As filed with the Securities and Exchange Commission on June 2, 1994.
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-12390
QUANTUM CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-2665054 500 McCarthy Blvd.
(State or other jurisdiction of (I.R.S. Employer Milpitas, California 95035
incorporation or organization) Identification No.) (408) 894-4000
(Address of principal
executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
6 3/8% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002
PREFERRED SHARE RIGHTS
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) 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 this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of May 2, 1994: $702,725,166 based upon the last sale price
reported for such date on the NASDAQ National Market System. For purposes of
this disclosure, shares of Common Stock held by persons who hold more than 5%
of
the outstanding shares of Common Stock and shares held by officers and directors
of the Registrant have been excluded in that such persons may be deemed to be
affiliates. This determination is not necessarily conclusive.
The number of shares outstanding of the Registrant's Common Stock as of May 2,
1994 was 44,692,410.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1994 Annual Meeting of
Shareholders (the "Proxy Statement") are incorporated by reference into Part III
of this Form 10-K Report.
TABLE OF CONTENTS
PART I Item 1. Business
Executive Officers
Products
Product Development
Manufacturing
Sales and Marketing
Warranty and Service
Backlog
Competition
Patents and Licenses
Employees
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
PART IV Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K:
(a) Documents Filed with Report
(b) Reports on Form 8-K
(c) Exhibits
(d) Financial Statement Schedules
PART I
Item 1.
Business
Quantum Corporation (the "Company" or "Quantum") was incorporated as a
California corporation in February 1980, and reincorporated as a Delaware
corporation in April 1987.
Quantum Corporation is a leader in designing, manufacturing and marketing
advanced small-form-factor hard disk drives for a broad range of computer
systems, including desktop workstations, personal computers and advanced
notebook computers. The Company markets its products directly to major OEMs
and
through a broad range of distributors, resellers and systems integrators in more
than 40 countries worldwide.
Executive Officers
The executive officers of the Company, and certain information about them as of
March 31, 1994, are as follows:
Name Age Position with the Company
William J. Miller 48 Chairman and Chief Executive Officer
Michael A. Brown 35 President, Desktop and Portable Storage Group
Robert K. Maeser 54 President, High-Capacity Storage Group
Kenneth Lee 57 Executive Vice President, Technology and
Engineering, Chief Technical Officer
William F. Roach 50 Executive Vice President, Worldwide Sales
Joseph T. Rodgers 51 Executive Vice President, Finance,
Chief Financial Officer and Secretary
Deborah E. Barber 55 Vice President, Human Resources
Gina M. Bornino 33 Vice President, Corporate Development and
Planning
Kenneth F. Potashner 37 Vice President, Quality and Business Excellence
Mr. Miller joined the Company as Chief Executive Officer in March 1992 and was
elected Chairman in September 1993. He has been a member of the Board of
Directors since May 1992. He previously served 11 years at Control Data
Corporation, where his last position was Executive Vice President and President
of Information Services. He also served as President and Chief Executive
Officer of Imprimis Technology, formerly a subsidiary of Control Data
Corporation.
Mr. Brown joined the Company's marketing organization in August 1984, was
named
Vice President, Marketing, in June 1990, and became Executive Vice President in
February 1992. In August 1993, he was named President of the Desktop and
Portable Storage Group. Prior to June 1990, Mr. Brown held positions in product
and marketing management. Prior to joining the Company, he served in the
marketing organization at Hewlett-Packard Company and provided management
consulting services at Braxton Associates.
Mr. Maeser joined the Company in 1992 as Vice President and General Manager,
High-Capacity Storage Group, and was promoted to President, High-Capacity
Storage Group, in August 1993. Prior to joining the Company, he served as
Executive Vice President, Operations and Development, for the Automated
Wagering
Division of Control Data Corporation from September 1991 to July 1992, and as
Vice President, Product Line Management and Product Development, for Seagate
Technology from October 1989 to September 1991. Prior to that time, Mr. Maeser
was employed by Control Data Corporation for over 26 years, last serving as Vice
President, Operations, for Imprimis Technology.
Dr. Lee joined the Company in 1989 as Director of Advanced Recording
Technologies and was promoted to Vice President, Engineering, in August 1990.
In August 1993, he was promoted to Executive Vice President, Technology and
Engineering, and Chief Technical Officer. Prior to joining the Company, he
served for five years as Vice President, Product Development, for Domain
Technology, and previously spent 15 years at IBM Research Laboratory in San
Jose, California, working on advanced magnetic storage devices.
Mr. Roach joined the Company in September 1989 as Vice President, Sales, and
was
promoted to Executive Vice President, Worldwide Sales, in August 1993. Prior to
joining the Company, he spent 12 years in sales at Intel Corporation, last
serving as Worldwide Director, Distribution Sales and Marketing.
Mr. Rodgers joined the Company in December 1980 as its Vice President,
Finance,
and was elected Secretary in May 1981, Treasurer in September 1981 and
Executive
Vice President, Finance, in April 1986. Mr. Rodgers is currently serving as
Executive Vice President, Finance, Chief Financial Officer and Secretary. From
July 1979 to December 1980, he served as Vice President, Finance, of Braegen
Corporation, a manufacturer of computer equipment. He also has more than
nine
years experience at Price Waterhouse, last serving as an audit manager.
Ms. Barber joined the Company in October 1992 as Vice President, Human
Resources. Prior to joining the Company, she served as Vice President, Human
Resources, for Cray Research from January 1988 to October 1992. From June 1978
to January 1988, Ms. Barber was employed by Honeywell, Inc., last serving as
Director of Human Resources for the Military Avionics Division.
Ms. Bornino joined the Company in August 1993 as Vice President, Corporate
Development and Planning. Prior to joining the Company, she served as Director
of Strategic Planning for Silicon Graphics, Inc., from July 1992 to August 1993.
From November 1989 to July 1992, Ms. Bornino was employed by MIPS Computer
Systems, Inc., last serving as Director of Engineering. Prior to joining MIPS,
she was a general management consultant with the consulting firm of Arthur D.
Little, Inc., from June 1988 to November 1989.
Mr. Potashner joined Quantum in March 1992 as Vice President, Quality and
Business Excellence. Prior to joining the Company, he served 11 years at
Digital Equipment Corporation (DEC) where he held several positions in
engineering, operations and manufacturing, and most recently as Group
Technology
Manager, providing strategic leadership to DEC's quality and technology
organization.
Products
Quantum's major products are shown below and are described following the
chart.
Average
Capacity No. No. Seek Time
Products (MB) Disks Heads (millisec.) Interface
Manufacturer
3.5-inch:
ProDrive ELS 85 85 1 2 17 SCSI-2, AT MKE *
ProDrive ELS 127 127 2 3 17 SCSI-2, AT MKE
ProDrive ELS 170 170 2 4 17 SCSI-2, AT MKE
ProDrive LPS 240 245 2 4 16 SCSI-2, AT MKE
ProDrive LPS 525 525 3 6 10 SCSI-2, AT Quantum
ProDrive LPS 170 170 1 2 14 SCSI-2, AT MKE
ProDrive LPS 270 270 1 2 12 SCSI-2, AT MKE
ProDrive LPS 340 342 2 4 12 SCSI-2, AT MKE
ProDrive LPS 540 541 2 4 12 SCSI-2, AT MKE
ProDrive 700 700 4 8 10 SCSI-2 Quantum
ProDrive 1050 1,050 6 12 10 SCSI-2 Quantum
ProDrive 1225 1,225 7 14 10 SCSI-2 Quantum
ProDrive 1800 1,800 7 14 10 SCSI-2 Quantum
Quantum Empire 540 540 2 4 9.5 SCSI-3 Quantum
Quantum Empire 1080 1,080 4 8 9.5 SCSI-3 Quantum
Quantum Empire 1440 1,440 4 8 9.5 SCSI-3 Quantum
Quantum Empire 2160 2,160 6 12 9.5 SCSI-3 Quantum
2.5-inch:
Go-Drive GRS 80 85 1 2 <17 SCSI-2, AT MKE
Go-Drive 120 127 2 4 <17 SCSI-2, AT MKE
Go-Drive GRS 160 169 2 4 <17 SCSI-2, AT MKE
Go-Drive GLS 85 85 1 2 17 SCSI-2, AT MKE
Go-Drive GLS 127 127 2 3 17 SCSI-2, AT MKE
Go-Drive GLS 170 170 2 4 17 SCSI-2, AT MKE
Go-Drive GLS 256 256 3 6 17 SCSI-2, AT MKE
Quantum Daytona 127 127 1 2 17 SCSI-2, AT MKE
Quantum Daytona 256 256 2 4 17 SCSI-2, AT MKE
Quantum Daytona 341 341 3 6 17 SCSI-2, AT MKE
Quantum Daytona 540 541 4 8 17 SCSI-2, AT MKE
* Matsushita-Kotobuki Electronics Industries, Ltd., of Japan. See
"Manufacturing."
ProDrive (Reg. U.S. Pat. & Tm. Off.) and Quantum Empire (trademark) 3.5-inch
Products:
Quantum's 3.5-inch hard drives consist of the ProDrive ELS (trademark),
ProDrive
LPS (trademark), ProDrive Series (Reg. U.S. Pat. & Tm. Off.) and Quantum
Empire
products. These products are designed to meet the needs of the desktop PC and
workstation, disk array and file server markets and currently represent the
majority of the Company's product shipments.
ProDrive ELS 85/127/170. Mass production of the ProDrive ELS products began in
July 1992. These 1-inch-high drives are designed to serve a major segment of
the personal computer market: entry-level, low-cost desktop PC systems. The
enhanced reliability and price performance of the ProDrive ELS product line were
achieved through a reduced parts count, low-power requirements and the use of
features such as Quantum's proprietary WriteCache (Reg. U.S. Pat. & Tm. Off.)
and DisCache (Reg. U.S. Pat. & Tm. Off.) firmware for faster data retrieval and
throughput.
ProDrive LPS 240. Quantum began mass production of this 1-inch-high, 245-
megabyte product in July 1991. The ProDrive LPS 240 product was designed to
meet the increasing capacity and performance requirements of desktop PCs, and
was the first 1-inch-high 200-megabyte-range drive to be offered by a major hard
disk drive supplier. The ProDrive LPS 240 includes a number of performance-
enhancing features and has an average seek time of 16 milliseconds.
ProDrive LPS 525. Announced in conjunction with the high-capacity ProDrive
Series 700 and 1225 products, the ProDrive LPS 525 began mass production in
December 1992. With an average seek time of 10 milliseconds, the ProDrive LPS
525 product is a 1-inch-high, three-disk drive that meets the performance and
capacity needs of high-end personal computers and workstations.
ProDrive LPS 170/270/340/540. Announced in September 1993, Quantum's
ProDrive
170/270/340/540 1-inch-high products are designed to meet the capacity and
performance needs of entry-level, mid-range and high-end desktop PCs. The
ProDrive LPS 170/340 drives provide the best value for price-sensitive PCs in
terms of performance, reliability and versatility. With internal data transfer
rates of 46 megabits-per-second and a 12 millisecond seek time, the ProDrive LPS
270/540 drives provide leading areal density, plus superior performance and
reliability for high-end, multi-user PC environments. These ProDrive LPS
products began shipping in volume during the third quarter of fiscal 1994.
ProDrive 700/1050/1225. Designed to meet the high-performance and reliability
needs of technical workstations and multi-user systems, the Company began
mass
production shipments of the ProDrive 1050 product in June 1992. In August 1992,
the Company began mass production of the ProDrive 700/1225 products, which
extended the Company's high-capacity, high-performance product line.
Quantum's
high-capacity products follow the Company's approach of reducing parts count to
increase reliability and incorporating performance-enhancing firmware to speed
data throughput and retrieval.
ProDrive 1800. In August 1993, Quantum announced its first 2-gigabyte-class
drive, the ProDrive 1800 product. This 1.6-inch-high drive is designed for
workstations, file servers, redundant arrays of independent disks (RAIDs) and
other disk arrays, and provides a 350,000-hour Mean-Time-Between-Failures
rating. With average seek times of 10 milliseconds, the ProDrive 1800 includes
Quantum's proprietary AutoRead (trademark) and AutoWrite (trademark) ASIC
hardware and other features designed to optimize drive and overall system
performance. Volume production of the ProDrive 1800 began in the third quarter
of fiscal 1994.
Quantum Empire 540/1080. Introduced in September 1993, Quantum Empire
540/1080
drives broaden Quantum's offering for workstations, servers and disk arrays.
The 1-inch-high Quantum Empire 540/1080 drives offer average seek times of 9.5
milliseconds, 5,400 RPM rotational rate and include Quantum's proprietary
ORCA
(trademark) (Optimized Reordering of Commands Algorithm) feature, which
increases system performance. These low-power, high-performance drives began
shipping in volume during October 1993.
Quantum Empire 1440/2160. These high-capacity products for advanced
workstations, servers and disk arrays include Quantum's first 3.5-inch drive
with more than 2 gigabytes of formatted capacity - the Quantum Empire 2160.
The
Quantum Empire 1440 drive is a 1-inch-high model with a formatted capacity of
1.44 gigabytes. These drives are also the first to incorporate Quantum's
patented PRML (Partial Response Maximum Likelihood) read channel
technology.
PRML technology leads to the very high sustained data transfer rates that are
critical to disk-intensive applications such as multimedia and graphics.
Go-Drive (Reg. U.S. Pat. & Tm. Off.) and Quantum Daytona (trademark) 2.5-inch
Products:
Go-Drive 120, Go-Drive GRS (trademark) 80/160. Quantum's Go-Drive products
are
designed to meet the performance, reliability and low-power requirements of
portable notebook computers. Mass production of the Go-Drive 120 began in
March
1992. With the June 1992 announcement of the Go-Drive GRS products, Quantum
was
the first major supplier of 2.5-inch hard drives to offer more than 80 megabytes
of storage per disk. Mass production of the Go-Drive GRS products began in
September 1992.
Go-Drive GLS (trademark) 85/127/170/256. In September 1993, Quantum
announced
its Go-Drive GLS series of products for subnotebooks and standard-sized advanced
notebook computers. These low-power drives provide capacity, height and
performance to meet the needs of emerging segments within the notebook
computer
marketplace. Go-Drive GLS drives include heights of 12.5, 17 and 19
millimeters, and include Quantum's ShockLock (trademark) pivoting magnetic
actuator latch, which increases drive resistance to non-operating shock, the
type of shock to which notebook computers are most frequently subjected.
Quantum Daytona 127/256/341/514. The Quantum Daytona drive family,
announced in
November 1993, provides four leading capacities and PC-class performance for
subnotebook and notebook systems. The 2.5-inch drive family includes an
industry first - 256 megabytes of storage in a slim 12.5-millimeter-high package
for subnotebook systems, as well as a 127-megabyte version for subnotebooks.
For full-function notebooks, the Quantum Daytona drives provide 341- and 514-
megabyte, 19-millimeter-high products. Quantum Daytona drives spin at a rate of
4,500 RPM, provide a typical seek time of 17 milliseconds and transfer data
disk-to-buffer at 36 megabits per second.
Additional Products:
The Company also sells products in the Apple after-market directly to end users
through its wholly-owned subsidiary, La Cie, Ltd.
During fiscal 1994, Quantum discontinued production of the Quantum Hardcard
EZ
(trademark) and Quantum DriveKit (Reg. U.S. Pat. & Tm. Off.) products. In
March
1994, Quantum sold the Quantum Passport XL (Reg. U.S. Pat. & Tm. Off.) product
line to MountainGate Data Systems, Inc., the proceeds of which were immaterial
to the financial results of the Company.
Product Development
Quantum operates in an industry characterized by rapid technological change
and
shortening product life cycles. As a result, the Company's future is dependent
on its ability to develop new products, successfully introduce these products to
the market and ramp production to meet customer demands. Accordingly, the
Company is committed to the timely development of new products and the
continuing evaluation of new technologies. For the three fiscal years ended
March 31, 1994, 1993 and 1992, the Company's research and development
expenses
were $89.8 million, $63.0 million and $59.3 million, respectively.
The Company is currently concentrating its product development efforts on
broadening its existing 3.5-inch and 2.5-inch product lines, introducing new
generations of products and developing new mass storage technologies. The
Company expects that sales from new products will account for a significant
portion of fiscal 1995 revenue and will continue to replace sales from current
products. Accordingly, the failure of the Company to successfully develop and
manufacture new products and manage the transition of customers to these
products would adversely affect the Company's results of operations.
Manufacturing
The Company believes that its unique manufacturing strategy is a key to its
success. For production of its high-volume products, Quantum relies on
Matsushita-Kotobuki Electronics Industries, Ltd. (MKE), of Japan. MKE is a
substantial manufacturer of hard disk drives and other electronic components
and
is a majority-owned subsidiary (57.6%) of Matsushita Electric Industries
Company, Ltd., of Japan. MKE produces hard disk drives for Quantum in Japan
and
in Dundalk, Ireland. In addition, MKE will begin production of Quantum
products
in its Singapore facility during the first quarter of fiscal 1995. During
fiscal 1994, approximately 90% of the Company's sales were derived from products
manufactured by MKE. MKE's state-of-the-art manufacturing process is highly
automated, employing integrated computer networks and advanced control
systems.
Quantum uses its own state-of-the-art manufacturing facility at its headquarters
site in California to manufacture its higher capacity, more technically complex
products. Quantum's product design efforts are integrated with the design of
the manufacturing process, enabling the Company to rapidly achieve high-
volume,
high-quality production to meet customer requirements.
The Company and MKE purchase components, some of which are made to the
Company's
specifications, from outside vendors. Most of the components used in the
Company's products are available from more than one supplier. In the past,
limited availability of certain key components has constrained the Company's
revenue growth. There can be no assurance that similar shortages will not recur
in the future, and the Company's inability to obtain essential components or to
qualify additional sources as necessary, if prolonged, could have a material
adverse effect on the Company's results of operations.
The Company and MKE have had a continuous relationship since 1984. The
current
agreement between the Company and MKE gives MKE the exclusive worldwide
right to
manufacture, and the Company the exclusive worldwide right to design and
market,
certain products as agreed between the companies. The Company provides MKE
with
forecasts of its requirements and places purchase orders approximately three
months prior to delivery. The Company has only a limited right to modify these
purchase orders. The pricing structure is renegotiated periodically, generally
on an annual basis.
Sales and Marketing
The Company markets its products directly to major OEMs and distributors
through
its worldwide sales force. During fiscal 1994, sales to Apple Computer, Inc.
and Compaq Computer, Inc. represented 22% and 10%, respectively, of
consolidated
sales. For fiscal 1993 and 1992, sales to Apple Computer represented 20% and
25%, respectively, while sales to Compaq Computer represented less than 10% of
consolidated sales in each year.
Quantum maintains a European headquarters in Neuchatel, Switzerland, an
Asia-
Pacific headquarters in Singapore, a Japanese headquarters in Tokyo, and sales
offices throughout the world. International sales, which include sales to
foreign subsidiaries of United States companies, accounted for 53% of sales for
the year ended March 31, 1994, as compared with 48% of sales for the year ended
March 31, 1993, and 52% of sales for the year ended March 31, 1992. See also
Note 11 in the "Notes to Consolidated Financial Statements."
Warranty and Service
Quantum generally warrants its products against defects in design, materials
and
workmanship for one to five years. The Company believes its accrual for
warranty liability is adequate. The Company maintains in-house facilities for
refurbishment or repair of its products in Milpitas, California; Frankfurt,
Germany, and a temporary facility in Penang, Malaysia. However, the Company
is
currently in the process of closing its Frankfurt facility and establishing a
permanent worldwide repair facility in Malaysia.
Backlog
The Company's six-month order backlog at May 2, 1994, was approximately $574
million compared with approximately $304 million at May 2, 1993. Backlog
increased year-to-year as a result of increased customer demand, primarily for
the Company's new products. Backlog includes only firm orders for which the
customers have released a specific purchase order and specified a delivery
schedule.
Lead time for the release of purchase orders depends upon the scheduling
practices of the individual customer, and the rate of booking of new orders
varies from month to month. For this reason and because of the possibility of
customer changes in delivery schedules or cancellations of orders, Quantum's
backlog as of any particular date may not be representative of actual sales for
any succeeding period. In addition, it has been the Company's practice to
permit customers to increase or decrease (including canceling) orders for
products with relatively short notice to the Company. The Company believes that
this practice enables customers to improve the management of their inventory,
minimizes the Company's exposure to disputed accounts receivable and improves
the Company's relationships with customers.
Competition
Competition in the hard disk drive industry is intense and is based principally
on time to market, product availability, reliability, performance, product
capacity and price. The Company believes that it competes favorably in these
areas although certain of its competitors have greater financial, marketing and
technological resources.
Quantum faces intense direct competition for its 3.5-inch products from
companies such as Conner Peripherals, Maxtor, Seagate Technology and
Western
Digital. The Company expects continued strong competition in the 3.5-inch form
factor in all ranges of capacity and performance. In the 2.5-inch hard disk
drive market, the Company competes primarily with Conner Peripherals, JVC,
Maxtor, Seagate Technology, Toshiba and Western Digital. The Company also
competes indirectly with disk drive divisions of large computer manufacturers
such as Digital Equipment Corporation, Hewlett-Packard and IBM. These
companies
also have a presence in the OEM market. Should other major OEMs develop
internal disk drive manufacturing capabilities, the demand for the Company's
products would be reduced.
The Company also competes with companies offering products based on
alternative
data storage and retrieval technologies. Technological advances in magnetic,
optical or other technologies, or the development of new technologies, could
result in the introduction of competitive products with superior performance to
and substantially lower prices than the Company's products, which could
adversely affect the Company's results of operations.
Patents and Licenses
Quantum has been granted 65 United States patents, including patents originally
issued to its former subsidiary Plus Development Corporation. As a general
rule, these patents have 17-year terms from the date of issuance. Quantum also
has certain foreign patents and applications relative to certain of the products
and technologies. Although Quantum believes that its patents and applications
have significant value, the rapidly changing technology of the computer industry
makes Quantum's future success dependent primarily upon the technical
competence
and creative skills of its personnel rather than on patent protection. See also
"Legal Proceedings."
Several companies and individuals have approached Quantum concerning the
need
for a license under patented technology that Quantum has assertedly used, or is
assertedly using, in the manufacture and sale of one or more of Quantum's
products. Quantum conducts ongoing investigations into these assertions and
presently believes that any licenses ultimately determined to be required could
be obtained on commercially reasonable terms. However, there is no assurance
that such licenses are presently obtainable, or if later determined to be
required, could be obtained. See also "Legal Proceedings."
Quantum has a cross-licensing agreement with IBM that commenced on May 10,
1986,
and runs until expiration of the last of the licensed IBM patents (including
patents issued and issuing on patent applications filed prior to January 1,
1991). This agreement enables Quantum to use certain patents owned by IBM,
and
it enables IBM to use certain patents owned by Quantum.
Quantum also has a patent cross-licensing agreement with Seagate Technology
that
commenced on July 7, 1992, and runs until expiration of the last of the licensed
Seagate patents (including patents issued and issuing on patent applications
filed prior to January 1, 2002). This agreement enables Quantum to use certain
patents owned by Seagate, and it enables Seagate to use certain patents owned by
Quantum.
Quantum also has a patent cross-licensing agreement with the Hewlett-Packard
Corporation that commenced on September 21, 1993, and runs until expiration of
the last of the licensed Hewlett-Packard patents (including patents issued and
issuing on patent applications which are filed during the (5) five-year period
which begins on the first day after September 21, 1993). This agreement enables
Quantum to use certain patents owned by Hewlett-Packard, and it enables
Hewlett-
Packard to use certain patents owned by Quantum.
Quantum has also entered into limited patent cross-license and license
agreements with Integral Peripherals, Inc., and Syquest Technology.
Employees
At March 31, 1994, the Company employed 2,984 persons including 593 in
engineering, 1,729 in manufacturing, 347 in sales and marketing and 315 in
general management and administration. In the advanced electronics industry,
competition for highly skilled employees is intense. Quantum believes that a
great part of its future success will depend on its continued ability to attract
and retain qualified employees. None of the Company's employees are
represented
by a trade union, and the Company has experienced no work stoppage. Quantum
believes that its employee relations are favorable.
Item 2.
Properties
During fiscal 1992, the Company moved its corporate headquarters and
manufacturing operations to a new 37-acre leased campus complex in Milpitas,
California. The Company currently occupies four buildings of the planned five-
building campus and will begin construction on the fifth building during the
first quarter of fiscal 1995. The Company also leases office and warehouse
space and repair facilities throughout the world, typically on a short-term
basis. In addition, the Company is currently in the process of constructing a
new repair facility in Malaysia. Currently all of the Company's facilities are
fully utilized. The Company believes that its configuration and warehouse
facilities are adequate to support customer requirements during fiscal 1995.
The aggregate lease payments for these facilities in fiscal year 1994 were
approximately $12.1 million.
Item 3.
Legal Proceedings
On February 26, 1993, Quantum commenced a declaratory judgment lawsuit
against
Rodime PLC of Glasgow, Scotland, in the U.S. District Court for the District of
Minnesota. Minnesota is the site of Rodime's only U.S. office. Rodime has
counterclaimed by asserting that certain Quantum 3.5-inch hard disk drive
products infringe its U.S. Patent No. 4,638,383 and is seeking royalty payments
under that patent. That patent purports to cover hard disk drives using 3.5-
inch disks and specifies an architecture including attributes such as a head
positioning mechanism consisting of a rotary actuator moved by an open loop
stepper motor. Quantum's complaint alleges that the Rodime patent is invalid
and unenforceable, and that it has not been infringed by Quantum. On April 11,
1994, the United States District Court entered a summary judgment in
Quantum's
favor, ruling that claims 4, 6, 7, 9, 14 and 19-27 of the Rodime patent are
invalid because they were impermissibly broadened during earlier patent
reexamination proceedings conducted by the U.S. Patent and Trademark Office.
Quantum believes that this ruling, if upheld on appeal, is fully dispositive of
its dispute with Rodime. Due to the inherent uncertainties of litigation, there
can be no assurance that such ruling will be affirmed.
On March 26, 1993, Harry Aine, an individual, filed a complaint with the United
States International Trade Commission seeking an importation exclusion order
against hard disks which he alleged infringed his U.S. Reissue Patent No. 32,464
relating to sputtered carbon coated computer disks. Quantum was named as a
respondent, along with certain other disk drive makers and disk manufacturers
and suppliers. Quantum believed that the Aine patent was invalid and
unenforceable and was not infringed by Quantum. Quantum asked its disk
vendors
to participate actively in defending the proceedings before the International
Trade Commission, and to indemnify Quantum with regard to disk components
they
supply to Quantum. The dispute was settled by agreement during fiscal 1994 on
immaterial terms, and Quantum is awaiting receipt of a formal dismissal of the
ITC investigation.
Item 4.
Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
Market for the Registrant's Common Equity and Related Stockholder Matters
Quantum Corporation's common stock has been traded in the over-the-counter
market under the NASDAQ symbol QNTM since the Company's initial public
offering
on December 10, 1982.
The prices per share reflected in the table represent the range of high and low
closing prices in the NASDAQ National Market System for the quarter indicated.
Fiscal 1994 High Low
Fourth quarter ended March 31, 1994 19 1/4 14 1/8
Third quarter ended January 2, 1994 14 3/4 9 7/8
Second quarter ended October 3, 1993 13 1/2 9 1/2
First quarter ended July 4, 1993 14 1/2 10 1/2
Fiscal 1993 High Low
Fourth quarter ended March 31, 1993 17 1/4 12 3/4
Third quarter ended December 27, 1992 17 1/8 12 1/2
Second quarter ended September 27, 1992 16 12 7/8
First quarter ended June 28, 1992 15 3/4 12 1/2
The Company has not paid cash dividends on its common stock and does not plan
to
pay cash dividends to its shareholders in the near future. The Company
presently intends to retain its earnings to finance future growth of its
business.
As of May 2, 1994, there were approximately 1,677 shareholders of record of the
Company.
Item 6.
Selected Consolidated Financial Data
(In thousands except per Year Ended March 31,
share amounts, number of
employees and ratios) 1994 1993 1992 1991 1990
Sales $2,131,054 $1,697,240 $1,127,733 $877,733 $446,291
Net income $ 2,674 $ 93,811 $ 46,845 $ 73,881 $ 47,212
Net income per share
Primary $ .06 $ 2.05 $ 1.05 $ 1.69 $ 1.14
Fully diluted $ .06 $ 1.77 $ 1.04 $ 1.68 $
1.14
Total assets $ 997,438 $ 926,633 $ 550,864 $489,420 $243,209
Total long-term debt $ 212,500 $ 212,500 - - -
Shareholders' equity
per share $ 9.22 $ 9.19 $ 7.19 $ 6.09 $ 4.14
Number of employees 2,984 2,455 1,752 1,445 763
Sales per average number
of employees $ 772 $ 778 $ 713 $ 706 $ 663
Ratio of earnings to
fixed charges 1.2 9.3 8.1 19.1 27.5
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Quantum's results of operations for fiscal 1994 reflect a significant increase
in sales over the prior fiscal year. Sales for the year ended March 31, 1994
grew 26%, to $2.1 billion, compared to sales of $1.7 billion recorded in fiscal
1993. This increase in sales is the result of an increase in unit shipments
offset by a significant decline in average unit sales prices.
Unit shipments for fiscal 1994 increased 56% when compared to fiscal 1993.
Contributing to this increase in unit shipments in fiscal 1994 was a shift in
product mix to higher capacity products as well as the expansion of product line
offerings. The positive impact of these factors on sales was partially offset
by a significant decline in average unit sales prices, especially during the
first half of the fiscal year, due to severe pricing pressures in both the
distribution and OEM channels.
The Company is currently unable to meet demand for certain key products and is
taking steps to increase the availability of such products. Should the Company
be unable to meet customer demand for a prolonged period, results of operations
could be adversely affected.
Sales for the year ended March 31, 1993, of $1.7 billion increased 51% when
compared to fiscal 1992. This increase reflected primarily an increase in unit
shipments.
The Company continues to focus on meeting the needs of major OEM customers.
Sales to the top five OEM customers represented 47% of sales for fiscal 1994,
compared to 45% and 40% for fiscal 1993 and 1992, respectively. Sales to Apple
Computer, Inc. were $458 million or 22%, of consolidated sales in fiscal 1994,
compared to $333 million or 20% of sales in fiscal 1993 and $277 million or 25%
of sales in fiscal 1992. Sales to Compaq Computer, Inc. were $220 million or
10%, of consolidated sales in fiscal 1994 compared to less than 10% in fiscal
1993 and 1992. Any significant decrease in sales to a major customer or the
loss of a major customer would have a material adverse effect on the Company's
results of operations.
Sales to the distribution channel were 20% of consolidated sales or $428 million
for fiscal 1994, compared to 33%, or $568 million for fiscal 1993 and 36% or
$406 million for fiscal 1992. Due to the large degree of volatility experienced
in the distribution channel during the first half of fiscal 1994, combined with
the Company's decision to focus on the OEM channel, sales to the distribution
channel decreased as a percentage of consolidated sales for the year.
Gross margin declined to 11% for fiscal 1994, compared to 19% for fiscal 1993
and 1992. The decrease in gross margin is attributable to intense pricing
pressures in both the distribution and OEM sales channels resulting primarily
from an industry-wide oversupply of disk drives particularly during the second
quarter. During the second half of fiscal 1994 the Company began to transition
its customers from existing products to the Company's newer more cost effective
products. These product transitions along with stabilizing industry conditions
contributed to an increase in gross margin to 11% for the third quarter and 18%
for the fourth quarter of fiscal 1994; however, due to the cyclical nature of
the disk drive industry and the Company's dependence on new product
introductions, there can be no assurance that the Company will be able to
sustain the current gross margin levels.
Over the past ten years, Quantum has established a strong business relationship
with Matsushita Kotobuki Electronics Industries, Ltd. (MKE) of Japan. This
relationship has been built on Quantum's engineering and design expertise and
MKE's high-volume, high-quality manufacturing expertise. The Company's
master
agreement with MKE, which covers the general terms of the business
relationship,
was renegotiated during fiscal 1993 for a period of five years. In fiscal 1994,
approximately 90% of Quantum's sales were derived from products
manufactured by
MKE. In the event MKE is unable to supply such products or increases its prices
for manufacturing services, the Company's results of operations would be
adversely affected. The Company's transactions with MKE are denominated in
U.S.
dollars with prices for product purchases negotiated periodically, usually on an
annual basis. Thus fluctuations in the exchange rate have no material short-
term impact on Quantum's results of operations, however, such fluctuations may
impact future negotiated prices.
During fiscal 1994, the Company invested $90 million, or 4.2% of sales, in
research and development, compared to $63 million, or 3.7% of sales, in fiscal
1993 and $59 million, or 5.2% of sales, in fiscal 1992. The increases are due
to increased headcount and higher expenses related to preproduction activity for
an increased number of new products. Quantum intends to continue its
investment
in research and development as the hard disk drive industry is subject to rapid
technological advances and the future success of the Company is dependent upon
continued successful and timely introductions of new products and technologies.
Sales and marketing expenses in fiscal 1994 were $74 million, or 3.5% of sales,
compared to $77
million, or 4.5% of sales, in fiscal 1993 and $55 million, or 4.9% of sales, in
fiscal 1992. The decrease in sales and marketing expenses in fiscal 1994 is
attributable to lower co-op marketing and channel development expenses as a
result of a decline in sales to the distribution channel. These decreases were
partially offset by costs associated with supporting the higher sales volume and
expanding the Company's international infrastructure. The increase in
expenses
in fiscal 1993 over 1992 is due to costs associated with supporting the higher
sales volume, expanding the Company's international infrastructure and the
introduction of multiple new products.
General and administrative expenses in fiscal 1994 were $42 million, or 2.0% of
sales, compared
to $34 million, or 2.0% of sales, in fiscal 1993, and $24 million, or 2.1% of
sales, in fiscal 1992. The absolute increase in general and administrative
expenses of $8.1 million reflects the increased costs necessary to support the
Company's international growth, including the establishment of European and
Asia-Pacific headquarters operations in Switzerland and Singapore during fiscal
1993. Fiscal 1994 was the first full year of operations at these headquarters.
Included in the Company's fiscal 1994 results of operations are restructuring
and non-recurring charges of $22.8 million. The charges were primarily
associated with the write-off of goodwill associated with its former subsidiary,
Plus Development, the Company's reduction in work force, accelerated product
transitions, and the consolidation of sales offices and other facilities. In
addition, the Company is in the process of consolidating repair facilities from
three facilities worldwide into a single location in Malaysia, the costs of
which are included in these restructuring charges.
Net interest and other income and expense for fiscal 1994 was $6.7 million net
expense compared to $2.3 million net expense and $.9 million net expense for
fiscal 1993 and 1992, respectively. This increase is due mainly to lower
interest income resulting from lower interest rates and lower cash balances
during fiscal 1994. The increase in fiscal 1993 over 1992 is due primarily to
interest incurred on the issuance in April 1992 of the Company's convertible
subordinated debentures.
The Company's effective tax rates were 27%, 36% and 37% for the fiscal years
1994, 1993 and 1992, respectively. The reduction in the rate for fiscal 1994
was attributable to the benefit of foreign earnings taxed at a lower rate.
The Company recorded net income for fiscal 1994 of $2.7 million compared to net
income of $94 million and $47 million for fiscal 1993 and 1992, respectively.
The decrease in net income for fiscal 1994 is due to a decrease in gross margin
from lower average sales prices combined with a charge of $22.8 million recorded
in the second quarter for expenses associated with certain non-recurring write-
offs and restructuring of the Company. The increase in net income in fiscal
1993 over fiscal 1992 is due to the increased level of sales combined with gross
margin and operating expenses remaining flat as a percentage of sales.
Quantum operates in an extremely competitive industry and its rapid growth has
been the result of the Company's ability to identify customer needs and develop
quality products to meet those requirements. The Company expects that sales
from new products will continue to account for a majority of sales in 1995 and
will replace sales of some current products. The Company's ability to produce
new products economically and manage the transition of customers to these new
products is essential for continued success. The hard disk drive industry is
characterized by increasingly shorter product life cycles and is dependent on
the strength of unit demand in the personal computer market. As a result, the
industry tends to experience periods of excess product inventory and intense
price competition. These and other factors may affect the Company's results of
operations, and past financial performance should not be considered a reliable
indicator of future performance. Investors should not use historical trends to
anticipate results of trends in future periods.
Liquidity and Capital Resources
At March 31, 1994, the Company had $330 million in cash and cash equivalents
and
short-term marketable securities, compared to $289 million at March 31, 1993.
The increase is due primarily to a reduction in inventory that existed at the
beginning of the year combined with significant cash collections. Cash
generated from the reduction in inventory was primarily used to fund operations.
The Company also has available $85 million under a bank agreement for the
issuance of standby letters of credit. This credit agreement is secured by cash
deposits totaling $85 million. The Company manages its foreign exchange risk,
to the extent it has any, through the purchase of foreign exchange contracts.
Major expenditures during fiscal 1994 included the investment of $38 million in
leasehold improvements and capital equipment and $17.5 million to repurchase
1.5
million shares of its common stock in the open market.
At this time, the Company expects to spend approximately $40 to $60 million for
leasehold improvements, capital equipment and the expansion of the Company's
facilities. Additionally, the Company has an authorization outstanding from the
Board of Directors to repurchase an additional 1.5 million shares of its common
stock in the open market. The Company believes that its current cash position
and its anticipated future cash flow from operations are sufficient to meet all
currently planned expenditures and sustain operations during the next fiscal
year.
Item 8.
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements Page
Financial Statements:
Report of Ernst & Young, Independent Auditors
Consolidated Statements of Income for each of the
three years in the period ended March 31, 1994
Consolidated Balance Sheets at March 31, 1994 and 1993
Consolidated Statements of Cash Flows for each of the
three years in the period ended March 31, 1994
Consolidated Statements of Shareholders' Equity for
each of the three years in the period ended
March 31, 1994
Notes to Consolidated Financial Statements
Financial Statement Schedules:
Schedule I - Marketable Securities and Investments
Schedule VIII - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure
Not applicable.
Report of Ernst & Young, Independent Auditors
To the Board of Directors and Shareholders
Quantum Corporation
We have audited the accompanying consolidated balance sheets of Quantum
Corporation as of March 31, 1994 and 1993, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended March 31, 1994. Our audits also included the
financial statement schedules listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Quantum
Corporation at March 31, 1994 and 1993, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1994, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
Palo Alto, California
April 22, 1994
CONSOLIDATED STATEMENTS OF INCOME
Year ended March 31,
(In thousands except per share data) 1994 1993 1992
Sales $2,131,054 $1,697,240 $1,127,733
Cost of sales 1,892,211 1,374,422 914,348
238,843 322,818 213,385
Operating expenses:
Research and development 89,837 63,019 59,255
Sales and marketing 74,015 77,085 55,027
General and administrative 41,910 33,849 23,852
Restructuring and non-recurring charges 22,753 - -
228,515 173,953 138,134
Income from operations 10,328 148,865 75,251
Interest and other income 8,217 12,077 6,868
Interest expense (14,882) (14,363) (7,763)
Income before income taxes 3,663 146,579 74,356
Income tax provision 989 52,768 27,511
Net income $ 2,674 $ 93,811 $ 46,845
Net income per share:
Primary $ .06 $ 2.05 $ 1.05
Fully diluted $ .06 $ 1.77 $ 1.04
Common and common equivalent shares:
Primary 44,967 45,728 44,672
Fully diluted 44,967 57,499 45,106
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
March 31, March 31,
(In thousands except share and per share data) 1994 1993
Assets
Current assets:
Cash and cash equivalents $217,531 $121,838
Marketable securities 112,508 167,114
Accounts receivable, net of allowance for
doubtful accounts of $9,391 in 1994 and
$8,118 in 1993 324,376 266,994
Inventories 194,083 223,162
Deferred taxes 32,821 37,479
Other current assets 14,365 13,094
Total current assets 895,684 829,681
Property, plant and equipment, less
accumulated depreciation 85,874 74,698
Investments - 3,220
Other assets 15,880 19,034
$997,438 $926,633
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $267,189 $215,445
Accrued warranty expense 55,617 42,410
Accrued compensation 15,315 17,189
Income taxes payable - 19,026
Other accrued liabilities 35,545 21,825
Total current liabilities 373,666 315,895
Subordinated debentures 212,500 212,500
Commitments and contingencies (Notes 9 and 10)
Shareholders' equity:
Preferred stock, $.01 par value; authorized:
4,000,000 shares; issued: none in 1994 and
1993 - -
Common stock, $.01 par value; authorized:
150,000,000 shares; issued and outstanding:
44,603,808 in 1994 and 43,321,588 in 1993 446 433
Capital in excess of par value 124,084 99,616
Retained earnings 286,742 298,189
Total shareholders' equity 411,272 398,238
$997,438 $926,633
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
(In thousands) 1994 1993 1992
Cash flows from operating activities:
Net income $ 2,674 $ 93,811 $ 46,845
Adjustments to reconcile net income to
net cash provided by (used in)
operations:
Depreciation and amortization 29,340 26,929 28,126
Write-off of goodwill 6,338 - -
Changes in assets and liabilities:
Accounts receivable (57,382) (72,644) (32,601)
Inventories 29,079 (135,787) 14,334
Accounts payable 51,744 44,099 (26,523)
Accrued warranty expense 13,207 12,843 11,810
Other assets and liabilities (3,710) 658 8,453
Net cash provided by (used in)
operating activities 71,290 (30,091) 50,444
Cash flows from investing activities:
Purchase of marketable securities (134,581) (434,797) (62,024)
Proceeds from sale of marketable
securities 192,407 351,228 -
Investment in property and equipment (38,372) (36,055) (37,766)
Net cash provided by (used in)
investing activities 19,454 (119,624) (99,790)
Cash flows from financing activities:
Repurchase of common stock (17,479) (19,868) -
Proceeds from issuance of common stock 22,428 10,095 9,111
Net proceeds from issuance of
convertible subordinated debentures - 206,840 -
Net cash provided by financing activities 4,949 197,067 9,111
Increase (decrease) in cash and
cash equivalents 95,693 47,352 (40,235)
Cash and cash equivalents at beginning
of year 121,838 74,486 114,721
Cash and cash equivalents at end of year $217,531 $ 121,838 $ 74,486
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $13,707 $ 7,939 $ 7,559
Income taxes $18,100 $ 59,738 $ 22,642
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Capital
Common Stock in excess Retained
(In thousands) Shares Amount of par value Earnings Total
Balances at March 31, 1991 39,146 $ 391 $ 62,584 $175,280
$238,255
Shares repurchased from
employees (232) (2) (473) (2,747) (3,222)
Shares issued under employee
stock option plans 3,530 35 8,686 - 8,721
Shares issued under employee
stock purchase plan 449 5 3,607 - 3,612
Tax benefits related to stock
option plans - - 14,178 - 14,178
Net income for year ended
March 31, 1992 - - - 46,845 46,845
Balances at March 31, 1992 42,893 429 88,582 219,378
308,389
Shares repurchased in the open
market (1,500) (15) (5,211) (14,642) (19,868)
Shares repurchased from
employees (29) - (104) (358) (462)
Shares issued under employee
stock option plans 1,449 14 5,784 - 5,798
Shares issued under employee
stock purchase plan 509 5 4,754 - 4,759
Tax benefits related to stock
option plans - - 5,811 - 5,811
Net income for year ended
March 31, 1993 - - - 93,811 93,811
Balances at March 31, 1993 43,322 433 99,616 298,189
398,238
Shares repurchased in the open
market (1,500) (15) (3,494) (13,970) (17,479)
Shares repurchased from
employees (11) - (63) (151) (214)
Shares issued under employee
stock option plans 2,058 21 15,581 - 15,602
Shares issued under employee
stock purchase plan 735 7 6,251 - 6,258
Tax benefits related to stock
option plans and other - - 6,193 - 6,193
Net income for year ended
March 31, 1994 - - - 2,674 2,674
Balances at March 31, 1994 44,604 $446 $124,084 $286,742
$411,272
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of significant accounting policies
The summary of significant accounting policies is presented to assist the reader
in understanding and evaluating the consolidated financial statements. These
policies are in conformity with generally accepted accounting principles.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of Quantum Corporation and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Revenue recognition: Revenue from sales of products is recognized upon
shipment
to customers with provision made for estimated returns.
Foreign currency transactions and translation: A significant percentage of the
Company's sales are made to customers in non-U.S. locations, and a significant
percentage of the Company's products are manufactured by MKE in Japan.
However,
the majority of the Company's transactions are denominated in U.S. dollars.
Accordingly, the application of SFAS No. 52, "Foreign Currency Transactions," to
the Company's historical financial statements has not resulted in transaction or
translation gains or losses which are material to the Company's consolidated
financial statements for any year presented. The effect of foreign
currency exchange rate fluctuations on cash flows was also not material for any
year presented.
Net income per share: Net income per share is computed using the weighted
average number of common and dilutive common equivalent shares outstanding.
Net
income per share in fiscal 1993 computed on a fully diluted basis, assumes
conversion of the Company's outstanding 6 3/8% convertible subordinated
debentures having a principal value of $212.5 million. For fiscal 1994, the net
income per share is the same for both primary and fully diluted, as the
convertible subordinated debentures are anti-dilutive.
Cash equivalents and marketable securities: The Company has classified all cash
and highly liquid investments with original maturities of three months or less
at the date of acquisition as cash equivalents. All other short-term
investments have been classified as marketable securities and are stated at
cost, which approximates fair value. The carrying amount for the short-term
investments approximates fair value due to the short-term maturity of these
instruments. The Company will adopt Statement of Financial Accounting
Standards
No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity
Securities," effective April 1, 1994. Had SFAS 115 been adopted for the March
31, 1994 balance sheet, the impact on the Company's financial position would be
immaterial.
Concentration of credit risk: The Company designs, manufactures and sells hard
disk drives to desktop personal computer, workstation and notebook computer
manufacturers and distributors throughout the world. The Company performs
ongoing credit evaluations of its customers' financial condition and generally
requires no collateral from its customers. The Company maintains reserves for
potential credit losses and such losses have historically been within
management's expectations.
The Company invests its excess cash in deposits with major banks and in money
market and short-term debt securities of companies with strong credit ratings
from a variety of industries. These securities mature within 365 days and,
therefore, bear minimal risk. The Company has not experienced any material
losses on its investments. The Company, by Corporate policy, limits the amount
of credit exposure to any one issuer and to any one type of investment.
Foreign exchange contracts: The Company enters into foreign exchange contracts
to minimize the effects of exchange rate fluctuations on foreign cash flows
which are converted into U.S. dollars. Foreign exchange gains and losses from
market rate changes on these contracts are recorded as offsets to the underlying
transactions. At March 31, 1994, the Company had foreign exchange contracts
with maturities between April 8, 1994 and August 5, 1994 to sell 2.7 billion yen
for $25.3 million. The fair value of the yen underlying these instruments at
March 31, 1994 totaled $26.3 million.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Property, plant and equipment: Property, plant and equipment are stated at cost
and depreciated using the straight-line method over the estimated useful lives
of the assets, which range from three to seven years. Amortization of leasehold
improvements is computed over the useful life of the improvements or the terms
of their respective leases, whichever is shorter.
Goodwill: Goodwill and purchased intangibles of approximately $8 million are
included in other assets at March 31, 1993 and represented the excess of cost
over fair value of net assets acquired as a result of the acquisition of the
minority interest in Plus Development Corporation (Plus) on December 22, 1987,
and the acquisition of La Cie, Ltd., on November 19, 1990. The unamortized
balance of $6.4 million related to goodwill and purchased intangibles for Plus
was written off during fiscal 1994 (see Note 7). The goodwill and purchased
intangibles relating to La Cie, Ltd. are being amortized using the straight-line
method over a 10-year period.
Warranty expense: The Company generally warrants its products against defect
for
a period of one to five years. A provision for estimated future costs relating
to warranty expense is recorded when products are shipped.
Note 2: Inventories
Inventories consisted of:
Year ended March 31,
(In thousands) 1994 1993
Materials and purchased parts $ 27,841 $ 25,994
Work in process 14,729 14,517
Finished goods 151,513 182,651
$194,083 $223,162
Note 3: Property, plant and equipment
Property, plant and equipment consisted of:
Year ended March 31,
(In thousands) 1994 1993
Machinery and equipment $ 81,800 $ 72,049
Furniture and fixtures 32,329 25,740
Leasehold improvements 44,546 34,351
158,675 132,140
Less accumulated depreciation and amortization (72,801) (57,442)
$ 85,874 $ 74,698
Note 4: Credit agreements
The Company has a secured credit agreement expiring in August 1994, with
certain
banks totaling $85 million for the issuance of standby letters of credit. The
Company has pledged as collateral cash of $85 million related to this agreement.
This agreement requires the Company to maintain a specific financial covenant
relating to tangible net worth and as of March 31, 1994, the Company was in
compliance with this covenant.
Note 5: Long-term debt
In April 1992, the Company issued $212.5 million of 6 3/8% convertible
subordinated debentures. Each debenture is convertible, at the option of the
holder, into the Company's common stock at a conversion price of $18.15 per
share. The debentures are redeemable at the Company's option on or after April
2, 1995, at prices ranging from 104.5% of the principal to 100% at maturity.
The debentures are due April 1, 2002, and are subordinated to all existing and
future senior indebtedness of the Company.
The estimated fair value at March 31, 1994, of the Company's subordinated
debentures was $219 million, based on the quoted market price as of that date.
Note 6: Shareholders' equity
Stock Option Plans: The Company has Stock Option Plans (the "Plans") under
which
an aggregate of 6.3 million shares of common stock have been reserved for future
issuance. Options under the Plan are granted at prices determined by the Board
of Directors, but at not less than the fair market value, and expire five to ten
years from the date of grant. Options generally vest ratably over one to four
years. At March 31, 1994, options with respect to 435,000 shares were available
for grant.
A summary of transactions relating to outstanding stock options follows:
Year ended March 31,
1994 1993
(In thousands) Options Price Options Price
Outstanding beginning of
period 6,985 $ .82-16.00 5,968 $ .82-13.75
Granted 1,637 $ 9.50-12.00 3,201 $12.50-16.00
Canceled (680) $ 2.22-13.75 (735) $ .82-16.00
Exercised (2,028) $ .82-13.75 (1,449) $ .82-13.75
Outstanding end of period 5,914 $ .82-16.00 6,985 $ .82-16.00
Exercisable end of period 1,887 1,807
Stock Purchase Plan: The Company has an employee stock purchase plan (the
"Purchase Plan") under which 4.3 million shares of common stock have been
reserved for issuance. The Purchase Plan is qualified under Section 423 of the
Internal Revenue Code.
During fiscal 1994, 1993 and 1992, 735,000, 509,000 and 449,000 shares,
respectively, were issued under this plan.
1993 Long-Term Incentive Plan: During fiscal 1994, shareholders approved the
Company's 1993 Long-Term Incentive Plan which provides for the issuance of
stock
options, stock appreciation rights, stock purchase rights and long-term
performance awards. The plan has available and reserved for issuance 2,000,000
shares and allows for an annual increase in the number of shares available for
issuance, subject to a limitation. As of March 31, 1994, only stock options had
been granted under this plan.
A summary of transactions relating to the 1993 Long-Term Incentive Plan
follows:
Year ended March 31, 1994
(In thousands) Shares Option Price
Outstanding beginning of
period - $ -
Granted 1,045 $9.875-15.50
Canceled (3) $ 9.875
Exercised (30) $ 9.875
Outstanding end of period 1,012 $9.875-15.50
Exercisable end of period 170
Shareholder Rights Plan: The Company has a shareholder rights plan (the
"Rights
Plan") which provides existing shareholders with the right to purchase 1/100
preferred share for each common share held in the event of certain changes in
the Company's ownership. The Rights Plan may serve as a deterrent to takeover
tactics which are not in the best interests of shareholders.
Note 7: Restructuring and non-recurring expenses
During fiscal 1994, the Company recorded $22.8 million in restructuring and non-
recurring charges to operations. The charges were primarily related to the
write-off of goodwill associated with its former subsidiary, Plus Development,
the Company's reduction in force, accelerated product transitions, and the
consolidation of sales offices and other facilities, including the costs
associated with the consolidation of repair facilities into a single location in
Malaysia.
Note 8: Income taxes
The provision for income taxes computed under Statement of Financial
Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes," consists of the
following:
Year ended March 31,
(In thousands) 1994 1993 1992
Federal: current $(10,396) $ 48,637 $ 28,466
deferred 4,805 (12,725) (7,500)
(5,591) 35,912 20,966
State: current 3,965 11,066 5,874
deferred (3,219) (2,255) -
746 8,811 5,874
Foreign: current 1,244 7,915 671
deferred 4,590 130 -
5,834 8,045 671
$ 989 $ 52,768 $ 27,511
The tax benefits associated with nonqualified stock options, disqualifying
dispositions of stock options, or employee stock purchase plan shares, as shown
above, are $5.4 million, $5.8 million and $14.2 million in fiscal 1994, 1993 and
1992, respectively. Such benefits are credited to capital in excess of par
value when realized.
The Company's provision for income taxes differs from the amount computed by
applying the Federal statutory rates of 35% for 1994 and 34% for 1993 and 1992
to income before income taxes for the following reasons:
Year ended March 31,
(In thousands) 1994 1993 1992
Tax at Federal statutory rate $ 1,282 $49,837 $25,281
State income tax, net of
Federal benefit 485 5,815 3,877
Amortization and write-off of goodwill 2,386 299 299
Foreign earnings taxed at different
rates (3,007) (517) 58
Research and development
credit - - (1,531)
Other (157) (2,666) (473)
$ 989 $52,768 $27,511
Effective tax rate 27% 36% 37%
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of deferred tax assets and liabilities are as follows:
Year ended March 31,
(In thousands) 1994 1993
Deferred tax assets
Inventory valuation methods $ 18,221 $ 10,995
Accrued warranty expense 13,627 16,159
Allowance for doubtful accounts 3,218 2,993
Distribution reserves 1,402 4,130
Capital equipment reserve 136 271
Depreciation methods 4,730 1,728
Foreign tax on unremitted foreign earnings
net of related U.S. tax liability - 3,066
Other accruals and reserves not currently
deductible for tax purposes 3,318 2,369
Deferred tax liabilities 44,652 41,711
Tax on unremitted foreign earnings
net of foreign tax credits and
foreign deferred taxes (8,454) -
Other (3,240) (2,577)
$ 32,958 $ 39,134
Management has concluded that no valuation allowance in any year is required
based on its assessment that current levels of taxable income will be sufficient
to realize the tax benefit.
Pretax income from foreign operations was $49.2 million, $14.8 million and
$923,000 for the years ended March 31, 1994, 1993 and 1992, respectively. U.S.
taxes have not been provided for unremitted foreign earnings of $15.7 million.
The residual U.S. tax liability if such amounts were remitted would be
approximately $3,925,000.
Note 9: Litigation
On February 26, 1993, Quantum commenced a declaratory judgment lawsuit
against
Rodime PLC of Glasgow, Scotland, in the U.S. District Court for the District of
Minnesota. Minnesota is the site of Rodime's only U.S. office. Rodime has
counterclaimed by asserting that certain Quantum 3.5-inch hard disk drive
products infringe its U.S. Patent No. 4,638,383 and is seeking royalty payments
under that patent. That patent purports to cover hard disk drives using 3.5-
inch disks and specifies an architecture including attributes such as a head
positioning mechanism consisting of a rotary actuator moved by an open loop
stepper motor. Quantum's complaint alleges that the Rodime patent is invalid
and unenforceable, and that it has not been infringed by Quantum. On April 11,
1994, the United States District Court entered a summary judgment in
Quantum's
favor, ruling that claims 4, 6, 7, 9, 14 and 19-27 of the Rodime patent are
invalid because they were impermissibly broadened during earlier patent
reexamination proceedings conducted by the U.S. Patent and Trademark Office.
Quantum believes that this ruling, if upheld on appeal, is fully dispositive of
its dispute with Rodime. Due to the inherent uncertainties of litigation, there
can be no assurance that such ruling will be affirmed. The Company is also
subject to other legal proceedings and claims which arise in the ordinary course
of its business.
In the opinion of management, the amount of ultimate liability, if any, with
respect to these actions will not materially affect the financial position or
results of operations of the Company.
On March 26, 1993, Harry Aine, an individual, filed a complaint with the United
States International Trade Commission seeking an importation exclusion order
against hard disks which he alleged infringed his U.S. Reissue Patent No. 32,464
relating to sputtered carbon coated computer disks. Quantum was named as a
respondent, along with certain other disk drive makers and disk manufacturers
and suppliers. Quantum believed that the Aine patent was invalid and
unenforceable and was not infringed by Quantum. Quantum asked its disk
vendors
to participate actively in defending the proceedings before the International
Trade Commission, and to indemnify Quantum with regard to disk components
they
supply to Quantum. The dispute was settled by agreement during fiscal 1994 on
immaterial terms, and Quantum is awaiting receipt of a formal dismissal of the
ITC investigation.
Note 10: Commitments
The Company leases its present facilities under non-cancelable operating lease
agreements for periods of up to 15 years with various expiration dates through
2006. Some of the leases have renewal options ranging from one to ten years and
contain provisions for maintenance, taxes or insurance.
Rent expense was $12.1 million, $8.3 million and $7.9 million for the years
ended March 31, 1994, 1993 and 1992, respectively.
Future minimum lease payments under operating leases are as follows:
Year ended March 31, (In thousands)
1995 $ 11,282
1996 10,764
1997 8,992
1998 8,202
1999 8,355
Thereafter 68,284
Total future minimum lease payments $115,879
Note 11: Business segment and foreign operations
The Company is engaged in a single business segment consisting of the design,
manufacture and marketing of hard disk drives based on Winchester technology.
The Company is a leading supplier of small-form-factor hard disk drives for
desktop personal computers, workstations and notebook computers, providing a
broad range of 3.5-inch and 2.5-inch hard disk drives with capacities ranging
from 80 megabytes to 2.1 gigabytes. The Company also designs and markets
storage enhancement products that upgrade the capacity of existing desktop
personal computer systems.
During fiscal 1994, the Company began operations in its European headquarters.
Prior to fiscal 1994, export sales from domestic operations accounted for a
significant portion of the Company's sales. Following is a table that
summarizes U.S. export sales to certain geographic areas for each of the three
years ended March 31:
(In thousands) 1994 1993 1992
Europe $140,000 $408,000 $344,000
Asia-Pacific 59,000 322,000 220,000
Other 21,000 91,000 27,000
$220,000 $821,000 $591,000
Geographic information at March 31, 1994 and for the year ended March 31, 1994
is presented in the table below. Transfers between geographic areas are
accounted for at amounts which are generally above cost and are eliminated in
the consolidated financial statements. Identifiable assets are those assets
that can be directly associated with a particular geographic location.
Operating income (loss) by geographic segment does not include an allocation of
general corporate expenses.
Geographic Area
Rest
(In millions) U.S. Europe of World Eliminations Total
Revenue from unaffiliated
customers $1,218 $ 837 $ 76 $ - $2,131
Transfers between geographic
locations 261 77 - (338) -
Total net sales $1,479 $ 914 $ 76 $ (338) $2,131
Operating income (loss) $ (106) $ 120 $ (4) $ - $ 10
Identifiable assets $ 692 $ 252 $ 53 $ - $ 997
Foreign operations in prior years were not material.
One major customer accounted for 22%, 20% and 25% of consolidated sales in
1994,
1993 and 1992, respectively. In addition, another customer accounted for 10% of
consolidated sales in 1994 and less than 10% in 1993 and 1992.
Note 12: Unaudited quarterly consolidated financial data
(In thousands except Fiscal 1994
per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th
Quarter
Sales $479,112 $493,955 $523,021 $634,966
Gross profit 58,494 10,533 56,822 112,994
Net income (loss) 3,373 (45,340) 6,139 38,502
Net income (loss) per share
Primary .08 (1.02) .14 .83
Fully diluted .08 (1.02) .14 .70
(In thousands except Fiscal 1993
per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th
Quarter
Sales $368,549 $362,806 $459,315 $506,570
Gross profit 74,365 66,343 89,689 92,421
Net income 21,492 18,040 28,011 26,268
Net income per share
Primary .47 .39 .62 .58
Fully diluted .41 .35 .52 .50
Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure
Not applicable.
Part III
Item 10.
Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference to Part I,
Item 1 of this document and to the Company's Proxy Statement.
Item 11.
Executive Compensation
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
Item 13.
Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
With the exception of the information incorporated in Items 10, 11, 12 and 13 of
this Form 10-K Annual Report, the Company's definitive Proxy Statement for its
1994 Annual Meeting of Stockholders is not deemed "filed" as part of this Form
10-K Annual Report.
PART IV
Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements and Financial Statement Schedules - See Index to
Consolidated Financial Statements at Item 8 on page of this report.
2. Exhibits
Sequentially
Exhibit Numbered
Number Page
3.1(a) (2) Certificate of Incorporation of Registrant
3.1(b) (11) Certificate of Amendment of Certificate of
Incorporation of Registrant
3.2 (11) By-laws of Registrant, as amended
4.1 (10) Indenture between Registrant and LaSalle National
Bank, Trustee, covering $212.5 million of 6 3/8%
Convertible Subordinated Debentures due 2002
(including form of Debenture)
4.2 (16) Shareholder Rights Plan
10.7 (2) Registrant's 1984 Incentive Stock Option Plan and
Agreement
10.8 (4) Registrant's 1986 Stock Option Plan and
Agreement, as amended
10.9 (5) Registrant's Employee Stock Purchase Plan and
form of Subscription Agreement, as amended
10.10 (1) Form of Indemnification Agreement between
Registrant and Certain Officers and Directors
10.11 (12) Agreement between Registrant and MKE
10.12 (3) (6) Purchase Agreement between Registrant and MKE
10.13 (7) Lease (dated October 13, 1989) between Registrant
and John Arrillaga and Richard T. Perry, Separate
Property Trusts
10.14 (8) Lease (dated September 17, 1990) between
Registrant and John Arrillaga and Richard T.
Perry, Separate Property Trusts
10.15 (11) Lease (dated April 10, 1992) between Registrant
and John Arrillaga and Richard T. Perry, Separate
Property Trusts
10.16 (11) Loan agreement dated March 30, 1992, between
Registrant and William F. Roach
10.17 (9) Form of Statement of Employment Terms executed by
Stephen M. Berkley, David A. Brown and William J.
Miller, directors of Registrant, and Joseph T.
Rodgers, William F. Roach and Michael A. Brown,
executive officers of Registrant
10.18 (12) Lease (dated November 13, 1992) and First
Amendment to Lease (dated November 17, 1992)
between Registrant and Milpitas Realty Delaware,
Inc.
10.19 (3)(13) Credit Agreement dated August 18, 1992, among
Registrant, Bank of America NT&SA as agents and
other financial institutions party hereto
10.20 (14) Third Amendment to the Purchase Agreement between
Registrant and MKE dated December 31, 1992
10.21 (15) 1993 Long-Term Incentive Plan
10.22 Amendment dated August 18, 1993 to Credit
Agreement (dated August 18, 1992), among
Registrant, Bank of America NT&SA as agents and
other financial institutions party hereto
10.23 Second Amendment (dated April 15, 1993) to Lease
(dated November 13, 1992) between Registrant and
Milpitas Realty Delaware, Inc.
10.24 Lease (dated April 14, 1993) between Registrant
and Milpitas Realty Delaware, Inc.
11 Statement of Computation of Earnings Per Share
12 Statement of Computation of Ratios of Earnings to
Fixed Charges
21 Subsidiaries of Registrant
23 Consent of Ernst & Young, Independent Auditors
24 Power of Attorney. See page 35.
(1) Incorporated by reference to the Registrant's Definitive Special
Meeting Proxy Statement filed with the Securities and Exchange
Commission on March 24, 1987.
(2) Incorporated by reference from Annual Report on Form 10-K for
Registrant's fiscal year ended March 31, 1987.
(3) Confidential Treatment Requested. Granted by the Securities and
Exchange Commission.
(4) Incorporated by reference from exhibits filed with Registrant's Form
S-8, No. 33-52190 filed with the Securities and Exchange Commission
on September 21, 1992.
(5) Incorporated by reference from exhibits filed with Registrant's Form
S-8, No. 33-52192 filed with the Securities and Exchange Commission
on September 21, 1992.
(6) Incorporated by reference from Annual Report on Form 10-K for
Registrant's fiscal year ended March 31, 1988.
(7) Incorporated by reference from exhibits filed with Registrant's Form
10-Q for the quarterly period ended December 31, 1989, filed with the
Securities and Exchange Commission on February 14, 1990.
(8) Incorporated by reference from exhibits filed with Registrant's Form
10-Q for the quarterly period ended December 30, 1990, filed with the
Securities and Exchange Commission on February 13, 1991.
(9) Incorporated by reference to the Registrant's Amendment No. 1 to Form
10-Q for the quarter ended June 30, 1991.
(10) Incorporated by reference from Registration Statement No. 33-46387 on
Form S-3.
(11) Incorporated by reference from exhibits filed with Registrant's
Annual Report on Form 10-K for fiscal year ended March 31, 1992.
(12) Incorporated by reference from exhibits filed with Registrant's Form
10-Q for the quarterly period ended December 27, 1989, filed with the
Securities and Exchange Commission on February 10, 1993.
(13) Incorporated by reference from exhibits filed with Registrant's Form
10-Q for the quarterly period ended September 27, 1992, filed with
the Securities and Exchange Commission on November 10, 1992.
(14) Incorporated by reference from Annual Report on Form 10-K for
Registrant's fiscal year ended March 31, 1993.
(15) Incorporated by reference from Registration Statement No. 33-72222 on
Form S-8 filed with the Securities and Exchange Commission on
November 30, 1993.
(16) Incorporated by reference from Form 8-A filed with the Securities and
Exchange Commission on August 5, 1988.
(b) Reports on Form 8-K
None.
(c) Exhibits
See Item 14(a) above.
(d) Financial Statement Schedules
See Item 14(a) above.
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.
QUANTUM CORPORATION
Dated: June 1, 1994
Joseph T. Rodgers
Executive Vice President, Finance
Chief Financial Officer
and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears
below constitutes and appoints William J. Miller and Joseph T. Rodgers, jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form 10-
K, and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons in the capacities and on June 1,
1994.
Signature Title
Chairman of the Board and Chief Executive
(William J. Miller) Officer (principal executive officer)
Executive Vice President, Finance, Chief
(Joseph T. Rodgers) Financial Officer and Secretary (principal
financial and accounting officer)
Director
(Stephen M. Berkley)
Director
(David A. Brown)
Director
(Robert J. Casale)
Director
(Edward M. Esber, Jr.)
Directorfiler
(Steven C. Wheelwright)
SCHEDULE I
MARKETABLE SECURITIES AND INVESTMENTS
Marketable Securities:
March 31, 1994
Value on
Market Balance
Type of security (In thousands) Principal Cost Value Sheet
Ford Motor Credit MTN $ 2,000 $ 2,090 $ 2,098 $ 2,033
TransAmerica Finance MTN 1,700 1,766 1,776 1,743
New Zealand Govt Notes 3,000 3,102 3,115 3,064
Key Corp MTN 5,000 5,204 5,333 5,187
US Government Notes 5,650 5,727 5,745 5,665
Dillard Dept Stores Inc CP 1,000 1,069 1,076 1,046
Hydro Quebec MTN 1,000 1,067 1,073 1,046
Bank of America: 140-day
Eurodollar CD 36,825 36,825 36,825 36,825
ABN-AMRO Bank: 140-day
Eurodollar CD 26,332 26,332 26,332 26,332
CIBC: 140-day Eurodollar CD 26,347 26,347 26,347 26,347
Puerto Rico Bonds 3,220 3,304 3,249 3,220
$112,074 $112,833 $112,969 $112,508
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions Balance at
Classification beginning of charged to end of
(In thousands) period expense Write-offs period
Allowance for doubtful
accounts year ended:
March 31, 1994 $8,118 $6,296 $(5,023) $9,391
March 31, 1993 6,474 4,724 (3,080) 8,118
March 31, 1992 5,397 3,595 (2,518) 6,474
Exhibit 11
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
Year ended March 31,
(In thousands except per share data) 1994 1993 1992
Primary
Weighted average number of common
shares outstanding 43,341 43,038 41,139
Incremental common shares attributable
to outstanding options 1,626 2,690 3,533
Total shares 44,967 45,728 44,672
Net income $ 2,674 $ 93,811 $46,845
Net income per share $ .06 $ 2.05 $ 1.05
Fully Diluted
Weighted average number of common
shares outstanding 43,341 43,038 41,139
Incremental common shares attributable to:
Outstanding options 1,759 2,753 3,967
6 3/8% convertible subordinated
debentures 11,708 11,708 -
Total shares 56,808 57,499 45,106
Net income:
Net income $ 2,674 $ 93,811 $46,845
Add interest on convertible subordinated
debentures, net of tax 8,128 8,127 -
Adjusted net income $10,802 $101,938 $46,845
Net income per share $ .19 * $ 1.77 $ 1.04
* The primary net income per share is shown in the statements of income
for both primary and fully diluted, as the effect of the assumed conversion
of the subordinated debentures is anti-dilutive.
Exhibit 12
STATEMENT SETTING FORTH THE COMPUTATION OF RATIOS
OF EARNINGS TO FIXED CHARGES
Years Ended March 31,
(In thousands) 1994 1993 1992 1991 1990
Income before income taxes $ 3,663 $146,579 $74,356 $115,959 $72,069
Add fixed charges 19,483 17,711 10,409 6,409 2,722
Earnings (as defined) $23,146 $164,290 $84,765 $122,368 $74,791
Fixed charges
Interest expense $14,882 $ 14,363 $ 7,763 $ 5,205 $ 1,820
Amortization of debt
issuance costs 577 586 - - -
Estimated interest
component of rent
expenses 4,024 2,762 2,646 1,204 902
Total fixed charges $19,483 $ 17,711 $10,409 $ 6,409 $ 2,722
Ratio of earnings to fixed
charges 1.2 9.3 8.1 19.1 27.5
Exhibit 21
SUBSIDIARIES OF REGISTRANT
1. Quantum International, Inc., a California corporation.
2. Quantum International DISC Inc., a California corporation.
3. Quantum Foreign Sales Corporation, a Barbados corporation.
4. Quantum GmbH, a German corporation.
5. Quantum Peripheral Products, Ltd., a United Kingdom corporation.
6. Quantum France SARL, a French corporation.
7. Quantum Asia Pacific Pte., Ltd., a Singapore corporation.
8. La Cie, Ltd., an Oregon corporation.
9. Quantum Japan Corporation, a Japanese corporation.
10. Quantum Data Storage B.V., a Netherlands corporation.
11. Quantum Peripheral Products (Ireland), Ltd., an Ireland corporation.
12. Quantum Peripherals (Europe) S.A., a Swiss corporation.
13. Quantum Singapore Pte. Ltd., a Singapore corporation.
14. Quantum Korea Corporation, a Korean corporation.
15. Quantum Hong Kong, Ltd., a Hong Kong corporation.
16. Quantum Peripherals (Malaysia) Sdn. Bhd., a Malaysian corporation.
Exhibit 23
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Prospectus constituting
part of the Post-Effective Amendment on Form S-8 to the Registration
Statement on Form S-1 (No. 2-81255) pertaining to the 1981 Incentive Stock
Option Plan and Employee Stock Purchase Plan, in the Prospectus constituting
part of the Registration Statement on Form S-8 (No. 2-94170) pertaining to
the 1984 Stock Option Plan, in the Prospectus constituting part of the
Registration Statement on Form S-8 (No. 33-1412) pertaining to the Plus
Development 1987 Stock Option Plan of Quantum Corporation, in the Prospectus
constituting part of the Registration Statement on Form S-8 (No. 33-52192)
pertaining to the Employee Stock Purchase Plan and in the Prospectus
constituting part of the Registration Statement on Form S-8 (No. 33-72222)
pertaining to the 1993 Long-Term Incentive Plan, of our report dated April
22, 1994, with respect to the consolidated financial statements and schedules
of Quantum Corporation included in the Annual Report on Form 10-K for the
year ended March 31, 1994.
Ernst & Young
Palo Alto, California
June 1, 1994
EXHIBIT 10.22
AMENDMENT TO CREDIT AGREEMENT
THIS AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is entered into as
of August l8 , 1993, among QUANTUM CORPORATION , a Delaware corporation
(the "Company"), the several financial institutions party to the
Agreement (collectively, the "Banks," and individually, a "Bank" 3, and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as agent for the
Banks (in such capacity, the "Agent") .
RECITALS
A. The Company, Banks, and Agent are parties to a Credit
Agreement dated as of August 18, 1992 (the "Agreement") pursuant to
which the Agent and the Banks have extended certain credit facilities to
the Company.
B. The Company has requested that the Banks extend the
Termination Date and agree to certain other amendments of the Agreement
.
C . The Banks are willing to amend the Agreement, subject to the
terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized
terms used herein shall have the meanings, if any, assigned to them in
the Agreement.
2. Amendments to Agreement.
(a) Section 1.01 of the Agreement shall be amended at the
defined term "Termination Date" by deleting it in its entirety and
restating it as follows:
"Termination Date" means the earliest to occur of: (a)
August 18, 1994; and (b) the date on which the Commitments shall
terminate in accordance with the provisions of this Agreement."
(b) Section 7.02 shall be amended by adding the following
after the word "quarter" at the end thereof:
"provided, however, that for purposes of this Section 7.02
only, any decrease in its Consolidated Tangible Net Worth during any
given fiscal quarter from Consolidated Tangible Net Worth at the end of
its previous fiscal quarter attributable solely to the purchase for cash
by the Company of its capital stock (but only to the extent that such
purchases do not exceed one hundred million dollars ($100,000,000) in
the aggregate from and after July 1, 1993) shall not be deemed to be a
decrease in Consolidated Tangible Net Worth"
3. Representations and Warranties. The Company hereby
represents and warrants to the Agent and the Banks as follows:
(a) No Default or Event of Default has occurred and is
continuing.
(b) The execution, delivery and performance by the Company
of this Amendment have been duly authorized by all necessary corporate
and other action and do not and will not require any registration with,
consent or approval of, notice to or action by, any Person (including
any Governmental Authority) in order to be effective and enforceable.
The Agreement as amended by this Amendment constitutes the legal, valid
and binding obligations of the Company, enforceable against it in
accordance with its respective terms, without defense, counterclaim or
offset.
(c) All representations and warranties of the Company
contained in the Agreement are true and correct.
(d) The Company is entering into this Amendment on the
basis of its own investigation and for its own reasons, without reliance
upon the Agent and the Banks or any other person.
4. Effective Date. This Amendment will become effective as of
August 18, 1993 (the "Effective Date"), Provided that each of the
following conditions precedent has been satisfied:
(a) The Agent has received from the Company and each of
the Banks a duly executed original of this Amendment.
(b) The Agent has received from the Company a copy of a
resolution passed by-the board of directors of such corporation,
certified by the Secretary or an Assistant Secretary of such corporation
as being in full force and effect on the date hereof, authorizing the
execution, delivery and performance of this Amendment.
5. Miscellaneous.
(a) Except as herein expressly amended, all terms,
covenants and provisions of the Agreement and the Collateral Documents
are and shall remain in full force and effect and all references therein
to such Agreement shall henceforth refer to the Agreement as amended by
this Amendment. This Amendment shall be deemed incorporated into, and a
part of, the Agreement.
(b) This Amendment shall be binding upon and inure to the
benefit of the parties hereto and thereto and their respective
successors and assigns. No third party beneficiaries are intended in
connection with this Amendment.
(c) This Amendment shall be governed by and construed in
accordance with the law of the State of California; provided that the
Agent and the Banks shall retain all rights arising under Federal law.
(d) This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
(e) This Amendment, together with the Agreement and the
other Documents, contains the entire and exclusive agreement of the
parties hereto with reference to the matters discussed herein and
therein. This Amendment supersedes all prior drafts and communications
with respect thereto. This Amendment may not be amended except in
accordance with the provisions of Section 10.01 of the Agreement.
(f) If any term or provision of this Amendment shall be
deemed prohibited by or invalid under any applicable law, such provision
shall be invalidated without affecting the remaining provisions of this
Amendment or the Agreement, respectively.
(g) Company covenants to pay to or reimburse the Agent and
the Banks, upon demand, for all costs and expenses (including allocated
costs of in-house counsel) incurred in connection with the development,
preparation, negotiation, execution and delivery of this Amendment.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Amendment as of the date first above written.
QUANTUM CORPORATION
By: Joseph T. Rodgers
Title: Executive Vice President, Finance, & Secretary
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent
By:
Title: Vice President
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank
By:
Title: Vice President
ABN AMRO BANK N.V.
By: Jeffrey A. French
Title: Vice President
By: Robert N. Hartinger
Title: Vice President
EXHIBIT 10.23
AMENDMENT NO. 2 TO LEASE
THIS AMENDMENT NO. 2 TO LEASE, dated April 15, 1993, is entered into by
and between MILPITAS REALTY DELAWARE, INC., a Delaware corporation
("Landlord") and QUANTUM CORPORATION, a Delaware corporation ("Tenant").
A. Landlord and Tenant have entered into that certain Multi-
Tenant Net Lease Agreement dated November 13, 1992 (the "Lease") for
certain premises located 501 Sycamore Drive, Milpitas, California,
located in the property commonly known as Sycamore Business Park in the
city of Milpitas, California. All capitalized terms not otherwise
defined herein shall have the meanings set forth in the Lease.
B. The Lease was subsequently modified by an Amendment No. 1
dated November 17, 1992. The initial Lease as so modified is hereinafter
referred to as the "Lease".
C. Landlord and Tenant desire to amend the Lease to modify the
term, rent, operating expenses and the options to extend the Lease, all
on the terms and conditions set forth below.
NOW, THEREFORE, Landlord and Tenant hereby agree as follows:
1. Sub-paragraphs 3.1 and 3.2 of the Lease shall be deleted and
replaced by the following:
"3.1 The term of this Lease shall be a period of thirty-two (32)
months, commencing on December 1, 1992 and terminating on July 31,
1995, unless sooner terminated as provided herein.
3.2 Tenant agrees that if landlord, for any reason whatsoever, is
unable to deliver possession of the Premises on the commencement
date, Landlord shall not be liable to Tenant for any loss or
damage therefrom, nor shall this Lease be void or voidable; but in
such event the commencement date shall be postponed until the date
when Landlord can deliver possession and the expiration of the
Lease term shall be thirty (30) months after such commencement
date. No delay in delivery of possession shall operate to extend
the term hereof or the date for adjustment of rental or exercise
of any option set forth herein."
2. Sub-paragraph 4.1 of the Lease shall be deleted and replaced
by the following:
"4.1 Tenant shall pay in lawful money of the United States to
Landlord, for each month of the term of this Lease, "Base Monthly
Rent" as follows:
(i) The minimum Base Monthly Rent from month one to month nine of
the lease term will be seventeen thousand nine hundred dollars
($17,900.00) based on a minimum occupancy of 35,800 square feet.
During the first nine months of the lease term any occupied space
in excess of 35,800 square feet will increase the minimum Base
Monthly Rent at the rate of $0.50 per square foot occupied per
month payable on the first day of each calendar month without
abatement, deduction, offset, prior notice or demand.
(ii) The minimum Base Monthly Rent from month ten to month
eighteen of the lease term will be thirty five thousand eight
hundred dollars ($35,800.00) based on full occupancy of 71,600
square feet.
(iii) The minimum Base Monthly Rent from month nineteen to month
thirty-two of the lease term will be thirty-nine thousand three
hundred eighty dollars ($39,380.00) based on full occupancy of
71,600 square feet.
First month's advanced rental for the first month's rent under the
Lease shall be due upon execution of this Lease. If the
commencement date is not the first (1st) day of a month, or if the
termination date is not the last day of a month, a prorated
monthly installment based on a thirty (30) day month shall be paid
at the then current rate for the fractional month during which the
Lease commences or terminates."
3. Sub-paragraph 10.5 of the Lease shall be deleted.
4. Paragraph 35 of the Lease shall be deleted in its entirety
and replaced by the following:
"35. Option to extend lease
35.1 At the expiration of the initial term, and if Tenant
is not in default of any of the terms and conditions of this
Lease, Tenant shall have one option (the "First Option") to extend
this Lease for an additional twelve (12) month term (from August
1, 1995 to July 31, 1996) (the "First Extended Term") for the
Premises. Base Monthly Rent for the First Extended Term shall be
thirty-nine thousand three hundred eighty dollars ($39,380.00).
Such option will require at least four (4) months advance written
notice, and must be exercised no earlier than February 1, 1995 nor
later than April 1, 1995.
35.2 At the expiration of the First Extended Term, and if
Tenant is not in default of any of the terms and conditions of
this Lease, Tenant shall have one option (the "Second Option") to
extend this Lease for an additional twenty-four (24) month term
(from August 1, 1996 to July 31, 1998) (the "Second Extended
Term") for the Premises. Base Monthly Rent for the Second
Extended Term shall be forty-two thousand two hundred forty-four
dollars ($42,244.00). Such option will require at least four (4)
months advance written notice, and must be exercised no earlier
than February 1, 1996 nor later than April 1, 1996.
35.3 At the expiration of the Second Extended Term, and if
Tenant is not in default of any of the terms and conditions of
this Lease, Tenant shall have one option (the "Third Option") to
extend this Lease for an additional twenty-four (24) month term
(from August 1, 1998 to July 31, 2000) (the "Third Extended Term")
for the Premises. Base Monthly Rent for the Second Extended Term
shall be at 95% of fair market net rental value as defined below,
but no less than the Base Monthly Rental in the last month of the
Second Extended Term. Such option will require at least four (4)
months advance written notice, and must be exercised no earlier
than February 1, 1998 nor later than April 1, 1998. Landlord and
Tenant shall meet, negotiate and attempt to agree upon the fair
market net rental value for the Premises for the Third Extended
Term. If Landlord and Tenant have not agreed in writing on such
fair market net rental value within thirty (30) days after
Landlord's receipt of Tenant's written notice of exercise of the
Third Option, then upon written notice of either party to the
other requesting determination of such fair market net rental
value by real estate brokers, such fair market net rental value
shall be determined by real estate brokers in accordance with the
terms of subparagraph 35.3.1 below.
35.3.1 Each party shall select (and pay the fees of) a
disinterested real estate broker with at least five (5) years of
commercial real estate experience in Santa Clara County. Each
party shall, within ten (10) days after the notice of request for
the determination of fair market net rental value by brokers,
notify the other party of the name and address of the real estate
broker selected by such party. If either Landlord or Tenant shall
fail timely to so select a broker, the selected broker shall
select the second broker (subject to the above selection criteria)
within ten (10) days after the failure of Landlord or Tenant, as
the case may be, to so select. The two brokers selected shall
attempt to determine the fair market net rental value of the
Premises. The term "fair market net rental value" as used in this
Lease shall mean the rental rate per square foot prevailing at the
commencement of the extended term for leases with terms of five
(5) years or less then being entered into for uses permitted under
paragraph 6 of this lease of premises comparable to the Premises
in Santa Clara County. The decision of each broker shall be in
writing and a copy thereof shall be given to Landlord and Tenant
promptly after such decisions are rendered. In the event that
within thirty (30) days after the first of such notices of request
for determination of said fair market net rental value by brokers
is received the two selected brokers cannot agree upon said fair
market net rental value, then they shall select a third
disinterested real estate broker with at least five (5) years of
commercial real estate experience in Santa Clara County. The fees
of the third broker shall be borne equally by Landlord and Tenant.
In the event a third such broker has not been selected within five
(S) days following the expiration of said thirty (30) day period,
then the third broker shall be selected by the then presiding
Judge of the Superior Court in and for the County of Santa Clara.
The third broker shall select either the Landlord's broker's
opinion of the fair market net rental value of the Premises or the
Tenant's broker's opinion of such fair market net rental value.
Until such time as the Basic Rent is determined as aforesaid,
Tenant shall pay a Base Monthly Rent for the Premises rental at
the rate which was last in effect under this Lease, and upon the
final resolution of such rent pursuant to the foregoing, the
parties shall forthwith settle accounts and either pay or return
an appropriate amount to reflect such resolution.
35.4 All of the terms, covenants and conditions of this
Lease shall remain in effect during each of the First, Second and
Third Extended Terms (collectively, the "Extended Terms" and in
the singular, an "Extended Term"). The First, Second and Third
Options (collectively, the "Options" and in the singular, an
"Option") are personal to Tenant. If Tenant subleases any portion
of the Premises or assigns or otherwise transfers any interest
under the Lease prior to the exercise of an Option, the option
rights shall terminate. If Tenant subleases any portion of the
Premises or assigns or otherwise transfers any interest of Tenant
under the Lease after the exercise of an Option but prior to the
commencement of the Extended Term of the Option, such Option shall
terminate and the Term of the Lease shall expire as if the Option
were not exercised.
35.5 If Tenant fails to deliver to landlord written notice
of the exercise of any of the Options within the time period
prescribed above, the Option and a11 subsequent Options if any
shall lapse, and there shall be no further right to extend the
Term. "Term", as used in the Lease, shall be deemed to include
the Extended Term or Extended Terms of the exercised Option or
Options. Each Option shall be exercisable by Tenant on the
express conditions that (i) at all times prior to the exercise of
an Option, and thereafter at all times prior to the commencement
of an Extended Term, no default shall have occurred under the
Lease and (ii) Tenant has not been late in the payment of rent
more than a total of three (3) times during the Term of the
Lease."
5. This Amendment, together with the Lease and exhibits
thereto, are the entire agreement between the parties with respect to
the subject matter thereof, and there are no binding agreements or
representations between the parties except as expressed herein.
IN WITNESS WHEREOF, Landlord and Tenant have executed this
Amendment No. 2 to Lease as of the date first written above.
Landlord: Tenant
Milpitas Realty Delaware, Inc., Quantum Corporation,
a Delaware corporation a Delaware corporation
By: S. Bradford By: Joseph T. Rodgers
Its Senior Investment Manager Its: Executive VP, Finance
By:
Its Senior Investment Officer
EXHIBIT 10.24
MULTI-TENANT NET LEASE AGREEMENT
QUANTUM CORPORATION
525 SYCAMORE DRIVE, MILPITAS, CALIFORNIA
1. PARTIES
THIS LEASE, dated April 15, 1993, is entered into by and between
Milpitas Realty Delaware, Inc., (hereinafter referred to as "Landlord")
and Quantum Corporation, a Delaware Corporation, whose address is 500
McCarthy Blvd., Milpitas, California 95035, (hereinafter referred to as
"Tenant"), and shall be effective on the date set forth above.
2. PREMISES
2.1 Landlord hereby leases to Tenant, and Tenant hereby leases
from Landlord, upon the terms, conditions and covenants hereinafter set
forth, approximately 93,324 rentable square feet of floor space (the
"Premises") located as shown on Exhibit A-l; hereto, within the building
(the "Building") commonly known as 525 Sycamore Drive, Milpitas,
California, together with the right to the reasonable, and nonexclusive
use of the Common Areas (defined in paragraph 2.3).
2.2 The Term "Property" shall mean that certain land together
with all buildings and improvements thereon and appurtenances thereto,
consisting of 3 buildings on approximately 14.03 acres and containing a
total rentable area of approximately 216,438 square feet, commonly known
as Sycamore Business Park in the city of Milpitas, California, all as
more particularly shown on Exhibit "A-2" attached hereto and made a part
hereof.
2.3 The term "Common Areas" shall mean all areas and facilities
within the Property, except for the building(s), provided and designated
by Landlord for the general use and convenience of Tenant and other
tenants of all or any part of the Property including, without
limitation, parking areas, access and perimeter roads, sidewalks,
landscaped areas, recreation areas, service areas, trash disposal
facilities. These areas and facilities shall be subject to the
reasonable rules and regulations and changes thereof from time to time,
promulgated by Landlord governing the use of said Common Areas.
Landlord shall have the right, in Landlord's sole reasonable
discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of
driveways, entrances, parking spaces, parking areas, loading and
unloading areas, ingress, egress, direction of traffic, landscaped areas
and walkways; (b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises
remains available; (c) To use the Common Areas while engaged in making
additional improvements, repairs or alterations to the Property, or any
portion thereof; (d) To do and perform such other acts and make such
other changes in, to or with respect to the Common Areas and the
Property as Landlord may, in the exercise of good faith business
judgment, deem to be appropriate.
2.4 The term "Tenant's Proportionate Share" shall mean the
percentage obtained by dividing the occupied rentable area of the
Premises by the total rentable area within the Property. The Tenant's
Proportionate Share when fully occupied is agreed to be forty-three and
12/100 percent (43.12%) for the purpose of the Lease.
3. TERM
3.1 The term of this Lease (the "Term") shall be a period of
thirty-six (36) months, commencing on August 1, 1993 and terminating on
July 31, 1996, unless sooner terminated as provided herein.
3.2 Tenant agrees that if Landlord, for any reason whatsoever,
is unable to deliver possession of the Premises on the commencement
date, Landlord shall not be liable to Tenant for any loss or damage
therefrom, nor shall this Lease be void or voidable; but in such event
the commencement date shall be postponed until the date when Landlord
can deliver possession and the expiration of the Lease term shall be
thirty-six (36) months after such commencement date. No delay in
delivery of possession shall operate to extend the term hereof or the
date for adjustment of rental or exercise of any option set forth
herein.
3.3 Tenant shall be permitted to occupy the Premises upon full
execution of the lease, prior to commencement of the Lease Term and
after the date of this Lease, for the purpose of constructing Tenant
Improvements pursuant to Exhibit B. Such occupancy shall be subject to
each and every provision of this Lease, except that Tenant shall not be
obligated to pay Base Monthly Rent until commencement of the Lease Term.
The Premises are separately metered for gas and electricity. Tenant
shall contract with and directly pay the provider thereof during
Tenant's occupancy pursuant to this Paragraph 3.3 and throughout the
Lease Term.
4. RENT
4.1 Tenant shall pay in lawful money of the United States to
Landlord, for each month of the term of this Lease, "Base Monthly Rent"
in the amount of $0.61 times the total number of square feet in the
Premises. The Base Monthly Rent will be fifty-six thousand nine hundred
twenty-seven dollars and 64/100 ($56,927.64). First month's advanced
rental for the first month's rent under the Lease shall be due upon
execution of this Lease. If the commencement date is not the first (1st)
day of a month, or if the termination date is not the last day of a
month, a prorated monthly installment based on a thirty (30) day month
shall be paid at the then current rate for the fractional month during
which the Lease commences or terminates.
4.2 All sums of money or charges required to be paid by Tenant
hereunder shall be deemed rental for the Premises and may be designated
as such in any statutory notice to pay rent or quit the Premises
5. LATE PAYMENT CHARGES AND INTEREST
5.1 Tenant acknowledges that late payment by Tenant to Landlord
of Rent and other charges provided for under this Lease will cause
Landlord to incur costs not contemplated by this Lease, the exact amount
of such costs being extremely difficult or impracticable to fix. Such
costs include, but are not limited to, processing and accounting
charges, and late charges that may be imposed on Landlord by the terms
of any encumbrance and notes secured by any encumbrance covering the
Premises, or late charges and penalties due to late payment of Real
Property Taxes due on the Premises. Therefore, if any installment of
Rent or any other charge due from Tenant is not received by Landlord
within seven (7) days due from Tenant, Tenant shall pay to Landlord an
additional sum equal to five percent (5 %) of the amount overdue as a
late charge for every month or portion thereof that the rent or other
charges remain unpaid. The parties agree that this late charge
represents a fair and reasonable estimate of the costs that Landlord
will incur by reason of the late payment by Tenant. Acceptance of any
late charge shall not constitute a waiver of Tenant's default with
respect to the overdue amount, nor prevent Landlord from exercising any
of the other rights and remedies available to Landlord.
5.2 All amounts of money payable by Tenant to Landlord
hereunder, if not paid when due, shall bear interest from the due date
until paid at an annual rate equal to the lesser of twelve percent (12%)
or the highest rate legally permitted (the "Agreed Interest Rate").
6. USE OF THE PREMISES AND COMPLIANCE WITH LAW
6.1 Tenant shall use the Premises solely for office, light
manufacturing, repair and warehousing and shall not use the Premises for
any other purpose. Tenant acknowledges that the Premises and the
Property are subject to those certain covenants, conditions and
restrictions recorded at Page 189, of Book E545, of the Official Records
of Santa Clara County, State of California, on June 5, 1979,
(hereinafter referred to as the "CC&R's"). Tenant further acknowledges
that it has read the CC&R's and knows the contents thereof. Throughout
the term of this Lease, and any extensions thereof, Tenant shall
faithfully and timely perform and comply with the CC&R's and any
modification or amendments thereof and Tenant shall hold Landlord
harmless and indemnify Landlord against any loss, expense, damage,
attorney's fees or liability arising out of the failure of Tenant to so
perform or comply with the CC&R's.
6.2 Tenant shall not use the Premises or suffer or permit
anything to be done in or about the Premises which will in any way
increase Insurance Cost, or conflict with any law, statute, zoning
restriction, ordinance or governmental law, rule, regulation or
requirement of duly constituted public authorities now in force or which
may hereafter be in force, or Board of Fire Underwriters requirements or
other similar body now or hereafter constituted relating to or affecting
the condition, use or occupancy of the Premises or the Property. Tenant
shall not commit any public or private nuisance or any other act or
thing which might or would disturb the quite enjoyment of any other
tenant or occupancy of the Property or any occupant of nearby property.
Tenant shall place no loads upon the floors, walls or ceilings in excess
of the maximum designed load or which endanger the structure; or place
any harmful liquids in the drainage systems; dump or store waste
materials or refuse or allow such to remain in, on or about any part of
the Premises outside of the Building, except in the enclosed trash area
provided; and Tenant shall not store or permit to be stored or otherwise
placed any materials of any nature whatsoever outside the Building.
6.3 Tenant shall, at its sole cost and expense, promptly comply
with all laws, statutes, ordinances, and governmental rules,
regulations, or requirements now in force or which may hereafter be in
force; with the requirements of any board of fire underwriters or other
similar body now or hereafter constituted; with any direction or
occupancy certificate issued pursuant to any law by any public officer
or officers, as well as the provisions of all recorded documents
affecting the Premises, insofar as any thereof relate to or affect the
condition, use, or occupancy of the Premises.
7. CONDITION OF PREMISES
By entry hereunder, Tenant accepts the Premises as being in the
condition in which Landlord is obligated to deliver the Premises. Tenant
acknowledges that neither Landlord nor its agent(s) has made any
representation or warranty as to the condition of the Premises or the
Building, or as to the suitability or fitness of the Premises for the
conduct of Tenant's business, or for any other purpose. Landlord has no
obligation, and has made no promise, to alter, remodel, improve, repair,
decorate, or paint the Premises or any part thereof, except as
specifically herein set forth in Exhibit B.
8. TRADE FIXTURES, ALTERATIONS, AND LEASEHOLD IMPROVEMENTS
8.1 Trade Fixtures: Throughout the Lease Term, Tenant shall
provide to the Landlord a written list of all trade fixtures installed
by Tenant at the Premises for the conduct of its business. All trade
fixtures shall remain Tenant's property and may be removed by Tenant at
anytime during the Lease Term. Trade fixtures shall include only movable
equipment and other personal property of Tenant and shall exclude any
alterations, additions, or improvements, including, but not limited to,
heating, lighting, electrical, air conditioning, partitioning, drapery
and carpet installation, millwork, and any equipment which is affixed to
the Premises so that it cannot be removed without material damage to the
Premises.
8.2 Leasehold Improvements: Tenant shall not make or suffer to
be made any alterations, additions, or improvements ("Leasehold
Improvement") to, or of, the Premises or any part thereof, or attach any
fixtures or equipment thereto, the cost of which shall exceed $10,000 or
which affect the building structure, facade, HVAC, plumbing or
electrical system, without first obtaining Landlord's approval, which
approval may be withheld by Landlord in its absolute discretion. All
such approved Leasehold Improvements shall be installed in compliance
with the approved plans and specification by Tenant at Tenant's expense
using a licensed contractor first approved by Landlord. All construction
done by Tenant shall be done in accordance with all laws and regulations
and in a good and workmanlike manner using new material of good quality.
Tenant shall not commence construction of any Leasehold Improvements
until (i) Landlord has approved the plans and specifications for such
improvements, (ii) all required governmental approvals and permits shall
have been obtained, (iii) all requirements regarding insurance imposed
by this Lease have been satisfied, (iv) Tenant has given Landlord at
least ten (10) business days prior written notice of its intention to
commence such construction, (v) Tenant has notified Landlord of the
commencement of construction on the day it commences, and (vi) if
requested by Landlord, Tenant shall have obtained a lien and completion
bond reasonably satisfactory to Landlord and contingent liability and
broad form builders risk insurance in an amount satisfactory to
Landlord. Landlord shall have the right at anytime to post notices of
nonresponsibility or similar notices on the Premises in connection
therewith. Upon completion of construction of such Leasehold
Improvements, Tenant shall submit "as-built" plans to Landlord. All
Leasehold Improvements shall immediately become the property of Landlord
and, at the end of the term hereof, shall remain on the Premises,
without compensation to Tenant, provided that Landlord shall have the
right, by notice to Tenant prior to the end of the term, to require
Tenant to remove all or part of the Leasehold Improvements, in which
event Tenant shall promptly restore the Premises to their condition
prior to the installation of the Leasehold Improvements. Notwithstanding
the foregoing, Tenant shall not be required to remove the initial
Leasehold Improvements pursuant to Exhibit B.
8.3 Liens: Tenant shall keep the Premises free from any liens and
shall pay when due all bills arising out of any work performed,
materials furnished, or obligations incurred by Tenant, its agents,
employees or contractors relating to the Premises. If any claim of lien
is recorded, Tenant shall bond against or discharge the same within ten
(10) days after the same has been recorded against the Premises.
9. COMMON AREAS
9.1 Landlord hereby grants to Tenant, its employees, customers
and invites a non-exclusive license to use all Common Areas on the
Property, subject to the terms and conditions of this Lease. The surface
parking facilities on the Common Areas shall be available for the
automobiles of Tenant and other occupants and tenant of the Property and
their respective customers, employees and invites on a non-assigned non-
exclusive basis.
9.2 Landlord shall operate, manage and maintain all Common
Areas. Landlord shall at all times have exclusive control of the Common
Areas and may at any time temporarily close any part thereof, exclude
and restrain anyone from any part thereof, except the bona fide
customers, employees and invites of Tenant and other occupants and
tenants of the Property who use the Common Areas in accordance with the
rules and regulations as Landlord may from time to time promulgate, and
may change the configuration or location of the Common Areas. In
exercising any such rights Landlord shall make a reasonable effort to
minimize any disruption to Tenant's business.
10. OPERATING EXPENSES
10.1 Tenant agrees to pay Tenant's Proportionate Share of all
costs and expenses as may be paid or incurred by Landlord in the
maintenance and operation of the Property (hereinafter referred to as
the "Operating Expenses") during the term of this Lease. The Operating
Expenses shall include, without limitation, wages, salaries, benefits
and payroll burden of employees to the extent the employees are directly
included in the management, operation, repair and maintenance of the
Property; management fees; janitorial; maintenance, guard and other
services; outside area repair and maintenance, including landscape
maintenance and replacement, concrete walkway curbs and paved parking
areas, pest control services, power, water, waste disposal and other
utilities for Common Areas; materials and supplies; maintenance and
repairs; license costs; insurance premiums, and the deductible portion
of any insured loss under Landlord's insurance; depreciation on
equipment and other personal property and the costs of any capital
improvements made to the Building by Landlord that are for the purpose
of reducing other Operating Expenses, that are required for the health
and safety of Tenants, or that are required under any governmental law
or regulation that was not applicable to the Building at the time it was
constructed, such costs or allocable portion thereof to be amortized
over such reasonable period as Landlord shall determine, together with
interest on the unamortized balance at the rate of 12% per annum or such
higher rate as may have been paid by Landlord on funds borrowed for the
purpose of constructing such capital improvements. Operating Expenses
shall not include Real Property Taxes, real estate brokers' commissions,
debt service on the Property, or capital improvements, other than those
specifically referred to above.
10.2 From and after the commencement date for this Lease, Tenant
shall pay Landlord on the first day of each calendar month during the
term of this Lease, an amount estimated by Landlord to be Tenant's
Proportionate Share of such the Operating Expenses. The foregoing
estimated monthly charge may be adjusted by Landlord at the end of any
calendar quarter on the basis of Landlord's experience and reasonably
anticipated costs. Any such adjustment shall be effective as of the
calendar month next succeeding receipt by Tenant of written notice of
such adjustment.
10.3 Within ninety (90) days following the end of each calendar
year Landlord shall furnish Tenant a statement covering the calendar
year just expired, showing the total of such Operating Expenses, the
amount of Tenant's Proportionate Share of such Operating Expenses for
such calendar year and the payments made by Tenant with respect to such
period. If Tenant's share of such Operating Expenses exceeds Tenant's
payments so made, Tenant shall pay Landlord the deficiency within ten
(10) days after receipt of such statement. If said payments exceed
Tenant's share of such Operating Expenses, Tenant shall be entitled to
offset the excess against payments next thereafter to become due to
Landlord pursuant to this Article. There shall be appropriate pro rata
adjustment of the estimated Operating Expenses as of the commencement of
rentals and expiration of the term of this Lease, if such commencement
or expiration shall occur other than on the first or last day of the
month. The termination of this Lease shall not affect the obligations of
Landlord and Tenant to make the adjustment required herein after such
termination.
10.4 Tenant's Proportionate Share of Operating Expenses shall be
payable as additional rent hereunder. Failure of Tenant to pay any such
additional rent required under this Article shall constitute a default
under the terms of this Lease in like manner as failure to pay Base
Monthly Rent when due.
11. REAL PROPERTY TAXES
11.1 Real Property Taxes Defined: The term "Real Property Taxes"
as used herein shall mean all real property taxes and personal property
taxes, licenses, charges, and assessments which are levied, assessed, or
imposed by any governmental or quasi-governmental authority, improvement
or assessment district with respect to the Property or any other
fixtures, improvements, equipment, or other property of Landlord, real
or personal, located on the Property and used in connection with the
operation thereof, whether or not now customary or in within the
contemplation of the parties hereto, including, without limitation, any
taxes, charges, or assessments for public improvements, services, or
benefits, irrespective of when commenced or completed, transfer tees,
housing funds, education funds, street, highway, or traffic fees, as
well as any taxes which shall be levied or assessed in addition to or in
lieu of such taxes, any charge upon Landlord's business of leasing of
the Property, and any cost or expenses of such taxes, licenses, charges,
or assessments, that exclude any federal or state income or gift tax, or
any franchise, capital stock, estate or inheritance taxes. In the event
that it shall not be lawful for Tenant to reimburse Landlord for
Tenant's Proportionate Share of any real property tax, the rent payable
to the Landlord under this Lease shall be revised to yield to Landlord
the same net rent from the Premises after imposition of any such tax
upon Landlord as would have been received by Landlord hereunder prior to
the imposition of any such tax.
11.2 Tenant's Obligation to Reimburse: As additional rent, Tenant
shall pay to Landlord Tenant's Proportionate Share of all Real Property
Taxes which become due during or with respect to the Lease term. Tenant
shall pay Tenant's Proportionate Share of such Real Property Taxes
within ten (10) days after being billed for the same by Landlord. If
requested by Tenant in writing within thirty (30) days of receipt of a
bill for such Real Property Taxes, Landlord shall furnish Tenant with
such evidence as is reasonably available to Landlord with respect to the
amount of any Real Property Tax which is part of such bill. Tenant may
not withhold payment of such bill pending receipt and/or review of such
evidence. If any lender requires Landlord to impound Real Property Taxes
on a periodic basis during the Lease Term, then Tenant, on notice from
Landlord indicating this requirement, shall pay a sum of money toward
its liability under this subparagraph to Landlord on the same periodic
basis as required by such lender. Landlord shall impound the Real
Property Tax payments received form Tenant in accordance with the
requirements of the Lender. In the event the Building is sold during the
primary lease term, Lessor shall be 100% responsible for the increase in
real estate taxes over the then-current base.
11.3 Taxes and Other Charges payable by Tenant. In addition to
the monthly rental and other charges to be paid by Tenant hereunder,
Tenant shall pay or reimburse Landlord for any and all of the following,
whether or not now customary or in the contemplation of the parties
hereto: taxes (other than local, state, and federal, personal, or
corporate income taxes measured by the net income of Landlord from all
sources), assessments (including, without limitation, all assessments
for public improvements, services, or benefits, irrespective of when
commenced or completed), excises, levies, business taxes, license,
permit, inspection and other authorization fees, transit-development
fees, assessments or charges for housing funds, service payments in lieu
of taxes, and any other fees or charges of any kind which are levied,
assessed, confirmed or imposed by any public authority: (a) upon,
measured by, or reasonably attributable to, the cost or value of
Tenant's equipment, furniture, fixtures, and other personal property
located in the Premises, or by the cost of any Leasehold Improvements
made in or to the Premises by or for Tenant, regardless of whether title
to such improvements shall be in Tenant or Landlord; (b) upon or
measured by the monthly rental or other charges payable hereunder,
including, without limitation, any gross income tax or excise tax levied
by the city, county, state, Federal Government or any other governmental
body with respect to the receipt of such rental; (c) upon, with respect
to, or by reason of, the development, possession, leasing, operation,
management, maintenance, alteration, repair, use, or occupancy by Tenant
of the Premises or any portion thereof; (d) upon this transaction or any
document to which Tenant is a party creating or transferring an interest
or an estate in the Premises. In the event that it shall not be lawful
for Tenant so to reimburse Landlord, the monthly rental payable to
Landlord under this Lease shall be revised to net Landlord the same net
rental after imposition of any such tax or other charge upon Landlord as
would have been payable to Landlord prior to the imposition of any such
tax or other charge.
12. WASTE DISPOSAL AND UTILITIES
12.1 Waste Disposal: Tenant shall store its waste either inside
the Premises or in containers with lids that are kept closed (e.g.,
"dumpsters") located within outside trash enclosures that are (l) fully
fenced and screened in compliance with all CC&R's and the Rules and
Regulations, and (ii) designed for such purpose. Except when wastes are
actually being placed in trash enclosures, all entrances to such outside
trash enclosures shall be kept closed, and waste shall be stored in
containers in such manner so that the container lids are kept closed and
such waste is not visible from the exterior of such outside enclosures.
Tenant shall cause all of its waste to be regularly removed from the
Premises at Tenant's sole cost. Tenant shall keep all fire corridors and
mechanical equipment rooms in the Premises free and clear of all
obstructions at all times.
12.2 Utilities: Tenant shall pay for all gas, electricity, heat,
cooling energy, telephone, janitorial service, water, waste-disposal,
refuse-collection and other utility-type services furnished to Tenant or
the Premises, together with all related installation or connection
charges or deposits. Landlord shall designate which of the above
utilities shall be separately metered to the Premises, and, as to such
utilities, Tenant shall pay the costs of metering and shall contract
directly with and shall directly pay the provider of such services.
Landlord reserves the right, at any time or from time to time during the
term of the Lease, to require any of the above utilities to be
separately metered to the Premises, at Tenant's expense, or any of the
above services to be contracted for directly by Tenant. Landlord shall
furnish the Premises with any of the above services and utilities not
designated by Landlord for direct contracting or metering, and the
expense thereof shall be included in the Operating Expenses, of which
Tenant shall pay its Proportionate Share pursuant to 10 above, provided
that Tenant shall promptly reimburse Landlord upon demand for the cost
of such utilities or services used on the Premises in excess of the
average level of such services consumed by other tenants of the
Property. Landlord shall not be liable in damages, consequential or
otherwise, nor shall there be any rent abatement or right on the part of
Tenant to terminate this Lease, arising out of any interruption
whatsoever in utility services which is due to fire, accident, strike,
governmental authority, acts of God or other causes beyond the
reasonable control of Landlord, or any temporary interruption in such
services which is necessary to the making of alterations, repairs, or
improvements to the Premises, the Building, or the Property or any part
thereof.
13. ENVIRONMENTAL MATTERS
13.1 Tenant and the Premises will remain in compliance with all
applicable laws, ordinances, and regulations (including consent decrees
and administrative orders) relating to public health and safety and
protection of the environment, including those statutes, laws,
regulations, and ordinances identified in subparagraph 13.7, all as
amended and modified from time to time (collectively, "environmental
laws"). All governmental permits relating to the use or operation of the
Premises required by applicable environmental laws are and will remain
in effect, and tenant will comply with them.
13.2 Tenant will not permit to occur any release, generation,
manufacture, storage, treatment, transportation, or disposal of
"hazardous material," as that term is defined in subparagraph 13.7, on,
in, under, or from the Premises. Tenant will promptly notify Landlord,
in writing, if Tenant has or acquires notice or knowledge that any
hazardous material has been or is threatened to be released, discharged,
disposed of, transported, or stored on, under, or from the Premises,
Tenant, at its own cost and expense, will immediately take such action
as is necessary to detain the spread of and remove the hazardous
material to the complete satisfaction of Landlord and the appropriate
governmental authorities. Notwithstanding the foregoing or anything
herein to the contrary, Tenant shall have no liability or responsibility
with respect to any hazardous substances existing on the Premises prior
to Tenant's occupancy, provided that Tenant shall notify Landlord of any
such condition if Tenant at any time acquires actual knowledge thereof.
13.3 Tenant will immediately notify Landlord and provide copies
upon receipt of all written complaints, claims, citations, demands,
inquiries, reports or notices relating to the condition of the Premises
or compliance with environmental laws. Tenant will promptly cure and
have dismissed with prejudice any such actions and proceedings to the
satisfaction of Landlord. Tenant will keep the Premises free of any lien
imposed pursuant to any environmental law.
13.4 Landlord will have the right at all reasonable times and
from time to time to conduct environmental audits of the Premises, and
Tenant will cooperate in the conduct of each audit. The audits will be
conducted by a consultant of Landlord's choosing. If any hazardous
material introduced during tenant's possession is detected or if a
violation of any of the warranties, representations, or covenants
contained in this paragraph is discovered, the fees and expenses of such
consultant will be borne by Tenant and will be paid as additional rent
under this Lease on demand by Landlord.
13.5 If Tenant fails to comply with any of the foregoing
warranties, representations, and covenants, Landlord may cause the
removal (or other cleanup acceptable to Landlord) of any hazardous
material from the Property. The costs of hazardous material removal and
any other cleanup (including transportation and storage costs) will be
additional rent under this Lease, whether or not a court has ordered the
cleanup, and such costs will become due and payable on demand by
Landlord. Tenant will give Landlord, its agents, and employees access to
the Premises to remove or otherwise clean up any hazardous material.
Landlord, however, has no affirmative obligation to remove or otherwise
clean up any hazardous material, and this Lease will not be construed as
creating any such obligation.
13.6 Tenant agrees to indemnity, defend (with counsel reasonably
acceptable to Landlord and at Tenant's sole costs), and hold Landlord
and Landlord's affiliates, shareholders, directors, officers, employees,
and agents free and harmless from and against all losses, liabilities,
obligations, penalties, claims, litigation, demands, defenses, costs,
judgments, suits, proceedings, damages (including consequential
damages), disbursements or expenses of any kind (including attorneys'
and experts' fees and expenses and fees and expenses incurred in
investigating, defending, or prosecuting any litigation, claim, or
proceeding) that may at any time be imposed upon, incurred by, or
asserted or awarded against Landlord or any of them in connection with
or arising from or out of:
(a) any hazardous material on, in, under, or affecting all or
any portion of the Premises;
(b) any misrepresentation, inaccuracy, or breach of any
warranty, covenant, or agreement contained or referred to in this
Article;
(c) any violation or claim of violation by Tenant of any
environmental law;
(d) the imposition of any lien for the recovery of any
environmental law; or cleanup or other response costs relating to the
release or threatened release of hazardous material. This
indemnification is the personal obligation of Tenant and will survive
termination of this Lease. Tenant, its successors, and assigns waive,
release, and agree not to make any claim or bring any cost recovery
action against Landlord under CERCLA, as that term is defined in
subparagraph 13.7, or any state equivalent or any similar law now
existing or enacted after this date. To the extent that Landlord is
strictly liable under any such law, regulation, ordinance, or
requirement, Tenant's obligation to Landlord under this indemnity will
likewise be without regard to fault on the part of Tenant with respect
to the violation or condition that results in liability to Landlord.
13.7 For purposes of this Lease, "hazardous materials" means: (i)
"hazardous substances" or "toxic substances" as those terms are defined
by the Comprehensive Environmental Response, Compensation, and Liability
Act (CERCLA), 42 U.S.C. Section 901, et seq., or Sections 66680 through
66685 of Title 22 of the California Administrative Code, Division 4,
Chapter 30, or the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, all as amended and amended after this date; (ii)
"hazardous wastes," as that term is defined by the Resource Conservation
and Recovery Act (RCRA), 42 U.S.C. Section 6901, et seq., as amended and
amended after this date; (iii) any pollutant or contaminant or
hazardous, dangerous, or toxic chemicals, materials, or substances
within the meaning of any other applicable federal, state, or local law,
regulation, ordinance, or requirement (including consent decrees and
administrative orders) relating to or imposing liability or standards of
conduct concerning any hazardous, toxic, or dangerous waste substance or
material, all as amended or amended after this date; (iv) crude oil or
any fraction thereof which is liquid at standard conditions of
temperature and pressure (60 degrees Fahrenheit and 14.7 pounds per
square inch absolute); (v) any radioactive material, including any
source, special nuclear or byproduct material as defined in 42 U.S.C.
Section 2011, et seq., as amended and amended after this date; (vi)
asbestos in any form or condition; and (vii) polychlorinated biphenyls
(PCBs) or substances or compounds containing PCBs.
13.8 Certain De Minimis Substances. Permitted Substances
13.8.1 Landlord recognizes that the fluids and toner materials
used in current office photocopying equipment and in chemical compounds
routinely used for light office cleaning and housekeeping may contain
chemicals which are Hazardous Materials. Landlord agrees that the
provisions of Article 13 shall not be regarded as prohibiting Tenant's
use of such normal office materials so long as the quantities are
limited to amounts required for normal office use and the materials are
contained, stored and used in conformity with manufacturers'
recommendations and all applicable laws, statutes, ordinances,
regulations and orders now existing or hereinafter enacted.
13.8.2 To the extent any of the substances enumerated in Exhibit
"C" ("Permitted Substances") attached hereto, initialed and made a part
hereof, are Hazardous Materials, this Article shall not prohibit
Tenant's use and storage of such Permitted Substances in the Premises.
Notwithstanding Landlord's consent to Tenant's use and storage of the
Permitted Substances in the Premises, however, Tenant shall nonetheless
comply with each and every other provision of this Article in its use
and handling of the Permitted Substances, and Tenant shall not be
relieved of its other obligations and agreements set forth in this
Article which pertain or may pertain to the Permitted Substances.
14. REPAIR AND MAINTENANCE
14.1 Tenant's Obligation to Maintain: Except as otherwise
provided in paragraph 14.2 regarding Landlord's obligations and Article
16 regarding the restoration of damage caused by fire and other perils,
Tenant shall, at all times during the Lease Term, clean, keep, and
maintain in good order, condition, and repair the Premises and every
part thereof, through regular and annual inspections and servicing,
including but not limited to (i) all plumbing within the Premises
(including all sinks, toilets, faucets and drains), and all ducts,
pipes, vents, or other parts of the HVAC or plumbing system, (ii) all
fixtures, interior walls, floors, carpets, and ceilings, (iii) the roots
(including routine roof maintenance and repair of all roof leaks on the
roof over the Premises but excluding replacement of the roof), (iv) all
windows, doors, entrances, plate glass, showcase, and skylights
(including cleaning both interior and exterior surfaces), (v) all
electrical facilities, wiring and equipment, including lighting
fixtures, lamps, bulbs and tubes, fans, vents, exhaust equipment in the
Premises; (vi) any automatic fire extinguisher equipment and systems
(including fully sprinkler testing) in the Premises, and (vii) interior
and exterior surfaces repainting. Tenant shall replace any damaged or
broken glass in the Premises (including all interior and exterior doors,
windows, and showcases) with glass of the same kind, size, and quality.
Tenant shall repair any damage to the Premises (including exterior doors
and windows) caused by vandalism or any unauthorized entry. Tenant shall
be responsible for and shall maintain, repair and replace when necessary
HVAC equipment which serves the Premises and shall keep the same in good
condition through regular inspection and servicing, throughout the Lease
Term utilizing competent personnel. Tenant shall maintain continuously
throughout the Lease Term a service contract for HVAC equipment,
reasonably satisfactory to Landlord. Tenant shall furnish Landlord with
a copy of the HVAC service contract which shall provide that the service
contract may not be canceled or changed without at least thirty (30)
days prior written notice to Landlord. All repairs and replacements
required of Tenant shall be promptly made with materials of like kind
and quality. If the work affects the structural parts of the Building
then Tenant shall first obtain Landlord's written approval of the scope
of work, plans therefor, materials to be used, and the contractor.
14.2 Landlord's Obligation to Maintain: Except as expressly
provided in paragraph 14.1, Landlord shall repair and maintain the
structural parts of the Building, which structural parts include only
the foundations, exterior walls columns foundations, roof structure
(excluding ordinary maintenance and repair of leaks) and floors
(provided Tenant does not exceed the floor loading capacity) located on
the Premises so that the same are kept in good order and repair.
Landlord shall not be responsible for repairs required by any accident,
fire or other peril, except as otherwise required by Article 16 or for
damage caused to any part of the Premises by any act, negligence or
omission of Tenant or its agents, contractors, employees or invites to
the extent not covered by insurance required to be carried herein.
Landlord may engage contractors of its choice to perform the obligations
required of it by this Article, and the necessity of any expenditure
made to perform such obligations shall be at the sole discretion of
Landlord. It is an express condition precedent to all obligations of
Landlord to repair and maintain that Tenant shall have notified Landlord
of the need for such repairs and maintenance.
15, INSURANCE
15.1 Landlord's Insurance: Operating Expenses shall include all
property, liability, and other insurance carried by Landlord with
respect to the Property, including, without limitation, the cost of
property insurance (including, at Landlord's option, earthquake and
flood coverage) procured by Landlord covering the full replacement cost
of the Building and the Premises, excluding coverage of all Tenant's
personal property on or in the Premises. Tenant agrees not to do
anything or fail to do anything which will violate the terms of any such
insurance, increase the cost of such insurance or prevent Landlord from
procuring policies satisfactory to Landlord. Tenant shall pay any
increases in insurance premiums resulting from the nature of Tenant's
occupancy or any act or omission of Tenant.
15.2 Tenant's Insurance: Tenant agrees to maintain in full force
and effect at all times during the Term, at its own expense, for the
protection of Tenant and Landlord, as their interest may appear,
policies of insurance issued by a responsible carrier or carriers
reasonably acceptable to Landlord which afford the following coverages:
(i) Worker's Compensation - Statutory limits.
(ii) Employer's liability - Not less than:
Bodily Injury by Accident $250,000 each accident
Bodily Injury by Disease $250,000 policy limit
Bodily Injury by Disease $250,000 each employee
(iii) Property Insurance insuring the Tenant's business personal
property against direct risk of loss, and insuring Tenant's business
income. Coverage shall be provided on coverage forms at least as broad
as the standard Building and Personal Property Coverage Form (CP0010),
Business Income Coverage Form (CP0030), Boiler and Machinery Coverage
Form (BM0025), Causes of Loss Special Form (CP1030), and Sprinkler
Leakage - Earthquake Extension (CP1039) all as published by ISO
Commercial Risk Services, Inc. Replacement cost valuation must apply.
The limit of coverage required for business personal property shall
approximate the current replacement cost value of such business personal
property. The limit of coverage for business income shall be equal to
one-half of the Tenant's annual total anticipated net earnings.
(iv) At Tenant's sole cost and expense, the Tenant shall procure
and maintain throughout the lease term (and any extensions thereto
Commercial General Liability Insurance ("Insurance") on a coverage form
at least as broad as the most recent edition of Commercial General
Liability Coverage Form (CG0001) published by the Insurance Services
Office, Inc. naming the Landlord as Additional Insured using an
endorsement form at least as broad as the most recent edition of
Additional Insured-Managers or Lessors of Premises Endorsement Form
(CG2011) as published by the Insurance Services Office, Inc. The limits
of such insurance shall be no less than:
Each Occurrence Limit $2,000,000
General Aggregate Limit $2,000,000
Products/Completed Operations Aggregate Limit $2,000,000
Personal Injury and Advertising Injury Limit $1,000,000
Fire Damage (Any One Fire) $50,000
Medical Expense (Any One Person) $5,000
covering Bodily Injury, Personal Injury and Property Damage Liability
occasioned by or arising out or in connection with the use, operation
and occupancy of the Premises. The Landlord retains the right to require
reasonable increases in these limits from time to time. Such Commercial
General Liability insurance policy must cover events that occur during
the policy period regardless of when the claim is made. This Insurance
shall be primary insurance to any other insurance that may be available
to Landlord except for Landlord's sole negligence. Any other insurance
available to Landlord shall be non-contributing with and excess to this
Insurance.
15.3 Certificates: Tenant shall deliver to Landlord, concurrent
with execution of this Lease, certificates of insurance, and, with
respect to the insurance policy described in subparagraph 15.2(iv) above
a copy of the Additional Insured - Managers of Lessors of Premises
Endorsement (CG2011). Such Certificate shall provide an obligation by
the insurer to notify the Landlord in writing at least 30 days prior to
cancellation Of non-renewal of any such insurance. Tenant shall deliver
to Landlord renewal certificate at least 30 days prior to the expiration
of any insurance policy required hereunder.
15.4 Increased Coverage: Upon demand, Tenant shall provide
Landlord, at Tenant's expense, with such increased amount of existing
insurance, and such other insurance as Landlord or Landlord's lender may
reasonably require to afford Landlord and Landlord's lender adequate
protection.
15.5 Co-Insurer: If, on account of the failure of Tenant to
comply with the foregoing provisions, Landlord is adjudged a co-insurer
by its insurance carrier, then, any loss or damage Landlord shall
sustain by reason thereof, including attorneys' fees and costs, shall be
borne by Tenant and shall be immediately paid by Tenant upon receipt of
a bill therefor and evidence of such loss.
15.6 No Limitation of Liability: Landlord and its Agents make no
representation that the limits of liability specified to be carried by
Tenant under this Lease are adequate to protect Tenant. If Tenant
believes that any such insurance coverage is insufficient, Tenant shall
provide, at its own expense, such additional insurance as Tenant deems
adequate.
15.7 Insurance Requirements: All such insurance shall be in a
form satisfactory to Landlord and shall be carried with companies that
have a general policy holder's rating of not less than "A" and a
financial rating of not less than Class "X" in the most current edition
of Best's Insurance Reports; shall provide that such policies shall not
be subject to non-renewal or cancellation except after at least thirty
(30) days' prior written notice to Landlord; and shall be primary as to
Landlord. The policy or policies, or duly executed certificates for
them, together with satisfactory evidence of payment of the premium
thereon shall be deposited with Landlord prior to the Commencement Date,
and upon renewal of such policies, not less than thirty (30) days prior
to the expiration of the term of such coverage. If Tenant fails to
procure and maintain the insurance required hereunder, Landlord may, but
shall not be required to, order such insurance at Tenant's expense and
Tenant's reimbursement to Landlord for such amounts shall be deemed
Additional Rent. Such reimbursement shall include all sums disbursed,
incurred or deposited by Landlord including Landlord's costs, expenses
and reasonable attorney's fees with interest thereon at the Agreed
Interest Rate.
15.8 Landlord's Disclaimer: Landlord and its Agents shall not be
liable for any loss or damage to persons or property resulting from
fire, explosion, falling plaster, glass, tile or sheetrock, steam, gas,
electricity, water or rain which may leak from any part of the Premise,
or the Building, or from the pipes, appliances or plumbing works therein
or from the root; street or subsurface or whatsoever, except to the
extent caused by or due to the sole gross negligence or willful acts of
Landlord. Tenant shall give prompt written notice to Landlord in case of
a casualty or accident on or about the Premises.
15.9 Waiver of Subrogation. Notwithstanding anything to the
contrary contained herein, to the extent of insurance proceeds received
with respect to the loss, Tenant and Landlord each hereby waive any
right of recovery against the other party for any loss or damage
maintained by such other party with respect to the Building, the
Premises, the contents of same, or any operation therein, whether or not
such loss is caused by the fault or negligence of such other party.
Landlord and Tenant shall each obtain from their respective insurers
under all policies of property, liability, and other insurance
maintained by either of them at any time during the term hereof insuring
or covering the Building, the Premises or any portion thereof or
operations therein, a waiver of all rights of subrogation which the
insurer of one party might have against the other party, and Landlord
and Tenant shall each indemnify the other against any loss or expense,
including reasonable attorneys' fees, resulting trom the failure to
obtain such waiver.
16. DAMAGE AND DESTRUCTION TO PREMISES
16.1 Landlord's Dutv to Restore: If the Premises or Building is
damaged by any peril, or by any risk covered by insurance, Landlord
shall restore the Premises unless the Lease is terminated by Landlord
pursuant to paragraph 16.2 or by Tenant pursuant to paragraph 16.3. All
insurance proceeds available from the fire and property damage insurance
required to be carried pursuant to paragraph 15.2 shall be paid to and
become the property of Landlord and Tenant shall reimburse Landlord for
the amount of the deductible thereunder. If this Lease is terminated
pursuant to either paragraph 15.2 or 15.3, then all insurance proceeds
available from insurance carried by Tenant which covers loss to property
that is Landlord's property or would become Landlord's property on the
termination of this Lease shall be paid to and become the property of
Landlord. If this Lease is not so terminated, then upon receipt of the
insurance proceeds (if the loss is covered by insurance) and the
issuance of all necessary governmental permits, (which Landlord shall
use best efforts to obtain with all due diligence). Landlord shall
promptly commence and diligently prosecute to completion the restoration
of the Premises, to the extent then allowed by law, to substantially the
same condition in which the Premises were immediately prior to such
damage. Landlord's obligation to restore shall be limited to the
structural portion of the Premises and interior improvements constructed
by Landlord as they existed as of the Commencement Date, and any
Leasehold Improvements, but not Trade Fixtures and/or personal property
constructed or installed by Tenant in the Premises.
16.2 Landlord's Right to Terminate: Landlord shall have the
option to terminate this Lease in the event any of the following occurs,
which option may be exercised only by delivery to Tenant of a written
notice of election to terminate within forty-five (45) days after the
date of such damage:
16.2.1 The Premises or the Building is damaged by any
peril and such damage is fully covered (other than any policy deductible
amount) by available insurance proceeds, to such an extent that the
estimated cost to restore such damage exceeds thirty-three and one-third
percent (33-1/3%) of the then actual replacement costs of the Building;
16.2.2 The Building or the Premises is damaged by any
peril and such damage is not fully covered by available insurance
proceeds, to such an extent that the estimated cost to restore such
damage exceeds five percent (5%) of the then actual replacement cost
thereof, provided, however, that Tenant can elect to pay for the
restoration and, in that event, Landlord's option is nullified.
16.2.3 The Premises or the Building is damaged by any
peril during the last twelve (12) months of the Lease Term to such an
extent that the estimated cost to restore equals or exceeds an amount
equal to six (6) times the Base Monthly Rent; provided, however, that
Landlord may not terminate this Lease pursuant to this subparagraph if
Tenant, at the time of such damage, has an express written option to
further extend the term of this Lease and Tenant exercises such option
to so further extend the Lease Term within fifteen (15) days following
the date of such damage in which event Landlord's termination shall be
nullified.
16.3 Tenant's Right to Terminate:
16.3.1 If the Premises or any portion of the Building
is damaged by any peril necessary to Tenant's occupancy of the Premises
and Landlord does not elect to terminate this Lease pursuant to
paragraph 16.2, then within forty-five (45) days of the date of damage,
Landlord shall furnish Tenant with the written opinion of Landlord's
architect or construction consultant as to when the restoration work
required of Landlord may be completed with all due diligence. Tenant
shall have the following option to terminate this Lease either in whole
or in part in the event any of the following occurs, which option may be
exercised only by delivery to Landlord of a written notice of election
to terminate within seven (7) days after Tenant receives from Landlord
the estimate of the time needed to complete such restoration:
16.3.1 (i) Tenant may terminate this Lease if the damage is
caused by any peril and, in the reasonable opinion of Landlord's
architect or construction consultant, the restoration of the Premises
cannot be substantially completed within one hundred eighty (180) days
after any insurance claims have been adjusted and a building permit and
all other governmental approvals necessary to repair the damage have
been obtained; or
16.3.2 (ii) Tenant may terminate this Lease if Premises or
any portion of the Building necessary to Tenant's occupancy of the
Premises is damaged by any peril during the last year of the Lease and
(a) such damage affects more than twenty percent (20%) of the rentable
area within the Premises that would be affected by Tenant's exercise of
its option to terminate, and (b) such damage cannot be substantially
restored within ninety (90) days following the date of such damage.
16.4 Abatement of Rent: In the event of damage to the Premises
which does not result in the termination of this Lease, and provided
that such damage was not caused by the negligence of Tenant, its
employees, agents, or contractors, the Base Monthly Rent shall be
temporarily abated from the date of damage and during the period of
restoration in proportion to the degree to which Tenant's use of the
Premises is impaired by such damage, provided however, the amount of
rent abated shall not exceed the amount of rent loss insurance paid to
Landlord. Tenant shall not be entitled to any compensation from Landlord
for loss of Tenant's property or to Tenant's business caused by such
damage or restoration. Tenant hereby waives the provisions of Section
1932, Subdivision 2, and Section 1933, Subdivision 4, of the California
Civil Code, and the provisions of any similar law hereinafter enacted.
17. CONDEMNATION
17.1 Taking of Premises: If all or any part of any of the
Premises is taken by means of (i) any taking by the exercise of the
power of eminent domain, whether by legal proceedings or otherwise, (ii)
a voluntary sale or transfer by Landlord to any condemnor under threat
of condemnation or while legal proceedings for condemnation are pending,
or (iii) any taking by inverse condemnation (a "Condemnation"), then
Landlord shall have the option to terminate this Lease. If all or any
part of any of the Premises is taken by Condemnation and Premises cannot
be reconstructed within a reasonable period of time and thereby made
reasonably suitable for Tenant's continued occupancy, then Tenant shall
have the option to terminate this Lease. Any such option to terminate by
either Landlord or Tenant must be exercised within thirty (30) days
after the date of the taking to be effective as of the date that
possession of the Premises is taken by the condemnor.
17.2 Restoration Following the Taking: If any part of the
Premises is taken by Condemnation and this Lease is not terminated, then
Landlord shall make all repairs and alterations that are reasonably
necessary to make that which is not taken a complete architectural unit
including sufficient access, but Landlord shall not be obligated to
spend more than the amount of any condemnation award recovered by
Landlord for such restoration. During such repairs or alterations there
shall be an abatement of rent in the same proportion that the floor area
of any part of the Premises being so repaired or altered bears to the
original floor area of the entire Premises.
17.3 Abatement of Rent: Except in the case of a temporary taking,
if any portion of the Premises is taken by Condemnation and this Lease
is not terminated, then as of the date possession is taken by the
Condemnor, the Base Monthly Rent shall be reduced in the same proportion
that the floor area of any part of the Premises so taken (less any
addition thereto by reason of any reconstruction) bears to the original
floor area of all the entire Premises.
17.4 Temporary Taking: If any portion of the Premises is
temporarily taken by Condemnation for a period which does not extend
beyond the natural expiration of the Lease Term, then this Lease shall
continue in full force and effect, and the Base Monthly Rent shall be
reduced in the same proportion that the floor area of any part of the
Premises so taken (less any addition thereto by reason of any
reconstruction) bears to the original floor area of the entire Premises
except that the Base Monthly Rent reduction shall not exceed the
available rent abatement insurance proceeds available under loss of
rents insurance carried by Landlord. If any portion of the Premises is
temporarily taken by Condemnation for a period which extends beyond the
natural expiration of the Lease Term, and such taking materially and
adversely affects Tenant's ability to use the Premises, then Landlord
and Tenant shall each independently have the option to terminate this
Lease, effective on the date possession is taken by the condemnor.
17.5 Division of Condemnation Award: Any award made as a result
of any Condemnation of the Premises shall belong to and be paid to
Landlord, and Tenant hereby assigns to Landlord all of its right, title
and interest in any such award, provided, however, that Tenant shall be
entitled to receive any Condemnation award that is made directly to
Tenant (i) for the taking within the term of the Lease personal property
or trade fixtures belonging to Tenant, (ii) for the interruption of
Tenant's business or its moving costs, or (iii) for loss of Tenant's
goodwill. The rights of Landlord and Tenant regarding any Condemnation
shall be determined as provided in this Article, and each party hereby
waives the provisions of Section 1265.130 of the California Code of
Civil Procedures allowing either party to petition the Superior Court to
terminate this Lease in the event of a partial taking of the Premises.
18. TERMINATION AND HOLDOVER
18.1 Surrender of the Premises: Immediately prior to the
expiration or upon the earlier termination of this Lease, Tenant shall
remove all Tenant's trade fixtures and other personal property, repair
all damage caused by the installation and removal of such property, and
shall vacate and surrender the Premises to Landlord in the same
condition as existed at the Commencement Date, reasonable wear and tear
excepted, with all interior and exterior walls cleaned, all interior
painted surfaces to be repainted in the original color, all holes in
walls and floors repaired, all carpets shampooed and cleaned, all HVAC
equipment on or within the Premises in good operating order and in good
repair, and all floors cleaned and polished, all to the reasonable
satisfaction of Landlord. Landlord may hire independent contractors to
inspect any HVAC and electrical systems serving the Premises for the
purpose of determining whether they have been properly maintained by
Tenant, and Tenant shall pay the cost thereof within ten (10) days after
receipt of a statement therefor from Landlord. If Tenant is required to
remove any Leasehold Improvement then Tenant shall, prior to the
expiration or earlier termination of this Lease, remove any such
Leasehold Improvements, repair all damage caused by such removal, and
restore the Premises to the condition existing prior to the time such
removed Leasehold Improvements were initially installed. If the Premises
are not so surrendered at the termination of this Lease, Tenant shall be
liable to Landlord for all reasonable and necessary costs incurred by
Landlord in returning the Premises to the required condition, plus
interest on all costs incurred at the Agreed Interest Rate. Tenant shall
also furnish, to the Landlord, a copy of a report by an independent
environmental consultant indicating that there has been no contamination
as a result of tenant's occupancy; and a copy of an approved closure
plan from the relevant authorities. Tenant shall indemnify Landlord
against loss or liability resulting from delay by Tenant in so
surrendering the Premises, including, without limitation, any claims
made by any succeeding tenant or losses to Landlord due to lost
opportunities to lease to succeeding tenants. Any personal property of
Tenant or any other person left on the Premises after Tenant has
abandoned and Landlord may dispose of such property in accordance with
the provisions of California Civil Code Sections 1980-1991. Failure to
surrender Premises to standards set by this paragraph 18.1 will be
deemed a month to month holding over, at Landlord's option.
18.2 Holding Over: This Lease shall terminate without further
notice at the expiration of the Lease Term. Any holding over by Tenant
after expiration of the Lease Term without Landlord's written consent
shall not constitute a renewal or extension of the Lease or give Tenant
any rights in or to the Premises. Any holding over after such expiration
with the written consent of Landlord shall be construed to be a tenancy
from month to month on the same terms and conditions herein specified
insofar as applicable except that Base Monthly Rent shall be increased
in an amount equal to one hundred fifty percent (150%) of the Base
Monthly Rent required during the last month of the Lease Term.
19. ASSIGNMENT AND SUBLETTING
19.1 By Tenant: Tenant shall not sublet all or any part of the
Premises or assign or encumber any of its interest in this Lease,
whether voluntary or by operation of law.
19.2 By Landlord: Landlord and its successors in interest shall
have the right to transfer their interest in the Premises at any time
and to any person or entity. In the event of any such transfer, the
Landlord originally named herein (and in the case of any subsequent
transfer, the transferor), from the date of such transfer, (i) shall be
relieved of all further liability for the performance of the obligations
of the Landlord hereunder accruing after the effective transfer date, to
the extent that transferee agrees in writing to assume and be bound by
the terms of this Lease and to perform all obligations of the landlord
hereunder and (ii) in the event of such assumption, shall be
automatically relieved, without any further act by any person or entity,
of all liability for the performance of the obligations of the Landlord
hereunder that may accrue after the date of transfer. As used herein,
the term "Landlord shall mean the Landlord originally named herein, but
following any transfer of its interest in the Premises, the term
"Landlord" shall transfer of its interest in the Premises, the term
"Landlord" shall thereafter mean the transferee of such interest.
20. INDEMNITY
Tenant hereby waives all claims against Landlord for damage to any
property or injury or death of any person in, upon or about the Premises
arising at any time and from any cause other than solely by reason of
the negligence or willful act of Landlord, its employees or contractors,
and Tenant shall hold Landlord harmless from any damage to any property
or injury to or death of any person arising from the use of the
Premises, the Building, or the Property by Tenant, its agents,
employees, contractors and invites, except such as is caused solely by
the negligence or willful act of Landlord, its contractors or employees.
The foregoing indemnity obligation of Tenant shall include reasonable
attorneys' fees, investigation costs and all other reasonable costs and
expenses incurred by Landlord from the first notice that any claim or
demand is to be made or may be made. The provisions of this Article 20
shall survive the termination of this Lease with respect to any damage,
injury or death occurring prior to such termination.
21. DEFAULT AND REMEDIES
21.1 Events of Tenant's Default: Tenant shall be in default of
its obligations under this Lease if any of the following events occurs:
21.1.1 Tenant fails to pay any Base Monthly Rent or
Additional Rent due pursuant to paragraph 10.2, when due;
21.1.2 Tenant fails to pay any sum, other than Base
Monthly Rent and additional rent pursuant to paragraph 10.2 hereunder,
when due and such failure is not cured within seven (7) days after
written notice that such payment was due; or
21.1.3 Tenant fails to perform any term, covenant, or
condition of this Lease except those requiring the payment of money to
Landlord and Tenant fails to cure such default within ten (10) days
after delivery of written notice from Landlord specifying the nature of
such default where such default could reasonably be cured within said
ten (10) day period, or fails to commence such cure within said ten (10)
day period and thereafter continually with due diligence prosecute such
cure to completion where such default cannot reasonably be cured within
said ten (10) day period; or
21.1.4 Tenant makes a general assignment of its assets
for the benefit of its creditors; or
21.1.5 There occurs an attachment of, execution on, the
appointment of a custodian or receiver with respect to, or other
judicial seizure of substantially all of Tenant's assets, any property
of Tenant essential to the conduct of Tenant's business in the Premises,
or the leasehold created by this Lease, and Tenant fails to obtain a
return or release of such property within thirty (30) days thereafter or
prior to sale or other disposition, whichever is earlier, or
21.1.6 Tenant abandons the Premises; or
21.1.7 A court makes or enters any decree or order with
respect to Tenant or Tenant submits to or seeks a decree or order (or a
petition or pleading is filed in connection therewith) which: (i) grants
or constitutes (or seeks) an order for relief, appointment of a trustee,
or confirmation of a reorganization plan under the bankruptcy laws of
the United States, (ii) approves as properly filed (or seeks such
approval of) a petition seeking liquidation or reorganization under said
bankruptcy laws or any other debtor's relief law or statute of the
United States or any state thereof; or (iii) otherwise directs (or
seeks) the winding up or liquidation of Tenant; provided, however, that
if any such petition, decree or order is not voluntarily filed or made
by Tenant, that Tenant shall not be in default;dull until such petition,
decree or order is not voluntarily filed or made by Tenant, that Tenant
shall not be in default until such petition, decree or order remains
undischarged for a period of thirty (30) days.
21.2 Landlord's Remedies: In the event of any default by Tenant,
Landlord shall have the following remedies, in addition to all other
rights and remedies provided by any Law or otherwise provided in this
Lease, to which Landlord may resort cumulatively, or in the alternative:
21.2.1 Landlord may, at Landlord's election, keep this
Lease in effect and enforce by an action at law or in equity all of its
rights and remedies under the Lease, including (i) the right to recover
the rent and other sums as they become due by appropriate legal action,
(ii) the right to make payments required of Tenant or perform Tenant's
obligations and be reimbursed-Lourdes by Tenant for the cost thereof
with interest at 5% per month from the date the sum is paid by Landlord
until Landlord is reimbursed by Tenant, (iii) the remedies of injunctive
relief and specific performance to compel Tenant to perform its
obligations under this Lease, to the extent permitted by law, and (iv)
the right to cause a receiver to be appointed to administer the
Premises.
21.2.2 In the event Tenant breaches this Lease and
abandons the Premises, this Lease shall not terminate unless Landlord
gives Tenant written notice of its election to so terminate this Lease,
which Landlord may do at the time of such breach and abandonment or at
any time thereafter and which shall cause this Lease to terminate,
regardless of whether Landlord has theretofore exercised any other of
its remedies. No act by or on behalf of Landlord intended to mitigate
the adverse effect of such breach will constitute a termination of
Tenant's right to possession unless Landlord gives Tenant written notice
of termination. Should Landlord not terminate this Lease by giving
Tenant written notice, Landlord may enforce all its rights and remedies
under this Lease, including the right to recover the rent as it becomes
due under the Lease as provided in California Civil Code Section 1951.4.
21.2.3 Landlord may, at Landlord's election, terminate
this Lease by giving Tenant written notice and on the date specified in
such notice, Tenant's right to possession shall terminate, and this
Lease shall terminate. No act by or on behalf of Landlord intended to
mitigate the adverse effect of Tenant's default shall constitute a
termination of the Lease or Tenant's right of possession unless Landlord
gives Tenant written notice of termination. Any such termination shall
not relieve Tenant from the payment of any sums then due Landlord or
from any claim for damages resulting from Tenant's default. Following
termination of the Lease, and without prejudice to any other remedies
Landlord may have, Landlord may then or any time thereafter (i)
peaceably re-enter the Premises upon voluntary surrender by Tenant or
expel or remove Tenant therefrom together with any other persons
occupying it, using such legal proceedings as are then available, (ii)
repossess and use the Premises or re-let it or any part thereof for such
term, at such rent, and upon such other terms and conditions as Landlord
in its sole discretion may determine, and (iii) remove all property of
Tenant therefrom at Tenant's expense.
21.2.4 In the event Landlord terminates this Lease,
Landlord shall be entitled, at Landlord's election, to damages in an
amount as set forth in California Civil Code Section 1951.2. For
purposes of computing damages pursuant to said Section 1951.2, (i) the
Agreed Interest Rate shall be used where permitted, and (ii) rent due
under this Lease shall include the Base Monthly Rent and the additional
rent due under Articles 10 and 11, determined on a monthly basis where
necessary to compute such damages. Such damages shall include without
limitation:
21.2.4(1) The worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that Tenant proves could be
reasonably avoided, computed by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of award
plus two percent (2%); and
21.2.4(2) Any other amount necessary to compensate Landlord
for all detriment caused by Tenant's failure to perform Tenant's
obligations under this Lease, including, without limitation, the
reasonable and necessary: (i) expenses for cleaning, repairing or
restoring the Premises; (ii) expenses for altering, remodeling or
otherwise improving the Premises for the purpose of reletting, including
installation of Leasehold Improvements (whether such installation be
funded by a reduction of rent, direct payment or allowance to a new
tenant, or otherwise); (iii) broker's fees, advertising costs and other
expenses of reletting the Premises; (iv) costs of carrying the Premises,
such as taxes, insurance premiums, utilities, and security precautions;
(v) expenses in retaking possession of the Premises; and (vi) attorneys'
fees and court costs incurred by Landlord in retaking possession of the
Premises and in re-leasing the Premises or otherwise incurred as a
result of Tenant's default.
21.2.5 Nothing in this paragraph shall limit Landlord's
right to indemnification from Tenant.
21.2.6 Tenant hereby waives all right now or hereafter
existing to redeem the Premises after termination pursuant to this
Article or by order or judgment of any court or by any legal process.
21.3 Landlord's Default: Landlord shall be deemed in default
hereunder only if Landlord fails to perform any of its obligations under
this Lease and fails to cure such default within thirty (30) days after
written notice from Tenant specifying the nature of such default where
such default could reasonably be cured within said thirty (30) day
period, or fails to commence such cure within said thirty (30) day
period and thereafter continuously with due diligence prosecute such
cure to completion where such default could not reasonably be cured
within said thirty (30) day period.
21.4 Waiver: One party's consent to or approval of any act by the
other party requiring the first party's consent or approval shall not be
deemed to waive or render unnecessary the first party's consent to or
approval of any subsequent similar act by the other party. The receipt
by Landlord of any rent or payment with or without knowledge of the
breach of any other provision hereof shall not be deemed a waiver of any
such breach unless such waiver is in writing and signed by Landlord. No
delay or omission in the exercise of any right or remedy accruing to
either party upon any breach by the other party under this Lease shall
impair such right or remedy or be construed as a waiver of any such
breach theretofore or thereafter occurring. The waiver by either party
of any breach of any provision of this Lease shall not be deemed to be a
waiver of any subsequent breach of the same or any other provisions
herein contained.
22. LANDLORD'S RIGHT TO ENTER
Landlord or its agents may enter the Premises at any reasonable
time upon twenty-four (24) hour prior notice in writing or by telephone,
except in case of emergency, for the purpose of (i) inspecting the same,
(ii) posting notices of nonresponsibility, (iii) supplying any service
to be provided by Landlord to Tenant, (iv) showing the Premises to
prospective purchasers, mortgagees or tenants, (v) making necessary
alterations, additions or repairs required or permitted to be made, (vi)
placing upon the Premises ordinary "for sale" signs reasonably located,
(vii) In the absence of Tenant exercising its option to renew within the
time period prescribed in paragraph 35.1.1, placing upon the Premises
ordinary "For Lease" signs, (viii) in case of any emergency and/or (ix)
to determine whether Tenant is complying with its obligations hereunder.
Tenant hereby waives any claims for damages for any injury or
inconvenience or interference with Tenant's business, or any loss of
occupancy or quiet enjoyment of the Premises, or any other loss
occasioned by such entry. For each of the aforesaid purposes, Landlord
may enter the Premises by means of a master key, and Landlord shall have
the right to use any means Landlord may deem necessary to enter the
Premises in an emergency and any entry to the Premises obtained by
Landlord by any of said means, or otherwise, shall not under any
circumstances be construed or deemed to be a forcible or unlawful entry
into, or a detainer of, the Premises, or an eviction (actual or
constructive) of Tenant from the Premises or any portion thereof.
23. SUBORDINATION
23.1 This Lease, and any Option granted hereby, at Landlord's
option, shall be subordinate to any ground lease, mortgage, deed of
trust, or any other hypothecation or security now or hereafter placed
upon the Property and to any and all advances made on the security
thereof and to all renewals, modifications, consolidations, replacements
and extensions thereof. Such subordination shall be conditioned upon a
commitment contained in the document evidencing the senior obligation,
or written commitment from the holder thereof, that, notwithstanding
such subordination, Tenant's right to quiet possession of the Premises
shall not be disturbed if Tenant is not in default and so long as Tenant
shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms.
If any mortgagee, trustee or ground Landlord shall elect to have this
Lease and any Option granted hereby prior to the lien of its mortgage,
deed of trust or ground lease, and shall give written notice thereof to
Tenant, this Lease and such Option shall be deemed prior to such
mortgage, deed of trust or ground lease, whether this Lease or such
Option are dated prior or subsequent to the date of said mortgage, deed
of trust or ground lease or the date of recording thereof.
23.2 Tenant agrees to execute any documents required to
effectuate an attornment, a subordination or to make this Lease or any
Option granted herein prior to the lien of any mortgage, deed of trust
or ground lease, as the case may be. Tenant's failure to execute such
documents within ten (10) days after written demand shall constitute a
material default by Tenant hereunder without further notice to Tenant
or, at Landlord's option, Landlord shall execute such documents on
behalf of Tenant as Tenant's attorney-in-fact. Tenant does hereby make,
constitute and irrevocably appoint Landlord as Tenant's attorney-in-fact
and in Tenant's name, place and stead, to execute such documents in
accordance with this paragraph 23.
24. TENANT'S ATTORNMENT
Tenant shall attorn (i) to any purchaser of the Premises at any
foreclosure sale or private sale conducted pursuant to any security
instrument encumbering the Premises, or (ii) to any grantee or
transferee designated in any deed given in lieu of foreclosure.
25. MORTGAGEE PROTECTION
In the event of any default on the part of Landlord, Tenant will
give notice by registered mail to any Lender whose name has been
provided to Tenant and shall otter such Lender a reasonable opportunity
to cure the default, including time to obtain possession of the Premises
by power of sale or judicial foreclosure or other appropriate legal
proceedings, if such should prove necessary to effect a cure.
26. ESTOPPEL CERTIFICATE AND FINANCIAL STATEMENTS
Tenant agrees, following any request by Landlord, to promptly
execute and deliver to Landlord an estoppel certificate upon which
Landlord and any others it designates may rely (i) certifying that this
Lease is unmodified and in full force and effect, or, if modified,
stating the nature of such modification and certifying that this Lease,
as so modified, is in full force and effect, (ii) stating the date to
which the rent and other charges are paid in advance, if any, (iii)
acknowledging that there are not, to Tenant's knowledge, any uncured
defaults on the part of Landlord hereunder, or if there are stating
their nature, and (iv) certifying such other information about the Lease
as may be reasonably required by Landlord. Tenant's failure to deliver
an estoppel certificate within ten (10) days after delivery of
Landlord's request therefor shall be a conclusive admission by Tenant
that, as of the date of the request for such statement, (i) this Lease
is unmodified except as may be represented by Landlord in said request
and is in full force and effect, (ii) there are no uncured defaults in
Landlord's performance, and (iii) no rent has been paid in advance. At
any time during the Lease Term, Tenant shall, upon ten (10) days prior
written notice from Landlord, provide Tenant's most recent financial
statement and financial statements covering the twenty-four (24) months
prior to the date of such most recent financial statement to any
existing Lender or to any potential Lender or buyer of the Premises.
Such statements shall be prepared in accordance with generally accepted
accounting principles and, if such is the normal practice of Tenant,
shall be audited by an independent certified public accountant.
27. FORCE MAJEURE
Any prevention or delay due to strikes, lockouts, inclement
weather, labor disputes, inability to obtain labor, materials, fuels or
reasonable substitutes therefore, governmental restrictions,
regulations, action or inaction, civil commotion, fire or other acts of
God, or other causes beyond the reasonable control of the party
obligated to perform (except financial inability) shall excuse the
performance, for a period equal to the period of any said prevention or
delay, of any obligation hereunder except the obligation of Tenant to
pay rent.
28. NOTICES
All notices and demands which may or are required to be given by
either party to the other hereunder shall be in writing and shall be
deemed to have been fully given when deposited in the United States
mail, certified or registered, postage prepaid, and addressed as
follows: to Tenant, at 500 McCarthy Boulevard, Milpitas, CA 95035, or to
such other place as Tenant may from time to time designate in a notice
to Landlord; to Landlord c/o GSIC Realty Corporation, 255 Shoreline
Drive, Suite 600, Redwood City, California 94065 or to such other place
as Landlord may from time to time designate in a notice to Tenant.
Tenant hereby appoints as its agent to receive the service of all
dispossessor or distraint proceedings and notices thereunder the person
in charge of or occupying the Premises at the time, and, if no person
shall be in charge of or occupying the same, then such service may be
made by attaching the same on the main entrance of the Premises.
29. ATTORNEY'S FEES
If as a result of any breach or default in the performance of any
of the provisions of this Lease, Landlord uses the services of an
attorney in order to secure compliance with such provisions or recover
damages therefor, or to terminate this Lease or evict Tenant, Tenant
shall reimburse Landlord upon demand for any and all attorneys' fees and
expenses so incurred by Landlord, provided that if Tenant shall be the
prevailing party in any legal action brought by Landlord against Tenant,
Tenant shall be entitled to recover for the fees of its attorneys in
such amount as the court may adjudge reasonable.
30. CORPORATE AUTHORITY
If Tenant is a corporation (or a partnership), each individual
executing this Lease on behalf of said corporation (or partnership)
represents and warrants that he or she is duly authorized to execute and
deliver this Lease on behalf of said corporation (or partnership in
accordance with the partnership agreement of said partnership) and that
this Lease is binding upon said corporation (or partnership) in
accordance with its terms. If Tenant is a corporation, Tenant shall,
concurrently with execution of this Lease, deliver to Landlord a
certified copy of the resolution of the board of directors of said
corporation authorizing or ratifying the execution of this Lease.
31. MISCELLANEOUS
31.1 Should any provision of this Lease prove to be invalid or
illegal, such invalidity or illegality shall in no way affect, impair or
invalidate any other provision hereof, and such remaining provisions
shall remain in full force and effect. Time is of the essence with
respect to the performance of every provision of this Lease in which
time of performance is a factor. Any executed copy of this Lease shall
be deemed an original for all purposes. This Lease shall, subject to the
provisions regarding assignment, apply to and bind the respective heirs,
successors, executors, administrators and assigns of Landlord and
Tenant. If Tenant consists of more than one person or entity, then all
members of Tenant shall be jointly and severally liable hereunder. This
Lease shall be construed and enforced in accordance with the laws of the
State of California. The language in all parts of this Lease shall in
all cases be construed as a whole according to its fair meaning, and not
strictly for or against either Landlord or Tenant. The captions used in
this Lease are for convenience only and shall not be considered in the
construction or interpretation of any provision hereof. When the context
of this Lease requires, the neuter gender includes the masculine, the
feminine, a partnership or corporation or joint venture, and the
singular includes the plural. The terms "shall", "will", and "agree" are
mandatory. The term "may" is permissive. When a party is required to do
something by this Lease, it shall do so at its sole cost and expense
without right of reimbursement from the other party unless specific
provision is made therefor. Landlord shall not become or be deemed a
partner or a joint venturer of Tenant by reason of this Lease.
31.2 In the event that the original Landlord hereunder, or any
successor owner of the Property, shall sell or convey the Property, all
liabilities and obligations on the part of the original Landlord, or
such successor owner, under this Lease, accruing after such transfer
shall terminate, and thereupon all such liabilities and obligations
shall be binding upon the new owner. Tenant agrees to attorn to such new
owner.
32. LIMITATION ON TENANT'S RECOURSE
The liability of Landlord under this Lease shall be, and is hereby
limited to, Landlord's interest in the Property, and no other assets of
Landlord shall be affected by reason of any liability which Landlord may
have to Tenant or to any other person by reason of this Lease.
33. BROKERAGE COMMISSIONS
Tenant warrants that it has not had any dealings with any real
estate brokers or salesmen or incurred any obligations for the payment
of real estate brokerage Commissions or finder's fees which would be
earned or due and payable by reason of the execution of this Lease other
than Cornish & Carey Oncor International paid by Landlord pursuant to
Listing Agreement between J. R. Parrish, Inc. and Landlord. Tenant
agrees to indemnify, defend, and hold Landlord harmless from and against
any claim by any other broker, agent, or other person claiming a
commission or other form of compensation by virtue of having dealt with
Tenant with regard to this Lease.
34. RULES AND REGULATIONS
Tenant shall, after notice thereof, comply with any rules and
regulations which may from time to time be promulgated by Landlord with
respect to the use of the Premises or the Property, and any amendments
or modifications thereof ("Rules and Regulations"). Landlord shall not
be responsible to Tenant for the violation of the Rules and Regulations
by any other tenant or occupant of the Property.
35. OPTIONS TO EXTEND LEASE
35.1 At the expiration of the initial term, and if Tenant is not
in default of any of the terms and conditions of this Lease, Tenant
shall have one option (the "First Option") to extend this Lease for an
additional twenty-four (24) month term (from August 1, 1996 to July 31,
1998) (the "First Extended Term") for the Premises. Base Monthly Rent
for the First Extended Term shall be sixty thousand six hundred sixty
and 60/100 dollars ($60,660.60). Such option will require at least four
(4) months advance written notice, and must be exercised no earlier than
February 1, 1996 nor later than April 1, 1996.
35.2 At the expiration of the First Extended Term, and if Tenant
is not in default of any of the terms and conditions of this Lease,
Tenant shall have one option (the "Second Option") to extend this Lease
for an additional twenty-tour (24) month term (from August 1, 1998 -
July 31, 2000) (the "Second Extended Term") for the Premises. Base
Monthly Rent for the Second Extended Term shall be at 95% of fair market
net rental value as defined below, but no less than the Base Monthly
Rental in the last month of the First Extended Term. Such option will
require at least tour (4) months advance written notice, and must be
exercised no earlier than February 1, 1998 nor later than April 1, 1998.
Landlord and Tenant shall meet, negotiate and attempt to agree upon the
fair market net rental value for the Premises for the Second Extended
Term. If Landlord and Tenant have not agreed in writing on such fair
market net rental value within thirty (30) days after Landlord's receipt
of Tenant's written notice of exercise of the Third Option, then upon
written notice of either party to the other requesting a determination
of such fair market net rental value by real estate brokers, such fair
market net rental value shall be determined by real estate brokers in
accordance with the terms of sub-paragraph 35. 3.1 below.
35.2.1 Each party shall select (and pay the fees of) a
disinterested real estate broker with at least five (S) years of
commercial real estate experience in Santa Clara County. Each party
shall, within ten (10) days after the notice of request for the
determination of fair market net rental value by brokers, notify the
other party of the name and address of the real estate broker selected
by such party. If either Landlord or Tenant shall fail timely to so
select a broker, the selected broker shall select the second broker
(subject to the above selection criteria) within ten (10) days after the
failure of Landlord or Tenant, as the case may be, to so select. The two
brokers selected shall attempt to determine the fair market net rental
value of the Premises. The term "fair market net rental value" as used
in this Lease shall mean the rental rate per square foot prevailing at
the commencement of the extended term for leases with terms of five (S)
years or less then being entered into for uses permitted under paragraph
6 of this Lease of premises comparable to the Premises in Santa Clara
County. The decision of each broker shall be in writing and a copy
thereof shall be given to Landlord and Tenant promptly after such
decisions are rendered. In the event that within thirty (30) days after
the first of such notices of request for determination of said fair
market net rental value by brokers is received the two selected brokers
cannot agree upon said fair market net rental value, then they shall
select a third disinterested real estate broker with at least five (S)
years of commercial real estate experience in Santa Clara County. The
fees of the third broker shall be borne equally by Landlord and Tenant.
In the event a third such broker has not been selected within five (S)
days following the expiration of said thirty (30) day period, then the
third broker shall be selected by the then presiding Judge of the
Superior Court in and for the County of Santa Clara. The third broker
shall select either the Landlord's broker's opinion of the fair market
net rental value of the Premises or the Tenant's broker's opinion of
such fair market net rental value. Until such time as the Basic Rent is
determined as aforesaid, Tenant shall pay as Base Monthly Rent for the
Premises rental at the rate which was last in effect under this Lease,
and upon the final resolution of such rent pursuant to the foregoing,
the parties shall forthwith settle accounts and either pay or return an
appropriate amount to reflect such resolution.
35.3 All of the terms, covenants and conditions of this
Lease shall remain in effect during each of the First and Second
Extended Terms (collectively, the "Extended Terms" and in the singular,
an "Extended Term"). The First and Second Options (collectively, the
"Options" and in the singular, an "Option") are personal to Tenant. If
Tenant subleases any portion of the Premises or assigns or otherwise
transfers any interest under the Lease prior to the exercise of an
Option, the option rights shall terminate. If Tenant subleases any
portion of the Premises or assigns or otherwise transfers any interest
of Tenant under the Lease after the exercise of an Option but prior to
the commencement of the Extended Term of the Option, such Option shall
terminate and the Term of the Lease shall expire as if the Option were
not exercised.
35.4 If Tenant fails to deliver to Landlord written notice
of the exercise of any of the Options within the time period prescribed
above, the Option and all subsequent Options if any shall lapse, and
there shall be no further right to extend the Term. "Term", as used in
the Lease, shall be deemed to include the Extended Term or Extended
Terms of the exercised Option or Options. Each Option shall be
exercisable by Tenant on the express conditions that (i) at all times
prior to the exercise of an Option, and thereafter at all times prior to
the commencement of an Extended Term, no default shall have occurred
under the Lease and (ii) Tenant has not been late in the payment of rent
more than a total of three (3) times during the Term of the Lease.
36. OPTION TO TERMINATE LEASE
Tenant may terminate the Lease at the end of the twenty-fourth
month of the Term by giving to the Landlord written notice at least one
hundred and twenty (120) days prior to the end of the twenty-fourth
month of the Lease together with the payment of the amount of one
hundred and fifty thousand dollars ($150,000) to the Landlord.
37. ENTIRE AGREEMENT
The Lease, and Exhibits A through C, which are executed by
Landlord and Tenant concurrently with this Lease and are attached hereto
(and by this reference incorporated herein), are the entire agreement
between the parties, and there are no binding agreements or
representations between the parties except as expressed herein. Landlord
and Tenant each expressly waive all claims for damage by reason of any
statement, representation, warranty, promise or other agreement by
Landlord or Tenant or their respective agent(s), if any, not contained
in this Lease or in any addendum or amendment hereto. No subsequent
change or addition to this Lease shall be binding unless in writing and
signed by the parties hereto.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Leased
with the intent to be legally bound thereby.
Tenant: Quantum Corporation
By: Joseph T. Rodgers
Its: Executive Vice President, Finance
Landlord: Milpitas Realty Delaware, Inc.
By: S. Bradford
Its: Senior Investment Manager
By:
Its: Senior Investment Officer
EXHIBIT A-1 IS A MAP OF THE PREMISES
EXHIBIT A-2 IS A PROPERTY MAP INCLUDING THE OUTLINING STREETS
EXHIBIT B - Tenant Improvements - BELOW
1. Landlord's Work.
Tenant shall accept, and Landlord shall deliver subject Premises in "as
is" condition and repair, with all existing overhead doors/load
levelers, lighting, plumbing, roof membrane, mechanical and electrical
systems in good working order. Landlord shall also perform, at its own
expense, the following items in the Premises:
(a) Toxic Materials: Landlord will furnish Lessee with the
"G.E. Calma Closure Plan" for the premises on file with the city of
Milpitas, for Tenant's review and approval. Landlord will be responsible
for the removal, if required, of any toxic materials discovered or known
to exist on the site prior to August 1, 1993, including the removal of
any asbestos tiles or carpet.
(b) Compliance with ADA: As of the Lease execution date,
Landlord shall, where required by any applicable authority including but
not limited to this American with Disabilities Act of 1990, state,
local, or municipal ordinances, cause to be constructed any exterior
modifications to the existing structure required by such applicable
authority in order to secure a Certificate of Occupancy. Tenant shall
bear the cost of any such ADA or other accessibility modifications
necessary due to Tenant's interior modifications or improvements to the
premises.
2. Tenant Improvements.
(a) Except as provided in paragraph 1 above, Tenant shall
construct and install in the Leased Premises improvements (the "Tenant
Improvements") necessary or desirable for Tenant's use and occupancy
pursuant to plans and specifications approved by Landlord as provided
herein.
(b) Tenant shall commence the Tenant Improvements as soon as
reasonably possible after execution of the Lease, and shall continuously
and diligently pursue such work to completion, as described in paragraph
7 below.
(c) Tenant shall be allowed to remove portions of the
existing interior improvements ("Demolition"), prior to installation of
Tenant Improvements. Such Demolition shall be defined as part of the
Plans and subject to Landlord's prior written approval. Tenant will not
be required to replace such removed interior improvements at lease
termination.
3. Plan Approval.
(a) Tenant shall submit to Landlord complete, finished
architectural drawings and specifications (the "Plans") for the
Demolition and the Tenant Improvements. Tenant's Plans shall be subject
to Landlord's approval, which approval shall not unreasonably be
withheld. Landlord shall notify Tenant of its approval or disapproval of
Tenant's Plans, and if Landlord disapproves Tenant's Plans, the
revisions that Landlord requires to obtain approval. Tenant and Tenant's
architect or engineer shall meet with Landlord and/or Landlord's
architect or engineer within a reasonable period of time after any
request for such meeting by Landlord to answer questions or provide
additional information with respect to Tenant's Plans. As promptly as
reasonably possible thereafter, Tenant shall submit to Landlord modified
Tenant Plans incorporating the revisions required by Landlord. The
modified Tenant Plans shall be subject to Landlord's approval, which
approval shall not unreasonably be withheld. The final Tenant Plans and
specifications approved by Landlord shall be referred to as the "Final
Plans".
(b) Tenant shall cause two sets of reproducible Final Plans,
marked final pricing and construction to be delivered to Landlord within
5 days after Landlord's approval of Final Plans.
(c) Tenant may engage, at Tenant's sole expense, an
architectural firm of its choice for preparation of the Plans subject to
Landlord's approval, which approval shall not unreasonably be withheld,
provided that such firm is duly licensed by the State of California.
(d) Tenant shall not commence any work in the demised
premises until Landlord has finally approved the Plans.
4. Demolition and Tenant Improvement Allowance.
(a) Landlord shall pay Tenant Improvement Costs (as defined
below) up to $466,620 (the "Tenant Improvement Allowance") and Tenant
shall pay the Tenant Improvement Costs in excess of the Tenant
Improvement Allowance. Landlord shall not be obligated to pay any costs
or expenses of any kind in connection with the Tenant Improvements in
excess of the Tenant Improvement Allowance. Landlord shall pay the
Tenant Improvement Allowance (or the cost of the Tenant Improvements,
whichever is less) to Tenant pursuant to the provisions of paragraph 6
below.
(b) Tenant Improvement Costs may include all hard costs of
construction, for improvements installed by Tenant in the Leased
Premises, permitting fees and the fees of Tenant's architect and
engineer. Tenant Improvement Costs shall not include any of Tenant's
equipment or other personal property or trade fixtures.
(c) Before August 1, 1993, Tenant may request Landlord to
pay an Additional Improvement Allowance of up to $466,620, and Landlord
shall recover the amount paid as additional rent at the rate of $.033
per month for each of the thirty-six months of the Term for every $1 of
Additional Improvement Allowance. When the Option to Terminate the Lease
is exercised, Tenant shall reimburse Landlord in a lump sum the
equivalent amount of $0.40 for every $1 of Additional Improvement
Allowance.
5. Construction Requirements.
(a) Tenant shall employ a general contractor for the
Demolition and Tenant Improvements duly licensed in the State of
California and approved by Landlord, which approval shall not
unreasonably be withheld. Upon request by Landlord, Tenant shall deliver
to Landlord a copy of the construction contract entered into by Tenant
and the general contractor. Construction of the Tenant Improvements
shall be subject to Landlord's policies and schedules and shall be
conducted in such a way as not to hinder, cause any disharmony with or
delay work of improvements in the Building or the Property. Tenant's
contractors shall employ only such labor as will not result in
jurisdictional disputes or strikes or cause his harmony with other
workers employed in the Building or the Property. The Tenant
Improvements shall be constructed in a good and workmanlike manner and
shall comply with all laws, codes and ordinances having jurisdiction
over the Property.
(b) Not less than 10 days prior to the date Tenant desires
to commence the Demolition or the Tenant Improvements, it shall give a
written request to Landlord setting forth or accompanied by all of the
following:
(l) A description and schedule for the work to be performed;
(2) The names and addresses of all contractors,
subcontractors and material suppliers who will construct the Tenant
Improvements;
(3) The approximate number of individuals, itemized by
trade, who will be present in the demised premises;
(4) Copies of all licenses and permits which may be required
in connection with the Tenant Improvements;
(5) Certificates of insurance indicating compliance with the
insurance requirements set forth in Article 15 of the Lease;
(6) Lien and completion bonds in an amount not less than the
total Tenant Improvement Costs; and, at Landlord's request, evidence of
the availability of funds sufficient to pay the Tenant Improvement Costs
in excess of the Tenant Improvement Allowance.
All of the foregoing shall be subject to Landlord's approval,
which approval shall not unreasonably be withheld.
(c) If, in Landlord's opinion, any supplier, contractor or
workman constructing the Tenant Improvements hinders or delays, directly
or indirectly, any other work of improvement in the Building or the
Property or performs any work which may or does impair the quality,
integrity or performance of any portion of the Building or the Property,
Landlord shall give notice to Tenant and immediately thereafter, Tenant
shall cause such supplier, contractor or workman immediately to remove
all of its tools, equipment and materials and to cease working in the
Building. As additional rent under the Lease, Tenant shall reimburse
Landlord for any repairs or corrections of any portion of the Building
or the Property or the cost of any delays in work in the Building or the
Property caused by or resulting from the actions or omissions of anyone
constructing the Tenant Improvements.
(d) During the progress of the work to be done by Tenant,
such work shall be subject to inspection by representatives of Landlord
who shall be permitted access and the opportunity to inspect, at all
reasonable times, but this provision shall not in any way whatsoever
create any obligation on Landlord to conduct such an inspection.
6. Disbursements
Landlord shall disburse the Demolition Allowance and Tenant
Improvement Allowance to Tenant upon completion of each phase of the
work, based on work completed, within 20 days after Tenant's application
for payment and submission of the items listed below, subject to a ten
percent (10%) retention to be disbursed to Tenant upon completion as
described in paragraph 7 below.
1. An executed AIA Payment Application certified by
Tenant's architect;
2. Partial or full lien releases, as appropriate, from
all subcontractors.
Such progress payments shall be in an amount equal to the
proportion which the Tenant Improvement Allowance bears to the Tenant
Improvement Costs.
7. Completion.
(a) Upon completion of the Tenant Improvements, Tenant
shall pay the general contractor the balance of all sums due in
connection with the Tenant Improvements and deliver to Landlord (i) lien
waivers from all contractors, subcontractors and suppliers of materials
and equipment; (ii) an affidavit executed by the general contractor
certifying the cost of the Tenant Improvements and stating that it has
delivered to Landlord lien waivers from all subcontractors and suppliers
and that the contractor has paid all debts or settled all claims for
labor and materials in connection with the Tenant Improvements; and
(iii) an affidavit executed by Tenant that all contractors and suppliers
in connection with the Tenant Improvements have been paid.
(b) The Tenant Improvements shall be deemed completed when
Tenant has complied with paragraph 7(a) and when Tenant's Architect
shall furnish a certificate of substantial completion confirming that
the Tenant Improvements have been substantially completed in accordance
with the Plans and when a Certificate of Occupancy shall be issued with
respect to the demised premises by the local authority having
jurisdiction thereof.
(c) Tenant shall, at Tenant's expense, deliver to Landlord a
set of "as-built" plans and specifications for Tenant Improvements upon
completion thereof.
8. No Postponement of Rental
The commencement of rental under the Lease shall not be postponed due to
delay of any nature, however arising in completion of the Tenant
Improvements.
RULES AND REGULATIONS
1. Tenant, its employees, agents, contractors and invitees shall
comply with all parking regulations promulgated by Landlord from
time to time for the orderly use of the vehicle parking areas,
including without limitation the following: parking shall be
limited to automobiles, passenger or equivalent vans, motorcycles,
light four wheeled pickup trucks, and bicycles. Parked vehicles
shall not be used for vending or any other business or other
activity while parked in the parking areas. Vehicles shall be
parked only in striped parking spaces adjacent to Tenant's
Premises, except for loading and unloading, which shall occur
solely in zones marked for such purpose, and be so conducted as to
not unreasonably interfere with traffic flow within the Project or
with loading and with unloading areas of other tenants. All
vehicles entering or parking in the parking areas shall do so at
their owner's sole risk and Landlord assumes no responsibility for
any damages, destruction, vandalism or theft. Tenant shall
cooperate with Landlord in all measures implemented by Landlord to
control abuse of the parking areas. Any vehicle in violation of
the parking regulations may be cited, towed at the expense of the
owner, temporarily or permanently excluded from the parking areas,
or subjected to other lawful consequences .
2. Canvassing, soliciting and distribution of handbills or any other
written material, and peddling on the Property are prohibited, and
Tenant shall cooperate to prevent same.
3. Landlord reserves the right to exclude or expel from the Property
any person who, in Landlord's judgment, is intoxicated or under
the influence of liquor or drugs or who is in violation of the
Rules and Regulations of the Property.
4. Tenant shall comply with all safety, fire protection and
evacuation procedures and regulations established for the Property
by Landlord or any governmental authority.
5. Tenant assumes any and all responsibility for protecting its
Premises from theft, robbery and pilferage, which includes keeping
doors locked and keeping closed other means of entry to the
Premises. If Tenant requires telegraphic, telephonic, burglar
alarm or similar services, Tenant shall first obtain, and comply
with Landlord's instructions in their installation. Tenant shall
make provision for the prompt termination of any sounding alarm
and failure to do so shall constitute grounds for Landlord to
require that Tenant's alarm be modified as reasonably directed by
Landlord or removed.
6. Tenant shall store all trash refuse and garbage within the
Premises or in designated areas established by Landlord.
7. Forklifts which operate on asphalt paving areas shall not have
solid rubber tires and shall only have tires that do not damage
the asphalt.
8. The sidewalks, driveways, entrances and exits of and associated
with the Property shall be used only as a means of ingress and
egress and shall remain unobstructed at all times. Loitering on
any part of the Property and the obstruction of any of its means
of ingress or egress shall not be permitted .
9. Landlord may elect, from time to time, not to enforce any one or
more of these Rules and Regulations with respect to Tenant or any
other tenant, but no such election by Landlord shall be construed
as a waiver of such Rules and Regulations or prevent Landlord from
thereafter enforcing any such Rules and Regulations against any or
all of the tenants of the Property.
EXHIBIT C = "Permitted Substances"
