGATION TO PAY RENT HEREUNDER IS NOT DEPENDENT UPON THE CONDITION OF THE
PREMISES OR THE PERFORMANCE BY LANDLORD OF ITS OBLIGATIONS HEREUNDER, AND,
EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, TENANT SHALL CONTINUE TO PAY
THE RENT, WITHOUT ABATEMENT, SETOFF, DEDUCTION, NOTWITHSTANDING ANY BREACH BY
LANDLORD OF ITS DUTIES OR OBLIGATIONS HEREUNDER, WHETHER EXPRESS OR IMPLIED.
[signature page follows]
14
<PAGE>
DATED as of the date first written above.
LANDLORD: COLLINS CROSSING, LTD.,
a Texas limited partnership
By: TCDFW-Collins Crossing, Ltd.,
a Texas limited partnership
By: TCDFW #1, Inc.,
a Delaware corporation,
its sole general partner
By: ______________________________
Name:_____________________________
Title:____________________________
TENANT: INET TECHNOLOGIES, INC.,
a Delaware corporation
By:_________________________________________________
William Mina, Senior Vice President
15
<PAGE>
EXHIBIT A-1
OUTLINE OF PREMISES
[Outlines of
Floors 1 (partial floor), 2, 8, 9, 10, and 11
attached]
A-1 Page 1
<PAGE>
EXHIBIT A-2
SITE PLAN OF LAND, BUILDING AND DEVELOPMENT SITE
[attached]
A-2 Page 1
<PAGE>
EXHIBIT A-3
LEGAL DESCRIPTION OF LAND
[attached]
A-3 Page 1
<PAGE>
EXHIBIT A-4
OUTLINE OF MUST-TAKE SPACE
[Outline of Floor 7 attached]
A-4 Page 1
<PAGE>
EXHIBIT A-5
OUTLINE OF ADDITIONAL SPACE
[Outline of
Floors 1 (partial floor), 3, 4, 5, and 6
attached]
A-5 Page 1
<PAGE>
EXHIBIT A-6
OUTLINE OF FIRST EXPANSION AREA
[Outline of Floor 6 attached]
A-6 Page 1
<PAGE>
EXHIBIT A-7
OUTLINE OF SECOND EXPANSION AREA
[Outline of Floor 5 attached]
A-7 Page 1
<PAGE>
EXHIBIT B
BUILDING RULES AND REGULATIONS
The following rules and regulations shall apply to the Premises, the
Building, the parking garage associated therewith, the Land and the
appurtenances thereto:
1. Sidewalks, doorways, vestibules, halls, stairways, and other
similar areas shall not be obstructed by tenants or used by any tenant for
purposes other than ingress and egress to and from their respective leased
premises and for going from one to another part of the Building.
2. Plumbing, fixtures and appliances shall be used only for the
purposes for which designed, and no sweepings, rubbish, rags or other
unsuitable material shall be thrown or deposited therein. Damage resulting to
any such fixtures or appliances from misuse by a tenant or its agents,
employees or invitees, shall be paid by such tenant.
3. No signs, advertisements or notices shall be painted or affixed
on or to any windows or doors or other part of the Building without the prior
written consent of Landlord. No nails, hooks or screws (other than those
which are necessary to hang painting, prints, pictures, or other similar
items on the Premises' interior walls) shall be driven or inserted in any
part of the Building except by Building maintenance personnel. No curtains or
other window treatments shall be placed between the glass and the Building
standard window treatments.
4. Landlord shall provide and maintain an alphabetical directory for
all tenants in the main lobby of the Building.
5. Landlord shall provide all door locks in each tenant's leased
premises, at the cost of such tenant, and no tenant shall place any
additional door locks in its leased premises without Landlord's prior written
consent (except as may otherwise be provided in Section 23 with respect to
Secured Areas). Landlord shall furnish to each tenant a reasonable number of
keys to such tenant's leased premises, at such tenant's cost, and no tenant
shall make a duplicate thereof.
6. Movement in or out of the Building of furniture or office
equipment, or dispatch or receipt by tenants of any bulky material,
merchandise or materials which require use of elevators or stairways, or
movement through the Building entrances or lobby shall be conducted under
Landlord's supervision at such times and in such a manner as Landlord may
reasonably require. Each tenant assumes all risks of and shall be liable for
all damage to articles moved and injury to persons or public engaged or not
engaged in such movement, including equipment, property and personnel of
Landlord if damaged or injured as a result of acts in connection with
carrying out this service for such tenant.
7. Landlord may prescribe weight limitations and determine the
locations for safes and other heavy equipment or items, which shall in all
cases be placed in the Building so as to distribute weight in a manner
acceptable to Landlord which may include the use of such supporting devices
as Landlord may require. All damages to the Building caused by the
installation or removal of any property of a tenant, or done by a tenant's
property while in the Building, shall be repaired at the expense of such
tenant.
8. Corridor doors, when not in use, shall be kept closed. Nothing
shall be swept or thrown into the corridors, halls, elevator shafts or
stairways. No birds or animals shall be brought into or kept in, on or about
any tenant's leased premises. No portion of any tenant's leased premises
shall at any time be used or occupied as sleeping or lodging quarters.
9. Tenant shall cooperate with Landlord's employees in keeping its
leased premises neat and clean. Tenants shall not employ any person for the
purpose of such cleaning other than the Building's cleaning and maintenance
personnel.
10. To ensure orderly operation of the Building, no ice, mineral or
other water, towels, newspapers, etc. shall be delivered to any leased area
except by persons approved by Landlord, which approval shall not be
unreasonably withheld.
11. Tenant shall not make or permit any improper, objectionable or
unpleasant noises or odors in the Building or otherwise interfere in any way
with other tenants or persons having business with them.
12. No machinery of any kind (other than normal office equipment and
any other equipment approved by Landlord in connection with its review of the
Working Drawings) shall be operated by any tenant on its leased area without
Landlord's prior written consent, nor shall any tenant use or keep in the
Building any flammable or explosive fluid or substance.
13. Landlord will not be responsible for lost or stolen personal
property, money or jewelry from tenant's leased premises or public or common
areas regardless of whether such loss occurs when the area is locked against
entry or not.
14. No vending or dispensing machines of any kind may be maintained
in any leased premises without the prior written permission of Landlord,
which permission shall not be unreasonably withheld.
15. All mail chutes located in the Building shall be available for
use by Landlord and all tenants of the Building according to the rules of the
United States Postal Service.
B-1
<PAGE>
EXHIBIT C
OPERATING EXPENSE ESCALATOR
1. Tenant shall pay an amount (per each rentable square foot in the
Premises) equal to the excess ("EXCESS") from time to time of actual Basic
Cost per rentable square foot in the Building over the actual Basic Cost per
rentable square foot in the Building in calendar year 2000 (the "EXPENSE
STOP"). Landlord may collect such amount in a lump sum, to be due within
thirty (30) days after Landlord furnishes to Tenant the Annual Cost
Statement. Alternatively, Landlord may make a good faith estimate of the
Excess to be due by Tenant for any calendar year or part thereof during the
Term, and, unless Landlord delivers to Tenant a revision of the estimated
Excess, Tenant shall pay to Landlord, on January 1, 2001 and on the first day
of each calendar month thereafter, an amount equal to the estimated Excess
for such calendar year or part thereof divided by the number of months in
such calendar year during the Term. Once during any calendar year, Landlord
may re-estimate the Excess to be due by Tenant for that calendar year and
deliver a copy of the re-estimate to Tenant. Thereafter, the monthly
installments of Excess payable by Tenant shall be appropriately adjusted in
accordance with the estimations so that, by the end of the calendar year in
question, Tenant shall have paid all of the Excess as estimated by Landlord.
Any amounts paid based on such an estimate shall be subject to adjustment
pursuant to paragraph 3 of this Exhibit when actual Basic Cost is available
for each calendar year.
2. For the purposes of this Exhibit, the term "BASIC COST" shall
mean all expenses and disbursements of every kind (subject to the limitations
set forth below) which Landlord incurs, pays or becomes obligated to pay in
connection with the ownership, operation, and maintenance of the Building
(including the associated parking facilities), determined in accordance with
generally accepted accounting principles consistently applied, including but
not limited to the following:
(a) Wages and salaries (including management fees) of all
employees engaged in the operation, repair, replacement, maintenance, and
security of the Building, including taxes, insurance and benefits relating
thereto;
(b) All supplies and materials used in the operation,
maintenance, repair, replacement, and security of the Building;
(c) Annual cost of all non-structural capital improvements
made to the Building which although capital in nature can reasonably be
expected to reduce the normal operating costs of the Building (but only to
the extent of actual savings), as well as all capital improvements made in
order to comply with any law or building code hereafter promulgated (or
hereafter amended) by any governmental authority (other than the Disabilities
Act), as amortized over the actual useful economic life of such improvements
as determined in accordance with generally accepted accounting principles on
a straight line basis;
(d) Cost of all utilities, other than the cost of utilities
actually reimbursed to Landlord by the Building's tenants (including Tenant
under Section 7.(b) of this Lease);
(e) Cost of any insurance or insurance related expense
applicable to the Building and Landlord's personal property used in
connection therewith;
(f) Subject to the abatements set forth in Section 26(g) of
this Lease, all taxes and assessments and governmental charges whether
federal, state, county or municipal, and whether they be by taxing or
management districts or authorities presently taxing or by others,
subsequently created or otherwise, and any other taxes and assessments
attributable to the Building (or its operation), and the grounds, parking
areas, driveways, and alleys around the Building, excluding, however, federal
and state taxes on income (collectively, "TAXES"); if the present method of
taxation changes so that in lieu of the whole or any part of any Taxes levied
on the Land or Building, there is levied on Landlord a capital tax directly
on the rents received therefrom or a franchise tax, assessment, or charge
based, in whole or in part, upon such rents for the Building, then all such
taxes, assessments, or charges, or the part thereof so based, shall be deemed
to be included within the term "Taxes" for the purposes hereof;
(g) Cost of repairs, replacements, and general maintenance
of the Building, other than repair, replacement, and general maintenance of
the roof, foundation and exterior walls of the Building; and
(h) Cost of service or maintenance contracts with
independent contractors for the operation, maintenance, repair, replacement,
or security of the Building (including, without limitation, alarm service,
window cleaning, and elevator maintenance).
There are specifically excluded from the definition of the term "Basic Cost"
costs (1) for capital improvements made to the Building, other than capital
improvements described in subparagraph 2.(c) of this Exhibit (as determined
in accordance with generally accepted accounting principles); (2) for repair,
replacements and general maintenance paid by proceeds of insurance or by
Tenant or other third parties, and alterations attributable solely to tenants
of the Building other than Tenant; (3) for interest, amortization or other
payments on loans to Landlord; (4) for depreciation of the Building; (5) for
leasing commissions; (6) for legal expenses, other than those incurred for
the general benefit of the Building's tenants (e.g., tax disputes); (7) for
renovating or otherwise improving space for occupants of the Building or
vacant space in the Building; (8) for correcting defects in the construction
of the Building, the Building systems, and the Parking Garage; (9) for
overtime or other expenses of Landlord in curing defaults or performing work
expressly provided in this Lease to be borne at Landlord's expense; (10) for
federal income taxes imposed on or measured by the income of Landlord from
the operation of the Building; (11) of labor and materials and contract costs
for other services directly and separately charged to other tenants of
subtenants in the Building, other than through operating expenses charged to
such tenants and subtenants; (12) incurred in
C-1
<PAGE>
connection with leasing, licensing or otherwise granting the right to use
space in the Building and the extension or renewal thereof, including,
without limitation, leasing commissions, brokerage or finder's fees,
marketing costs, legal and consulting fees, advertising expenses, and
payments, free rent, lease takeover obligations and other inducements; (13)
of constructing or renovating space for tenants or other subtenants or space
vacated by any tenant or other subtenants in the Building; (14) of utilities
directly and separately charged to the tenants or subtenants in the Building
or other over-standard electrical use by other tenants or subtenants in the
Building, other than through operation expenses charged to such tenants and
subtenants; (15) of depreciation (except for depreciation, in accordance with
generally accepted accounting and management practices, of the costs of
tools, maintenance equipment, uniforms and similar items purchased by
Landlord to enable Landlord to supply services Landlord might otherwise
contract for with a third party where such depreciation would otherwise have
been included in the charge for such third party's services); (16) for debt
or financing costs, including, without limitation, interest, points and fees
on debt, amortization payments on mortgages or deeds of trust, and ground
lease payments (except to the extent attributable to the cost of tools,
maintenance equipment, uniforms and similar items purchased by Landlord to
enable Landlord to supply services Landlord might otherwise contract for with
a third party); (17) of legal and other related expenses associated with the
negotiation, amendment, and enforcement of leases and other agreements
regarding occupancy of the Building, or the defense of Landlord's title to
the Building; (18) of legal and other related expenses which are incurred in
the management of Landlord's internal partnership affairs such as preparing
amendments to the partnership agreement of Landlord, preparing assignments of
partnership interests in Landlord's partnership, admitting new partners to
Landlord's partnership and the like; (19) of Landlord's general corporate
overhead and general administrative expenses, except for costs directly
related or properly allocable to the management and operation of the
Building; (20) of any compensation paid to clerks, attendants or other
persons in commercial concessions operated by Landlord, if any, and costs
incurred in connection with the operation, maintenance and management of
commercial concessions operated in space which is not included in the
rentable area of the Building; (21) which are separately reimbursed
(including, without limitation, by virtue of fees or other charges payable
therefor) to Landlord by others, including, without limitation, reimbursement
under warranties, by insurance carriers, by condemning authorities, or by
tenants, other than operating expenses charged to tenants, occupants or other
users of the Building; (22) of any subsidies or credits to any restaurant,
food stand or other food service or retail operation of any kind in the
Building; (23) incurred in connection with the purchase or sale of the
Building, or of Landlord, or of any portion of or interest (direct or
indirect) in either; (24) expressly excluded from Basic Cost pursuant to any
other provisions of this Lease; (25) incurred by Landlord due to the
violation by Landlord or any tenant or other occupant (other than Tenant) of
the terms and conditions of any lease (or other occupancy agreement) for
space in the Building, but only if such violation has been determined to
occur by a final judicial order; (26) paid to Landlord or to subsidiaries or
affiliates of Landlord for services in the Building to the extent that same
exceeds the costs of such services if rendered by unaffiliated third parties
on a competitive basis; (27) of contributions to civic or charitable
organizations; and (28) arising out of the default or breach by Landlord
under any contract, including, without limitation, penalties and interest due
to late payment, but only if such default or breach has been determined to
occur by a final judicial order.
3. The Annual Cost Statement shall include a statement of Landlord's
actual Basic Cost for the previous year adjusted as provided in paragraph 4
of this Exhibit. If the Annual Cost Statement reveals that Tenant paid more
for Basic Cost than the actual Excess in the year for which such statement
was prepared, then Landlord shall credit or reimburse Tenant for such excess
within thirty (30) days after delivery of the Annual Cost Statement;
likewise, if Tenant paid less than the actual Excess, then Tenant shall pay
Landlord such deficiency within thirty (30) days after delivery of the Annual
Cost Statement.
4. With respect to any calendar year or partial calendar year
(including calendar year 2000) in which the Building is not occupied to the
extent of ninety-five percent (95%) of the rentable area thereof, the Basic
Cost for such period shall, for the purposes hereof, be increased to the
amount which would have been incurred had the Building been occupied to the
extent of ninety-five percent (95%) of the rentable area thereof.
5. For purposes of calculating Excess hereunder, the maximum
increase in the amount of Controllable Basic Cost (defined below) that may be
included in calculating Excess for each calendar year after 2000 shall be
limited to five percent (5%) per calendar year on a cumulative basis; I.E.,
the maximum amount of Controllable Basic Cost that may be included in the
calculation of Excess for each calendar year after 2000 shall equal the
product of the 2000 Controllable Basic Cost in the following percentages for
the following calendar years: 105% for 2001; 110% for 2002; 115% for 2003;
120% for 2004; 125% for 2005; 130% for 2006; 135% for 2007; 140% for 2008;
145% for 2009; and 150% for 2010; provided that the maximum increase in
management fees that may be included in calculating Excess for each calendar
year after 2000 shall be limited to three percent (3%) per calendar year on a
cumulative basis. For purposes hereof, the term "CONTROLLABLE BASIC COST"
shall mean all Basic Cost which is within the reasonable control of Landlord;
thus, excluding Taxes, insurance, utilities and other costs beyond the
reasonable control of Landlord.
C-2
<PAGE>
EXHIBIT D
TENANT FINISH-WORK: ALLOWANCE
1. LANDLORD'S WORK. Landlord shall furnish to the Premises, at its
expense, the following (the "LANDLORD'S WORK"):
- Level Floor - Level concrete slab to an 1/8 inch rise
or drop in 10 feet.
- 2x2 Prelude XL ceiling grid installed and Armstrong
Tegular machine fissured ceiling tile stacked on each
floor.
- Sprinkler heads turned up in the ceiling, furnished
and installed to meet shell code. Building standard,
as relates to Tenant's improvements, will be fully
recessed heads.
- 2x4, 18 cell, 2-lamp light fixtures, furnished boxed
and stacked on the floor at a ratio of 1 fixture per
each 150 rentable square foot, ready for installation
by interior construction contractor.
- All HVAC installed with complete distribution to
ceiling mounted diffusers for exterior zones only.
All panels shall have thermostats coiled up and
placed in the ceiling. For interior areas, air
distribution includes through interior zone terminal
boxes but does not include low pressure duct from the
interior boxes to interior diffusers nor the
diffusers themselves. The distribution shall be
designed in accordance with ASHRAE standard 62-89 and
provide 75 degree F inside temperature during a
design load day of 102 degrees F.
- Tenant will have access to a base building condenser
water loop for supplemental computer and
telecommunications room air conditioning unit(s).
Tenant will be required to separately meter
electrical and water and be responsible for
associated equipment costs (i.e. liebert units, etc.)
and consumption.
- Building security system installed to control access
to the shell Building common areas only. Two (2)
passenger elevators and two (2) garage elevators are
currently equipped with proximity readers to control
after hours access and may be programmed by floor.
- All life safety systems per code and the Disabilities
Acts for shell construction.
- Fur out 5/8" gypsum wall board on exterior walls and
shafts as required - taped and bedded. Shaftwalls
will have necessary 2-hr. rating, if required to meet
code.
- Plumbing - One set of men and women's restrooms per
floor, complete with finishes, and compliant with the
Disabilities Acts.
- 1" Mini-blinds installed on all exterior windows.
- 277/480 volt 3-phase electrical service capable of
providing a minimum of three (3) watts per rentable
square foot for power and two (2) watts per rentable
square foot for lighting for the Tenant's sole use to
each floor including all necessary transformers,
panels and breakers on the floor to support the above
required wattage. An additional five (5) watts per
rentable square foot capacity shall be provided in
the buss duct riser for Tenant's access, if required.
Notwithstanding the foregoing, if Landlord and Tenant hereafter agree that
some or all of the Landlord's Work is to be completed as part of the Work,
Landlord shall provide to Tenant an additional credit for the cost of
performing such portion(s) of the Landlord's Work.
2. SCHEDULE. Preparation and approval of working drawings, requests for and
approval of bids, contracting and the other actions indicated below shall be
completed on or before the date herein specified:
<TABLE>
<CAPTION>
Required Action Responsible Party Due Date
--------------- ----------------- --------
<S> <C> <C>
Delivery to Landlord of Final Working Drawings Tenant
- As to 2nd Floor Space January 18, 2000
- As to 1st, 8th, 9th, 10th and 11th floors March 1, 2000
Delivery to Tenant of Approval or Required Changes
To Final Working Drawings Landlord within 3 business days
Delivery to Landlord, if necessary, of Redesign of
Final Working Drawings Tenant within 5 business days
Delivery to Tenant of Approval of or Required
Changes to Final Working Drawings Landlord within 2 business days
D-1
<PAGE>
Selection of Contractor Landlord January 17, 2000
& Tenant
Execution of Construction Contract by Landlord Landlord January 26, 2000
Commencement of Construction by Landlord Landlord within 3 business days
Anticipated Date of Substantial Completion Landlord July 1, 2000
"SCHEDULED COMPLETION DATE" Landlord July 15, 2000
</TABLE>
If either party fails to meet any of the aforesaid deadlines, the date by
which the other party is obligated to respond shall be delayed by the number
of days of delay by the other. The foregoing Schedule is intended to provide
a general guideline as to the dates by which, or time periods within which,
certain actions are to be taken by the respective parties hereunder; however,
the other provisions of this EXHIBIT D shall control to the extent such
provisions conflict with the foregoing or contemplate or provide for more
specific or additional approval rights, change orders, delays and the like.
3. WORKING DRAWINGS. On or before the dates set forth above, Tenant
shall provide to Landlord for its approval final working drawings, prepared
by Staffelbach Architects (which has been approved by Landlord ) or another
architect that has been approved by Landlord (which approval shall not be
unreasonably withheld), of all improvements that Tenant proposes to install
in the Premises; provided that, at Tenant's option, Tenant may sooner submit
to Landlord for its approval final working drawings prepared by such
architect of such improvements on a full floor by full floor basis; provided
further, that Tenant shall be solely responsible for any delays or additional
costs which result from delivery of such working drawings on a floor by floor
(rather than the entire Premises) basis. All such working drawings shall
include the partition layout, ceiling plan, electrical outlets and switches,
telephone outlets, drawings for any modifications to the mechanical and
plumbing systems of the Building, and detailed plans and specifications for
the construction of the improvements called for under this Exhibit in
accordance with all applicable governmental laws, codes, rules, and
regulations. Further, if any of Tenant's proposed construction work will
affect the Building's heating, ventilation and air conditioning ("HVAC"),
electrical, mechanical, or plumbing systems, then the working drawings
pertaining thereto shall be submitted to and reviewed by the Building's
engineer of record, whom Tenant shall at its cost engage for such purpose.
Landlord shall approve such working drawings or notify Tenant of any changes
(with reasonable specificity) that must be made to secure such approval
within five (5) business days of receipt thereof (on a floor by floor or
entire Premises basis, as Tenant may elect). Landlord's approval of such
working drawings shall not be unreasonably withheld, provided that (a) they
comply with all applicable governmental laws, codes, rules, and regulations,
(b) such working drawings are sufficiently detailed to allow construction of
the improvements in a good and workmanlike manner, and (c) the improvements
depicted thereon conform to the rules and regulations promulgated from time
to time by the Landlord for the construction of tenant improvements (a copy
of which has been delivered to Tenant). As used herein, "WORKING DRAWINGS"
shall mean the final working drawings approved by Landlord, as amended from
time to time by any approved changes thereto, and "WORK" shall mean all
improvements to be constructed in accordance with and as indicated on the
Working Drawings. Approval by Landlord of the Working Drawings shall not be a
representation or warranty of Landlord that such drawings are adequate for
any use, purpose, or condition, or that such drawings comply with any
applicable law or code, but shall merely be the consent of Landlord to the
performance of the Work. Tenant shall, at Landlord's request, sign the
Working Drawings to evidence its review and approval thereof. All changes in
the Work must receive the prior written approval of Landlord and Tenant (it
being agreed that approval or disapproval of any such change order will be
given by the applicable party within three (3) business days of request
therefor), and in the event of any such approved change Tenant shall, upon
completion of the Work, furnish Landlord with an accurate, reproducible
"as-built" plan (e.g., sepia) of the improvements as constructed, which plan
shall be incorporated into this Lease by this reference for all purposes.
4. CONTRACTORS. The Work shall be performed only by contractors and
subcontractors approved in writing by Landlord, which approval shall not be
unreasonably withheld. Landlord and Tenant shall consider at least five (5)
reputable, qualified contractors, mutually acceptable to Landlord and Tenant,
for the performance of the Work. Landlord and Tenant shall mutually select
the contractor from among those five (5) contractors. Landlord and Tenant
agree that Austin Commercial, Phoenix Commercial and Pacific Builders are
mutually acceptable to them. Landlord shall execute the construction contract
with the selected contractor, the form of which shall be subject to the prior
approval of Tenant, not to be unreasonably withheld or delayed. Landlord will
require the selected contractor to "hard bid" all subcontractors who are
expected to provide services and/or materials in excess of $10,000.00.
Landlord shall not authorize or consent to any change order which will result
in an increase in the Total Construction Costs or otherwise modify or amend
the construction contract without Tenant's prior written consent. All
contractors and subcontractors shall be required to procure and maintain (a)
insurance against such risks, in such amounts, and with such companies as
Landlord may reasonably require and (b) at Landlord's option and expense,
payment and performance bonds covering the cost of the Work and otherwise
reasonably satisfactory to Landlord. Certificates of such insurance, with
paid receipts therefor, and copies of any such bonds must be received by
Landlord before the Work is commenced.
5. PERFORMANCE OF WORK. The Work shall be performed in a good and
workmanlike manner that is free of defects and is in strict conformance with
the Working Drawings, and shall be performed in such a manner and at such
times as to maintain harmonious labor relations and not to interfere with or
delay Landlord's other contractors, the operation of the Building, and the
occupancy thereof by other tenants. Landlord shall notify Tenant in writing,
not less than thirty (30) days in advance, of the date on which Landlord
reasonably anticipates the Work will have progressed to such a stage as to
permit Tenant to commence the installation of cabling and other fixtures and
equipment (and, to the extent appropriate, certain furniture) in an economic
and integrated basis with the performance of the other Work (such date being
called the "FIXTURING DATE"). All contractors and subcontractors
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shall contact Landlord and schedule time periods during which they may use
Building facilities in connection with the Work (e.g., elevators, excess
electricity, etc.).
6. TENANT'S REPRESENTATIVES. Landlord acknowledges that Tenant has
retained the Staubach Company to assist Tenant in the build-out of the
Premises. Landlord agrees to afford the Staubach Company representatives
complete access to the Premises during the performance of the Work. Bid
information and forms provided by the Staubach Company shall be integrated in
the bidding process for the construction contract. Tenant shall not be
required to use Landlord's standard finish-out materials in the performance
of the Work; however, to the extent Tenant elects to do so, Landlord agrees
that such materials shall be charged to Tenant at Landlord's actual cost
therefor. Landlord shall provide to Tenant during the performance of the
Work, at no cost to Tenant, electricity and other utilities, security
limiting access to the Building and Premises, elevator service (in a
designated service or construction elevator), and contractor parking in
designated areas.
7. DELAYS; SUBSTANTIAL COMPLETION. Delays in the Substantial
Completion of the Work which occur (a) because of any delay in Tenant's
delivery of the final working drawings to Landlord for Landlord's approval,
(b) because of any delay by Tenant in designating its architect, engineer,
contractors and/or subcontractors for Landlord's approval, (c) because of any
change by Tenant to the Working Drawings, (d) because of any specification by
Tenant of materials or installations in addition to or other than Landlord's
standard finish-out materials, (e) because Tenant, any contractor or
subcontractor of Tenant, or Tenant's agents otherwise delays completion of
the Work, (f) because of any delay resulting from Tenant's exercise of the
early occupancy option with respect to the 2nd Floor Space, or (g) because of
any other reason within Tenant's control are herein called "TENANT'S DELAYS",
provided that the foregoing shall not constitute Tenant Delays unless and
until Landlord gives notice thereof to Tenant and Tenant fails to correct the
action, inaction or condition giving rise to such Tenant Delay within one (1)
day of such notice. Delays in the Substantial Completion of the Work which
occur because of (i) any delay by Landlord in approving final working
drawings or changes in the Work submitted to Landlord for approval, (ii) any
delay by Landlord in approving architects, engineers, contractors and/or
subcontractors designated by Tenant, (iii) any other reason within Landlord's
control, or (iv) Force Majeure are herein called "LANDLORD'S DELAYS".
"SUBSTANTIAL COMPLETION" of the Work shall be deemed to have occurred, and
the Work shall be deemed to be "SUBSTANTIALLY COMPLETED", when Landlord
delivers the Premises to Tenant with the Work completed to a stage sufficient
to permit the conduct by Tenant of its business in the ordinary course, in
substantial compliance with all applicable governmental codes and
requirements (including the Disabilities Acts to the extent Landlord is
responsible therefor pursuant to the terms of this Lease), with all
applicable Building systems and equipment in first class order and operating
condition, and with all legal requirements prerequisite to Tenant's use of
the Premises for the Permitted Use having been met, other than any required
zoning changes for the Permitted Use which shall be governed by Section
26(f). The "COMPLETION DATE" of the Premises shall occur on the earlier of
(1) fourteen (14) days after the date on which the Premises are delivered to
Tenant in a Substantially Complete condition, or (2) fourteen (14) days
following the date the Premises would have been Substantially Complete but
for Tenant Delays (the 14-day period described in clause (1) or (2), as
applicable, being herein called the "MOVE-IN PERIOD"); provided that the
Move-In Period shall be extended for one (1) day, and the Completion Date
shall be delayed by one (1) day, for each day of Landlord's Delays during the
Move-In Period.
8. COST OF THE WORK. Tenant shall bear the entire cost of performing
the Work (including, without limitation, design of the Work and preparation
of the Working Drawings, costs of construction labor and materials
(including, without limitation, the purchase and installation of telephone
and data cabling and equipment and supplemental HVAC equipment), additional
janitorial services, general tenant signage, and related taxes and insurance
costs, all of which costs are herein collectively called the "TOTAL
CONSTRUCTION COSTS") in excess of the Construction Allowance (hereinafter
defined) available therefor, taking into account the application of any
portion of the Construction Allowance by Tenant to Other Costs (as
hereinafter defined). Upon approval of the Working Drawings and selection of
a contractor, Tenant shall promptly (a) execute a work order agreement
prepared by Landlord which identifies such drawings, itemizes the Total
Construction Costs and sets forth the Construction Allowance, and (b) pay to
Landlord fifty percent (50%) of the amount by which the estimated Total
Construction Costs exceed the Construction Allowance available therefor. The
remaining portion of such excess shall be payable in equal monthly
installments on the first day of each month, beginning the first day of the
second full calendar month after the date hereof, and on the Substantial
Completion date. The monthly installments due on the first day of each month
shall equal the portion of such excess divided by the number of scheduled
payment dates (including the Substantial Completion date) from the date
hereof through the estimated Substantial Completion date for the Work. Upon
Substantial Completion of the Work and before Tenant occupies the Premises to
conduct business therein, Tenant shall pay to Landlord an amount equal to the
Total Construction Costs (as adjusted for any approved changes to the Work),
less (1) the amount of the payments already made by Tenant, (2) the amount of
the Construction Allowance, and (3) the cost reasonably estimated by Landlord
for completing all "punch list" items; finally, upon completion of the punch
list items, Tenant shall pay to Landlord the costs incurred in completing the
same.
9. CONSTRUCTION ALLOWANCE. Landlord shall provide to Tenant a
construction allowance (the "CONSTRUCTION ALLOWANCE") equal to the lesser of
(a) the sum of (i) $25.00 per rentable square foot in the Premises, and (ii)
at Tenant's option, an additional $5.00 per rentable square foot in the
Premises, provided that any such additional allowance under this clause (ii)
shall be repaid by Tenant to Landlord in equal monthly installments of
principal and interest amortized over the initial Term of this Lease at an
interest rate of ten and one-half percent (10.5%) per annum, such option to
be exercised prior to commencement of the Work, if at all, or (b) the sum of
(i) the Total Construction Costs, as adjusted for any approved changes to the
Work, and (ii) Other Costs; however, if Tenant or its agent is managing the
performance of the Work, then Tenant shall not become entitled to full credit
for the Construction Allowance until the Work has been Substantially
Completed and Tenant has caused to be delivered to Landlord (1) all invoices
from contractors, subcontractors, and suppliers evidencing the cost of
performing the Work, together with lien waivers from such parties, and a
consent of the surety to the finished Work (if applicable) and (2) a
certificate of occupancy from the appropriate governmental authority, if
applicable to the Work, or evidence of governmental inspection and approval
of the Work. Notwithstanding anything contained herein to the contrary,
Landlord agrees (A) to pay to Tenant upon execution of this Lease, a portion
of the Construction Allowance equal to $1.00 per rentable square foot in the
Premises; (B) at Tenant's option, Tenant may apply a
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portion of the Construction Allowance to costs and expenses incurred by
Tenant in relocating to the Premises, space planning, design costs, and
project management costs (collectively, the "OTHER COSTS"); and (C) to the
extent the sum of Total Construction Costs and Other Costs is less than
$25.00 per rentable square foot in the Premises, Landlord shall pay to Tenant
in cash a sum equal to seventy-five percent (75%) of such unused Construction
Allowance.
10. CONSTRUCTION SUPERVISION. Landlord or its affiliate shall
execute the construction contract and supervise the Work, make disbursements
required to be made to the contractor, and act as a liaison between the
contractor and Tenant and coordinate the relationship between the Work, the
Building, and the Building's systems; provided that Landlord shall not be
entitled to a fee for Landlord's construction supervision services.
11. LEASE PROVISIONS. To the extent not inconsistent with this
Exhibit, Section 8.(a) of this Lease shall govern the performance of the Work
and the Landlord's and Tenant's respective rights and obligations regarding
the improvements installed pursuant thereto.
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EXHIBIT E
PARKING
Tenant shall be permitted to use vehicular parking spaces in the
surface lot and the parking garage associated with the Building (the "PARKING
GARAGE") at a ratio of one (1) space for each two hundred fifty (250)
rentable square feet in the Premises (the "REQUIRED PARKING SPACES") during
the initial Term at no additional charge to Tenant, but otherwise subject to
such terms, conditions and regulations as are from time to time charged or
applicable to patrons of the Parking Garage; provided that of the Required
Parking Spaces, covered parking spaces in the Parking Garage shall be
provided at a ratio of one (1) space for each three hundred thirteen (313)
rentable square feet in the Premises (it being agreed that the remainder of
the Required Parking Spaces need not be covered parking spaces). In addition,
of the Required Parking Spaces, twenty (20) of the covered parking spaces in
the Parking Garage and twenty-five (25) of the parking spaces in the surface
lot shall be designated parking spaces reserved for Tenant's use (and the
remainder shall be undesignated parking spaces).
Concurrently with the commencement of construction of the Work,
Landlord shall construct one hundred two (102) surface parking spaces on the
surface of the Land immediately adjacent to the Building which shall be
integrated into the currently existing parking facilities for the Building.
Landlord shall secure at least three (3) bids for this construction, and
Landlord and Tenant shall mutually agree on the contractor to perform such
work. Such work shall be completed no later than December 31, 2000; provided
that Landlord's obligation to timely commence and complete such work shall be
subject to timely completion by the City of Richardson, Texas of such
stormwater drainage improvements as may be necessary to close and fill the
detention pond currently located on the intended site of such additional
surface parking spaces; provided further that Landlord shall use commercially
reasonable efforts to cause the City to complete such stormwater drainage
improvements as soon as reasonably possible. Tenant shall pay Landlord
$250,000 for such construction upon the completion of such work, after
Landlord has submitted to Tenant copies of contracts, invoices, bills,
statements and evidence of payment of such bills together with Landlord's
request for payment of $250,000 from Tenant. Tenant shall pay Landlord such
amount within thirty (30) days after Tenant receives such request from
Landlord with reasonable supporting documentation, irrespective of the actual
cost to Landlord of performing such work. Fifty-one (51) of such additional
parking spaces shall be designated parking spaces reserved for Tenant's use
during the Term of this Lease, as extended (which are in addition to the
designated spaces stipulated above).
Landlord agrees that Landlord will not lease any space in the
Building to any tenant which lease provides for a parking ratio of more than
three and one-half (3.5) parking spaces per 1,000 rentable square feet in the
subject leased premises under such other lease, except to the extent that
Landlord provides, constructs or otherwise makes available therefor parking
spaces in addition to the one thousand sixty-three (1,063) existing parking
spaces in the Parking Garage and the surface lot and the one hundred two
(102) surface parking spaces to be hereafter constructed by Landlord.
If Tenant (a) assigns any of its interest in this Lease (other than
as a result of a Permitted Transfer), or (b) enters into any sublease as to
less than two (2) full floors in the Premises, then (i) such assignee or
sublessee shall only be entitled to use, and Tenant may not grant to such
assignee or sublessee more than, the Building standard ratio of parking
spaces per rentable square foot (3.5 parking spaces per 1,000 rentable square
feet), and (ii) the number of designated parking spaces reserved for Tenant's
use shall be reduced by a percentage equal to the percentage of the rentable
square feet in the Premises so assigned or subleased (other than pursuant to
a Permitted Transfer). Notwithstanding the foregoing, if Tenant enters into a
sublease as to at least two (2) full floors in the Premises, Tenant may, at
Tenant's option, grant to such sublessee such portion of the parking spaces
allocated to Tenant hereunder as Tenant elects in its discretion.
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EXHIBIT F
EXTENSION OPTIONS
1. OPTION. Provided no Event of Default (which has continued beyond
any applicable cure periods) exists and subject to Paragraph 3 of this
Exhibit, Tenant may renew this Lease for two (2) additional periods of five
(5) years each on the same terms provided in this Lease (except as set forth
below), by delivering written notice of the exercise thereof to Landlord not
later than nine (9) months before the expiration of the applicable Term (the
"ELECTION NOTICE"). On or before the commencement date of the extended Term
in question, Landlord and Tenant shall execute an amendment to this Lease
extending the Term on the same terms provided in this Lease, except as
follows:
(a) The Basic Rental payable for each month during each such
extended Term shall be the Fair Market Rental Rate, determined in
accordance with Paragraph 2 below.
(b) The Premises during the renewal Term may be for all or
such fewer number of full floors in the Premises as Tenant shall
designate in the Election Notice. If the renewal is as to at least
three (3) full floors, Tenant shall designate in the Election Notice
which floor or floors will be included in the Premises, provided that
Tenant must choose contiguous floors (except that Tenant may choose the
2nd floor and other floors that are not contiguous to the 2nd floor but
are contiguous to one another). If the renewal is as to less than three
full floors, Landlord shall determine which floors may be renewed
(except that Tenant may specify in the Election Notice that the 2nd
floor shall be included).
(c) Tenant shall have no further renewal options unless
expressly granted by Landlord in writing; and
(d) Landlord shall lease to Tenant the Premises in their
then-current condition, and Landlord shall not provide to Tenant any
allowances (e.g., moving allowance, construction allowance, and the
like) or other tenant inducements.
2. DETERMINATION OF FAIR MARKET RENTAL RATE. Within thirty (30) days
after Landlord receives the Election Notice, Landlord shall deliver to Tenant
its assessment of the Fair Market Rental Rate ("LANDLORD'S ASSESSMENT"). If
Tenant disagrees with Landlord's Assessment, it shall deliver to Landlord
written notice thereof (an "OBJECTION NOTICE") within thirty (30) days after
Landlord delivers Landlord's Assessment to Tenant specifying Tenant's
assessment of the Fair Market Rental Rate; otherwise, Landlord's Assessment
shall be the Basic Rental for the extended Term. If Tenant timely delivers an
Objection Notice, Landlord and Tenant shall meet to attempt to determine the
Fair Market Rental Rate for the extended Term. If Tenant and Landlord after
good faith negotiations are unable to agree on such Fair Market Rental Rate
within thirty (30) days after Tenant delivers to Landlord the Objection
Notice, then (a) Tenant may elect not to extend the Term by notifying
Landlord in writing within five (5) days after the expiration of such thirty
(30) day period (and if Tenant fails to so notify Landlord that it has
elected to not extend the Term within such five (5) day period, Tenant shall
be deemed to have elected to not renew the Term and its rights under this
Exhibit shall lapse; time being of the essence with respect thereto); or (b)
Tenant may object to Landlord's determination of the Fair Market Rental Rate
but confirm its exercise of the extension option, in which event Landlord and
Tenant shall each promptly appoint a Qualified Broker (as defined below). As
soon as reasonably possible following their appointment, and in any event
within thirty (30) days after Tenant's confirmation of its election to
exercise the extension option, the two (2) Qualified Brokers selected by
Landlord and Tenant shall each make a separate determination of the Fair
Market Rental Rate as of the commencement date of the applicable extension
term and shall deliver a written report of their determination (including
reasonable detail supporting such determination) to Landlord and Tenant. If
the higher of the two (2) Fair Market Rental Rate determinations is not more
than one hundred five percent (105%) of the lower determination, then the
average of the two determinations shall be the annual Basic Rental rate
during the applicable extension term. If the higher determination is more
than one hundred five percent (105%) of the lower determination, then the two
(2) Qualified Brokers selected by Landlord and Tenant shall, within ten (10)
days of such final determination, select a third Qualified Broker. If the
first two (2) brokers cannot agree upon a third broker within said ten (10)
day period, either Landlord or Tenant may elect to have the third broker
appointed by the President of the Dallas Chapter of AAA or its successor
organization. Each party shall be responsible for the compensation, if any,
of the broker appointed by it and for one-half (1/2) of the compensation, if
any, or the third broker. As soon as reasonably possible following its
appointment, the third broker shall determine which of the first two brokers'
determinations most closely approximates the Fair Market Rental Rate as of
the commencement date of the applicable extension Term, and the determination
so selected shall be the annual Basic Rental rate for the applicable
extension Term. Landlord and Tenant hereby covenant and agree that the annual
Basic Rental rate determined in accordance with the foregoing procedure shall
be binding upon each of them. As used herein, the term "QUALIFIED BROKER"
means a real estate broker who (A) is licensed in the State of Texas, (B) has
been actively and continuously engaged in the leasing of office space in the
Dallas, Texas market during the preceding ten (10) year period, (C) has been
the primary broker representing either the lessor or the lessee to a lease
covering at least 25,000 square feet of space during the most recent three
(3) year period, and (D) has not represented Landlord or Tenant during the
preceding five (5) year period. The term "FAIR MARKET RENTAL RATE" shall mean
the market rental rate for the time period such determination is being made
for comparable new lease transactions of office space in other Class A office
buildings in the "telecom corridor" sub-market of Dallas, Texas for space of
equivalent quality, size, utility, and location. Such determination shall
take into account all relevant factors, including, the length of the term,
credit standing of Tenant, market concessions, expense stop, construction
allowances, and the ratio of parking spaces provided to Tenant under this
Lease.
3. Tenant's rights under this Exhibit shall terminate if
(1) this Lease or Tenant's right to possession of the Premises is terminated,
(2) Tenant assigns its interest in this Lease other than to a Permitted
Transferee or another transferee approved by Landlord or (3) Tenant fails to
timely exercise its option under this Exhibit, time being of the essence with
respect to Tenant's exercise thereof. Tenant may not exercise the extension
right herein granted with respect to any portion of the Premises then under
sublease except pursuant to Short-Term Subleases.
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EXHIBIT G
TENANT'S PREFERENTIAL RIGHT TO LEASE
1. Subject to then-existing preferential rights or renewal or
expansion options of other tenants in the Building, before offering to lease
to any third-party person (except the then-current tenant therein) any
portion (the "OFFER SPACE") of the tenant space in the Building other than
the Premises and the Must-Take Space (the "ADDITIONAL SPACE"), Landlord shall
first offer to lease to Tenant the Offer Space. Such offer (the "OFFER
NOTICE") shall be in writing and specify: (a) the rent to be paid for the
Offer Space, which shall be (i) if such Offer Notice is given within eighteen
(18) months of the Commencement Date, the Basic Rental for the Premises, or
(ii) if such Offer Notice is given more than eighteen (18) months after the
Commencement Date, Landlord's Assessment of the Fair Market Rental Rate
(which shall assume the provision of market allowances, as set forth below),
(b) the lease term for the Offer Space which shall be (i) if such Offer
Notice is given within sixty (60) months of the Commencement Date,
coterminous with the initial Lease Term, and (ii) if such Offer Notice is
given more than sixty (60) months after the Commencement Date, such term as
Landlord shall reasonably designate, but not expiring sooner than the
expiration of the initial Lease Term, and (c) the date after completion of
applicable build-out on which the Offer Space shall be included in the
Premises. In addition, Tenant may from time to time (but not more frequently
than once every six (6) months) request Landlord to provide to Tenant a list
of the portions of the Additional Space then unencumbered and available for
rent and thereafter, if Tenant shall so request in writing, Landlord shall
provide an Offer Notice to Tenant as to such available, unencumbered portions
of Additional Space as Tenant shall specify (also referred to as "OFFER
SPACE"). Within ten (10) business days after Landlord delivers to Tenant the
Offer Notice, Tenant shall notify Landlord in writing that (a) Tenant elects
to lease the entire Offer Space at the applicable rental rate set forth in
the Offer Notice, (b) Tenant objects to Landlord's determination of the Fair
Market Rental Rate (if applicable) but confirms its exercise of the
preferential right to lease the Offer Space, in which event Tenant shall
deliver its Objection Notice within thirty (30) days after receipt of the
Offer Notice, Landlord and Tenant thereafter shall each promptly appoint a
Qualified Broker, and the Fair Market Rental Rate shall be determined in
accordance with the procedures set forth in EXHIBIT F, or (c) Tenant elects
not to lease the Offer Space. If Tenant timely elects to lease the Offer
Space, then Landlord and Tenant shall execute an amendment to this Lease,
effective as of the date the Offer Space is to be included in the Premises,
on the same terms as this Lease except that (1) the rentable area of the
Premises shall be increased by the rentable area in the Offer Space (and
Tenant's Proportionate Share shall be adjusted accordingly), (2) the Basic
Rental for such space shall be the Fair Market Rental Rate or other
applicable rental rate set forth in the Offer Notice, (3) if the Offer Notice
is given within eighteen (18) months after the Commencement Date, the
allowances to be provided by Landlord to Tenant shall be decreased
proportionally in the same ratio as the then remaining Term of the Lease (not
including any renewal and extension options) bears to the initial 10-year
Term of this Lease, and (4) if the Offer Notice is given more than eighteen
(18) months after the Commencement Date, market allowances will be provided
(and taken into account in establishing the Fair Market Rental Rate). If,
however, Tenant does not elect within the time and in the manner above
provided to exercise said option, then Landlord may lease the Offer Space to
third parties, subject to paragraph 2 below. If a lease for such Offer Space
is not fully executed within one hundred eighty (180) days following the
expiration of the ten (10) business day period mentioned above, then the
Offer Space shall again be subject to the preferential right in accordance
with the foregoing provisions of this paragraph 1; provided that in any
event, Tenant's preferential right shall continue with respect to the
remainder of the Additional Space not then or previously the subject of an
Offer Notice on the terms hereinabove set forth.
2. If at any time during the Term of this Lease, Landlord receives a
bona fide offer from a third-party to lease all or a portion of the
Additional Space (other than pursuant to then-existing preferential rights or
renewal or expansion options of other tenants in the building or the
then-current tenant therein) which Landlord desires to accept, whether or not
Landlord shall have previously given an Offer Notice with respect thereto,
Landlord shall so notify Tenant in writing (a "REFUSAL NOTICE") and shall (a)
identify the Additional Space affected thereby (the "REFUSAL SPACE"); (b)
specify the rent to be paid and the allowances (if any) to be provided for
the Exercise Space (as hereinafter defined), which shall be the rent to be
paid and the allowances (if any) to be provided under such bona fide offer
which Landlord desires to accept; (c) specify the lease term for the Exercise
Space which shall be (i) if such Refusal Notice is given within sixty (60)
months of the Commencement Date, coterminous with the initial Lease Term, and
(ii) if such Refusal Notice is given more than sixty (60) months after the
Commencement Date, such term as is provided in the third-party offer Landlord
desires to accept, but not expiring sooner than the expiration of the initial
Lease Term; and (d) the date on which the Exercise Space shall be included in
the Premises. Within ten (10) business days after Landlord delivers to Tenant
the Refusal Notice, Tenant shall notify Landlord in writing that (1) Tenant
elects to lease at the rental rate set forth in the Refusal Notice all or a
portion of the Refusal Space, provided that until at least seventy-five
percent (75%) the Building is leased, Tenant must elect to lease not less
than two additional floors in the Building if the Refusal Space is two or
more floors, and if the Refusal Space is less than two full floors, then
Tenant must elect to lease all the Refusal Space, and provided further that
after at least seventy-five percent (75%) of the Building has been leased,
Tenant must elect to lease not less than one additional full floor in the
Building (the space as to which Tenant exercises its option, which if not
coextensive with the Refusal Space shall be mutually agreed to by Landlord
and Tenant, being hereinafter called the "EXERCISE SPACE"), or (2) Tenant
elects not to lease the Refusal Space. If Tenant timely elects to lease the
Exercise Space, then Landlord and Tenant shall execute an amendment to this
Lease, effective as of the date the Exercise Space is to be included in the
Premises, on the same terms as this Lease except that (x) the rentable area
of the Premises shall be increased by the rentable area in the Exercise Space
(and Tenant's Proportionate Share shall be adjusted accordingly), (y) the
Basic Rental for such space shall be the rental rate set forth in the Refusal
Notice, and (z) the allowances (if any) contained in the bona fide offer
which Landlord desires to accept will be provided. If, however, Tenant does
not elect within the time and in the manner above provided to exercise said
option, then Landlord may lease the Refusal Space to third parties. If a
lease for such Refusal Space is not fully executed within one hundred eighty
(180) days following the expiration of the ten (10) business day period
mentioned above, then the Refusal Space shall again be subject to the
preferential right in accordance with the foregoing provisions of paragraph 1.
3. The preferential and refusal rights granted to Tenant under this
EXHIBIT G shall also be applicable to tenant space in any office building which
Landlord or CCII constructs on the Development Site, other than an
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office building constructed pursuant to a build-to-suit or other similar
arrangement whereby such building is developed for the principal use and
benefit of a single tenant.
4. Tenant may not exercise its rights under this Exhibit if an Event
of Default (which has continued beyond any applicable cure period) exists or,
after the Commencement Date, Inet Technologies, Inc. is not then in occupancy
of at least seventy-five percent (75%) of the net rentable area of the
Premises. Tenant's rights under this Exhibit shall terminate if (a) this
Lease or Tenant's right to possession of the Premises is terminated or (b)
Tenant assigns any of its interest in this Lease other than to a Permitted
Transferee. No sublessee or assignee of Tenant shall have any rights under
this Exhibit.
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EXHIBIT H
MUST-TAKE EXPANSION OBLIGATION
1. Tenant hereby irrevocably agrees to take and lease from Landlord
the entire seventh (7th) floor of the Building (Suite 700), containing 27,697
rentable square feet (the "MUST-TAKE SPACE") on the same terms and conditions
as are applicable to the initial Premises, including Basic Rental,
Construction Allowance, and finish out of the Must-Take Space generally in
accordance with the terms and conditions of EXHIBIT D of this Lease, except
that (a) the scheduled commencement date of this Lease as to the Must-Take
Space shall be the date specified in a written notice by Tenant to Landlord,
which date shall be not earlier than twenty (20) weeks after the date on
which Tenant undertakes to deliver to Landlord for its approval final working
drawings for the Must-Take Space (which dates shall be specified in such
notice) and not later than April 1, 2001, subject to adjustment in the same
manner as set forth in Section 3 with respect to the initial Premises,
provided that if Tenant fails to deliver such a notice at least twenty (20)
weeks prior to April 1, 2001, the Commencement Date with respect to the
Must-Take Space shall be April 1, 2001; (b) Tenant shall not be entitled to
any free rental period with respect to the Must-Take Space, except to the
extent that the Commencement Date applicable to the Must-Take Space occurs
prior to October 1, 2000 in which event Tenant shall be entitled to free rent
from the Commencement Date applicable to the Must-Take Space to but not
including October 1, 2000: and (c) the initial Term for the Must-Take Space
shall be coterminous with that of the initial Premises. By occupying the
Must-Take Space, Tenant shall be deemed to have accepted the Premises in
their condition as of the date of such occupancy, subject to the performance
of punch-list items that remain to be performed by Landlord, if any. Tenant
shall execute and deliver to Landlord, within ten (10) days after Landlord
has requested same, a letter agreement confirming (1) the Commencement Date
applicable to the Must-Take Space, (2) that Tenant has accepted the Must-Take
Space, (3) that Landlord has performed all of its obligations with respect to
the Must-Take Space (except for punch-list items specified in such letter),
and (4) that the number of rentable square feet in the Premises has been
increased by the number of rentable square feet in the Must-Take Space and
adjusting Tenant's Proportionate Share accordingly.
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EXHIBIT I
EXPANSION OPTIONS
1. Provided no Event of Default (which has continued beyond any
applicable cure periods) exists and Tenant is occupying the entire Premises
at the time of such election, Tenant may elect to lease up to 27,697 rentable
square feet of additional space on the sixth (6th) floor of the Building as
designated on EXHIBIT A-6 (the "FIRST EXPANSION AREA"), by delivering to
Landlord, on or before the date that is six (6) months after the Commencement
Date, written notice of Tenant's election to include such space in the
Premises (the "FIRST FIRST-YEAR EXPANSION OPTION"). If Tenant timely
exercises its First First-Year Expansion Option, then Tenant and Landlord
shall execute an amendment to this Lease including the First Expansion Area
in the Premises on the same terms and conditions as are applicable to the
initial Premises, including Basic Rental, Construction Allowance, and finish
out of the First Expansion Area generally in accordance with the terms and
conditions of EXHIBIT D of this Lease, except that (a) the scheduled
commencement date of this Lease as to the First Expansion Area shall be the
date specified in the written notice of election by Tenant, which date shall
be not earlier than twenty (20) weeks after the date on which Tenant
undertakes to deliver to Landlord for its approval final working drawings for
the First Expansion Area (which dates shall be specified in such notice) and
not later than eighteen (18) months after the Commencement Date (subject to
adjustment in the same manner as set forth in Section 3 with respect to the
initial Premises), (b) Tenant shall not be entitled to any free rental period
with respect to the First Expansion Area, (c) the initial Term for the First
Expansion Area shall be coterminous with that of the initial Premises, and
(d) the Construction Allowance and any other allowances to be provided by
Landlord to Tenant shall be decreased proportionally in the same ratio as the
then remaining term of this Lease (not including any renewal or extension
options) bears to the initial 10-year Term of this Lease. By occupying the
First Expansion Area, Tenant shall be deemed to have accepted the First
Expansion Area in their condition as of the date of such occupancy, subject
to the performance of punch-list items that remain to be performed by
Landlord, if any. Tenant shall execute and deliver to Landlord, within ten
(10) days after Landlord has requested same, a letter agreement confirming
(1) the Commencement Date applicable to the First Expansion Area, (2) that
Tenant has accepted the First Expansion Area, (3) that Landlord has performed
all of its obligations with respect to the First Expansion Area (except for
punch-list items specified in such letter), and (4) that the number of
rentable square feet in the Premises has been increased by the number of
rentable square feet in the First Expansion Area and adjusting Tenant's
Proportionate Share accordingly.
2. Provided no Event of Default exists, Tenant has exercised the
First Expansion Option, the fifth (5th) floor of the Building has not
theretofore been leased in whole or in part, and Tenant is occupying the
entire Premises at the time of such election, Tenant may elect to lease up to
27,697 rentable square feet of additional space on the fifth (5th) floor of
the Building as designated on EXHIBIT A-7 (the "SECOND EXPANSION Area"), by
delivering to Landlord, on or before the date that is twelve (12) months
after the Commencement Date, written notice of Tenant's election to include
such space in the Premises (the "SECOND FIRST-YEAR EXPANSION OPTION"). If
Tenant timely exercises its Second First-Year Expansion Option, then Tenant
and Landlord shall execute an amendment to this Lease including the Second
Expansion Area in the Premises on the same terms and conditions as are
applicable to the initial Premises, including Basic Rental, Construction
Allowance, and finish out of the Second Expansion Area generally in
accordance with the terms and conditions of EXHIBIT D of this Lease, except
that (a) the scheduled commencement date of this Lease as to the Second
Expansion Area shall be the date specified in the written notice of election
by Tenant, which date shall be not earlier than twenty (20) weeks after the
date on which Tenant undertakes to deliver to Landlord for its approval final
working drawings for the Second Expansion Area (which dates shall be
specified in such notice) and not later than twenty-four (24) months after
the Commencement Date (subject to adjustment in the same manner as set forth
in Section 3 with respect to the initial Premises), (b) Tenant shall not be
entitled to any free rental period with respect to the Second Expansion Area,
(c) the initial Term for the Second Expansion Area shall be coterminous with
that of the initial Premises, and (d) the Construction Allowance and any
other allowances to be provided by Landlord to Tenant shall be decreased
proportionally in the same ratio as the then remaining term of this Lease
(not including any renewal or extension options) bears to the initial 10-year
Term of this Lease. By occupying the Second Expansion Area, Tenant shall be
deemed to have accepted the Second Expansion Area in their condition as of
the date of such occupancy, subject to the performance of punch-list items
that remain to be performed by Landlord, if any. Tenant shall execute and
deliver to Landlord, within ten (10) days after Landlord has requested same,
a letter agreement confirming (1) the Commencement Date applicable to the
Second Expansion Area, (2) that Tenant has accepted the Second Expansion
Area, (3) that Landlord has performed all of its obligations with respect to
the Second Expansion Area (except for punch-list items specified in such
letter), and (4) that the number of rentable square feet in the Premises has
been increased by the number of rentable square feet in the Second Expansion
Area and adjusting Tenant's Proportionate Share accordingly. Landlord shall
use reasonable efforts to lease floors three (3), four (4) and five (5) in
the Building prior to leasing space on the sixth (6th) floor of the Building;
provided that Landlord shall not be obligated to forego any leasing
opportunity as to the sixth (6th) floor as part of such efforts.
3. Tenant's rights under this Exhibit shall terminate if (a) this
Lease or Tenant's right to possession of the Premises is terminated, (b)
Tenant assigns any of its interest in this Lease other than to a Permitted
Transferee, or (c) Tenant fails to timely exercise its First-Year Expansion
Options under this Exhibit, time being of the essence with respect to
Tenant's exercise thereof. Tenant may not exercise its rights under this
Exhibit if an Event of Default (which has continued beyond any applicable
cure periods) exists or, after the Commencement Date, Inet Technologies, Inc.
is not then in occupancy of at least seventy-five percent (75%) of the net
rentable area of the Premises. No sublessee or assignee of Tenant shall have
any rights under this Exhibit.
I-1
<PAGE>
EXHIBIT J
RIGHT OF FIRST REFUSAL - DEVELOPMENT SITE
1. Prior to Landlord's Commencement of Construction (as hereinafter
defined), Landlord agrees for itself and its affiliate, CCII, that, during
the Term, prior to offering to sell a development site in substantially the
same shape and configuration as is identified on EXHIBIT A-2 (the
"DEVELOPMENT SITE") to any third party not affiliated with Landlord or CCII,
CCII shall first offer to sell to Tenant the Development Site on the same
material business terms and conditions as the Development Site is to be
offered to any such unaffiliated third party; such offer shall be in writing
and specify the purchase price to be paid for the Development Site, the date
by which the Development Site must be purchased, and all other material
business terms of the sales proposal (the "PURCHASE OFFER NOTICE"). Tenant
shall notify CCII and Landlord in writing whether Tenant elects to purchase
the entire Development Site on the terms set forth in the Purchase Offer
Notice (the "TENANT ELECTION NOTICE") within ten (10) business days after
Landlord or CCII delivers to Tenant the Purchase Offer Notice. If Tenant
timely notifies CCII and Landlord in the Tenant Election Notice that Tenant
elects to purchase the Development Site, then CCII and Tenant shall enter
into a mutually acceptable purchase and sale agreement which shall
incorporate the terms of the Purchase Offer Notice, and shall provide for the
sale of the Development Site on an "as-is," "where-is" basis. If, however,
Tenant does not elect within the time and in the manner above provided to
exercise the preferential right to purchase hereinabove set forth, then CCII
may sell the Development Site to any such unaffiliated third party at a
purchase price that is not less than ninety-five percent (95%) of the
purchase price set forth in the Purchase Offer Notice. If a purchase and sale
agreement for such Development Site is not fully executed within one hundred
eighty (180) days following the expiration of the ten (10) business day
period mentioned above, or if CCII elects to sell the Development Site on
terms materially different from those that are set forth in the Purchase
Offer Notice, then the Development Site shall again be subject to the
preferential right in accordance with the foregoing provisions of this
Exhibit. Tenant may not exercise its rights under this Exhibit if an Event of
Default exists hereunder.
2. Tenant's rights under this Exhibit shall terminate if (a) this
Lease or Tenant's right to possession of the Premises is terminated; (b)
Tenant assigns any of its interest in this Lease or sublets any portion of
the Premises this Lease (other than to a Permitted Transferee); or (c)
Commencement of Construction by CCII, Landlord or an affiliate of CCII or
Landlord occurs on the Development Site (each of the foregoing being called
"TERMINATION EVENTS").
3. For purposes of this Exhibit, "COMMENCEMENT OF CONSTRUCTION"
shall be deemed to have occurred only after a building permit has been
obtained, rough grading has been completed, and work has been initiated on
the foundations for permanent improvements on the Development Site
4. Upon Tenant's written request, Landlord agrees to cause CCII to
execute and record a Memorandum of Preferential Right with respect to the
preferential rights herein granted in respect of the Development Site in the
form set forth below (the "MEMORANDUM"). Tenant hereby agrees that if (a) a
Termination Event has occurred, or (b) following receipt of a Purchase Offer
Notice, Tenant does not timely elect to purchase the Development Site
pursuant to a Tenant Election Notice, then within two (2) business days of
written request by Landlord or CCII, Tenant shall execute and deliver a
Termination of Preferential Right in the form set forth below (the
"TERMINATION"). Tenant further agrees that if Tenant fails to execute and
deliver a Termination following proper request by Landlord or CCII therefor,
such failure shall constitute an Event of Default by Tenant under the Lease.
In addition to any other remedies that Landlord may have under this Lease,
Landlord and/or CCII shall have the right, and are each hereby granted an
irrevocable power-of-attorney coupled with an interest, to execute and
deliver in the name of Tenant and record the Termination. Tenant further
acknowledges and agrees that the damages which will accrue to Landlord and
CCII if Tenant fails to execute and deliver the Termination cannot readily be
estimated or calculated, and that Landlord and/or CCII shall be entitled to
seek and obtain specific performance of such obligation.
[FORMS OF MEMORANDUM AND TERMINATION FOLLOW]
J-1
<PAGE>
FORM OF
MEMORANDUM OF PREFERENTIAL RIGHT
STATE OF TEXAS )
) KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF DALLAS )
That COLLINS CROSSING II, LTD., a Texas limited partnership
("GRANTOR") has granted in favor of INET TECHNOLOGIES, INC., a Delaware
corporation ("GRANTEE"), a preferential right (the "PREFERENTIAL RIGHT") to
purchase the property described on EXHIBIT A attached hereto and incorporated
herein (the "DEVELOPMENT SITE") on certain terms and conditions set forth in
that certain Lease dated January ____, 2000, between Collins Crossing, Ltd.,
a Texas limited partnership ("LANDLORD"), as landlord, and Grantee, as
tenant, relating to certain premises in the office building located on
certain adjoining property owned by Grantor (the "LEASE"). Grantor, an
affiliate of Landlord, acknowledges that it expects, or can reasonably be
expected, to derive benefit from the Lease and the Preferential Right.
The Preferential Right to purchase the Development Site terminates
upon the occurrence of a Termination Event (as defined in the Lease) or the
failure of Grantee to timely exercise the Preferential Right pursuant to
terms set forth in the Lease.
Grantee has granted to each of Grantor and Landlord an irrevocable
power-of-attorney, coupled with an interest, to execute, deliver and record a
Termination of Preferential Right in the form attached hereto as EXHIBIT B if
Grantee fails or refuses to do so in compliance with the Lease.
This Memorandum of Preferential Right (and the Preferential Right to
purchase the Development Site) shall terminate and be of no further force and
effect on the earlier to occur of (1) the execution and recording of a
Termination of Preferential Right in substantially the form attached hereto
as EXHIBIT B, or (2) June 30, 2020.
EXECUTED as of January ____, 2000.
GRANTOR: COLLINS CROSSING II, LTD.,
a Texas limited partnership
By: TCDFW-Collins Crossing, Ltd.,
a Texas limited partnership
By: TCDFW #1, Inc.,
a Delaware corporation,
its sole general partner
By: _______________________________
Name:_______________________________
Title:______________________________
GRANTEE: INET TECHNOLOGIES, INC.,
a a Delaware corporation
By: __________________________________________
William Mina, Senior Vice President
STATE OF TEXAS )
)
COUNTY OF DALLAS )
The foregoing instrument was acknowledged before me this _____ day of
January, 2000, by _____________________________, ________________________ of
TCDFW #1, Inc., a Delaware corporation, sole general partner of TCDFW-Collins
Crossing, Ltd., a Texas limited partnership on behalf of COLLINS CROSSING II,
LTD., a Texas limited partnership on behalf of such corporation and limited
partnerships. He is personally known to me or has produced HIS DRIVER'S LICENSE
as identification.
_____________________________________
Notary Public, State of Texas
_____________________________________
Notary's Printed Name
My Commission Expires: ______________
J-2
<PAGE>
STATE OF TEXAS )
)
COUNTY OF DALLAS )
The foregoing instrument was acknowledged before me this _____ day of
January, 2000, by William Mina, Senior Vice President of INET TECHNOLOGIES,
INC., a Delaware corporation on behalf of said corporation. He is personally
known to me or has produced HIS DRIVER'S LICENSE as identification.
_____________________________________
Notary Public, State of Texas
_____________________________________
Notary's Printed Name
My Commission Expires: ______________
J-3
<PAGE>
FORM OF
TERMINATION OF PREFERENTIAL RIGHT
STATE OF TEXAS )
) KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF DALLAS )
That COLLINS CROSSING II, LTD., a Texas limited partnership
("GRANTOR") has granted in favor of INET TECHNOLOGIES, INC., a Delaware
corporation ("GRANTEE"), a preferential right (the "PREFERENTIAL RIGHT") to
purchase the property described on EXHIBIT A attached hereto and incorporated
herein (the "DEVELOPMENT SITE") on certain terms and conditions set forth in
that certain Lease dated January ____, 2000, between Collins Crossing, Ltd.,
a Texas limited partnership and Grantee (the "LEASE"), as more fully set
forth in that certain Memorandum of Preferential Right dated January ____,
2000, between Grantor and Grantee, recorded in Volume _____, Page ______, of
the Real Property Records of Dallas County, Texas (the "MEMORANDUM").
The undersigned, being duly authorized to do so, does hereby certify
that either a Termination Event (as defined in the Lease) has occurred or
Grantee has failed to timely exercise the Preferential Right pursuant to
terms set forth in the Lease. Accordingly, the Memorandum and the
Preferential Right are hereby irrevocably and finally released and terminated
and are of no further force or effect.
EXECUTED as of ________________________, _______.
: INET TECHNOLOGIES, INC.,
a Delaware corporation
By: _______________________________
Name:_______________________________
Title:______________________________
STATE OF TEXAS )
)
COUNTY OF DALLAS )
The foregoing instrument was acknowledged before me this _____ day of
_____________, ______, by ____________________________, _______________________
of INET TECHNOLOGIES, INC., a Delaware corporation on behalf of said
corporation. He is personally known to me or has produced HIS DRIVER'S LICENSE
as identification.
_____________________________________
Notary Public, State of Texas
_____________________________________
Notary's Printed Name
My Commission Expires: ______________
J-4
<PAGE>
EXHIBIT K
WAIVER OF RIGHTS UNDER THE
DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT
EACH OF LANDLORD AND TENANT WAIVES ITS RIGHTS UNDER THE DECEPTIVE
TRADE PRACTICES-CONSUMER PROTECTION ACT, SECTION 17.41, ET. SEQ., BUSINESS &
COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS.
AFTER CONSULTATION WITH AN ATTORNEY OF ITS CHOICE, EACH OF LANDLORD AND
TENANT CONSENT TO THIS WAIVER.
LANDLORD:
COLLINS CROSSING, LTD.,
a Texas limited partnership
By: TCDFW-Collins Crossing, Ltd.,
a Texas limited partnership
By: TCDFW #1, Inc.,
a Delaware corporation,
its sole general partner
By: _______________________________
Name:_______________________________
Title:______________________________
TENANT:
INET TECHNOLOGIES, INC.,
a Delaware corporation
By:
___________________________________________
William Mina, Senior Vice President
K-1
<PAGE>
EXHIBIT L
FORMS OF SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT
[attached]
L-1
<PAGE>
EXHIBIT M
SECURITY SPECIFICATIONS
The Building is staffed on a seven day per week, 24 hour per day basis by a
Trammell Crow Company staff that includes a Security Manager and 3 Security
Staff.
There are 16 surveillance cameras throughout the property which include:
Lobby entrances (2)
Dock and service hallway (2)
Passenger elevator cabs (2)
Freight elevator cab (1)
Garage elevator cab (2)
Garage elevator vestibules (5)
Parking garage gates (2)
There are 13 proximity card readers throughout the property which include:
Lobby entrances (2)
Loading dock (1)
Garage elevator vestibules (5)
Parking garage gates (2)
Passenger elevator cabs (2)
Additionally, all cameras are recorded on a 24 hour per day basis.
M-1
<PAGE>
EXHIBIT N
FORM OF STAUBACH COMMPANY COMMISSION AGREEMENT
[attached]
N-1
<PAGE>
EXHIBIT O
SCHEDULE OF LISTED COMPETITORS
1. Nortel
2. Alcatel
3. 3Com Corporation
4. Tekelec (IEX)
O-1
<PAGE>
EXHIBIT P
[Intentionally Omitted]
P-1
<PAGE>
EXHIBIT Q
HVAC SPECIFICATIONS
Central System: Central chilled water system using two water
cooled (by cooling tower) chillers of total 900 tons
capacity and one 27,000 CFM variable air volume air
handling unit on each floor.
Terminal Unit: Variable air volume fan powered electric boxes for
all perimeter zones complete. Variable air volume
terminal boxes only for interior common areas.
Air Distribution: Medium pressure duct work complete from air handling
units to VAV fan powered electric heat perimeter
boxes, interior VAV boxes for common areas only and
for future interior VAV boxes for tenant areas. Low
pressure duct work complete from perimeter VAV fan
powered electric heat boxes to perimeter slot
diffusers and complete from interior VAV boxes to
diffusers for interior common areas only.
Control System: Automated direct digital control.
Computer Room A/C
Condenser Water Loop: 200 tons (600 GPM) surplus cooling tower capacity
with separate pump, standby pump and piping risers
for tenant
Q-1
<PAGE>
EXHIBIT R
JANITORIAL SPECIFICATIONS
A. OFFICE AREAS
1. Empty, clean and damp dust all waste receptacles and remove waste paper
and rubbish from the premises nightly; wash receptacles as necessary.
2. Empty and clean all ash trays, screen all sand urns nightly and supply
and replace sand as necessary.
3. Vacuum all rugs and carpeted areas in offices, lobbies and corridors
nightly. Spot clean carpets as needed.
4. Hand dust and wipe clean with damp or treated cloth all office
furniture, files, fixtures, paneling, window sills and other horizontal
surfaces nightly; wash window sills when necessary.
5. Damp wipe and polish all glass furniture tops nightly.
6. Remove all finger marks and smudges from vertical surfaces, including
doors, door frames, around light switches, private entrance glass and
partitions nightly.
7. Wash clean all water coolers nightly.
8. Sweep all stairways nightly, vacuum if carpeted.
9. Police all stairwells throughout the entire building daily and keep in
clean condition.
10. Damp mop spillage in office and public areas as required.
11. Damp dust all telephones as necessary.
B. WASH ROOMS
1. Mop, rinse and dry floors nightly.
2. Scrub floors weekly.
3. Clean all mirrors, bright work and enameled surfaces, nightly.
4. Wash and disinfect all basin, urinals and bowls nightly, using
non-abrasive cleaners to remove stains and clean underside of rim on
urinals and bowls nightly.
5. Wash both sides of all toilet seats with soap and water and disinfect
nightly.
6. Damp wipe nightly, wash all partitions, tile walls and outside surface
of all dispensers and receptacles.
7. Empty and sanitize all receptacles and sanitary disposals nightly;
thoroughly clean and wash at least once per week.
8. Fill toilet tissue, soap, towel and sanitary napkin dispensers nightly.
9. Clean flushometers, piping, toilet seat hinges and other metal work
nightly.
10.Wash and polish all wall, partitions tile walls and enamel surfaces
from trim to floor monthly or as needed.
11. Vacuum all louvers, ventilating grills, and dust light fixtures
monthly.
NOTE: It is the intention to keep the wash rooms thoroughly cleaned and not
to use a disinfectant or deodorant to kill odor. If a disinfectant is
necessary, an odorless product will be used with the Manager's
permission.
C. FLOORS
1. Ceramic tile, marble and terrazzo floors to be swept and buffed nightly
and washed or scrubbed as necessary.
2. Vinyl asbestos, asphalt, vinyl, rubber or other composition floors and
bases to be swept nightly; such floors in public areas on multiple
tenancy floors to be waxed and buffed as needed.
3. Tile floors in office areas will be washed and buffed monthly.
4. All vinyl floors stripped and rewaxed as necessary.
5. All carpeted areas and rugs to be vacuumed clean nightly.
6. Detail vacuuming shall be performed as necessary.
R-1
<PAGE>
7. Carpet shampooing will be performed at Manager's request and billed by
Manager.
D. RAISED COMPUTER FLOORS
1. Dry mop and spot clean all computer flooring nightly.
2. Wet mop all computer flooring at least once weekly. Mopping may be
performed on separate sections of the computer flooring on successive
nights, as long as entire raised flooring is mopped once during each one
week period.
3. Buff all computer flooring monthly.
4. Computer sub-flooring shall be cleaned annually by contractor, or as
necessary.
E. GLASS
1. Clean glass entrance doors, adjacent glass panels, and any common area
glass nightly.
F. HIGH DUSTING (As Needed)
1. Dust and wipe clean all closet shelving when empty and carpet sweep or
dry mop all floors in closets if such are empty.
2. Dust all picture frames, charts, graphs and similar wall hangings.
3. Dust clean all vertical such as walls, partitions, doors, door bucks and
other surfaces above shoulder height.
4. Damp dust all ceiling air conditions diffusers, wall grilles, registers
and other ventilating louvers.
5. Dust the exterior surfaces of lighting fixtures, including glass and
plastic enclosures.
6. Dust all mini blinds.
G. ELEVATORS
1. Carpets will be vacuumed daily and spot cleaned as necessary.
2. Exterior and interior doors and trim will be dusted nightly.
3. Cabinets will be dusted nightly.
4. Control and dispatch panels will be dusted and polished as necessary.
5. Elevator thresholds will be cleaned nightly.
6. Hardwood surfaces will be kept clean.
7. Telephones will be kept dust free.
8. Garage elevators - floors will be stripped, waxed, and damp mopped as
necessary. Elevator tracks are to be kept clean.
H. GENERAL
1. Wipe all interior metal window frames, mullions, and other unpainted
interior metal surfaces of the perimeter walls of the building each time
the interior of the window is washed (as requested by the Manager).
2. Keep slopsink rooms in a clean, neat and orderly condition at all times.
3. Wipe clean and polish all metal hardware fixtures and other bright work
nightly.
4. Dust and/or wash all directory boards as required, remove fingerprints
and smudges nightly.
5. Maintain building lobby, corridors and other public areas in a clean
condition.
6. Dust fire extinguishers and cabinets nightly (interior and exterior);
wash as necessary.
7. All baseboards (resilient flooring and carpeted areas) will be washed
and wiped clean as necessary.
8. Vacuum entrance mats nightly.
9. Perform special cleaning needs of individual tenants only as authorized
and directed by the manager.
10.Properly maintain exterior of building at ground level by ensuring that
curtain wall, glass, marble, etc., is kept in a clean condition.
Exterior stainless steel is to be cleaned or polished weekly.
11. Polish standpipes and sprinkler Siamese connections as necessary.
R-2
<PAGE>
NOTE: Upon completion of nightly duties, floor supervisors will ensure that
all offices have been cleaned and left in a neat and orderly condition;
all lights have been turned off and all doors locked. Nightly condition
report should be completed, noting any employees working on the floor
or other incidents.
R-3
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES.
INET GLOBAL, LIMITED (UNITED KINGDOM)
INET FOREIGN SALES CORPORATION (BARBADOS)
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-83285) pertaining to the 1998 Stock Option/Stock Issuance Plan and
Employee Stock Purchase Plan, of our report dated January 27, 2000, with respect
to the consolidated financial statements and schedule of Inet Technologies, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31, 1999
filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Dallas, Texas
March 1, 2000
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