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FORM 10-K FY 1996
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended AUGUST 25, 1996
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OR
--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________TO___________
Commission file number 0-12622
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TELCO SYSTEMS, INC
------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2178777
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
63 NAHATAN STREET, NORWOOD, MASSACHUSETTS 02062
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(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 551-0300
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 nonaffiliates of the
registrant was approximately $189,243,700 as of November 20, 1996.
On November 20, 1996 there were 10,689,824 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
(2) Portions of the definitive proxy statement (the "Definitive Proxy
Statement") required to be filed with Securities and Exchange Commission
relative to the Company's 1996 annual meeting of shareholders are incorporated
by reference into Part III.
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Item 1. Business
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General
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The Company was incorporated in California on September 7, 1972, and
reincorporated in Delaware on December 17, 1986. Its principal office is located
at 63 Nahatan Street, Norwood, Massachusetts 02062 (telephone number is (617)
551-0300). Unless the context indicates otherwise, the terms "Company" and
"Telco Systems" refer to Telco Systems, Inc. The Company is a manufacturer of
three major product lines, focused on providing integrated access for network
services: the broadband transmission products, referred to as "Broadband"; the
network access products, referred to as "Access"; and the bandwidth optimization
products, referred to as "Bandwidth Optimization".
The Company's products are deployed at the edge of the service
providers' networks to provide organizations with a flexible, cost-effective
means of transmitting voice, data, video and image traffic over public or
private networks. These products are used in a wide variety of applications by
network service providers, such as long distance carriers, Bell Operating
Companies, independent and competitive local access providers, as well as
government agencies, electric utilities, wireless service operators, and major
corporations. Its products, which can be found most often in telephone company
central offices and in private communications networks, perform functions that
range from basic signaling and multiplexing of DS0 (64kbps) low speed data and
voice traffic to digital fiber optic transmission of high-speed, high-capacity
services over SONET OC-3 (155Mbps) networks.
In January 1983, the Company acquired the fiber optics transmission
business from Raytheon Company, which evolved into the Broadband product line.
Sales of broadband transmission products in fiscal year 1996 comprised about 50%
of the Company's total revenue. In August 1984, the Company acquired TeleBit,
Inc., a manufacturer of digital transmission systems based in Lombard, Illinois.
Later, the products from this acquisition were merged with the Company's Voice
Frequency products which together evolved into the Access product line. In
fiscal 1996, sales of access products were 44% of total sales. In May 1992, the
Company acquired Magnalink Communications Corporation, a developer and
manufacturer of high speed data compression and bandwidth optimization products,
which evolved into the Bandwidth Optimization product line.
For fiscal 1996, the Company reported sales of $94.0 million and a net
loss of $15.5 million or $1.50 per share. Working capital at year end amounted
to $35.9 million, including cash and short term investments of $15.0 million.
For a more complete discussion of the results of operations, please refer to
Management's Discussion and Analysis of Results of Operations and Financial
Condition found on page 12 of this report.
Broadband Products
- ------------------
Primary customers of the Company's broadband products are Bell
Operating Companies and major independent telephone companies as well as
competitive and alternate access providers. Products are sold as either complete
systems or as stand-alone equipment installed by the Company, third party
installers, or by the Company's customers. A complete system may include the
fiber optic cable, which is not manufactured by the Company but is purchased
from a number of suppliers.
The most common application of the Company's broadband transmission
products is for cost-effective delivery of high capacity T1 (1.544Mbps) and T3
(45Mbps) services in the local loop applications between the telephone company
central office or hubbing sites and customers' business premises. These services
are delivered over both fiber optic technology, as well as copper-based
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HDSL (High speed Digital Subscriber Loop) technology. The Company believes that
such local loop applications will continue to grow due to the Telecommunications
Reform Act of 1996 as the local access market opens to competition.
Broadband transmission products currently manufactured by the Company
can be grouped into two categories: fiber optic terminals and multiplexers; and
network monitoring and control systems.
FIBER OPTIC TERMINALS AND MULTIPLEXERS: These systems typically consist
of digital multiplexing and a fiber optic transmitter/receiver integrated into
one functional unit. The multiplexer portion of the terminal unit combines
digital inputs from multiple sources into one digital output. Multiplexers can
be combined in order to achieve higher transmission rates. The basic function of
the transmitter portion of a terminal is to convert electronic input into a
series of light pulses for transmission over optical fiber. The receiver
function of a terminal reconverts the light pulses received over the fiber into
digital electronic signals. To meet the various needs of the public and private
telephone networks, the Company offers products for transmitting at different
capacities.
The Company offers modular fiber optic terminals that enable the
customer to upgrade its system by adding modules as increased capacity is
required. The Company's terminals, depending on bit-rate and other design
configurations, can accommodate transmission over distances of up to 60
kilometers. Prices for a typical system are dependent on configuration and
accordingly can range from $5,000 to $30,000 per terminal.
The broadband transmission multiplexers support speeds ranging from T1
(1.544Mbps) to SONET OC3 (155Mbps). These systems can connect into asynchronous
or SONET digital cross-connect systems in a service providers' central office.
NETWORK MONITORING AND CONTROL SYSTEMS: The Company offers a modular
computer-based management system that is used to configure the products, monitor
and control their operations, and to identify failure of specific multiplexers
or terminals in the network. It also detects and reports system signal
degradation, allowing an operator to identify potential failures before they
occur and to schedule preventative maintenance.
Access Products
- ---------------
Primary customers of the Company's access products are long distance
service providers, competitive and alternate local access providers, Bell
Operating Companies, government agencies, electric utilities and wireless
service operators. In many cases, the products are purchased by the service
providers, but are installed on customer premises or are leased to private
network users. These products comply with both North American and
international standards, and are sold worldwide.
The Company's network access products are designed for the digital
multiplexing of voice and data traffic of up to T1 and E1 rates. The trend
towards increased use of public network services for voice, data and video
applications has created greater demand for customer premises access
multiplexers. The Company's access servers enables integration of multiple
slower-speed lines and services onto a single or multiple, high-speed, T1/E1
access facility, ultimately saving access line charges for end users. They
support interfaces for various types of telephony and data services, such as
POTS, Centrex extensions, P-Phones, switched data, ISDN and Frame Relay. In
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addition, the Company provides a network management system which is designed to
control its intelligent transmission products.
Typical prices for network access equipment range from $5,000 to $15,000.
NETWORK ACCESS SERVERS: The Company's Access50 and Access60 network
access servers provide highly reliable digital access to public, private and
hybrid networks. They integrate multiple business applications through
cost-effective connections to dedicated, switched and packet network services,
and support multiple networking functions such as T1/E1 add/drop multiplexing,
grooming and digital cross-connection. They also support advanced services such
as ISDN and Frame Relay. The products provide complete redundant architecture
for fail-safe operation, a must for service providers.
DIGITAL MULTIPLEXER PRODUCTS: The Company's products use digital
technology and provide over 40 different plug-in printed circuit cards to
support a large variety of analog and digital voice, data, and video
applications. The products provide conversion of analog signals into digital
information, combine them with additional digital data inputs and enable them to
be processed and transmitted at high speed over copper wires. The Company
provides a full range of products from cost effective digital channel banks to
high-functionality DSU/CSU.
NETWORK MANAGEMENT AND CONTROL SYSTEM: The Company offers a
standards-based SNMP network management system for its Access50/60 network
access servers and Access35 network access multiplexer. It also offers a
software-based management and control system, which is designed to control the
Route-24 and network access multiplexer and DCB-24 digital channel bank. This
system remotely manages voice and data mix, bandwidth allocation, and selective
access to special services offered by T1 carriers. In addition, it can be used
to modify the network as user requirements change.
Bandwidth Optimization Products
- -------------------------------
Primary customers for the Company's bandwidth optimization products are
private network users at major corporations worldwide. These products
interconnect geographically remote local area networks (LANs) through wide area
networks (WANs), with an emphasis on optimizing the utilization of WAN links. In
LAN/WAN applications, WAN links have the lowest throughput, the highest expense,
the lowest reliability, and the least security. The bandwidth optimization
products increase the throughput of WAN links by two to six times (depending on
the type of data traffic) via data compression; reduce expense of WAN links by
enabling usage of lower-speed links at higher throughput; and offer features for
improved redundancy, fault tolerance, security and privacy. Typical units are in
the $3,000 to $9,000 price range.
Marketing and Customers
- -----------------------
Telco Systems is engaged in a single business segment constituting the
development, manufacturing, marketing and service of integrated access solutions
for the telecommunications industry. Primary users of the Company's products are
the Regional Bell Operating Companies (RBOCs), independent telephone companies,
interexchange carriers, competitive and alternate access providers, electric
utilities, wireless service operators, government agencies, value added
resellers and private network end users.
The Company's broadband transmission products and network access
products are generally sold to specialized common carriers and telephone
operating companies on an off-the-shelf basis. Typically, the products have been
evaluated by such customers and approved for purchase in advance. Both network
access and broadband products are manufactured by the Company based on
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forecasted usage. Sales to the RBOCs accounted for 37% of sales in fiscal 1996,
29% of sales in fiscal 1995 and 37% of sales in fiscal 1994. RBOC sales include
sales to NYNEX of 31% in fiscal 1996, 17% in fiscal 1995 and 21% in fiscal 1994.
NYNEX has become a significant customer of the Broadband Business Unit. A
material curtailment in the NYNEX order rate, if not offset by sales to other
customers, would result in insufficient gross margin to cover the current level
of operating costs and would adversely impact total company results. Other
significant customers are Sprint which represented 13% of sales in fiscal 1996,
18% of sales in fiscal 1995 and 14% of sales in fiscal 1994. Sales to Walker and
Associates accounted for 11% of sales in fiscal 1996.
The Company markets its products through a combination of its own sales
force, value-added resellers and distributors. Installation is primarily
performed by third party providers. The Company has technical support and
applications engineering personnel and offers training of customer personnel.
Orders and Backlog
- ------------------
In fiscal 1996, the Company received orders totaling $113.5 million. Of
this amount, $58.4 million was for broadband transmission products, $49.8
million was for network access products, and $5.3 million was for bandwidth
optimization products. Firm backlog shippable within a twelve-month period was
approximately $24.8 million at the end of fiscal 1996, compared to approximately
$5.5 million at the end of fiscal 1995. Broadband transmission products
comprised 44% of the backlog for fiscal year 1996 and 7% for fiscal 1995.
Network access products represented 54% of backlog in 1996 and 85% of backlog in
1995. The Company's order trend is characterized by short customer-scheduled
delivery cycles. Accordingly, a substantial portion of sales in each fiscal
quarter are derived from orders received in the quarter. In the Company's
experience, its backlog at a given time is not necessarily indicative of
prospective sales volume. In addition to the short delivery cycles, customers
may revise scheduled delivery dates, revise product configuration or cancel
orders.
Competition
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The Company competes in its markets based upon price/performance
advantages offered by a number of its products, certain product features, and
its ability to meet customer delivery requirements on a timely basis. Most of
the Company's competitors have greater financial, technological and personnel
resources than the Company. The Company's competitors in the broadband
transmission market are predominantly large, full-line, integrated manufacturers
of telecommunications equipment, such as AT&T, Fujitsu, Northern Telecom
Limited, Alcatel, NEC and ADC. Many of these competitors have introduced newer
SONET transmission products which the telephone operating companies are
deploying in public networks. The availability of such SONET products by
competitors provides a distinct product advantage for them in certain customer
applications. However, the higher cost of the SONET products, typically 20-50%
more expensive than the asynchronous transmission products, is providing a
demand for the Company's asynchronous products in certain customer applications.
The Company's principal competitors with respect to the network access product
market include Premisys Communications, Newbridge Networks, Tellabs and
Coastcomm. The Company believes that it has substantially strengthened its
competitive position in this market with the availability of newer features for
the Access50 and Access60 product lines, as well as with a broadened network of
distributors. The Company also believes that the redundancy and the fail-safe
nature of the Access50/60 architecture makes the product more suitable for the
service providers market. Primary competitors for bandwidth optimization
products are Fastcom and Symplex, which focus on data compression technologies
for lower data rates in the range of 64Kbps. The Company believes that its data
compression technology has significant cost and performance advantages for
higher data rates in the range of 256Kbps and 1.544Mbps.
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Research and Development
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During fiscal 1996, the Company centralized its R&D efforts into two
technology centers located in Norwood, Massachusetts and Fremont, California. In
the broadband transmission product area, the Company is concentrating its
research and development efforts on new products for delivering ATM-based
advanced services in the local loop distribution portion of the telephone
network. In the network access product area, development programs continue for
further enhancements and newer features for digital loop access applications for
Access50 and Access60 Network Access servers and Access35 Network Access
Multiplexer. Programs for new products are based on market analysis and
estimates of customer demand which are subject to continuing change. Therefore,
there can be no assurance that sales of such products will meet current
expectations.
Spending on research and development activities of $18.0 million
represented 19% of sales in fiscal 1996. This compares with $18.2 million in
fiscal 1995 and $16.0 million in fiscal 1994 which represented 20% and 16% of
sales in each year, respectively. The Company's overall spending for research
and development is expected to remain at the 1996 level in fiscal 1997 to meet
schedules for new products.
From time to time the Company has employed consultants to perform
research and development functions. The Company plans to continue this practice
as a means of augmenting its internal research and development capabilities.
Employees
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As of August 25, 1996, the Company had 388 employees, of whom 110 were
in sales, sales support and marketing, 83 in product development, 145 in
manufacturing and 50 in administration. Competition for highly skilled
engineering, managerial, sales, marketing and product development personnel is
very intense. The Company believes that its future success will depend in large
part on its ability to attract and retain such individuals. Accordingly, the
loss of key personnel could materially and adversely affect the Company's
business, results of operations and financial condition. There can be no
assurance that the Company will be successful in attracting and retaining the
personnel required to engineer, manage, market or develop its products and
conduct its operations successfully. The Company considers its employee
relations to be excellent and is not a party to any collective bargaining
agreement.
Manufacturing
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The Company's manufacturing process primarily involves the assembly of
electronic components onto custom-designed printed circuit boards, incorporating
these boards into larger system packages, and testing the finished products to
assure their proper functioning in accordance with customers' specifications.
Most components used in the process are standard electrical, electronic and
mechanical parts available from many suppliers. The Company does, however,
currently depend on various single sources to supply certain custom-designed
components used in its products. To balance single source dependence, the
Company will maintain higher inventory levels or seek to qualify secondary
sources where appropriate.
During the latter half of fiscal 1996, the Company's management
approved a plan to consolidate its manufacturing operations into its facility
located in Norwood, Massachusetts. This plan is expected to be completed by the
end of calendar 1996. Please refer to note 8 to the consolidated financial
statements for a more complete discussion of the 1996 restructuring plan.
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Approximately 85% of the Company's older network access equipment is
manufactured by a subcontractor at facilities in Malaysia and Singapore.
Inspection, final test and system assembly is performed at the Company's
Fremont, California facility, which will move to Norwood, Massachusetts by end
of calendar 1996. Approximately 20% of the Company's broadband transmission
products are manufactured by a subcontractor in Singapore. Inspection, final
test and system assembly is performed at the Company's Norwood, Massachusetts
facility. The Company presently maintains a favorable relationship with these
vendors and does not presently anticipate any difficulties that would prevent
timely procurement of scheduled product. As a backup to these principal
sub-contractors, the Company maintains an in-house ability to manufacture these
products.
The Company maintains a non-exclusive volume purchase agreement with a
major distributor of electronic components. The benefits of this agreement to
the Company are principally discounts and product availability at certain
purchasing levels. This agreement does not contain purchase commitments.
Although the Company has not experienced significant difficulty in obtaining
desired quantities from any of its single sources or other vendors, business
could be adversely affected if components used in its products were not
available on a timely basis.
Regulatory and Legislative Matters
- ----------------------------------
Regulations of the Federal Communications Commission affect various
products of the Company. Certain regulations require that products which reside
on a customer's premises and interconnect the public switched network meet
certain standards to prevent harm to the network. Other regulations limit the
levels of electromagnetic radiation which may emanate from an electronic device
located on a customer's premise. The Company currently complies with these
regulations and sees no problem in complying with these regulations in the
future. Changes in existing laws and regulations which govern the
telecommunication industry could affect the business of the Company.
Patents
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The Company currently holds several patents and has patent applications
pending approval. Management believes, however, that timely implementation of
technological advances, responsiveness to market requirements, depth of
technical expertise and a high level of customer service and support are more
important to its success than patent rights.
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Executive Officers of Registrant
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Following is a list of the Company's executive officers, within the
meaning of item 401 (b) of Regulation S-K under the Securities Exchange Act of
1934.
Name Age Position
---- --- --------
William B. Smith, Ph.D. 52 President and Chief Executive Officer
John A. Ruggiero 60 Vice Chairman of the Board and
Chief Financial Officer
Wayne R. Lasson 50 Group Vice President and
General Manager
Kenneth J. Hamer Hodges 51 Vice President, Chief Technical Officer
Richard J. Nardone 48 Vice President, Corporate Resources
Anand S. Parikh 37 Vice President, Marketing and Business
Development
C.G. (Bill) Waters 44 Vice President, Global Sales
Philip D. Wilson 51 Vice President, Engineering
Dr. Smith Has been Chief Executive Officer since March of 1996. He joined
the Company as President and Chief Operating Officer in 1995. Prior to that he
was Senior Vice President of US West, Inc. and President of US West Advanced
Technologies since 1991. Prior to that, he was Executive Director of AT&T Bell
Laboratories since 1986.
Mr. Ruggiero has been Vice Chairman since March of 1996. Prior to that he
was Chief Executive Officer since 1994. Prior to that he was Chief Operating
Officer since 1993 and Executive Vice President, Chief Financial Officer and
Secretary since 1986.
Mr. Lasson joined the Company in November 1995 as Group Vice President and
General Manager. Prior to that he was Senior Vice President, Video Products
Division of Compression Labs, Inc., a manufacturer of video conferencing systems
since 1992. Prior to that he was Corporate Vice President, Operations with
Northern Telecom, Limited, a worldwide manufacturer of telecommunications
systems since 1990.
Mr. Hamer Hodges has been Vice President, Chief Technical Officer since
October 1994 and previously was Vice President of the Research and Development
activities for the Fiber Optics Division since 1992. Prior to that, he was
Assistant Vice President of Engineering at Ascom Timeplex (a manufacturer of
equipment for voice and data networks) since 1989.
Mr. Nardone has been Vice President of Corporate Resources since March of
1996 and Vice President of Human Resources since September 1995. Prior to that
he was Senior Manager of Human Resources at Ungermann-Bass Networks, Inc. ( a
manufacturer of networking systems)
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since 1992. Prior to that he was Director of Human Resources at Proteon, Inc.( a
manufacturer of networking systems).
Mr. Parikh joined the Company as Vice President of Marketing and Business
Development in 1995. Prior to that he was with Lightstream Corporation in
Billerica, Massachusetts as Vice President, Strategic Business Development since
1994 and Vice President, Marketing since 1993. Prior to that, he was General
Manager of the Broadband Networks Business Unit of UB Networks (formerly
Ungerman Bass) a manufacturer of network equipment and software, since 1991.
Prior to that, he held various senior management positions at Digital Equipment
Corp. for nine years.
Mr. Waters was appointed Vice President, Global Sales in 1996. Prior to
that he was Vice President of North American Sales since 1995 and was Vice
President, Network Access Division Sales since 1993. Prior to that, he was Vice
President, Western Area Sales for Racal Datacom (a manufacturer of data
communications equipment) for four years.
Mr. Wilson joined the Company as Vice President, Engineering in March of
1996. Prior to that he held various senior management positions with Racal
Datacom, a manufacturer of data communications equipment since 1991, most
recently as Vice President of Engineering, LAN Products and Fiber Systems.
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Item 2. Properties
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The Company's corporate offices and manufacturing operations are
located in Norwood, Massachusetts. Engineering, sales and marketing activities
are located in Norwood and Fremont, California.
The Company leases a 216,000 square foot manufacturing, research and
administration facility in Norwood, Massachusetts, that is owned by a limited
partnership in which the Company has a 50% partnership interest. Approximately
60% of this facility is utilized by the Company. Excess costs associated with
idle portions of the facility have been included in the restructuring charge
recorded by the Company in fiscal 1993. On November 11, 1994, the Company
entered into an agreement for the lease of an 85,000 square foot manufacturing,
research and administration facility in Fremont, California. During fiscal 1996,
portions of this facility were identified as excess following the consolidation
of manufacturing operations into the Norwood, Massachusetts facility. The
consolidation plan is expected to be complete by the end of calendar 1996. For a
more complete discussion of excess facilities, please refer to note 8 to the
consolidated financial statements.
The Company leases additional facilities, primarily for sales and sales
support in California, Georgia, Kansas, Texas, Hong Kong and Belgium under one
to five-year leases, each facility being between 1,000 and 5,000 square feet.
The Company believes that its present facilities are adequate for its current
level of operations.
The Company owns substantially all of its equipment.
Item 3. Legal Proceedings
-----------------
There are no material legal proceedings to which the Company is a party
or of which any of its properties is the subject.
Item 4. Submission of Matters to a Vote of Securities Holders
-----------------------------------------------------
No matters were submitted to a vote of security holders of the Company
through solicitation of proxies or otherwise, during the fourth quarter of
fiscal 1996.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
-----------------------------------------------------------------
Matters
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<TABLE>
Telco Systems' common stock is traded on the NASDAQ National Market under the
symbol "TELC." The quarterly price ranges for the Company's common stock are as
follows:
<CAPTION>
Fiscal Year
-----------
1996 1995
---- ----
High Low High Low
------------------------------------------
<S> <C> <C> <C> <C>
First Quarter ................. 14 3/4 9 3/4 18 11 5/8
Second Quarter ................ 12 3/8 9 1/4 17 3/4 12 1/2
Third Quarter ................. 16 3/8 8 3/8 13 5/8 9 5/8
Fourth Quarter................. 18 3/8 11 3/8 14 9 5/8
</TABLE>
The Company has never declared or paid any dividends on its common stock
and does not plan to pay cash dividends in the foreseeable future.
At August 25, 1996, the number of holders of the Company's common stock
was 446. The Company believes that many of its shares are held by individual
participants in security listing positions or "street names" and estimates there
are an additional 6,900 beneficial holders as of August 25, 1996.
Item 6. Selected Financial Data
-----------------------
<TABLE>
Five years ended August 25, 1996
<CAPTION>
1996 1995 1994 1993 1992
(Dollars in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Summary of Operations
Backlog .......................... $ 24,815 $ 5,527 $ 7,251 $ 6,714 $ 3,146
Sales ............................ 93,954 89,070 100,470 83,222 96,661
Net income (loss)* ............... (15,545) 628 4,770 (16,285) 5,909
Earnings (loss) per share ........ $ (1.50) $ .06 $ .48 $ (1.75) $ .62
Average shares and
equivalents (thousands) .......... 10,357 10,345 9,858 9,300 9,567
Year-end employment .............. 388 436 443 442 478
Balance Sheet
Working capital .................. $ 35,917 $49,915 $ 43,210 $ 36,989 $52,318
Total assets ..................... 79,504 82,439 82,202 80,551 88,932
Long-term liabilities ............ 3,350 3,490 4,443 7,852 5,615
Total shareholders' equity ....... $ 53,997 $67,405 $ 61,548 $ 54,872 $70,695
- ----------
<FN>
* The 1996 net loss includes $4,209 of restructuring costs; 1995 Net income
includes $420 of restructuring credits; 1993 net loss includes $13,605 of
restructuring costs.
The Company has never declared or paid any dividends on its common stock.
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
FISCAL 1996 COMPARED WITH FISCAL 1995
Sales for fiscal 1996 increased 5% to $94.0 million compared with sales in
fiscal 1995 of $89.1 million as increased shipments of broadband transmission
products and the Company's new Access 50/60 products more than offset a decrease
in sales of certain older low-end access products.
Sales of broadband transmission products, which represented 50% of total
sales, increased 30% in fiscal 1996 principally due to strong demand by some
Regional Bell Operating Company (RBOC) customers for the Company's asynchronous
products for use in local loop applications. Approximately 80% of the Company's
sales of these products continued to be for provision of high bandwidth fiber
optic services in the feeder or distribution section of the public telephone
network. RBOCs represented 69% and 58% of sales of broadband transmission
products in fiscal 1996 and fiscal 1995, respectively. Sales to one RBOC of
broadband products amounted to 31% and 17% of total sales in FY96 and FY95,
respectively. The Company has no assurance that RBOC customer demand will
continue at the rate experienced in fiscal 1996. Accordingly, any significant
decline would adversely impact financial results. Sales of network access
products were 44% of total sales and decreased 12% in fiscal year 1996. This
decrease was principally related to continued competitive pressure on certain
older products which was partially offset by increased demand for the Company's
new Access60 network access server and other new products. Sales of Bandwidth
Optimization products declined 3% in fiscal 1996.
Total orders booked in fiscal 1996 amounted to $113.5 million, an increase
of 30% compared with fiscal 1995 orders of $87.3 million. Increased customer
demand for both the Company's Access60 network access server and HyperSPAN
broadband multiplexers accounted for this increase. The backlog of unfilled
orders at August 25, 1996 increased 351% to $24.8 million compared with $5.5
million at the previous year end. The year end backlog is reflective of
increased demand for both network access products and broadband transmission
products and also includes early receipt of some customer stocking orders. The
Company believes that it has sufficient manufacturing capacity to meet the
increased demand.
The Company's major customers include telephone operating companies and
interexchange carriers. Sales to RBOC customers and other major telephone
companies represented 42% of total sales in fiscal 1996 compared with 35% of
total sales in fiscal 1995. The major interexchange carriers represented 19% and
23% of sales in fiscal 1996 and fiscal 1995, respectively.
The Company recorded a net loss of $15.5 million or $1.50 per share for
fiscal 1996 compared with net income of $0.6 million or $.06 per share in fiscal
1995. The fiscal 1996 net loss included a $4.2 million restructuring charge
discussed in Note 8 to the financial statements. In addition, year end results
included non-recurring charges resulting from the transfer of manufacturing
operations from the Company's Fremont, California, facility to its facility
located in Norwood, Massachusetts, which were recorded in the third quarter. As
a result of lower operating costs experienced after these actions, a favorable
adjustment to the third quarter restructuring charge of $0.5 million and record
sales in the fourth quarter of fiscal 1996, the Company reported net income of
$1.2 million or $.11 per share on sales of $29.6 million .
Gross profit in fiscal 1996 was $36.7 million and represented 39% of sales
compared with $40.5 million or 46% of sales in fiscal 1995. Gross profit was
adversely affected by additional costs for facility consolidations and by lower
product margins on the initial production of new network access products. In
addition, the Company experienced increased competitive pricing pressures on
older network access products.
Spending for research and development in fiscal 1996 was slightly below
the fiscal 1995 level. Lower spending resulted as development efforts for
certain broadband products were curtailed in conjunction with
12
<PAGE> 13
the Company's restructuring activities discussed in Note 8 to the financial
statements. Research and development represented 19% of sales in fiscal 1996 and
20% of sales in fiscal 1995. The Company anticipates that R&D spending will
remain at this level in fiscal 1997 as new features are added to existing
products, and products are modified to compete in the international marketplace.
In addition, development efforts are increasing for a next generation broadband
product for the future.
Sales, marketing and administration expense increased 33% to $30.4 million
compared with $22.9 million in fiscal 1995. Increased expenses resulted from
domestic sales channel development, international selling and marketing
activities and certain non-recurring administrative charges relating to facility
consolidations. Sales, marketing and administrative expenses represented 32% of
sales in fiscal 1996 and 26% of sales in fiscal 1995.
During the third quarter of fiscal 1996, the Company's management approved
a plan to restructure its operations. As a result, the Company recorded a
restructuring charge of $4.2 million which was net of a recovery of $0.6 million
associated with restructuring activities recorded in fiscal 1993. The charge
included costs associated with excess facility costs in Fremont, California, the
write-down of certain assets to net realizable value, and employee severance
costs. For a more complete discussion of the 1996 restructuring charge, please
refer to Note 8 to the financial statements.
Amortization expense relates to the acquisition of the broadband family of
products in 1983, certain channel bank products in 1984, and the acquisition of
Magnalink Communications Corporation in 1992. Amortization expense was $0.8
million in both fiscal 1996 and fiscal 1995.
Interest income was $1.1 million in fiscal 1996 compared with $1.6 million
in fiscal 1995. This decrease was principally related to a lower level of
average cash equivalents and short-term investments in fiscal 1996 compared with
fiscal 1995.
In fiscal 1996, the Company's operating loss did not generate currently
available tax benefits. In fiscal 1995, no tax provision was recorded due to the
availability of tax benefits relating to prior year operating losses and tax
credits not previously benefited.
FISCAL 1995 COMPARED WITH FISCAL 1994
Sales for fiscal 1995 decreased 11% to $89.1 million compared with
$100.5 million in fiscal 1994. This decrease was principally related to a lower
level of shipments of broadband transmission products and network access
products and was partially offset by an increase in shipments of bandwidth
optimization products.
Sales of broadband transmission products decreased 21% compared with fiscal
1994. The Company experienced a decline in demand for its principal FOX and 828
families of broadband transmission products as customers increased deployment
of competitive synchronous optical network transmission (SONET) products. Sales
to Regional Bell Operating Companies (RBOCs) represented 58% and 60% of
broadband transmission product sales in fiscal 1995 and fiscal 1994,
respectively. Approximately 80% of the Company's sales of these products
continued to be for provision of high bandwidth fiber optic services in the
feeder or distribution section of the public telephone network.
Sales of network access products decreased 6% to $46.9 million compared with
$50.0 million in fiscal 1994. A lower level of shipments of the Company's
DCB-24 and Route 24 access multiplexers resulted from increased competition in
the low end of the access products market.
Sales of bandwidth optimization products increased 41% to $5.5 million. The
increase in sales resulted from increased customer acceptance for the Company's
local and wide area network (LAN/WAN) optimizer products in both the domestic
and international marketplaces.
13
<PAGE> 14
Total Company orders booked during fiscal 1995 amounted to $87.3 million
which reflected a decrease of 14% compared with fiscal 1994. The backlog of
unfilled orders was $5.5 million at year end compared with $7.3 million at the
previous year end. In fiscal 1995, the Company's major customers included
telephone operating companies and interexchange carriers. The RBOCs and major
telephone companies accounted for 35% of sales in fiscal 1995 and 43% of sales
in fiscal 1994. The major interexchange carriers represented 23% of total sales
in fiscal 1995 and 19% of total sales in fiscal 1994.
Net income for the year amounted to $0.6 million or $.06 per share compared
with $4.8 million or $.48 per share in fiscal 1994. Lower net income was
principally related to lower sales volume and increased spending for research
and development, offset in part by higher interest income.
Gross profit in fiscal 1995 was $40.5 million or 45.5% of sales. In
comparison, fiscal 1994 gross profit was $44.7 million or 44.5 % of sales. Most
significant to the lower gross profit amount was the reduced sales volume,
somewhat offset by an improvement in gross margin percent principally due to
favorable product mix.
The Company continued heavy investment for next generation products with
research and development expense of $18.2 million in fiscal 1995, an increase
of 14% compared with fiscal 1994. Spending for research and development
represented 20% of sales in fiscal 1995 compared with 16% in fiscal 1994.
Sales, marketing and administration expense was $22.9 million in fiscal 1995,
approximately the same level as fiscal 1994. During fiscal 1995, existing
resources were realigned to focus on strategic business initiatives and
planning for opportunities in the international marketplace.
The fiscal 1993 restructuring charge of $13.6 million associated with the
reorganization of the Broadband Transmission Products Business Unit encompassed
a reduction in employment, consolidation of facilities, and the write-down of
certain assets (see Note 8 to Consolidated Financial Statements). At the end of
fiscal 1995, the status of the excess facilities was unchanged from fiscal
1993. Costs relating to the vacated space of $1.1 million and $1.4 million were
charged to the restructuring reserve in fiscal 1995 and fiscal 1994,
respectively. Final disposition of certain assets previously written down
resulted in a gain of $0.4 million, which was reported as a restructuring
credit in the fiscal 1995 results of operations.
Amortization expense was $0.8 million in both fiscal 1995 and 1994.
Amortization expense relates to the acquisition of the broadband family of
products in 1983, certain channel bank products in 1984, and the acquisition of
Magnalink Communications Corporation in 1992.
Interest expense of $0.2 million in fiscal 1994 related to the remaining
balance of 11% convertible subordinated notes which were paid in full during
the fourth quarter of fiscal 1994.
Interest income was $1.6 million and $0.8 million in fiscal 1995 and fiscal
1994, respectively. This increase resulted from higher interest rates earned on
a higher level of cash equivalents and short-term investments.
Income tax expense in fiscal 1995 was not provided due to the utilization of
operating losses and tax credits not previously benefited. In fiscal 1994,
income tax expense was $0.7 million, which represented an effective rate of
12.7%.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996, cash and short-term investments decreased $14.1
million resulting in a year end balance of $15.0 million compared with the
previous year end balance of $29.1 million. Net cash used for the year was an
outflow of ($16.1 million). In addition to operating losses discussed above,
cash in the amount of ($14.1 million) was used to fund increases in inventory
($6.1 million) and accounts receivable ($8.0 million) due to increased sales
volume in the second half of the year. Capital expenditures for development and
manufacturing equipment used ($6.3 million). These outflows were partly offset
by increased vendor accounts payable of $7.3 million and proceeds from the
exercise of stock options of $2.0 million.
Working capital decreased to $35.9 million at fiscal year end compared
with $49.9 million at the previous year end. The ratio of current assets to
current liabilities was 2.6 at August 25, 1996, down from 5.3 at August 27,
1995.
The Company has a $10.0 million line of credit with the Bank of Boston
which is available until September 30, 1997. Borrowings may be made at the
bank's prime rate plus one and one half percent. Although the Company did not
utilize the line during fiscal 1996, approximately $1.1 million has been
reserved to support various guarantees in effect at August 25, 1996.
Management believes that cash, short-term investments and the availability
of its line of credit will be adequate to support operating cash requirements
for the foreseeable future.
The Company has never declared or paid cash dividends on its capital
stock and does not anticipate a change to this practice in the foreseeable
future.
FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS
The stockholders' letter and discussions in this annual report include
statements concerning the Company's future products, expenses, revenue,
liquidity and cash needs as well as the Company's future operations and
financial results. These forward-looking statements are based on current
expectations, and the Company assumes no obligation to update this information.
Numerous factors, such as economic and competitive conditions, incoming order
levels, shipment volumes, and product margins, could cause actual results to
differ from those described in these statements and prospective investors and
stockholders should carefully consider the foregoing factors as well as those
set forth below in evaluating these forward-looking statements.
The Company's backlog may not be representative of actual sales for any
succeeding period because of the timing of orders, delivery intervals, customer
and product mix, the possibility of changes in delivery schedules, and additions
or cancellation of orders. In addition, a significant portion of the Company's
sales in any quarter result from orders received in the same period; thus, order
delays could have a material adverse impact on sales and profit.
The Company operates in a highly competitive environment and in a highly
competitive industry, which include significant pricing pressures and intense
competition for skilled employees. Accordingly, the Company may from time to
time experience unanticipated intense competitive pressure, possibly causing
operating results to vary from those expected.
The Company's future operating results are dependent on its ability to
develop, produce and market new and innovative products and services. Critical
to the Company's growth strategy is the acceptance of the Access60 product and
certain broadband products. There are numerous risks inherent in this complex
process, including rapid technological change and the requirement that the
Company bring to market in a timely fashion new products and services which meet
customers' changing needs.
Historically, the Company has generated a disproportionate amount of its
operating revenues toward the end of each quarter, making precise prediction of
revenues and earnings particularly difficult and resulting in risk of variance
of actual results from those forecast at any time. In addition, the Company's
operating results historically have varied from fiscal period to fiscal period.
Accordingly, the Company's financial results in any particular fiscal period are
not necessarily indicative of results for future periods.
15
<PAGE> 16
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Consolidated Financial Statements and Financial Schedules Page
------------------------------------------------------------------ ----
Report of Ernst & Young LLP Independent Auditors 17
Consolidated Statements of Operations 18
Consolidated Balance Sheets 19
Consolidated Statements of Shareholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22
Supplementary Data (Unaudited) 29
Consolidated Financial Statement Schedules: 30
Schedule II-Valuation and Qualifying Accounts
(All other schedules for which provision is made in
Regulation S-X are not required or are inapplicable and
therefore have been omitted.)
16
<PAGE> 17
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Telco Systems, Inc.
We have audited the accompanying consolidated balance sheets of Telco
Systems, Inc. as of August 25, 1996, and August 27, 1995 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended August 25, 1996. Our audits also
included the financial statement schedule listed in the index at Item 14 (a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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 Telco Systems, Inc. at August 25, 1996, and August 27, 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended August 25, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the financial statements
taken as a whole, present fairly, in all material respects the information set
forth therein.
ERNST & YOUNG LLP
Boston, Massachusetts
October 16, 1996
17
<PAGE> 18
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS Telco Systems, Inc.
<CAPTION>
Three years ended August 25, 1996 1996 1995 1994
- -------------------------------------------------------------------------------
(in thousands except per share amounts)
<S> <C> <C> <C>
Net sales............................. $ 93,954 $89,070 $100,470
Costs and expenses
Cost of products sold ................ 57,285 48,559 55,768
Research and development ............. 17,991 18,207 15,955
Sales, marketing and administration .. 30,408 22,945 23,082
Restructuring costs (credit) ......... 4,209 (420) --
Amortization of intangible assets .... 752 783 824
Interest expense ..................... -- -- 225
Interest income ...................... (1,146) (1,632) (845)
-------- ------- --------
109,499 88,442 95,009
-------- ------- --------
(Loss) income before income taxes .... (15,545) 628 5,461
Income tax provision ................. -- -- 691
-------- ------- --------
Net (loss) income .................... $(15,545) $ 628 $ 4,770
-------- ------- --------
Average shares and equivalents ....... 10,357 10,345 9,858
Net (loss) income per share .......... $ (1.50) $ .06 $ .48
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 19
<TABLE>
CONSOLIDATED BALANCE SHEETS TELCO SYSTEMS, INC.
<CAPTION>
August 25, 1996 and August 27, 1995 1996 1995
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents ................................. $ 8,461 $18,208
Short-term investments ............................... 6,581 10,895
Accounts receivable, less allowance for
doubtful accounts of $676 in 1996 ($649 in 1995) ..... 18,025 10,047
Refundable income taxes .............................. 702 1,251
Inventories, net ..................................... 23,495 18,473
Other current assets ................................. 810 2,585
------- -------
Total current assets .............................. 58,074 61,459
------- -------
Plant and equipment, at cost ........................... 45,941 41,720
Less accumulated depreciation ........................ 33,411 31,114
------- -------
Net plant and equipment ........................... 12,530 10,606
------- -------
Intangible and other assets, less accumulated
amortization of $10,935 in 1996($10,292 in 1995) ..... 8,900 10,374
------- -------
Total assets ......................................... $79,504 $82,439
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ..................................... $11,243 $ 3,952
Payroll and related liabilities ...................... 1,917 2,628
Other accrued liabilities ............................ 8,997 4,964
------- -------
Total current liabilities ......................... 22,157 11,544
------- -------
Restructuring and other long-term liabilities .......... 3,350 3,490
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized; no shares outstanding ............. -- --
Common stock, $.01 par value, 24,000,000
shares authorized; shares outstanding: 10,519,529 at
August 25, 1996; 10,230,624 at August 27, 1995 ..... 105 102
Capital in excess of par value ....................... 74,267 71,566
Accumulated deficit .................................. (19,808) (4,263)
Unearned compensation - restricted stock ............. (567) --
------- -------
Total shareholders' equity ..................... 53,997 67,405
------- -------
Total liabilities and shareholders' equity ........... $79,504 $82,439
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY TELCO SYSTEMS, INC.
<TABLE>
Three years ended August 25, 1996
- -------------------------------------------------------------------------------
<CAPTION>
Common Stock
----------------- Paid-in Unearned Accum
Shares Amount Capital Compensation Deficit Total
------ ------ ------- ------------ ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, August 29, 1993.............. 9,345,660 $ 93 $64,440 $ -- $(9,661) $ 54,872
---------- ---- ------- ----- -------- --------
Net income for year................... 4,770 4,770
Issuance of common stock:
Employee stock purchase plan........ 53,105 389 389
Exercise of stock options........... 250,286 3 1,514 -- -- 1,517
---------- ---- ------- ----- -------- --------
Balance, August 28, 1994.............. 9,649,051 96 66,343 -- (4,891) 61,548
---------- ---- ------- ----- -------- --------
Net income for year................... 628 628
Issuance of common stock:
Employee stock purchase plan........ 56,005 1 504 505
Exercise of stock options........... 525,568 5 4,719 -- -- 4,724
---------- ---- ------- ----- -------- --------
Balance, August 27, 1995.............. 10,230,624 102 71,566 -- (4,263) 67,405
---------- ---- ------- ----- -------- --------
Net (loss) for year................... (15,545) (15,545)
Issuance of common stock:
Employee stock purchase plan........ 56,010 514 514
Exercise of stock options........... 173,895 2 1,533 1,535
Restricted stock, net............... 59,000 1 654 (655)
Amortization of unearned compensation. 88 88
---------- ---- ------- ----- -------- --------
BALANCE, AUGUST 25, 1996.............. 10,519,529 $105 $74,267 $(567) $(19,808) $ 53,997
========== ==== ======= ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS TELCO SYSTEMS, INC.
<CAPTION>
Three years ended August 25, 1996 1996 1995 1994
- ------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
Cash Flows from Operating Activities
Net (loss) income ..................................... $(15,545) $ 628 $ 4,770
Depreciation and amortization ......................... 5,324 4,982 5,330
Restructuring costs (credit) .......................... 4,209 (420) --
Amortization of unearned compensation ................. 88 -- --
Change in assets and liabilities
Accounts receivable, net .............................. (7,978) 5,017 (4,051)
Refundable income taxes ............................... 549 (1,251) 2,060
Inventories, net ...................................... (6,074) (3,229) 2,335
Other current assets .................................. 1,775 320 (529)
Other assets .......................................... 25 (924) (128)
Accounts payable and other current liabilities ........ 9,585 (4,401) 2,271
Restructuring liabilities ............................. (1,845) (469) (3,176)
Long-term liabilities ................................. 113 (330) (120)
-------- -------- --------
Net cash (used in) provided by operating activities ...... (9,774) (77) 8,762
-------- -------- --------
Cash Flows from Investing Activities
Additions to plant and equipment, net ................. (6,336) (2,257) (2,248)
Purchase of short-term investments .................... (24,350) (29,665) (15,692)
Maturities of short-term investments .................. 28,664 29,716 4,746
-------- -------- --------
Net cash (used in) investing activities . ............. (2,022) (2,206) (13,194)
-------- -------- --------
Cash Flows from Financing Activities
Proceeds and related tax benefits from sale of common
shares under employee stock plans ................... 2,049 5,229 1,906
Payments on long-term debt ............................ -- -- (4,000)
-------- -------- --------
Net cash provided by (used in) financing activities ... 2,049 5,229 (2,094)
-------- -------- --------
(Decrease) increase in cash and equivalents .............. (9,747) 2,946 (6,526)
Cash and equivalents at beginning of year ................ 18,208 15,262 21,788
-------- -------- --------
Cash and equivalents at end of year ...................... $ 8,461 $ 18,208 $ 15,262
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Year
Interest .............................................. $ -- $ -- $ 299
Income taxes .......................................... $ 89 $ 1,235 $ 544
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TELCO SYSTEMS, INC.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The financial statements consolidate the accounts of
Telco Systems, Inc., and its subsidiaries (the Company). Intercompany accounts
and transactions have been eliminated. The Company's fiscal year is the 52- or
53-week period ending on the last Sunday in August. All years presented are
52-week periods. Certain amounts reported in prior years have been reclassified
to be consistent with the current year's presentation.
The Company has 50% limited partnership interests in two real estate
partnerships which are accounted for by the equity method of accounting. The
aggregate net investment in these partnerships on the accompanying balance
sheets is not material (See Note 7).
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." The Company has determined that it will continue to
account for stock-based compensation under Accounting Principles Board No. 25
and elect the disclosure-only alternative under SFAS No. 123. The Company will
be required to disclose the pro forma net income or loss and per share amounts
in the notes to the financial statements using the fair value based method
beginning in the fiscal year ending August 31, 1997 with comparable disclosures
for the fiscal year ending August 25, 1996.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
REVENUE RECOGNITION Revenues from product sales are recognized at time of
shipment to customer.
PRODUCT WARRANTY Expected future product warranty liability is provided for when
the product is sold.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company classifies all of its
marketable securities as available-for-sale securities. These securities are
stated at their fair value. There are currently no unrealized holding gains and
losses. The Company considers all highly liquid investments with maturity of 91
days or less to be cash equivalents. Those instruments with maturities greater
than 91 days and less than twelve months are classified as short-term
investments. Cash equivalents and short-term investments are carried at market,
and consist of U.S. Government securities, bank certificates of deposit and
corporate issues. All securities mature within twelve months.
INVENTORIES Inventories are stated at the lower of cost or market. The cost of
products sold is based on standard costs, which approximate actual costs as
determined by the first-in, first-out method.
<TABLE>
Inventories at fiscal year end were as follows:
<CAPTION>
1996 1995
-------------------
(in thousands)
<S> <C> <C>
Raw material...................................... $12,112 $ 9,101
Work-in-process................................... 5,560 3,060
Finished goods ................................... 5,823 6,312
------- -------
$23,495 $18,473
======= =======
</TABLE>
22
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TELCO SYSTEMS, INC.
NOTE 1 (continued)
PLANT AND EQUIPMENT Additions to plant and equipment are recorded at cost.
Depreciation is determined by using the straight-line method over the estimated
useful lives of the assets - three to eight years. Leasehold improvements are
amortized on a straight-line basis over the shorter of their estimated useful
life or the lease term.
<TABLE>
Plant and equipment, at cost, at fiscal year end were as follows:
<CAPTION>
1996 1995
-------------------
(in thousands)
<S> <C> <C>
Machinery and equipment............................. $31,214 $30,154
Furniture and leasehold improvements................ 14,727 11,566
------- -------
$45,941 $41,720
======= =======
</TABLE>
INTANGIBLE AND OTHER ASSETS Intangible assets arising in connection with
business acquisitions were $7,791,000 and $8,922,000 at August 25, 1996 and
August 27, 1995, respectively. They are amortized over lives ranging from seven
to twenty-five years using the straight-line method, with an average remaining
life of 11.7 years. The carrying value of goodwill is reviewed periodically
based on the undiscounted cash flows of the entities acquired over the remaining
amortization period. Should this review indicate that goodwill will not be
recoverable, the carrying value will be reduced by the estimated shortfall of
undiscounted cash flows. Software development costs are capitalized after a
product's technological feasibility has been established. At August 25, 1996 and
August 27, 1995, intangible and other assets included $41,000 and $279,000,
respectively, of software development costs. Amortization of software
development costs is provided using the straight-line method over an estimated
economic life of three years. During the three fiscal years ended 1996, related
amortization expense charged to cost of goods sold was $328,000, $273,000, and
$44,000, respectively.
CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject
the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments, and accounts receivable. The Company's
temporary cash investments, which are principally limited to U.S. Government
securities and bank certificates of deposit, are subject to minimal risk. The
Company routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk exposure is
limited.
EARNINGS (LOSS) PER SHARE Earnings (loss) per share is based on the weighted
average number of common shares outstanding and common stock equivalents, if
dilutive. Fully diluted earnings per share did not differ significantly from
primary earnings per share in any year. Net loss per share in fiscal 1996 did
not consider common stock equivalents as the effect would be antidilutive.
NOTE 2 DESCRIPTION OF BUSINESS
The Company is engaged in a single business segment constituting the
development, manufacturing, and marketing of broadband transmission products,
network access products, and bandwidth optimization products for the
telecommunications industry. Regional Bell Operating Companies (RBOC),
independent telephone companies, and interexchange carriers are the primary
users of the Company's products. Sales to the RBOCs accounted for 43% of sales
in fiscal 1996, 29% of sales in fiscal 1995, and 37% of sales in fiscal 1994.
RBOC sales include sales to one RBOC of 31% in fiscal 1996, 17% in fiscal 1995,
and 21% in fiscal 1994. In fiscal 1996, two additional customers each
represented 13% and 11% of sales. In fiscal 1995 and 1994, one additional
customer represented 18% and 14% of sales, respectively.
23
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TELCO SYSTEMS, INC.
NOTE 3 INCOME TAXES
<TABLE>
The components of the provision for income taxes were as follows:
<CAPTION>
Fiscal Year
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal (in thousands)
Current ............................. $(1,105) $(821) $1,321
Deferred............................. 1,105 821 (730)
State
Current ............................. 0 0 100
------- ----- ------
$ 0 $ 0 $ 691
======= ===== ======
</TABLE>
SFAS 109, "Accounting for Income Taxes", requires that a valuation reserve be
established if it is "more likely than not" that realization of the tax benefits
will not occur. The valuation reserve was $13,063,000 at August 25, 1996 and
$6,709,000 at August 27, 1995, an increase of $6,354,000. This increase is due
principally to the net operating loss carryforward generated in the current year
and the increase in available tax credits as a result of carrying back losses to
previous years. Both of these items have been fully reserved.
At August 25, 1996, the Company had net operating loss carryforwards
available to reduce future taxable income of $7,700,000. To the extent not
utilized, the U.S. Federal net operating loss will expire in 2011. The Company
also had unused research and development and investment tax credit carryforwards
of $3,500,000 at August 25, 1996, which expire from fiscal years 1999-2011.
<TABLE>
The provision (benefit) for income taxes differs from the amount computed using
the statutory rate as follows:
<CAPTION>
Fiscal Year
-----------
1996 1995 1994
------------------------------
(in thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate........... $(5,285) $ 214 $1,857
Loss producing no current tax benefit............ 5,024 -- --
Previously unbenefited deferred items ........... -- (566) --
Amortization of goodwill......................... 247 267 280
Tax credits...................................... -- -- (810)
Benefit of loss carryforward..................... -- -- (730)
Other............................................ 14 85 94
------- ----- ------
Income tax provision ............................ $ 0 $ 0 $ 691
======= ===== ======
</TABLE>
24
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TELCO SYSTEMS, INC.
NOTE 3 (continued)
<TABLE>
The components of deferred tax assets and liabilities at fiscal year end
are as follows:
<CAPTION>
1996 1995
----------------
(in thousands)
<S> <C> <C>
DEFERRED TAX ASSETS
Restructuring costs................................. $ 2,942 $ 2,403
Inventory and other reserves ....................... 4,384 3,675
Net operating loss carryforward..................... 3,173 --
Tax credit carryforward............................. 3,543 2,700
Other .............................................. 187 304
------- -------
14,229 9,082
Valuation reserve .................................. (13,063) (6,709)
------- -------
Total deferred tax assets........................... 1,166 2,373
------- -------
DEFERRED TAX LIABILITIES
Accelerated tax deduction .......................... 1,188 1,110
Amortization........................................ 287 308
Depreciation........................................ (250) (110)
Other .............................................. (59) (40)
------- -------
Total deferred tax liabilities ..................... 1,166 1,268
Net deferred tax assets............................. $ 0 $ 1,105
======= =======
<CAPTION>
NOTE 4 ACCRUED LIABILITIES
Accrued liabilities at fiscal year end were as follows:
1996 1995
-----------------
(in thousands)
<S> <C> <C>
Restructuring costs................................... $2,322 $1,295
Warranty and rework .................................. 1,173 772
All other accrued liabilities......................... 5,502 2,897
------ ------
$8,997 $4,964
====== ======
</TABLE>
NOTE 5 LINE OF CREDIT
The Company has a $10.0 million line of credit with the Bank of Boston.
Under the facility, which expires September 30, 1997, borrowings may be made at
the bank's prime rate plus one half of one percent. During fiscal 1996 and
fiscal 1995, the Company had no borrowings under the line of credit and had no
other short-term bank debt outstanding. Portions of the line have been reserved
to support various guarantees including the loan discussed in Note 7, leaving
unreserved credit of $8.9 million available at August 25, 1996.
NOTE 6 LONG-TERM LIABILITIES
At August 25, 1996 and August 27, 1995, restructuring and other long-term
liabilities include $2.6 million and $2.9 million, respectively, of
restructuring costs discussed in Note 8.
25
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TELCO SYSTEMS, INC.
NOTE 7 LEASE COMMITMENTS
The Company leases a 216,000 square-foot manufacturing, research and
administration facility in Norwood, Massachusetts, from a limited partnership in
which the Company has a 50% interest. Neither the Company nor the other partners
have made or anticipate making any substantial capital contributions or advances
to the partnership. Under the partnership agreement, the Company, in addition to
its 50% interest, is entitled to a priority payment (which would proportionately
increase with an increase in the property value) out of the proceeds of any sale
or future refinancing of the property. The gross rent payable is $1.5 million
annually through January 31,1999. For the remainder of the lease term ending
January 31, 2004, gross rent payable is $1.7 million annually.
The Company has issued a $900,000 guarantee on a bank loan to a second
limited partnership. This partnership has granted a 100% security interest and
collateral assignment to the Company in a parcel of undeveloped land owned by
the partnership. The land, comprised of approximately 7.5 acres, is adjacent to
the Company's leased facility in Norwood, Massachusetts. The Company believes
the value of the land is adequate to satisfy any obligation under the guarantee.
The Company leases other facilities and certain equipment under
noncancelable operating leases expiring at various dates through 2005. The
Company is required to pay property taxes, insurance and normal maintenance
costs. Certain of the lease agreements provide for five-year renewal options,
and future lease payments could increase based on the Consumer Price Index.
<TABLE>
Minimum annual lease commitments under non-cancelable operating leases for
facilities and equipment as of August 25, 1996 are set forth in the following
table. Amounts relating to excess facilities included herein have been accrued
as discussed in Note 8:
<CAPTION>
Gross Lease Sub-lease Net Lease
Fiscal Year Payments income Payments
- ------------------------------------------------------------------------------------
(in thousands)
<C> <C> <C> <C>
1997.................................. $ 2,642 $ 496 $ 2,146
1998.................................. 2,618 591 2,027
1999.................................. 2,738 528 2,210
2000.................................. 2,813 390 2,423
2001.................................. 2,794 293 2,501
Beyond................................ 9,385 -- 9,385
------- ------ -------
$22,990 $2,298 $20,692
======= ====== =======
</TABLE>
Rent expense under operating leases was $2.9 million in fiscal 1996, $2.4
million in fiscal 1995 and $3.0 million in fiscal 1994.
27
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TELCO SYSTEMS, INC.
NOTE 8 RESTRUCTURING COSTS
<TABLE>
During fiscal 1996, the Company's management approved a plan to restructure
its operations and recognized the following charges (in thousands):
<S> <C>
Excess Facilities $2,225
Write-down of assets to net realizable value 1,589
Employee severance costs 1,034
Restructuring credit relating to 1993 excess facilities costs (639)
------
$4,209
======
</TABLE>
The Company has implemented this restructuring plan in order to be able to
better respond to rapidly growing domestic and international markets. The plan
includes identifying operational efficiencies while maintaining the Company's
long-standing reputation for service and quality. The primary operational
efficiency to be implemented is the consolidation and move of manufacturing
operations from the Company's Fremont, California, site to the Norwood,
Massachusetts, location by the end of calendar year 1996. The Company's
technology centers of excellence will continue to be located both in Fremont and
Norwood.
The reserve for excess facilities costs was established for future cash
expenditures relating to unoccupied space at the Company's Fremont facility
resulting from the manufacturing consolidation. These costs include lease
payments, utilities, maintenance, property taxes and other related expenses. At
August 25, 1996, $2,175,000 was remaining to cover these expenditures which
included a current liability of $685,000 and a long-term liability of
$1,490,000.
The reserve for asset write-downs includes inventory relating to
management's decision to discontinue the development of certain products, fixed
asset production tools, and unamortized goodwill specifically related to these
product lines.
The reserve for employee severance costs includes charges relating to a
staff reduction of 28 employees resulting from cost containment measures
including the restructuring of the Engineering, Sales, Marketing and
Administration organizations as well as the decision to discontinue the
development of certain products. In addition, the reserve consists of severance
costs to be paid to approximately 50 employees at the Fremont site whose
positions will be eliminated upon the consolidation of manufacturing operations
in Norwood. At August 25, 1996, the balance of severance costs was $528,000.
Final payments are expected to be made upon completion of the facility
relocation.
The fiscal 1996 restructuring provisions were determined based on
significant estimates prepared at the time the restructuring actions were
approved by management. At August 25, 1996, the Company expects that the cost of
completing the restructuring programs will approximate the original estimates.
The credit relating to the 1993 restructuring charge represents the net
cash flows to be received from a recently entered sublease which will absorb
approximately 44% of the excess facility space reserved in fiscal 1993. As of
August 25, 1996, the remaining fiscal 1993 restructuring reserve of $2.2 million
was solely for the remaining excess facility costs in Norwood.
27
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TELCO SYSTEMS, INC.
NOTE 9 EMPLOYEE BENEFIT PLANS
Under the Company's 1980 Stock Option Plan, the 1988 Non-Qualified Stock
Option Plan, and the 1990 Stock Option Plan (the Plans), officers, directors,
and key employees have been granted options to purchase shares of the Company's
common stock at a price equal to the market value at the date of grant. Options
normally become exercisable ratably over a 48 month period, commencing six
months from the date of grant, and expire after ten years. At August 25, 1996,
1,315,156 shares of common stock were reserved for issuance under the Plans.
On February 15, 1996, 92,000 restricted shares of the Company's common
stock were granted and issued to certain key employees. Shares were awarded in
the name of each of the participants who have all the rights of other
stockholders, subject to certain restrictions and forfeiture provisions. For the
year ended August 25, 1996, 33,000 shares were forfeited due to employee
terminations. Restrictions on the shares expire equally on the anniversary date
of the award over the next four years.
<TABLE>
The market value of the shares awarded, net of forfeitures was $656,000 on
the date of grant. This amount has been recorded as unearned compensation -
restricted stock and is shown as a separate component of stockholder's equity.
Unearned compensation is being amortized to expense over the four year vesting
period. A summary of the activity in the stock option plans for fiscal 1996,
1995, and 1994 is presented as follows:
<CAPTION>
Available Options Option Price
Stock Option Plans For Options Outstanding Per Share
- ------------------ ----------- ----------- ------------
<S> <C> <C> <C>
Balance at August 29, 1993....... 551,014 1,115,558 $2.13 - $17.13
-------- --------- --------------
Grants......................... (527,500) 527,500 $8.38 - $14.50
Exercised...................... (250,286) $2.13 - $11.25
Canceled....................... 143,922 (143,922) $3.38 - $17.13
Expired........................ (500)
-------- --------- --------------
Balance at August 28, 1994....... 166,936 1,248,850 $2.13 - $15.88
-------- --------- --------------
Grants......................... (395,456) 395,456 $9.88 - $16.75
Authorized under 1990 plan..... 250,000
Exercised...................... (525,568) $2.13 - $15.50
Canceled....................... 159,439 (159,439) $3.38 - $16.25
Expired........................ (1,167)
-------- --------- --------------
Balance at August 27, 1995....... 179,752 959,299 $2.25 - $16.75
-------- --------- --------------
Authorized under 1990 Plan..... 350,000
Grants......................... (572,305) 572,305 $9.63 - $16.38
Exercised...................... (173,895) $3.00 - $16.25
Canceled....................... 182,887 (182,887) $3.38 - $16.38
-------- --------- --------------
Balance at August 25, 1996....... 140,334 1,174,822 $2.13 - $16.75
======== ========= ==============
</TABLE>
At August 25, 1996, August 27, 1995 and August 28, 1994, there were 464,767
shares, 413,495 shares and 729,480 shares exercisable, respectively.
Under the Company's 1983 Employee Stock Purchase Plan, eligible employees
may purchase shares of common stock through payroll deductions (up to a maximum
of 10% of their salary) at a price equal to 85% of the lower of the stock's fair
market value at the beginning or at the end of each six month offering period.
There were 55,975 shares issuable under the Plan for fiscal 1996 of which 26,276
were outstanding at August 25, 1996. For fiscal 1995 and 1994, 56,005 shares and
53,105 shares, respectively, were issued under the Plan. At August 25, 1996,
102,896 shares of common stock were reserved for issuance under the Plan.
Under the Company's Savings Plan, a defined contribution savings plan under
the provisions of Internal Revenue Code Section 401(k), the Company contributes
up to 3% of base pay to a fund which is held by a trustee. All employees are
eligible to participate in the plan and are entitled, upon termination or
retirement, to receive their vested portion of the savings fund assets. The
unvested portion remains in the Plan and is used to reduce future Plan expense.
Total Plan expense was $547,000 in fiscal 1996, $525,000 in fiscal 1995, and
$503,000 in fiscal 1994.
28
<PAGE> 29
SUPPLEMENTARY DATA
QUARTERLY INFORMATION TELCO SYSTEMS, INC.
<TABLE>
Quarterly financial information (unaudited) is as follows:
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1996 (Dollars in thousands except per share amounts)
<S> <C> <C> <C> <C>
Sales .............................. $20,533 $20,577 $ 23,223 $ 29,621
Gross profit........................ $ 8,421 $ 8,565 $ 8,049 $ 11,634
Net income (loss)................... $(2,620) $(2,679) $*(11,454) $ *1,208
Net income (loss) per share......... $ (.26) $ (.26) $ (1.10) $ .11
1995
Sales .............................. $26,217 $22,877 $ 20,656 $ 19,320
Gross profit........................ $11,835 $10,812 $ 9,596 $ 8,268
Net income ......................... $ 1,544 $ 1,255 $ (940) $**(1,231)
Net income per share................ $ .15 $ .12 $ (.09) $ (.12)
- ----------
<FN>
* Fiscal 1996 net (loss) income includes a restructuring charge of $4,659 in
the third quarter and a restructuring credit of $450 in the fourth quarter.
** Fourth quarter 1995 net loss includes $420 restructuring credit
</TABLE>
<PAGE> 30
SCHEDULE II
<TABLE>
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<CAPTION>
Three Years Ended August 27, 1995
---------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Allowance for Doubtful Accounts:
Balance at beginning of period........ $649 $ 797 $ 806
Charges to costs and expenses......... 102 63 220
Deductions............................ (75) (211) (229)
Balance at end of period.............. $676 $ 649 $ 797
Warranty and Rework Reserve:
Balance at beginning of period........ $ 772 $ 930 $ 969
Charges to costs and expenses......... 582 432 182
Deductions............................ (181) (590) (221)
Balance at end of the period.......... $1,173 $ 772 $ 930
</TABLE>
30
<PAGE> 31
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
--------------------------------------------------
Incorporated by reference from the Definitive Proxy Statement, with the
exception that information regarding the executive officers of Telco Systems,
Inc. is contained in Item 1 Part I on page 8 of this report.
Item 11. Executive Compensation
----------------------
Incorporated by reference from the Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management of
-----------------------------------------------------------------
Telco Systems, Inc.
-------------------
Incorporated by reference from the Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Incorporated by reference from the Definitive Proxy Statement.
31
<PAGE> 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a) 1. Financial Statements
--------------------
See index to Consolidated Financial Statements at page 16.
(a) 2. Financial Statement Schedules
-----------------------------
See index to Consolidated Financial Statements at page 16.
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and therefore
have been omitted.
(a) 3. Exhibits
--------
Management contracts and compensatory plans or agreements
required to be filed as exhibits pursuant to item 14(a)(3) of
Form 10-K are identified by asterisks (*).
3.1 Certificate of Incorporation of Telco Systems, Inc.(1)
3.2 Bylaws of Telco Systems, Inc., as amended.(2)
10.3 Telco Systems, Inc. Employee Stock Purchase Plan, as amended
through July, 1991(3)*
10.4 Amendment to Telco Systems, Inc. Employee Stock Purchase Plan,
adopted August, 1991.(4)*
10.5 Telco Systems, Inc. 1988 Non-Statutory Stock Option Plan, as
amended.(4)*
10.8 Partnership Agreement relating to facilities of Telco Systems
Fiber Optics Corporation located at 63 Nahatan Street, Norwood,
Massachusetts, dated August 29, 1985.
10.23 Lease of facilities of Telco Systems Fiber Optics Corporation
located at 63 Nahatan Street, Norwood, Massachusetts, dated
December 12, 1985.(5)
10.35 Agreement between the Registrant and John A. Ruggiero dated
October 4, 1989 *
10.38 Telco Systems, Inc. 1990 Stock Option Plan, as amended.(6)*
10.39 Lease dated May 3, 1990 between the Registrant and Pactel
Properties for facilities located at 4305 Cushing Parkway,
Fremont, California
10.40 Stock Purchase Agreement between Registrant and Magnalink
Communications Corporation dated May 29, 1992.(5)
32
<PAGE> 33
10.42 Amendment to lease of facility located at 63 Nahatan Street,
Norwood, MA dated January 1, 1994. (6)
10.44 Stock Purchase Agreement and Registration Rights Agreement
between the Registrant and Unitech Telecom, Inc. dated March 29,
1995 (7)
10.45 Amendments one and two to lease of facility in Fremont,
California between the Registrant and Riggs National Bank of
Washington D.C. as trustee of the Multi-Employer Property Trust,
(successor to Pactel Properties) dated April 12, 1995 and May 8,
1995, respectively. (7)
10.46 Agreement between the Registrant and John A. Ruggiero dated
March 26, 1996.*
10.48 Agreement between the Registrant and William B. Smith dated
March 6, 1995.* (7)
10.49 Amendments three to lease of facility in Fremont, California
between the Registrant and Riggs National Bank of Washington
D.C. as trustee of the Multi-Employer Property Trust, (successor
to Pactel Properties) dated January 22, 1996.
22.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule
Notes: (1) Incorporated by reference to Exhibit 3.1 to Appendix II of
the definitive proxy statement of the Company dated November
20, 1986 relating to the Annual Meeting of Shareholders on
December 17, 1986.
(2) Incorporated by reference to Exhibits 3.2 to the
Registrant's Report on Form 10-K for its fiscal year ended
August 30, 1987.
(3) Incorporated by reference to Exhibit 4.1 to the Registrant's
Form S-8 (File No. 33-26976).
(4) Incorporated by reference to Exhibits 10.4 and 10.5,
respectively, to the Registrant's Report on Form 10-K for
its fiscal year ended August 25, 1991.
(5) Incorporated by reference to Exhibits 10.23 and 10.40,
respectively, to the Registrant's Report on Form 10-K for
its fiscal year ended August 30, 1992.
(6) Incorporated by reference to Exhibit 10.38 and 10.42,
respectively to the Registrant's Report on Form 10-K for its
fiscal year ended August 28, 1994.
(7) Incorporated by reference to Exhibit 10.44 and 10.45,
respectively to the Registrant's Report on Form 10-K dated
August 27, 1995.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the fourth quarter of
fiscal 1996.
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: November 22, 1996 TELCO SYSTEMS, INC.
/s/ John A. Ruggiero
-----------------------------------------
By John A. Ruggiero
Vice Chairman and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ John A. Ruggiero
- ----------------------- Vice Chairman and
John A. Ruggiero Chief Financial Officer Date: November 22, 1996
/s/ William B. Smith
- ----------------------- President and Chief Executive Date: November 22,1996
William B. Smith Officer/Director
/s/ Dean C. Campbell
- ----------------------- Director Date: November 22,1996
Dean C. Campbell
/s/ Sheldon Horing
- ----------------------- Director Date: November 22,1996
Sheldon Horing
/s/ Steward Flaschen
- ----------------------- Director Date: November 22,1996
Steward Flaschen
<PAGE> 35
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
- -------------------------------------------------------------------------------
10.8 Partnership Agreement relating to facilities of Telco Systems Fiber
Optics Corporation located at 63 Nahatan Street, Norwood, Massachusetts,
dated August 29, 1985.
10.35 Agreement between the Registrant and John A. Ruggiero dated October 4,
1989 *
10.39 Lease dated May 3, 1990 between the Registrant and Pactel Properties for
facilities located at 4305 Cushing Parkway, Fremont, California
10.46 Agreement between the Registrant and John A. Ruggiero dated March 26,
1996
10.49 Amendments three to lease of facility in Fremont, California between the
Registrant and Riggs National Bank of Washington D.C. as trustee of the
Multi-Employer Property Trust, (successor to Pactel Properties) dated
January 22, 1996.
22.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors as to incorporation
by reference.
27 Financial Data Schedule
<PAGE> 1
------------------------------------------------
AMENDED AND RESTATED
AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
OF
NAHATAN STREET ASSOCIATES LIMITED PARTNERSHIP
------------------------------------------------
EXHIBIT 10.8
<PAGE> 2
TABLE OF CONTENTS
-----------------
Caption Page
- ------- ----
RECITALS. 1
--------
ARTICLE ONE
- -----------
DEFINITIONS
-----------
Section 1.1 Definitions 1
ARTICLE TWO
- -----------
GENERAL PROVISIONS
------------------
Section 2.1 Formation 6
Section 2.2 Name and Office 6
Section 2.3 Purpose and Scope 7
Section 2.4 Term 7
Section 2.5 General Partners 7
Section 2.6 Limited Partners 7
Section 2.7 Resident Agent 7
Section 2.8 Tax Matters Partner 7
ARTICLE THREE
- -------------
CAPITAL CONTRIBUTIONS; PARTNERSHIP INTERESTS; CAPITAL ACCOUNTS
--------------------------------------------------------------
Section 3.1 Initial Capital Contributions of the General Partners;
Partnership Interests of the General Partners 8
Section 3.2 Initial Capital Contributions of the Limited Partners;
Partnership Interests of the Limited Partners 8
Section 3.3 Additional Capital Requirements 9
Section 3.4 Capital Accounts 12
Section 3.5 Special Deemed Capital Account 13
Section 3.6 Partnership Capital 14
Section 3.7 Liability of Limited Partners 15
ARTICLE FOUR
- ------------
ALLOCATION OF PROFITS AND LOSSES; DISTRIBUTIONS
-----------------------------------------------
Section 4.1 Allocation of Profits and Losses 15
Section 4.2 Distributions 16
Section 4.3 Distributions in Connection with Dissolution 17
ARTICLE FIVE
- ------------
RIGHTS, POWERS, AND DUTIES OF THE GENERAL PARTNERS
--------------------------------------------------
Section 5.1 Management and Control of the Partnership 17
Section 5.2 Authority of the General Partners 18
Section 5.3 Restrictions on Authority of the General Partners 20
<PAGE> 3
Section 5.4 Duties and Obligations of the General Partners 21
Section 5.5 Authority of the General Partners to Deal With
Affiliates 21
Section 5.6 Compensation of Partners 22
Section 5.7 Other Interests of the General Partners
and Their Affiliates 23
Section 5.8 Rights to Income or Profits 23
Section 5.9 Liability and Indemnification of the
General Partners 23
ARTICLE SIX
- -----------
TRANSFERABILITY OF A GENERAL PARTNER'S INTEREST
-----------------------------------------------
Section 6.1 Voluntary Retirement or Transfer by a
General Partner 23
Section 6.2 Reconstitution of the Partnership 25
Section 6.3 Admission of a Person as the Substitute
General Partner 25
Section 6.4 Restrictions on Transfer by a General Partner 26
Section 6.5 Liability and Rights of a Retired or Transferor
General Partner 26
ARTICLE SEVEN
- -------------
TRANSFERABILITY AND ACQUISITION OF A LIMITED PARTNER'S INTEREST
---------------------------------------------------------------
Section 7.1 Representations of Limited Partners 26
Section 7.2 Restrictions on Transfer of Interests 26
Section 7.3 Incapacity of a Limited Partner 27
Section 7.4 Transferees 27
Section 7.5 Substitute Limited Partners 28
Section 7.6 Right of First Refusal 28
ARTICLE EIGHT
- -------------
DISSOLUTION,LIQUIDATION, AND TERMINATION OF THE PARTNERSHIP
-----------------------------------------------------------
Section 8.1 Events Causing Dissolution 29
Section 8.2 Liquidation 29
ARTICLE NINE
- ------------
FISCAL MATTERS
--------------
Section 9.1 Title to Property and Bank Accounts 30
Section 9.2 Books and Records 30
Section 9.3 Reports and Accountant 31
Section 9.4 Federal Tax Elections 31
<PAGE> 4
ARTICLE TEN
- -----------
MEETINGS AND VOTING R1GHTS OF LIMITED PARTNERS
----------------------------------------------
Section 10.1 Meetings 32
Section 10.2 Voting Rights of Limited Partners 33
Section 10.3 Conditions to Action by Limited Partners 33
ARTICLE ELEVEN
- --------------
AMENDMENTS
----------
Section 11.1 Adoption of Amendments 34
Section 11.2 Amendments on Admission or Substitution
of Partners 34
ARTICLE TWELVE
- --------------
VALUATION AND APPRAISAL PROCEDURE
---------------------------------
Section 12.1 General 35
Section 12.2 Appraisal Procedure 35
ARTICLE THIRTEEN
- ----------------
MISCELLANEOUS PROVISIONS
------------------------
Section 13.1 Appointment of Each General Partner
as Attorney-in-Fact 39
Section 13.2 Notices, Approvals, and Consents 41
Section 13.3 Binding Provisions 41
Section 13.4 Applicable Law 41
Section 13.5 Entire Agreement 41
Section 13.6 Further Assurances 41
Section 13.7 Captions 41
Section 13.8 Effect on Creditors 42
Section 13.9 Separability 42
Section 13.10 Counterparts 42
Section 13.11 Jurisdiction 42
Section 13.12 Attorneys' Fees 42
SCHEDULE A: Initial Capital Contributions and
Initial Capital Accounts
EXHIBIT A: Limited Partners
EXHIBIT B: BNE Lease
EXHIBIT C: Description of Land
EXHIBIT D: TIAA Lease
<PAGE> 5
NAHATAN STREET ASSOCIATES LIMITED PARTNERSHIP
A Massachusetts Limited Partnership
AMENDED AND RESTATED AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
---------------------------------------------------------------------
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, made and
entered into as of the day of August, 1985, by and between JAMES F. CARLIN
("Carlin") and WILLIAM A. YETMAN ("Yetman"), as General Partners, and the
Persons listed on Exhibit A attached hereto, as Limited Partners.
RECITALS:
---------
A. Richard R. Vazza and Nahatan Street Development Corporation, as general
partners, and Telco Systems Fiber Optics Corporation ("TSFOC"), as limited
partner, created a limited partnership under the name "Nahatan Street Associates
Limited Partnership" pursuant to an Agreement of Limited Partnership dated
August 8, 1985 (the "Original Agreement"). Francis M. Vazza was; later admitted
to the Partnership as an additional general partner. (Richard R. Vazza, Francis
M. Vazza and Nahatan Street Development Corporation are! hereinafter referred to
collectively as "Vazza").
B. The interest of TSFOC in the Partnership is, effective herewith$
assigned to its affiliate, Telco Systems, Inc. ("Telco").
C. The interests of Vazza in the Partnership are, effective herewith,
redeemed by the Partnership.
D. The Partnership wishes to admit certain individuals (the "Crosspoint
Group") to the Partnership as Partners.
E. The purpose and effect of this document is to amend and restate the
Original Agreement so as to provide for the continuation of the Partnership on
the terms herein set forth and, therefore, to simultaneously (i) remove TSFOC
(the original Limited Partner) and admit Telco as a Limited Partner, (ii) remove
Vazza as General Partners and (iii) admit the Crosspoint Group as General
Partners and Limited Partners as herein set forth.
NOW, THEREFORE, in consideration of the premises and the agreements herein
contained and intending to be legally bound hereby, the Partners hereby agree as
follows:
ARTICLE ONE
-----------
DEFINITIONS
-----------
Section 1.1 Definitions
-----------
For purposes of this Agreement, the following terms and phrases shall have
the meanings specified in this Article One. The singular shall include the
<PAGE> 6
plural, and the masculine gender shall include the feminine and neuter. and vice
versa, as the context requires:
"ACCOUNTANT". Arthur Young & Co., or such other independent
accountants as shall be designated from certified public accountant or firm
of independent certified pubic Interest of the Partners. time to time by a
Majority in
"ACT ". The Massachusetts Uniform Limited Partnership Act, as; the
same may hereafter be amended.
"AFFILIATE". With respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of
this definition, the term CONTROL when used with respect to any specified
Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms CONTROLLING and
controlled by have the meanings correlative to the foregoing.
"AGREEMENT". This Amended and Restated Agreement and Certificate of
Limited Partnership of Nahatan Street Associates Limited Partnership, as
the same may be amended from time to time.
"BASE RATE". The highest annual prime rate of interest charged from
time to time by The First National Bank of Boston to its prime commercial
customers for 90-day unsecured loans, plus two percent (2%).
"BNE FINANCING". The interim financing with respect to the Premises to
be provided to the Partnership by Bank of New England pursuant to its
commitment letter of May 6, 1985.
"BNE LEASE". The lease of the Premises, dated 1985, between the
Partnership, as landlord, and TSFOC, as tenant, pursuant to the terms of
the BNE Financing, in the form attached hereto as Exhibit B. The BNE Lease
is to commence upon the closing of the BNE Financing and is to terminate
upon the closing of the TIAA Financing.
"BUILDING". The former Masoneilan building situated on the Land which
is undergoing construction/renovation and which is to be substantially
constructed/renovated by the Partnership. Upon Building Completion, the
Building will be a one and two-story steel frame and brick office,
research/development and light assembly building containing approximately
216,000 rentable square feet.
"BUILDING COMPLETION". Substantial completion of the construction/
renovation of the Building as certified by the architect for the Building.
"CAPITAL ACCOUNT". The account of each Partner on the books of the
Partnership as defined in Section 3.4.
"CAPITAL CONTRIBUTION". The cash and/or property contributed to the
Partnership by each Partner.
2
<PAGE> 7
"CERTIFICATE". The Certificate of Limited Partnership of the
Partnership as provided for in the Act. as originally filed in the Office
of the Secretary of State of the State and as amended from time to time.
"CODE". The Internal Revenue Code of 1954, as amended.
"CONSENT". The consent of a Person to do the act or things for which
the consent is solicited, or the act of granting such consent.
"CROSSPOINT GROUP". All Partners of the Partnership other than Telco.
"DISTRIBUTABLE CASH". With respect to any Fiscal Year of the
Partnership, the excess of the Revenues (other than Excess Rent and other
than proceeds arising from an Excess Cash Proceeds Event) of the
Partnership during such Fiscal Year over the sum of:
(i) the amount of cash (other than cash withdrawn from reserves
therefor) disbursed in such Fiscal Year (a) to make payments then due on
accrued liabilities and obligations of the Partnership including those
related to advances or loans to the Partnership and/or (b) to pay other
costs and expenses incident to the redemption of the Vazza Interests and
the construction/renovation of the Building and other improvements on the
Land, and the development, operation and management of the Premises and the
Partnership business; and
(ii) amounts allocated during such Fiscal Year to reserves to pay
costs, expenses or liabilities of the type described in clause (i) for
which the General Partners do not expect the Partnership to receive the
necessary cash prior to the time such payments are required to be made.
"DISTRIBUTIONS". Payments of cash and distributions of property by the
Partnership to the Partners, or any of them.
"EXCESS CASH PROCEEDS". This term shall mean (i) with respect to any
financing or refinancing (other than the BNE Financing or the TIAA
Financing) affecting the Premises (or any portion thereof), the net amount
of cash realized by the Partnership; and (ii) with respect to insurance
proceeds from loss, to condemnation proceeds, and to proceeds from the
Transfer of Partnership assets, the amount by which such proceeds exceed
reserves for known liabilities incurred, and contingent liabilities arising
out of the transaction giving rise to such proceeds, as reasonably
determined by the General Partners, except that if the General Partners
reasonably determine that any such reserve is no longer necessary, then
such reserve shall be deemed Excess Cash Proceeds and shall be distributed
as if included in Excess Cash Proceeds initially. "EXCESS CASH PROCEEDS
EVENT" means an event of the type described in (i) or (ii) above, whether
or not Excess Cash Proceeds are generated therefrom.
"EXCESS RENT". With respect to any Fiscal Year of the Partnership, the
difference, if any, between (i) the total amount of the debt service
(principal, if any, and interest) required to be paid during such Fiscal
Year with respect to the TIAA Financing and (ii) the total amount of
absolutely net rent received by the Partnership during such FiscaL Year
pursuant to the TIAA Lease.
3
<PAGE> 8
The term Excess Rent only has relevance with respect to the first ten
(lo) years of the TIAA Lease. Accordingly, for example, there will be no
Excess Rent - that is, the amount of Excess Rent will be zero --- with
respect to any Fiscal Year or portion thereof subsequent to the occurrence
of any one or more of the following events: (i) the commencement of the
eleventh -year of the term of the TIAA Lease; and (ii) the sale or other
disposition of the Premises. Furthermore, Excess Rent shall be subject to
reduction or set-off as more particularly set forth in the TIAA Lease.
"FISCAL YEAR". The calendar year, except that in the year the
Partnership commences or terminates, the Fiscal Year shall begin on the
date of such commencement or end on the date of such termination, as the
case may be.
"GENERAL PARTNERS". Carlin and Yetman, and any successor general
partners admitted to the Partnership pursuant to this Agreement, in each
such Person's capacity as a General Partner of the Partnership.
"INCAPACITY" OR "INCAPACITATED". These terms shall meant as to any
Person, the bankruptcy, insolvency, dissolution or termination, as the case
may be, of such Person. With respect to any Person who is an individual,
these terms shall mean, in addition to the foregoing, the death or
adjudication of incompetence or insanity of such Person. "BANKRUPTCY" or
"INSOLVENCY" shall be deemed to have occurred (i) if a Person shall become
unable to pay his debts as they fall due, or shall make an assignment for
the benefit of creditors, or shall file a voluntary petition in bankruptcy
or shall be adjudicated a bankrupt or insolvent, or shall file any petition
or answer seeking, consenting to, or acquiescing in, any reorganization,
arrangement, composition readjustment, liquidation, 'dissolution or similar
relief under any present or future applicable statute or law, or shall seek
or consent to or acquiesce in the appointment of any trustee, receiver or
liquidator of such Person or of all or any substantial part of his
properties, or (ii) if within thirty (30) days after the commencement of
any proceeding against a Person, seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under
any present or future applicable statute or law, such proceeding shall not
have been dismissed, or if, within thirty (30) days after the appointment,
without the consent or acquiescence of such Person, of any trustee,
receiver or liquidator of such Person or of all or any substantial part of
his properties, such appointment shall not have been vacated or stayed on
appeal or otherwise, or if, within thirty (30) days after the expiration of
any such stay, such appointment shall not have been vacated.
"INTEREST". The ownership interest (or any portion thereof) of a
Partner in the Partnership at any particular time. A Partner's Interest in
the Partnership shall be considered personal property for all purposes.
"LAND". The parcel of land containing approximately twenty-five (25)
acres and more particularly described in Exhibit C attached hereto, on
which the Building and other improvements are situated.
"LIMITED PARTNER". Any one of the Limited Partners listed on Exhibit A
attached hereto, and their respective successors and assigns admitted to
4
<PAGE> 9
the Partnership as Substitute Limited Partners pursuant to this Agreement, in
each such Person's capacity as a Limited Partner of the Partnership.
"MAJORITY IN INTEREST". Partners (General Partners and/or Limited
Partners, as the context evidences) who in the aggregate own, at the time
in question. a majority of the particular Partnership Interests at issue,
determined on an aggregate percentage interest basis. The term "SUBSTANTIAL
MAJORITY IN INTEREST" means such Partners who in the aggregate own, at the
time in question, at least seventy-five percent (75%) of the particular
Partnership Interests at issue, determined on an aggregate percentage
interest basis.
"PARTNER". Any Person who is a General Partner or a Limited Partner of
the Partnership as herein provided; and "PARTNERS" means collectively the
Persons who are the General Partners and the Limited Partners.
"PARTNERSHIP". The limited -partnership of Nahatan Street Associates
Limited Partnership, as continued in accordance with this Agreement and as
said limited partnership may from time to time be constituted.
"PERSON". An individual, corporation. company, voluntary association,
partnership, trust, unincorporated organization, or government or any
agency, instrumentality, or political subdivision thereof.
"PREMISES". The Land together with the Building and other improvements
thereon.
"PROFITS AND LOSSES". The net income or loss of the Partnership for a
Fiscal Year as determined for federal income tax purposes, including all
items of Partnership income, gain, loss, deduction, credit or the like, and
any gain or loss from an Excess Cash Proceeds Event. The separate terms
"Profits" and "Losses" shall mean such net income or loss respectively.
"REVENUES". This term shall mean (i) gross receipts of the Partnership
from whatever source, exclusive of loans or advances to the Partnership or
Capital Contributions by the Partners and (ii) to the extent not included
in (i) above, the amount of any reserve established by the General
Partners, which the General Partners reasonably determine need no longer be
retained by the Partnership.
"SPECIAL DEEMED CAPITAL ACCOUNT". This term shall have the meaning set
forth in Section 3.5.
"STATE". The Commonwealth of Massachusetts.
"SUBSTITUTE LIMITED PARTNER". A Transferee of a Limited Partner's
Interest who has been admitted to the Partnership pursuant to Sections 7.5
and 11.2. The rights and obligations of any Substitute Limited Partner
shall be determined by reference to the rights and obligations of the
Transferor Limited Partner under this Agreement.
"TELCO". Telco Systems, Inc., a California corporation which is a
Limited Partner of the Partnership.
5
<PAGE> 10
"TIAA FINANCING". The initial permanent financing with respect to the
Premises to be provided to the Partnership by Teachers Insurance and
Annuity Association ("TIAA) pursuant to its commitment letter of May 29,
1985, as amended by letter of June 25, 1985.
"TIAA LEASE". The lease of the Premises between the Partnership, as
landlord, and TSFOC, as tenant, pursuant to the terms of the TIAA
Financing, in substantially the form attached hereto as Exhibit 1) but
subject to commercially reasonable changes requested by TIAA. The TIAA
Lease is to commence upon the termination of the BNE Lease and the closing
of the TIAA Financing.
"TRANSFER". This term means and includes any events action, or
transaction which is considered a sale or exchange for federal income tax
purposes (whether or not taxable income is recognized in connection
therewith), or any assignment , pledge, gift, or other disposition, or the
act of effecting any of the above.
"TRANSFEREE". The recipient of a Transfer of a Partnership Interest.
"TRANSFEROR". The- Partner who has made a Transfer of his Partnership
Interest.
"TSFOC". Telco Systems Fiber Optics Corporation, a California
corporation which is an Affiliate of Telco.
"U.C.C." The Uniform Commercial Code as enacted in the State, as the
same may hereafter be amended.
"VAZZA INTERESTS". The Interests of Richard R. Vazza, Francis M. Vazza
and Nahatan Street Development Corporation in the Partnership, the
redemption of which Interests by the Partnership is effective herewith.,
ARTICLE TWO
-----------
GENERAL PROVISIONS
------------------
Section 2.1 Formation
---------
Pursuant to the Act, the Partners hereby constitute themselves as a limited
partnership in accordance with this Agreement. The General Partners shall
promptly amend the Certificate in such form as shall be necessary under the laws
of the State to give effect to the provisions of this Agreement.
Section 2.2 Name and Office
---------------
The Partnership shall be conducted solely under the name of Nahatan Street
Associates Limited Partnership. The Massachusetts office of the Partnership is
located at 235 West Central Street, Natick, Massachusetts 01760, or such other
place in the State as the General Partners may from time to time determine and
shall specify by prior notice to the Limited Partners.
6
<PAGE> 11
Section 2.3 Purpose and Scope
-----------------
The purpose and scope of the business of the Partnership is to
construct/renovate the Building and other improvements on the Land, and to
develop, operate, lease and/or manage the Premises. Such business purpose shall
include. the doing of any and all things incident thereto or connected
therewith.
The Partnership shall carry out the foregoing activities pursuant to the
arrangements set forth in this Agreement.
The Partnership shall not engage in any other business or activity without
the prior Consent of all Partners.
Section 2.4 Term
----
The term of the Partnership commenced on August S. 1984, and shall continue
in full force and effect until December 31. 2015, unless sooner dissolved or
terminated as provided in this Agreement.
Section 2.5 General Partners
----------------
The General Partners of the Partnership and their respective addresses are
as follows:
James F. Carlin
99 Woodland Street
Natick, Massachusetts 01760
and
William A. Yetman
5 Bryant Lane
Dover, Massachusetts 02030
Section 2.6 Limited Partners
----------------
The Limited Partners of the Partnership and their respective addresses are
as set forth on Exhibit A attached hereto.
Section 2.7 Resident Agent
--------------
The Partnership's resident agent for service of process in Massachusetts
shall be:
Crosspoint Development Corporation
235 West Central Street
Natick, Massachusetts 01760
Section 2.8 Tax Matters Partner
-------------------
Yetman shall be the tax matters partner of the Partnership.
7
<PAGE> 12
ARTICLE THREE
-------------
CAPITAL CONTRIBUTIONS; PARTNERSHIP INTERESTS; CAPITAL ACCOUNT
-------------------------------------------------------------
Section 3.1 Initial Capital Contributions of the General Partners: Partnership
------------------------------------------------------------------
Interests of the General Partners
---------------------------------
A. Upon the execution of this Agreement, the General Partners shall make
Capital Contributions to the Partnership of all their right, title and
interest, and all of the right, title and interest of their
Affiliates, in and to the commitments for the BNE Financing and for
the TIAA Financing which they may now own; and the Partnership (i)
ratifies and confirms the actions of the General Partners (including
such actions as took place prior to the date hereof) with respect to
such commitments and (ii) shall. undertake, assume and perform the
obligations and duties of the General Partners and their Affiliates
with respect to such commitments.
The Capital Accounts of the General Partners shall not be credited in
any amount as a result of such Capital Contributions.
Each General Partner shall make an initial Capital Contribution in the
amount as set forth on Schedule A attached hereto.
The Partnership Interest of each of the General Partners shall be as
follows: Carlin -- ten and one-quarter percent (10-1/4%); Yetman ten
and one-quarter percent (10-1/4%).
B. In addition to the provisions of Subsection A of this Section 3.1, the
General Partners may from time to time, as they deem appropriate, make
loans to the Partnership at the Base Rate, to the extent they deem
necessary to protect and preserve Partnership assets; provided that
the principal amount of such loan(s) outstanding at any time shall not
exceed ten thousand dollars ($10,000) in the aggregate! and that the
term of each such loan shall not exceed ninety (90) days.,
C. Except as provided in Subsection A of this Section 3.1 and in Section
3.3, the General Partners shall not be required to make any Capital
Contributions or loans to the Partnership.
Section 3.2 Initial Capital Contributions of the Limited Partners;
------------------------------------------------------
Partnership Interests of the Limited Partners
---------------------------------------------
A. Upon the execution of this Agreement, Telco shall cause TSFOC, its
Affiliate, to execute and deliver the BNE Lease. Upon the termination
of the BNE Lease, Telco shall cause TSFOC to execute! and deliver the
TIAA Lease.
The Capital Account of Telco shall not be credited in any amount as a
result of the foregoing transactions.
Each Limited Partner shall make an initial Capital Contribution in the
amount as Set forth on Schedule A attached hereto.
8
<PAGE> 13
The Partnership Interest of each of the Limited Partners shall be as
set forth on Exhibit A attached hereto.
B. Except as provided in Subsection A of this Section 3.2 and in Section
3.3, the Limited Partners shall not be required to make any Capital
Contributions or loans to the Partnership.
Section 3.3 Additional Capital Requirements
-------------------------------
A. If from time to time during the term of the Partnership the General
Partners reasonably determine that additional funds are required to
meet obligations of the Partnership -- including, without imitation,
obligations in connection with the redemption of the Vazza Interests
and/or the construction/renovation, development, operation, leasing
and/or management of the Premises - or to protect and preserve
Partnership assets and if the Partnership has been unable to obtain
such funds through Partnership borrowings, then from time to time as
so determined and upon notice from the General Partners to all the
Partners, the Partners shall make additional Capital Contributions to
the Partnership of such additional funds as may be so required in cash
and in proportion to their respective Partnership Interests.
Notwithstanding the above provisions of this Subsection A, the
Partners are under no obligation to make additional Capital
Contributions to the Partnership in excess of two hundred thousand
dollars ($200,000) in the aggregate. If, from time to time, the
aggregate capital requirements of the Partnership are in excess of
this limitation, the General Partners shall give notice to all
Partners of such excess capital requirements. Such excess capital
requirements shall be funded by Capital Contributions in accordance
herewith only upon the Consent of all Partners; and the Consent of any
Partner may be withheld in such Partner's absolute discretion. If any
one or more of the Partners fail to so Consent within fifteen (15)
days after such notice, then the General Partners shall give notice of
this fact to the Partners; and within fifteen (15) days after such
notice is given, any one or more of the Partners may elect to loan the
amount of such excess capital requirements to the Partnership at the
Base Rate plus 2%. If more than one Partner elects to make such a
loan, then the rights and obligations of such Partners under this
Subsection A shall be allocated between or among them in proportion to
their respective Partnership Interests.
The respective amounts of additional Capital Contributions shall be
credited to the Partners' respective Capital Accounts upon payment
thereof.
B. In the event that any Partner (the "Defaulting Partner") fails to pay
to the Partnership his respective portion of the funds so required
hereby to be paid as an additional Capital Contribution within thirty
(30)days after receipt of notice therefor from the General Partners,
then the Defaulting Partner shall be deemed to be in default of his
obligation hereunder as of the thirtieth day after receipt of such
notice.
The General Partners shall promptly notify all Partners other than the
Defaulting Partner of such default. Within fifteen (15) days
9
<PAGE> 14
after such notice is given, any one or more of such Partners may elect
either to advance the sum which the Defaulting Partner failed to pay
in accordance with paragraph (1) of this Subsection B or to purchase
the Partnership Interest of the Defaulting Partner in accordance with
paragraph (2) of this Subsection B -- in each case by notifying the
Partnership of such election. If one or more of such Partners elect
each option, then the option as' to which Partners with the greater
aggregate Partnership Interest elect shall be the effective option; if
each option is elected by Partners with the same aggregate Partnership
Interest, then the General Partners shall determine the effective
option. If more than one of such Partners elect the effective option,
then the rights and obligations of such Partners under this Subsection
B shall be allocated between or among them in proportion to their
respective Partnership Interests. The General Partners shall promptly
notify all the Partners as to the effective option and as to which
Partners (and their respective proportions) have elected the effective
option.
If no such Partner elects either option, then the Partnership may
enforce the obligations of the Defaulting Partner at law and/or in
equity; all fees and expenses incurred by the Partnership with respect
to such enforcement, including reasonable attorneys' fees, shall be
paid by the Defaulting Partner.
For purposes of this Subsection B, such Partners electing to advance
the sum which the Defaulting Partner failed to pay shall be
collectively referred to as the "Advancing Partner", and such Partners
electing to purchase the Partnership Interest of the Defaulting
Partner shall be collectively referred to as the "Acquiring Partner".
The options to advance or to purchase shall be upon the following
terms and conditions:
(1) The Advancing Partner shall, within thirty (30) days after notice
of default is given by the General Partners, advance! the sum
which the Defaulting Partner failed to pay and thereupon the
Defaulting Partner shall be obligated to repay said stun
immediately to the Advancing Partner with interest from the date
of said default until such sum is paid at the lesser of WI the
highest rate of interest allowed by law or (ii) the Base Rate
PLUS 4%.
Each Partner hereby covenants and agrees that the Advancing
Partner, in addition to such other rights as may be available in
law or in equity, shall have and is hereby granted a security
interest and lien upon the Partnership Interest of the Defaulting
Partner to secure the payment of such indebtedness in accordance
with the following provisions, and that the Advancing Partner
shall have and is hereby granted all of the rights and remedies
available to a secured party under the U.C.C. If the full amounts
of principal and interest due the Advancing Partner are not paid
by the Defaulting Partner within ninety (90) days after written
demand therefor -- or, if the U.C.C. specifies a longer period,
such longer period prior to the related action
10
<PAGE> 15
after notice of default has been given to the Defaulting Partner
-- the Advancing Partner having such lien on the Interest of the
Defaulting Partner shall be entitled to foreclose upon the entire
Partnership Interest of such Defaulting Partner and enforce such
lien by causing the Defaulting Partner,s Interest to be sold at
public or private sale (in the manner specified in the U.C.C.) to
satisfy such obligation.
Without limiting the foregoing, any such lien on the Partnership
Interest of the Defaulting Partner and the obligations secured
thereby may be enforced by the Advancing Partner, including
enforcement through judicial proceedings, and the Defaulting
Partner shall execute a financing statement evidencing such lien.
and, upon foreclosure thereof, appropriate instruments of
transfer of the Partnership Interest subject thereto.
(2) The purchase price to be paid by the Acquiring Partner to the
Defaulting Partner for the latter's Partnership Interest shall be
an amount equal to (A) seventy-five percent (75%) of the then net
fair market value of such Partnership Interest as determined as
set forth in Article Twelve; less (B) the sum which the
Defaulting Partner failed to pay and all direct expenses actually
incurred by the Partnership in effectuating the process set forth
in this Subsection B.
The purchase price for such Partnership Interest shall be
determined within five (5) business days from the date the
General Partners receive notice of the decision of the Appraiser
as set forth in Article Twelve, and the General Partners shall
promptly notify all the Partners of such purchase price. The
purchase price for such Partnership Interest shall be payable,
without interest thereon, to the Defaulting Partner within two
(2) months from the date the General Partners notify all the
Partners of such purchase price.
The Acquiring Partner, as a condition to the exercise of his
right to purchase the Defaulting Partner's Partnership Interest
pursuant to this Subsection B and as a condition to receiving
such Partnership Interest, shall agree in writing to pay to the
Partnership the sum which the Defaulting Partner failed to pay.
The Acquiring Partner purchasing the Defaulting Partner's
Partnership Interest pursuant to this paragraph (2) of Subsection
B shall become the owner thereof upon payment of the purchase
price therefor. The Acquiring Partner shall pay to the
Partnership, within thirty (30) days from the date he acquires
such Partnership Interest, the sum which the Defaulting Partner
failed to pay and all direct expenses actually incurred by the
Partnership with respect to such default.
Notwithstanding the provisions of this paragraph (2) of
Subsection B, the obligation of the Defaulting Partner to pay the
sum which the Defaulting Partner failed to pay shall be
extinguished only by, and only to the extent 'of, the actual
11
<PAGE> 16
amount of the monies received by the Partnership from the
Acquiring Partner who has purchased the Partnership Interest of
the Defaulting Partner hereunder.
The Partnership Interest subject to purchase pursuant to this
paragraph (2) of Subsection B shall include the right to
Distributions and to the allocation of Profits and Losses
attributable to such Interest from and after the date of default
of the Defaulting Partner's obligation hereunder. From and after
the date of default of the Defaulting Partner's obligation
hereunder, the Defaulting Partner shall have no right to receive
Distributions or to be allocated Profits and Losses of the
Partnership.
The Transfer of such Partnership interest pursuant to this
paragraph (2) of Subsection B shall be effective as of the date
of payment of the purchase price therefor, without the necessity
of any action on the part of the Defaulting Partner. Each Partner
agrees that if his Partnership Interest is purchased pursuant to
this paragraph (2) of Subsection B, he will execute, acknowledge
and deliver all instruments requested by the Partnership or the
Acquiring Partner for the purpose Of confirming or evidencing the
Transfer of such Partnership Interest.
The Acquiring Partner who shall acquire the Defaulting Partner's
Partnership Interest pursuant to this paragraph (2) of Subsection
B shall, with respect to and Lo the extent of the Partnership
Interest so transferred to him, be deemed to be a Limited
Partner, with the same interest in Profits, Losses; and
Distributions, etc., as the Defaulting Partner had prior to the
time of default.
C. The Defaulting Partner may cure any default which he is deemed to have
made pursuant' to Subsection B of this Section 3.3 by paying, (i) the
sum which he previously failed to pay with interest from the date such
payment was due at the lesser of (A) the highest rate of interest
allowed by law or (B) the Base Rate PLUS 4%, and (ii) all direct
expenses actually incurred by the Partnership with respect to such
default; PROVIDED that no prior election has been made pursuant; to
Subsection B of this Section 3.3.
Section 3.4 Capital Accounts
----------------
A separate Capital Account shall be maintained for each Partner. There
shall be credited to each Partner's Capital, Account the amount of any cash, and
the agreed value of other property actually contributed by such Partner to the
capital of the Partnership and such Partner's share of Partnership Profits and
there shall be charged against such Partner's Capital Account the amount of all
Distributions to such Partner and such Partner's share of the Losses of the
Partnership.
All Partners confirm that the initial Capital Account of each Partner is as
set forth on Schedule A attached hereto.
12
<PAGE> 17
Section 3.5 Special Deemed Capital Account
------------------------------
A. Telco shall be credited with a Special Deemed Capital Account in the amount
of $1,500,000. This Special Deemed Capital Account (i) shall be separate
and distinct from and shall not be considered part of the Capital Account
of Telco; and (ii) shall not be increased or decreased and shall not be
payable to Telco except in connection with an Excess Cash Proceeds Event
and except in the manner set forth in Subsections B and C of this Section
3.5.
B. Upon the occurrence of the first Excess Cash Proceeds Event (not including
Excess Cash Proceeds Events, if any, occurring on or before the date
hereof) with respect to the Partnership which will result in Distributions
to the Partners in accordance with Section 4.2.C hereof, the then fair
market value of the Premises shall he determined as set forth in Article
Twelve. The Special Deemed Capital Account of Telco shall then be increased
(but not decreased) to an amount equal to $1,500,000 multiplied by a
fraction, the numerator of which is such fair market value and the
denominator of which is $16,500,000, which fraction shall in no case be
less than one. Distribution to Telco pursuant to clause (1) of Section
4.2.C of Excess Cash Proceeds in connection with such Excess Cash Proceeds
Event shall thereupon be made in accordance with and credited against the
Special Deemed Capital Account as so increased.
In the event that the Special Deemed Capital Account of Telco has not
theretofore been reduced to zero, upon the occurrence of each subsequent
Excess Cash Proceeds Event which will result in Distributions to the
Partners in accordance with Section 4.2.C hereof, the then remaining
balance of the Special Deemed Capital Account of Telco shall be increased
or decreased to an amount equal to the greater of (A) such then remaining
balance multiplied by a fraction, the numerator of which is the then fair
market value of the Premises (as determined as set forth in Article Twelve)
and the denominator of which is the fair market value of the Premises as
last determined in connection with an Excess Cash Proceeds Event and (B)
$1,500,000 minus all previous Distributions pursuant to clause (1) of
Section 4.2.C. Distribution to Telco pursuant to clause! (1) of Section
4.2-C of Excess Cash Proceeds in connection with each such subsequent
Excess Cash Proceeds Event shall be made in accordance with and credited
against such then remaining balance of the Special Deemed Capital Account
as so increased or decreased until the Special Deemed Capital. Account has
been reduced to zero.
C. The foregoing provisions of this Section 3.5 may be illustrated by the
following examples:
(1) Example l:
---------
The first Excess Cash Proceeds Event of the Partnership occurs on
January 1, 1996 when the Partnership refinances the Premises for
$25,000,000. The fair market value of the Premises is then
$33,000,000. The Special Deemed Capital Account of Telco is then
increased to $3,000,000: $1,500,000 x $33,000,000/ $16,500,000.
If there are Excess Cash Proceeds of $8,000,000 in connection
with the refinancing, then $3,000,000 will be
13
<PAGE> 18
distributed to Telco pursuant to clause (1) of Section 4.2.C, and
the remaining $5,000,000 will be distributed to the Partners
pursuant to clauses (2) and (3) of Section 4.2.C. Thereafter, the
Special Deemed Capital Account of Telco will be zero and,
accordingly, will not be a factor in any subsequent Distribution
of Excess Cash Proceeds.
(2) Example 2:
----------
The first Excess Cash Proceeds Event of the Partnership occurs on
January 1, 1992 when the Partnership refinances the Premises for
$18,000,000 and when the fair market value thereof is
$22,000.000. The Special Deemed Capital Account of Telco is then
increased to $2,000,000: $1,500,000 x $22,000,000/ $16,500,000.
If there are Excess Cash Proceeds of $1,500,000 in connection
with the refinancing, then the entire $1,500,000 will be
distributed to Telco pursuant to clause (1) of Section 4.2-C. The
remaining balance of the Special Deemed Capital Account of Telco
will then be $500,000.
The next Excess Cash Proceeds Event occurs on January 1, 1997
when the Partnership refinances the Premises for $25,000,000 and
when the fair market value thereof is $33,000,000. The remaining
balance of the Special Deemed Capital Account of Telco is then
increased to $750,000: $500,000 x $33,000,000/ $22,000,000. If
there are Excess Cash Proceeds of $6,000,000 in connection with
the refinancing, then $750,000 will be distributed to Telco
pursuant to clause (1) of Section 4.2.C, and the remaining
$5,250,000 will be distributed to the Partners pursuant to
clauses (2) and (3) of Section 4.2.C. Thereafter, the Special
Deemed Capital Account of Telco will be zero and, accordingly,
will not be a factor in any subsequent Distribution of Excess
Cash Proceeds.
(3) Example 3:
---------
The facts are the same as in Example 2 above, except that on
January 1, 1997 the Partnership sells the entire Premises for
$19,800,000, representing the then fair market value thereof. The
remaining balance of the Special Deemed Capital Account of Telco
is then reduced to $450,000: $500,000 x $19,800,000/ $22,000,000.
If there are Excess Cash Proceeds of $1,500,000 in connection
with the sale, then $450,000 will be distributed to Telco
pursuant to clause (1) of Section 4.2.C, and the remaining
$1,050.000 will be distributed to the Partners pursuant to
clauses (2) and (3) of Section 4.2.C.
Section 3.6 Partnership Capital
-------------------
A. No Partner shall be paid interest on his Capital Contribution to the
Partnership, on his Capital Account or on his Special Deemed Capital
Account, as the case may be.
14
<PAGE> 19
B No Partner shall have the right to withdraw his Capital Contribution
or to receive any return of any portion of his Capital Contribution,
except as provided for herein or in the Act.
C. Under circumstances requiring a, return of any Capital Contribution,
no Partner shall have the right to receive property other than cash,
except as may be specifically provided for in this Agreement.
Section 3.7 Liability of Limited Partners
-----------------------------
A. No Limited Partner in his capacity as a Limited Partner shall be
liable for the debts, liabilities, contracts, or any other obligations
of the Partnership, except to the extent of his obligations set forth
in Section 3.2 and Section 3.3.
B. No Limited Partner shall be required to lend funds to the Partnership,
but may do so in his discretion.
ARTICLE FOUR
------------
ALLOCATION OF PROFITS AND LOSSES:
---------------------------------
DISTRIBUTIONS
-------------
Section 4.1 Allocation of Profits and Losses
--------------------------------
A. The Profits and Losses of the Partnership shall be determined and
allocated with respect to each Fiscal Year of the Partnership its of,
and within ninety (90) days after, the end of such Fiscal Year.
B. Subject to Subsection C of this Section 4.1. Profits and Losses
(including all items of Partnership income, gain, loss, deduction,
credit, or the like) for any Fiscal Year shall be allocated (and
credited or borne, as the case may be) as follows:
(1) Profits shall be allocated as follows:
(a) FIRST, to the Partners, to eliminate and in proportion to
any deficit balances in their respective Capital Accounts;
(b) THEN, to the Partners pro rata in accordance with their
respective Partnership Interests.
(2) Losses shall be allocated to the Partners pro rata in accordance
with their respective Partnership Interests.
C. All gain or loss from an Excess Cash Proceeds Event, whether or not
such event causes or is in connection with the dissolution or
termination of the Partnership, shall be allocated (and credited or
borne, as the case may be) as follows:
(1) Gain from an Excess Cash Proceeds Event shall be allocated as
follows:
15
<PAGE> 20
(a) FIRST, to Telco to the extent of Excess Cash Proceeds
distributed to Telco pursuant to clause (1) Of Section
4.2.C;
(b) THEN, to the Partners, to eliminate and in proportion to any
deficit balances in their respective Capital Accounts;
(c) THEN, to the Partners in proportion to and to the extent of
the respective amounts of Excess Cash Proceeds distributed
to the Partners pursuant to clause (2) of Section 4.2.C;
(d) THEN, to the Partners pro rata. in accordance with their
respective Partnership Interests.
(2) Loss from an Excess Cash Proceeds Event shall be allocated as
follows:
(a) FIRST, to the Partners, to eliminate and in proportion to
any positive balances in their respective Capital Accounts;
(b) THEN, to the Partners pro rata in accordance with their
respective Partnership Interests.
Section 4.2 Distributions
-------------
A. All Distributable Cash of the Partnership shall be distributed to the
Partners not later than one hundred twenty (120) days after the end of
each Fiscal Year. All Excess Cash Proceeds arising out of an Excess
Cash Proceeds Event, which does not cause or is not in connection with
the dissolution, or termination of the Partnership, shall be
distributed to the Partners within ninety (90) days after the receipt
thereof.
B. Subject to Section 4.2.D and Section 8.2, Distributable Cash shall be
distributed to the Partners pro rata in accordance with their
respective Partnership Interests.
C. Subject to Section 4.2.1) and Section 8.29 Excess Cash Proceeds
arising from an Excess Cash Proceeds Event, whether or not such event
causes or is in connection with the dissolution or termination of the
Partnership, shall be distributed as follows:
(1) FIRST, to Telco up to an amount equal to the then remaining
balance of the Special Deemed Capital Account of Telco, as; such
remaining balance shall be determined as set forth in Section
3.5;
(2) THEN, to the Partners in proportion to, and up to an amount equal
to, any positive balances in their respective Capital Accounts;
(3) THEN, to the Partners pro rata in accordance with their
respective Partnership Interests.
16
<PAGE> 21
D. Distributable Cash and Excess Cash Proceeds arising from an Excess
Cash Proceeds Event, whether or not such event causes or is in
connection with the dissolution or termination of the Partnership,
shall be paid out in the following order:
(1) to any Partner in repayment of loans or advances of -cash to or
on behalf of the Partnership pursuant to Section 3.1.B, Section
3.3.A or Section 3.7.B, including accrued interest thereon;
(2) the balance, if any, in the manner provided in Section 4.2.B or
Section 4.2.C, as the case may be.
Section 4.3 Distributions in Connection with Dissolution
--------------------------------------------
Upon dissolution of the Partnership, all funds and assets of the
Partnership shall be distributed, subject to the prior payment of all
Partnership fees and obligations in accordance with Section 8.2.B, to and among
the Partners in accordance with Section 4.2.
ARTICLE FIVE
------------
RIGHTS, POWERS, AND DUTIES
--------------------------
OF THE GENERAL PARTNERS
-----------------------
Section 5.1 Management and Control of the Partnership
-----------------------------------------
A. Subject to the Consent of the Limited Partners where required by this
Agreement, the General Partners, or any one or more of them, shall
have the full and exclusive rights, powers, and obligations required
or appropriate to manage and control the business and affairs of the
Partnership in good faith and to make all decisions regarding the
business of the Partnership and shall have all of the rights, powers,
and obligations of general partners of a limited partnership under the
laws of the State.
B. In order to expedite the handling of the Partnership's business; and
affairs, it is understood that any document executed by the General
Partners, or any one or more of them, while acting in the name and on
behalf of the Partnership shall be deemed to be the action of the
Partnership as to any third parties.
C. The Limited Partners shall not participate in the management of, or
have any control over, the Partnership's business, nor shall the
Limited Partners have the power to represent, act for, sign for. or
bind the General Partners or the Partnership, but the Limited Partners
shall nevertheless have the rights provided herein.
The Limited Partners hereby Consent to the exercise by the General
Partners, or any one or more of them, of the rights and powers
conferred art the General Partners by this Agreement.
17
<PAGE> 22
Section 5.2 Authority of the General Partners
---------------------------------
A. In addition to any other rights and powers which the General Partners
may possess under this Agreement and the Act, the General Partners, or
any one or more of them, shall., except to the extent otherwise
provided herein, have all specific rights and powers required or
appropriate to the management of the Partnership business which, by
way of illustration but not by way of limitation, may include the
following rights and powers:
(1) to redeem the VaZza Interests;
(2) to admit Telco and the Crosspoint Croup as Partners;
(3) to close the BNE Financing;
(4) to enter into the BNE Lease;
(5) to construct/renovate the Building and other improvements on the
Land, and to develop, operate, lease and/or manage the Premises;
(6) to close the TIAA Financing;
(7) to enter into the TIAA Lease;
(8) to pay the Development/Construction Management Fee as set forth
in Section 5.5;
(9) to pay the Excess Rent as set forth in Section 5.5;
(10) to execute, acknowledge, and deliver, in furtherance of any and
all of the purposes of the Partnership, any and all agreements$
contracts, documents, certifications, bills of sale, deeds, and
other instruments deemed by the General Partners in good faith to
be necessary or appropriate in connection with the business of
the Partnership;
(11) to protect and preserve the title and interest of the Partnership
in its assets, and to collect all amounts due to the Partnership
and otherwise to enforce all rights of the Partnership, and in
that connection to retain counsel and institute suits or
proceedings in the name and on behalf of the Partnership;
(12) to the extent that funds of the Partnership are available, to pay
all debts and obligations of the Partnership and to make all
Distributions periodically to the Partners in accordance with the
provisions of this Agreement;
(13) to open separate bank accounts for the Partnership with such bank
or banks as the General Partners may from time to time select,
and to designate and change signatories on such accounts;
(14) to obtain governmental or other approvals, licenses, permits, and
authorizations, if any, which may be required for the
18
<PAGE> 23
construction, development, operation, leasing and/or management
of the Premises;
(15) to negotiate, execute and/or modify leases, options, concessions,
licenses, and other occupancy and operating agreements with
respect to the Premises;
(16) to employ on behalf of the Partnership such Persons as the
General Partners in good faith shall deem advisable in the
operation and management of the Partnership business, including,
without limitations accountants, architects, the Accountant,
attorneys, engineers, appraisers, advisers, and other experts, on
such terms and for such reasonable compensation as prevail for
such services in the geographical area in question;
(17) to borrow funds on behalf of the Partnership and/or to make loans
to the Partnership pursuant to the provisions of Section 3.1.B,
Section 3.3.A and Section 3.7.B;
(18) to adjust, in the event of a casualty with respect to the
Premises resulting in an insurance claim in favor of the
Partnership, any claim or retain the services of an independent
professional adjuster to settle such claim, the COST Of SUCH an
adjuster to be an expense of the Partnership;
(19) to grant any covenant, restriction, or similar lien or
encumbrance affecting the Premises; provided that the same is in
the best interest of the Partnership in each. instance;
(20) to execute and deliver all federal, state, and local tax returns
on behalf of the Partnership and to retain counsel and institute,
prosecute, defend, and compromise in good faith any suits or
proceedings, whether administrative or judicial., in connection
with such returns.
B. Any person dealing with the Partnership or the General Partners may
rely upon a certificate signed by the General Partners, or any one or
more of them, thereunto duly authorized, as to:
(1) the identity of the General Partners or the Limited Partners;
(2) the existence or non-existence of any fact or facts which
constitute conditions precedent to acts by the General Partners
or are in any other manner germane to the affairs of the
Partnership;
(3) the Person who is authorized to execute, acknowledge and deliver
any instrument or document of or on behalf of the Partnership; or
(4) any act or failure to act by the Partnership or as to any other
matter whatsoever involving the Partnership or any Partner.
19
<PAGE> 24
Section 5-3 Restrictions on Authority of the General Partners
-------------------------------------------------
A. Without the Consent of all the Limited Partners, the General Partners
shall not have the authority to:
(1) do any act in contravention of this Agreement;
(2) do any act which would make it impossible or impracticable to
carry on the ordinary business of the Partnership;
(3) confess a judgment against the Partnership;
(4) possess Partnership assets, or assign its rights in specific
Partnership assets, for other than a Partnership purpose;
(5) admit a Person as a General Partner, except as provided in this
Agreement; or
(6) knowingly perform any act that would subject any Limited Partner
to liability as a general partner in any jurisdiction.
B. Without the Consent of a Majority in Interest of the Limited Partners,
the General Partners shall not have the authority to:
(1) voluntarily dissolve the Partnership, except as set forth in
Article Six;
(2) voluntarily sell or otherwise dispose of the Premises, except
with respect to a lease or leases for a term or terms of riot
more than five (5) years (including renewals) with respect to
portions of the Premises not exceeding twenty thousand (20,000)
square feet in the aggregate;
(3) voluntarily grant a mortgage or other security interest with
respect to the Premises, except for such mortgages and other
security interests as are necessary or required in connection
with the BNE Financing and the TIAA Financing;
(4) construct any building or other improvement on the Land, except
for the Building and the improvements contemplated by the TIAA
Financing;
(5) enter into any agreement with any Partner or any Affiliate of any
Partner, except as set forth in Section 5.5;
(6) borrow funds on behalf of the Partnership, except with respect to
the BNE Financing or the TIAA Financing or pursuant 'to the
provisions of Section 3.1.B, Section 3.3.A or Section 3.7.B; or
(7) except pursuant to the provisions of Section 3.1.B, Section.
3.3.A or Section 3.7.B, voluntarily incur and pay ordinary and
necessary expenses with respect to the partnership business other
than debt service (with respect to the BNE Financing and/or the
TIAA Financing) and other than expenses which are
20
<PAGE> 25
payable by a tenant under the BNE Lease, under the TIAA Lease
and/or under any other lease of the Premises or any portion
thereof - in excess of (i) twenty thousand dollars ($20,000) in
any of the first three Fiscal Years of the Partnership after the
date hereof; (ii) twenty-five thousand dollars ($25,000) in any
of Fiscal Years four through six of the Partnership after the
date hereof; (iii) thirty thousand dollars ($30,000) in any of
Fiscal Years seven through nine of the Partnership after the date
hereof; and (iv) thirty thousand dollars ($30,000) as adjusted
upward as reasonably determined by the General. Partners with the
Consent of a Majority in Interest of the Limited Partners in any
Fiscal Year subsequent to the ninth Fiscal. Year of the
Partnership after the date hereof.
Section 5.4 Duties and Obligations of the General Partners
----------------------------------------------
A. The General Partners shall take all action which may be necessary or
appropriate (i) for the formation and continuation of the
Partnership's valid existence as a limited partnership under the: laws
of the State and (ii) for the redemption of the Vazza Interests, the
removal of TSFOC as a Limited Partner, the admission of Telco and the
Crosspoint Group as Partners, the construction/renovation of the
Building, and the development, operation, leasing and/or management of
the Premises, in accordance with the provisions of this Agreement and
applicable laws and regulations and to the extent that Partnership
funds are available to carry out such duties and obligations.
B. The General Partners shall devote to the Partnership such time as may
be necessary for the proper performance of their duties hereunder
C. The General Partners shall take such action as may be necessary or
appropriate in order to form or qualify the Partnership under the laws
of any jurisdiction in which the Partnership is doing business or in
which such formation or qualification is necessary in order to protect
the limited liability of the Limited Partners or. in order to continue
in effect such formation or qualification. The General Partners. shall
file or cause to be filed for recordation in the office of the
appropriate authorities of the State and in the proper office or
offices in each other jurisdiction in which the Partnership is formed
or qualified, the Certificate and such certificates (including limited
partnership and fictitious name certificates) and other documents as
are required by the applicable statutes, rules or regulations of any
such jurisdiction or are required to reflect the identity of the'
Partners and the amounts of their respective Capital Contributions.
Section 5.5 Authority of the General Partners to Deal With Affiliates
---------------------------------------------------------
A. The General Partners may for, in the name of, and on behalf of the
Partnership enter into' such agreements, contracts or the like with a
General Partner or any Affiliate of a General Partner to undertake
21
<PAGE> 26
and carry out the business of the Partnership as if such General
Partner or Affiliate were an independent contractor. The General
Partners may obligate the Partnership to pay reasonable compensation
for and on account of any such services and accept terms which are no
less favorable to the Partnership than are available from others on an
arm's-length basis in the same geographical area.
B. All Partners are aware that the Partnership has entered or may enter
into the following arrangements with Affiliates of the Partners. which
arrangements were not or will not be determined by arm's-length
negotiations:
(1) the payment to Crosspoint Development Corporation, a
Massachusetts corporation which is an Affiliate of that General
Partners and of certain of the Limited Partners, of a, fee
("Development/Construction Management Fee") equal to $450,000,
payable as follows:
(a) $225,000 upon the closing of the BNE Financing;
(b) $225,000.upon Building Completion;
(2) the payment to TSFOC of Excess Rent, payable in monthly
installments, but subject to the provisions of the TIAA Lease;
(3) the BNE Lease!, and
(4) the TIAA Lease.
All Partners ratify, confirm and assent to the foregoing arrangements and the
terms and provisions thereof.
Section 5.6 Compensation of Partners
------------------------
A. Subject to the provisions of Section 5.3.B(7), the General Partners
shall be reimbursed by the Partnership for their reasonable
out-of-pocket expenses incurred and paid in connection with
Partnership business -- including, without limitation, all, legal.,
accounting, travel and other expenditures incurred in connection
therewith and the costs of direct labor, materials and supplies used
for and in respect of the development, operation, leasing and/or
management of the Premises and other Partnership assets and for fees,,
commissions, and other amounts paid to brokers and similar parties in
connection with the acquisition of leases with respect to the Premises
or portions thereof; provided that, subject to the provisions
of the TIAA Lease, the Excess Rent shall be paid by the Partnership to
TSFOC before reimbursement of the General Partners pursuant to this
Subsection A.
B. Except as expressly provided for in this Agreement, no payment shall
be made by the Partnership to any Partner for the services; or,
out-of-pocket expenses of such Partner or of any employee, agent or,
representative of any Partner.
22
<PAGE> 27
Section 5.7 Other Interests of the General Partners and Their Affiliates
------------------------------------------------------------
Any General Partner and any Affiliate of a General Partner may engage IN or
possess an interest in other business ventures of every nature and description,
independently or with others -- including, without limitation, the real estate
business in all of its phases, which shall include, without limitation, the
ownership, construction, operation, management, sale, syndication, and
development of real property for his own account or for the account of others.
Section 5.8 Rights to Income or Profits
---------------------------
Neither the Partnership nor any other Partner shall have any rights in or
to any income or profits derived by or from any Person and any arrangements,
agreements and ventures described in or authorized by Section 5.5.A, Section
5.5.B(l) and (2), Section 5.6 or Section 5.7 by reason of this Agreement.
Section 5.9 Liability and Indemnification of the General Partners
-----------------------------------------------------
A. The General Partners shall be obligated to undertake and perform the
duties, responsibilities and obligations of the General Partners set
forth in this Agreement only to the extent that adequate funds of the
Partnership are available therefor.
B. The General Partners shall not be liable. responsible, or accountable
in damages or otherwise to any of the Partners or the Partnership for,
and the Partnership shall indemnify the General Partners against and
save each of them harmless from, any damage or expense (including
reasonable attorneys' fees) incurred by reason of any act or omission
performed or made by the General Partners on behalf of the Partnership
or the Limited Partners in good faith and in a manner reasonably
believed by the General Partners to be both within the scope of the
authority granted to them by this Agreement and in the best interests
of the Partnership or the Limited Partners; provided that the
satisfaction of any indemnification shall be from, and limited to,
Partnership assets. The Limited Partners shall not have any personal
liability whatsoever on account of the provisions of this Section 5.9.
C. The General Partners shall have the right and authority to require in
all Partnership contracts that the General Partners will not be
personally liable thereon and that the Person contracting with the
Partnership is to look solely to the Partnership and its assets; for
satisfaction.
ARTICLE SIX
-----------
TRANSFERABILITY OF A
--------------------
GENERAL PARTNER'S INTEREST
--------------------------
Section 6.1 Voluntary Retirement or Transfer by a General Partner
-----------------------------------------------------
A. No General Partner shall have the right to retire as a General Partner
of the Partnership or to Transfer, assign or encumber his
23
<PAGE> 28
Interest (or any part thereof) as a General Partner, without the
Consent Of a Majority in Interest of the Limited Partners in each
instance.
B. Notwithstanding the provisions of Section 6.1.A:
(1) any General Partner may Transfer or assign his Interest (or any
part thereof) as a General Partner to an Affiliate with the
Consent of a Majority in Interest of the Limited Partners;
(2) at any time after the tenth (10th) anniversary of the date of
this Agreement, any General Partner may retire or Transfer,
assign or encumber his Interest (or any part thereof) as a
General Partner without the Consent of any of the Limited
Partners;
PROVIDED in each case that the characteristics (including, without
limitation, the net worth) of the remaining General Partner, are
sufficient and of such quality so as to meet all then applicable
requirements set by statute, the Internal Revenue Service or the
courts to insure that the Partnership will not fail to be classified
for federal income tax purposes as a partnership, rather than as an
association taxable as a corporation.
Notice of any such retirement, Transfer, assignment or encumbrance
shall be given to all Partners; and, subject to the provisions of
Subsection D of this Section 6.1, such retirement, Transfer,
assignment or encumbrance shall be effective on the sixtieth (60th)
day after the date of such notice.
C. Subject to the provisions of Subsection D of this Section 6.1, upon
the retirement of a General Partner, the retiring General Partner
shall be entitled to receive (i) the then net fair market value of his
Interest as a General Partner as determined as set forth in Article
Twelve and (ii) any amounts due and owing to him by the Partnership
less any amounts due and owing by him to the Partnership.
The right of a retired General Partner to payment under this
Subsection C shall be subject to any claim for damages the Partnership
or any Partner may have against the General Partner if such retirement
is in contravention of this Agreement.
Any payments by the Partnership to a retiring General Partner pursuant
to this Subsection C may be paid, at the option, of the Partnership,
by a promissory note of the Partnership (which promissory note shall
be secured by Partnership assets and by security interests in the
Partnership Interests of the Partners but which promissory note shall
not impose personal liability on any Partner of the Partnership)
payable in three (3) equal, consecutive annual installments of
principal, the first such installment being payable one year after the
effective date of retirement, with interest on the unpaid principal
balance thereof at the rate of ten percent (10%) per annum and payable
annually on. the principal installment payment date.
24
<PAGE> 29
D. Upon the notice of the retirement of a General Partner, the remaining
Partners shall decide whether to reconstitute the Partnership in
accordance with the provisions of Section 6.2. If the remaining
Partners do not reconstitute the Partnership in accordance with the
provisions of Section 6.2, then the retirement of the retiring General
Partner shall be effective only for the purposes of Section 6.2.A and
Section 8.1.C; for all other purposes, the retiring General Partner
shall remain a General Partner of the Partnership until the
Partnership and his Interest are liquidated in accordance with the
provisions of Section 8.2.
Section 6.2 Reconstitution of the Partnership
---------------------------------
A. In the event of the retirement or Incapacity of a General Partner, the
Partnership shall be dissolved.
B. Notwithstanding the provisions of Subsection A of this Section 6.2,
the Partnership shall be continued on the terms and conditions of this
Agreement after the retirement or Incapacity of a General Partner (the
"Former General Partner") if, within sixty (60) days after such
dissolution of the Partnership:
(1) if there is a remaining General Partner or General Partners, each
such remaining General Partner and a Majority in Interest of the
Limited Partners Consent to continue the Partnership; or
(2) if there is no remaining General Partner, all the Limited
Partners Consent to continue the Partnership, designate in
writing one or more substituted General Partners, and at least
one such designee consents in writing to become a substitute
General Partner (collectively, the "Substitute General
Partner":).
C. If the business of the Partnership is continued pursuant to clause (2)
of Subsection B of this Section 6.2 with the Substitute, General
Partner, then, subject to the provisions of Section 6.3. the
Substitute General Partner shall succeed to all of the powers;,
privileges and obligations of the Former General Partner hereunder.
D. If the business of the Partnership is continued pursuant to Subsection
B of this Section 6.2, then the Interest of an Incapacitated Former
General Partner shall become a Limited Partner Interest (with the same
interest in Profits, Losses and Distributions, etc., as the
Incapacitated Former General Partner had prior to his Incapacity), and
such Incapacitated Former General Partner (or his legal
representative) shall be deemed a Limited Partner of the Partnership.
Section 6.3 Admission of a Person as the Substitute General Partner
-------------------------------------------------------
The admission of a Person as the Substitute General Partner pursuant to
Section 6.2 shall be effective only if and after the following conditions are
satisfied:
(1) the Interests of the Limited Partners shall not be adversely
affected by the admission of the Substitute General Partner;
25
<PAGE> 30
(2) any Person designated as a Substitute General Partner pursuant to
Section 6.2 shall have satisfied the requirements of Section 11.2
hereof; and
(3) all of the provisions of Section 6.2 and Section 10.3 shall. have
been complied with.
Section 6.4 Restrictions on Transfer by a General Partner
---------------------------------------------
Notwithstanding anything to the contrary contained in this Agreement, tile
Interests of the General Partners shall at all times be subject to tile
restrictions on Transfer set forth in Subsections A and B of Section 7.2.
Section 6.5 Liability and Rights of a Retired or Transferor General Partner
---------------------------------------------------------------
Any General Partner who shall duly retire or Transfer his entire Interest
as a General Partner shall remain liable for his portion of any obligations and
liabilities incurred as General Partner prior to the time such retirement or
Transfer shall have become effective, but any such duly retired or Transferor
General Partner shall be free of any obligation or liability incurred on account
of the activities of the Partnership from and after such time of retirement or
Transfer. Except as may be provided herein, such retirement or Transfer shall
not affect any rights of a retired or Transferor General Partner which shall
mature or become vested prior to the effective date of his retirement or
Transfer.
ARTICLE SEVEN
-------------
TRANSFERABILITY AND ACQUISITION
-------------------------------
OF A LIMITED PARTNER'S INTEREST
-------------------------------
Section 7.1 Representations of Limited Partners
-----------------------------------
Each Limited Partner hereby represents and warrants to the General Partners
and to the Partnership that his acquisition of his Interest is made as principal
for his own account for investment purposes only and not with a view to, or for,
the resale or distribution of such Interest or any portion thereof.
Section 7.2 Restrictions on Transfer of Interests
-------------------------------------
A. Notwithstanding anything to the contrary contained in this Agreement,
no Transfer of a Partner's Interest may be made unless an opinion,
satisfactory in form and substance to the Partnership, is rendered by
qualified, independent counsel to the Transferor directly to the
Partnership, that
(1) such Transfer when added to the total of all other Transfers of
Interests within the preceding twelve (12) months, would not
result in the Partnership being considered to have terminated
within the meaning of Section 708 of the Code; and
26
<PAGE> 31
(2) such Transfer would not violate the Securities Act of 1933, or
any state securities ("blue sky") laws (including any investor
suitability standards) applicable to the Partnership or the
Interest to be transferred.
B. In no event shall a Partner Transfer all or any part of his Interest
to a minor or an incompetent except by will or intestate succession.
Section 7.3 Incapacity of a Limited Partner
-------------------------------
If a Limited Partner dies, his executor, administrator or trustee, or, if
he is adjudicated incompetent, his committee, guardian or conservator or, if he
becomes bankrupt the trustee or receiver of his estate, shall have all tile
rights of the Limited Partner for the purpose of settling or managing his estate
and such power as the Incapacitated Limited Partner possessed to Transfer all or
any part of his Interest and to join with such Transferee in satisfying
conditions precedent to such Transferee becoming a Substitute Limited Partner.
The Incapacity of a Limited Partner shall not dissolve the Partnership.
Section 7.4 Transferees
-----------
A. The Partnership need not recognize for any purpose any purported
Transfer of all or any part of the Interest of a Partner unless the
pertinent provisions of Section 7.2 shall have been complied with and
there shall have been filed with the Partnership a written and dated
notice of such Transfer, executed and acknowledged both by the
Transferor and by the Transferee, which notice shall (i) contain all
of the terms and provisions of the agreement relating to such Transfer
and (ii) represent that such Transfer was made in accordance with all
applicable laws and regulations (including any investor suitability
standards). Any Transfer shall be recognized by the Partnership as
effective on the date of such notice if the date of such notice is
within thirty (30) days of the date on which such notice is filed with
the Partnership, and otherwise shall be recognized as effective on the
date such notice is filed with the Partnership.
B. If a Limited Partner shall Transfer all of his Interest, he shall
cease to be a Limited Partner, except that, unless and until a
Substitute Limited Partner is admitted in his stead, such Transferor
Limited Partner shall retain the statutory rights of the assignor of a
limited partner's interest under the Act.
C. A Person who is the Transferee of all or any part of the Interest of'
a Limited Partner, but does not become a Substitute Limited Partner,
and desires to make a further Transfer of such Interest, shall. be
subject to all the provisions of this Article Seven to the same extent
and in the same manner as if such Person were a Limited Partner
desiring to make a Transfer of his Interest.
27
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Section 7.5 Substitute Limited Partners
---------------------------
A. No Limited Partner shall have the right to substitute a Transferee as
a Limited Partner in his place. Any Transferee of an Interest of a
Limited Partner shall be admitted to the Partnership as a Substitute
Limited Partner (i) if the Transferee is an Affiliate of the
Transferor Limited Partner; (ii) if the Transferor Limited Partner
first offered his Interest to the other Partners in accordance with
the provisions of Section 7.6; or (iii) otherwise, only with the
Consent of the General Partners which Consent may, in the absolute
discretion of the General Partners, be withheld. Any such Consent by
the General Partners shall be binding and conclusive without the
Consent of any Limited Partner.
B. No Person shall become a Substitute Limited Partner until such Person
shall have satisfied the requirements of Section 11.2; PROVIDED that
for the purposes of Article Four, a Person shall be treated as having
become, and as appearing in the records of the Partnership as, a
Limited Partner on such date as the Transfer to such Person was
recognized by the Partnership pursuant to Section 7.4.A.
Section 7.6 Right of First Refusal
----------------------
A. No Limited Partner shall Transfer his Interest for value unless and
until he has first offered it to the other Partners as follows:
(1) The Limited Partner shall give notice to the General Partners
that he desires to Transfer his Interest for value. He shall
attach to such notice the written offer of a prospective
purchaser to buy such Interest. Such offer shall be complete in
all details as to purchase price and terms of payment. Such
notice shall include the representation and warranty of the
Limited Partner that such offer is genuine and in all respects
what it purports to be.
(2) The General Partners shall promptly notify all the other Partners
of such offer and the details thereof. Within twenty (20) days
after such notice from the General Partners is given, any one or
more of such Partners (including the General Partners) may elect
to purchase the Interest of the Limited Partner at the price and
on the terms contained in such offer. If more than one of such
Partners elect to so purchase, then such electing Partners shall
be entitled to purchase such Interest pro rata in accordance with
their respective Partnership Interests.
(3) If no such Partner elects to purchase such Interest, the Limited
Partner shall be free to Transfer such Interest to the Person,
for the price, and on the terms contained in such offer within
sixty (60) days after the expiration of the twenty (20) day
election period, in which event such Person shall become a
Transferee of such Interest under this Article Seven. If such
Interest is not so transferred to such Person. such Interest
shall become again subject to the terms and conditions of this
Section 7.6.
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B. Any such Partner who elects to purchase such Interest shall hold such
Interest as a Limited Partner.
ARTICLE EIGHT
-------------
DISSOLUTION, LIQUIDATION AND
----------------------------
TERMINATION OF THE PARTNERSHIP
------------------------------
Section 8.1 Events Causing Dissolution
--------------------------
The Partnership shall dissolve upon the happening of any of the following
events:
A. the expiration of its term;
B. the election to dissolve the Partnership made in writing by a
Substantial Majority in Interest of the Limited Partners pursuant to
Section 10.2.B;
C. the retirement or Incapacity of a General Partner, SUBJECT, HOWEVER,
to reconstitution as provided for in Section 6.2;
D. the Transfer of all of the Partnership assets; or
E. the happening of any other event causing the dissolution of the
Partnership under the laws of the State.
Dissolution of the Partnership shall be effective on the day on which the event
occurs giving rise to the dissolution, but the Partnership shall not terminate
until the Partnership's Certificate has been cancelled and the assets of the
Partnership have been distributed as provided in Section 8.2.
Section 8.2 Liquidation
-----------
A. Upon dissolution of the Partnership, its liabilities shall be paid in
the order provided hereinafter. The General Partners shall cause the
assets of the Partnership to be sold in accordance with reasonable
business judgment, in an effort to obtain the best prices for, the
assets, and the General Partners shall cause the cancellation of the
Certificate. Pending such actions, the General Partners shall have the
right to continue to operate and otherwise deal with the assets of the
Partnership. In the event the General Partners are not able to
function or in the event the General Partners are not performing their
responsibilities under this Section 8.2.A in accordance with
reasonable business judgment, the Partnership shall elect, by Consent
of a Majority in Interest of the Limited Partners, a Person to perform
the functions of the General Partners in liquidating the assets of the
Partnership and winding up its affairs.
B. In settling accounts after dissolution, the remaining assets of the
Partnership shall, subject to applicable laws, be paid out in the
following order:
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(1) FIRST, to pay the expenses of liquidation;
(2) THEN, to third party creditors (including, without limitation,
and Affiliates as such creditors, if and to the extent or
advances made by them to the Partnership), in the priority
provided for by law;
(3) THEN, to set up a reserve for contingencies such as the General
consider necessary;
(4) THEN, the balance, if any, to the Partners in the manner provided
in Section 4.3.
C. The foregoing provisions of this Section 8.2 shall not apply in the
event that the Partnership is reconstituted as provided for in Section
6.2.
ARTICLE NINE
------------
FISCAL MATTERS
--------------
Section 9.1 Title to Property and Bank Accounts
-----------------------------------
The assets of the Partnership shall be held in the name of the Partnership.
The funds of the Partnership shall be deposited in the name of the
Partnership in such bank account or accounts in Massachusetts as shall be
designated by the General Partners, and withdrawals therefrom shall be made upon
the signature of the General Partners or of such Persons as shall be so
designated by the General Partners.
All funds not needed in the operation of the Partnership business may be
deposited in interest-bearing accounts or invested in short-term United States
Government obligations maturing within one year or otherwise invested in such
manner as the General Partners in their discretion deem advisable.
Section 9.2 Books and Records
-----------------
The books and records of the Partnership, a list of the names; and
addresses and Interests of all Partners, and a certified copy of the Certificate
shall be maintained by the General Partners at the principal office of the
Partnership and shall be available to the Limited Partners and their duly
authorized representatives for inspection at any and all reasonable times upon
two business days' prior notice.
The books and records of the Partnership will be kept on the cash basis.
Reports of the Partnership for tax purposes will be prepared on such method of
accounting as will, in the opinion of the Accountant, be most advantageous to a
Substantial Majority in Interest of the Partners. Financial statements for the
Partnership will be prepared in conformity with generally accepted accounting
principles applied on a consistent basis and in respect of an annual period
ending on August 31; PROVIDED that the cost of. preparation of said financial
statements shall be paid solely by Telco.
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<PAGE> 35
Any Partner, or his duly-authorized representatives, upon paying the costs
of preparation, duplication and mailing, shall be entitled for any proper
purpose to a copy of the list of names and addresses and Interests of the
Partners. The Partnership may maintain such other books and records and may
provide such financial or other statements as the General Partners in their
discretion deem advisable.
Section 9.3 Reports and Accountant
----------------------
Within one hundred twenty (120) days after the end of each Fiscal Year of
the Partnership, the Partnership shall cause to be delivered to each Limited
Partner an annual report, prepared by the Accountant, containing (i) an audited
statement of financial condition as of the end of the Fiscal Year then ended,
(ii) an audited operating statement for the Fiscal Year then ended, (iii) an
opinion of the Accountant as to the fairness of presentation of such statement
of financial condition and operating statement. and (iv) an audited statement of
sources and application of funds for the Fiscal Year then ended.
Within ninety (90) days after the end of each Fiscal Year of the
Partnership, the Partnership shall cause to be delivered to each Limited Partner
(i) a report describing the Distributions to Partners for the Fiscal Year then
ended, and (ii) all information necessary for the preparationof such Limited
Partner's federal, state and local income tax returns.
Section 9.4 Federal Tax Elections
---------------------
The Partnership shall make elections for federal income tax purposes as
follows:
A. In case of a Transfer of all or part of the Partnership Interest of a
Partner, the Partnership may, in the sole discretion of the General
Partners, timely elect pursuant to Sections 743 and 754 of the Code
(or corresponding provisions of future law) and pursuant to similar
provisions of applicable state or local income tax laws, to adjust the
basis of the Assets of the Partnership. In such event, any basis
adjustment attributable to such Transfer shall be allocated solely to
the Transferee.
B. The Partnership shall elect the straight-line method (over the
shortest period of years allowed) of depreciation for so-called
"18-year real property" owned by the Partnership pursuant to the
accelerated cost recovery system set forth in the Code.
C. All other elections required or permitted to be made by the
Partnership under the Code and not otherwise expressly provided for in
this Agreement shall be made by the General Partners with the Consent
of a Majority in Interest of the Limited Partners.
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ARTICLE TEN
-----------
MEETINGS AND VOTING RIGHTS OF LIMITED PARTNERS
----------------------------------------------
Section 10.1 Meetings
--------
A. Meetings of the Limited Partners for any purpose may be called by the
General Partners and shall be called by the General Partners upon
receipt of a request in writing signed by a Majority in Interest of
the Limited Partners. Notice of such meeting shall be sent within ten
(10) days after receipt of such request. Such request shall state the
purpose of the proposed meeting and the matters proposed to be acted
upon thereat. Such meeting shall be held at the principal office of
the Partnership. or at such other place in Massachusetts as may be
designated by the General Partners or, if called upon the request of
Limited Partners, at such place in Massachusetts as designated by such
Limited Partners. In addition, upon receipt of a request in writing
signed by a Majority in Interest of the Limited Partners, the General
Partners shall submit any matter (upon which the Limited Partners are
entitled to act) to the Limited Partners for a-vote by written Consent
without a meeting.
B. A notice of any such meeting shall be given to each Limited Partner
not less than fifteen (15) days nor more than sixty (60) days before
the date of the meeting. Such notice shall state the place, date and
hour of the meeting, and shall indicate that it is being issued at or
by the direction of the Partners calling the meeting. The notice shall
state the purpose or purposes of the meeting. If a meeting is
adjourned to another time and/or place, and if announcement of such
adjournment is made at the meeting, it shall not be necessary to give
notice with respect to the adjourned meeting.
The presence in person or by proxy of a Majority in Interest of the
Limited Partners shall constitute a quorum at all meetings of the
Limited Partners; PROVIDED, however, that if there be no such quorum,
holders of a majority of the Limited Partner Interests so present or
so represented may adjourn the meeting from time to time without
further notice, until a quorum shall have been obtained.
No notice of the time, place, or purpose of any meeting of Limited
Partners need be given to any Limited Partner who attends in person or
is represented by proxy (except when the Limited Partner attends a
meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business on the ground that the
meeting is not lawfully called or convened), or to any Limited Partner
entitled to such notice who, in writing, executed and filed with the
records of the meeting, either before or after the time thereof,
waives such notice.
C. For the purpose of determining the Limited Partners entitled to vote
on, or to vote at, any meeting of the Limited Partners or any
adjournment thereof, the General Partners or the Limited Partners
requesting such meeting may fix, in advance, a date as the record date
for any such determination. Such date shall not be more than fifty
(50) days nor less than ten (10) days before any such meeting.
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<PAGE> 37
D. Each Limited Partner may authorize any person or persons to act for
him by proxy in all matters in which a Limited Partner is entitled to
participate, whether by waiving notice of any meeting, or voting or
participating at a meeting. Every proxy must be signed by the Limited
Partner or his attorney-in-fact . No proxy shall be valid after the
expiration of six (6) months from the date thereof unless otherwise
provided in the proxy. Every proxy shall be revocable at the pleasure
of the Limited Partner executing it.
E. At each meeting of Limited Partners, the Limited Partners present or
represented by proxy shall elect such officers and adopt such rules
for the conduct of such meeting as they shall deem appropriate.
Section 10.2 Voting Rights of Limited Partners
---------------------------------
Subject to Section 10.3, a Substantial Majority in Interest of the Limited
Partners, without the concurrence of the General Partners, may by affirmative
vote or written Consent:
A. Amend this Agreement, subject to the provisions of Section 11.1 and to
the conditions that such amendment (a) may not alter in any way the
purpose of the Partnership; (b) may not in any manner allow the
Limited Partners to take part in the control of the Partnership's
business; and (c) may not, without the Consent of the General
Partners: (1) alter the rights, powers and duties of the General
Partners as set forth in Article Five or the interests of the Partners
in Distributions, Profits and/or Losses; (2) increase the liability of
the General Partners hereunder; or (3) amend this Section 10.2.
B. Dissolve the Partnership; PROVIDED that no such vote or Consent shall
be effective prior to the tenth (10th) anniversary of the date of this
Agreement.
Section 10.3 Conditions to Action by Limited Partners
----------------------------------------
The right of the Limited Partners under this Agreement to amend this
Agreement, to dissolve the Partnership, or to designate a Substitute General
Partner shall not come into existence or be effective in any manner unless and
until (i) the Partnership has received an opinion of qualified, independent;
counsel, which counsel is also satisfactory to a Majority in Interest of the
Limited Partners, as to the legality of such action; (ii) either (a) the
Partnership has received an opinion of qualified, independent counsel, which
counsel is also satisfactory to a Majority in Interest of the Limited Partners,
that such action may be effected without subjecting the Limited Partners to
liability as general partners under the Act or under the laws of such other
jurisdictions in which the Partnership is formed or qualified, or (b) a court
having original jurisdiction in the matter has entered a judgment; to the
foregoing effect; and (iii) either (a) the Partnership has received an opinion
of qualified, independent counsel, which counsel is also satisfactory, to a
Majority in Interest of the Limited Partners, that such action may be effected
without changing the Partnership's status for federal income tax purposes or (b)
either a court having original jurisdiction has entered a, judgment, or the
Internal Revenue Service has issued a ruling, to the
33
<PAGE> 38
foregoing effect. For purposes of this Section 10.3, counsel will be deemed
satisfactory to a Majority in Interest of the Limited Partners if proposed by,
and affirmatively approved in writing within fifteen (15) days thereafter by, ,a
Majority in Interest of the Limited Partners.
ARTICLE ELEVEN
--------------
AMENDMENTS
----------
Section 11.1 Adoption of Amendments
----------------------
A. In addition to the amendments otherwise authorized herein. amendments
may be made to this Agreement from time to time by the General
Partners with the Consent of a Majority in Interest of the Limited
Partners; PROVIDED however, that without the Consent of the Partners
to be adversely affected by the amendment, this Agreement may not be
amended so as to CO convert a Limited Partner's Interest into a
General Partner's Interest; (ii) modify the limited liability of a
Limited Partner; or (iii) alter the Interest of a Partner in
Distributions, Profits and/or Losses.
B. The General Partners shall, within a reasonable time after the
adoption of any amendment to this Agreement, make any filings or
publications required or desirable to reflect such amendment,
including any required filing or recordation of an amended Certificate
or similar instrument or document.
Section 11.2 Amendments on Admission or Substitution of Partners
---------------------------------------------------
A. Each Limited Partner, Substitute Limited Partner, General Partner, and
Substitute General Partner shall become a signatory hereof by signing
such number of counterpart signature pages to this Agreement and such
other instrument or instruments, and in such manner and at such time,
as the General Partners shall determine. By so signing, each Limited
Partner, Substitute Limited Partner, General Partner or Substitute
General Partner, as the case may be, shall be deemed to have adopted,
and to have agreed to be bound by all the provisions of, this
Agreement, as amended from time to time in accordance with the
provisions of this Agreement.
B. If this Agreement shall be amended to reflect the admission or
substitution of a Limited Partner. the amendment to this Agreement
shall be signed by the General Partners, the Person to be substitute
or added, and the assigning Limited Partner or his attorney-in-fact.
C. If this Agreement shall be amended to reflect the replacement of the
Former General Partner by the Substitute General Partner, such
amendment shall be signed by the Substitute General Partner.
D. No person shall become a Partner unless such Person shall have:
(1) become a party to, and adopted all of the terms and conditions;
of, this Agreement;
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<PAGE> 39
(2) if such Person is a corporation, association or trust, provided
the General Partners with evidence satisfactory to counsel to the
Partnership of such Person's authority to become a Partner under
the terms and provisions of this Agreement;
(3) except as to an initial Partner under this Agreement, paid all
reasonable legal fees of the Partnership and the General Partners
and filing and publication costs in connection with such Person's
becoming a Partner; and
(4) except as to an initial Partner under this Agreement, furnished
to the Partnership such legal opinions with respect to compliance
with the provisions of Section 7.2.A as counsel to the
Partnership may reasonably request, and such opinions shall be
reasonably satisfactory in form and substance (and also as to the
Person rendering the same) to counsel to the Partnership.
ARTICLE TWELVE
--------------
VALUATION AND APPRAISAL PROCEDURE
---------------------------------
Section 12.1 General
-------
The determination of the fair market value of the Premises pursuant to
Section 3.5, the determination of the net fair market value of the Interest of
a. retiring General Partner pursuant to Section 6.1, and. the determination of
the net fair market value of the Defaulting Partner's Partnership Interest
pursuant to Section 3.3.B(2) shall be accomplished in accordance with the
provisions of Subsection A, Subsection B or Subsection C, as the case may be. of
Section 12.2. All Partners acknowledge and confirm that the guiding principle
underlying the appraisal procedure set forth in Section 12.2 shall be that each
determination of such fair market value or of such net fair market value, as the
case may be, shall be accomplished expeditiously, in good faith and at
reasonable expense to the Partnership and to the particular Partner or Partners
in question.
Any appraiser designated or appointed to serve in accordance with the
provisions of Section 12.2 shall be disinterested and shall be qualified to
appraise real estate of the same type as the Premises and situated in the
vicinity of the Premises, shall be a member of the American Institute of Real
Estate Appraisers (or any successor association or body of comparable standing
if such Institute is not then in existence), and shall have been actively
engaged in the appraisal of real estate situated in the vicinity of the Premises
for a period of not less than ten (10) years immediately preceding his
designation or appointment.
Section 12.2 Appraisal Procedure
-------------------
A. The determination of the fair market value of the Premises pursuant to
Section 3.5 shall be accomplished in accordance with the procedure set
forth in this Subsection A of Section 12.2.
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<PAGE> 40
If the General Partners (on behalf of the Partnership) and Telco are
unable to agree on the fair market value of the Premises within ten
(10) business days of the occurrence of an Excess Cash Proceeds Event
giving rise to the determination, then either party (that is, either
the General Partners on behalf of the Partnership or Telco) may
request, on behalf of both, within an additional further period of ten
(10) business days, the appointment of a qualified appraiser (the
"Appraiser") by the President of The Greater Boston Real Estate Board
(or any successor association or body of comparable standing if such
Board is not then in existence) or the person to whom the President
may delegate that function; and if no person then serves in that
capacity, then by the person serving in comparable position. The party
so requesting shall give notice to the other party of the appointment
of the Appraiser within three (3) business days of such appointment.
Within fifteen (15) business days following such notice of the
appointment of the Appraiser, each party shall set forth and deliver
in writing, in duplicate, to the Appraiser its position as to such
fair market value supported by the reasons therefor. If either party
fails timely to submit its position, the position submitted by the
other party shall constitute the decision of the Appraiser and shall
be final and binding upon the parties. Neither party may amend its
position once such position has been delivered to the Appraiser'. At
the expiration of such fifteen (15) business day period, the Appraiser
shall transmit the position of each party to the other party.
The Appraiser shall independently investigate all 'matters bearing on
the determination of such fair market value, shall select within
fifteen (15) business days following the expiration of the foregoing
fifteen (15) business day period, which of the two submitted positions
more closely approximates his determination of such fair market value
and shall immediately give notice of such selection to each party. The
Appraiser shall, have no right to propose a middle ground or any
modification of either of the two submitted positions. The Appraiser
shall have the right to consult experts and competent authorities with
factual information or knowledge concerning the determination of such
fair market value. The position the Appraiser selects as more closely
approximating his determination shall constitute the decision of the
Appraiser and shall be final and binding upon the parties.
Notwithstanding anything to the contrary contained in this Subsection
A, the determination by the Appraiser of such fair market value shall
be based upon the following conditions and assumptions:
(1) that the valuation date is the effective date of the Excess Cash
Proceeds Event giving rise to the determination;
(2) that the then current use of the Premises is the highest and best
use thereof; and
(3) that, even if the Premises are encumbered by the TIAA Lease on
the valuation date, the determination shall nevertheless be made
as if the Premises are not then encumbered by the TIAA Lease.
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<PAGE> 41
In the event of the failure, refusal or inability of the Appraiser to
act, a new Appraiser shall be appointed in his stead, which
appointment shall be made in the same manner as hereinbefore provided
for the appointment of such Appraiser so failing, refusing or being
unable to act.
All fees and expenses incurred with respect to the determination of
such fair market value in accordance with this Subsection A --
including, without limitation, the fees of the Appraiser and the costs
of both parties (including their reasonable attorneys' fees) with
respect to the preparation and submission of their respective
positions -- shall be paid by the party whose position is not selected
by the Appraiser.
B. The determination of the net fair market value of the Interest of a
retiring General Partner pursuant to Section 6.1 shall be accomplished
in accordance with the procedure set forth in this Subsection B of
Section 12.2.
If the Partnership. and the retiring General Partner are unable to
agree on the net fair market value of the Interest within ten (10)
business days of the effective date of the retirement of a General
Partner, then either party (that is, either the Partnership or the on
behalf of both, within an retiring General Partner) may request,
additional further period of ten business (10) days. the appointment
of a qualified appraiser (the "Appraiser") by the President of The
Greater Boston Real Estate Board (or any successor association or body
of comparable standing if such Board is not then in existence) or the
person to whom the President may delegate that function; and if no
person then serves in that capacity, then by the person serving in
comparable position. The party so requesting shall give notice to the
other party of the appointment of the Appraiser within three (3)
business days of such appointment. Within fifteen (15) business days
following such notice of the appointment of the Appraiser, each party
shall set forth and deliver in writing, in. duplicate, to the
Appraiser its position as to such net fair market value supported by
the reasons therefor. If either party fails timely to submit its
position, the position submitted by the other party shall constitute
the decision of the Appraiser and shall be final and binding upon the
parties. Neither party may amend its position once such position has
been delivered to the Appraiser. At the expiration of such fifteen
(15) business day period, the Appraiser shall transmit the position of
each party to the other party.
The Appraiser shall independently investigate all matters bearing on
the determination of such net fair market value, shall select, within
fifteen (15) business days following the expiration of the foregoing
fifteen (15) business day period, which of the two submitted positions
more closely approximates his determination of such net fair market
value and shall immediately give notice of such selection to each
party. The Appraiser shall have no right to propose it middle ground
or any modification of either of the two submitted positions. The
Appraiser shall have the right to consult experts and competent
authorities with factual information or knowledge concerning the
37
<PAGE> 42
determination of such net fair market value. The position the
Appraiser selects as more closely approximating his determination
shall constitute the decision of the Appraiser and shall be final and
binding upon the parties. Notwithstanding anything to the contrary
contained in this Subsection B, the determination by the Appraiser of
such net fair market value shall be based upon the following
conditions and assumptions:
(1) that the valuation date is the effective date of retirement of
the General Partner;
(2) that the then current use of the Premises is the highest and best
use thereof; and
(3) that, even if the Premises are encumbered by the TIAA Lease on
the valuation date, the determination shall nevertheless be made
as if the Premises are not then encumbered by the TIAA Lease.
In the event of the failure, refusal or inability of the Appraiser to
act, a new Appraiser shall be appointed in his stead, which
appointment shall be made in the same manner as hereinbefore Provided
for the appointment of such Appraiser so failing, refusing or being
unable to act.
All fees and expenses incurred with respect to the determination of
such net fair market value in accordance with this Subsection B
including, without limitation, the fees of the Appraiser and the costs
of both parties (including their reasonable attorneys' fees) with
respect to the preparation and submission of their respective
positions -- shall be paid by the party whose position is not selected
by the Appraiser.
C. The determination of the net fair market value of the Defaulting
Partner's Partnership Interest pursuant to Section 3.3.B(2) shall be
accomplished in accordance with the procedure set forth in Subsection
B of this Section 12.2; PROVIDED that the Acquiring Partner shall be
substituted for the Partnership and the Defaulting Partner shall be
substituted for the retiring General Partner; and PROVIDED FURTHER
that notwithstanding anything to the contrary contained in said
Subsection B, the determination by the Appraiser of such net fair
market value shall be based upon the following conditions and
assumptions:
(1) that the valuation date is the date of default of the Defaulting
Partner pursuant to Section 3.3.B;
(2) that the then current use of the Premises is the highest and best
use thereof; and
(3) that, if the Premises. are encumbered by the TiAA Lease on the
valuation date, the determination shall be made taking into
account such encurmbrance.
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ARTICLE THIRTEEN
----------------
MISCELLANEOUS PROVISIONS
------------------------
Section 13.1 Appointment of Each General Partner as Attorney-in-Fact
-------------------------------------------------------
A. Each Limited Partner irrevocably constitutes and appoints each General
Partner, with full power of substitution, as his true and lawful
attorney-in-fact, with full power and authority in his name, place,
and stead to execute, acknowledge, make, swear to, consent to, verify,
deliver, record, file, and/or publish at the appropriate public
offices such documents, instruments and conveyances as may be
reasonably necessary or appropriate to carry out the provisions or
purposes of this Agreement, including without limitation, the
following:
(1) the Certificate;
(2) all other certificates and instruments and amendments thereto
which the General Partners deem appropriate to qualify or
continue the Partnership as a limited partnership (or a
partnership in which the Limited Partners will have limited
liability comparable to that provided by the Act) in the
jurisdictions in which the Partnership may conduct business;
(3) all instruments which the General Partners deem appropriate to
reflect (a) any change or modification of the Partnership in
accordance with the provisions of this Agreement or (b) any
action of the Partners provided for in this Agreement's
(4) all conveyances and other instruments which the General Partners
deem appropriate to reflect the dissolution and termination of
the Partnership;
(5) all fictitious or assumed name certificates required or permitted
to be filed on behalf of the Partnership;
(6) any and all amendments of the Partnership necessary to admit
Limited Partners to the Partnership or to reflect any change in
or Transfer of a Partner's Partnership Interest;
(7) any and all instruments and documents referred to in Subsection B
of this Section 13.1; and
(8) all other instruments which may be required or permitted by law
to be filed on behalf of the Partnership and which are not
inconsistent with this Agreement.
B. Each Limited Partner hereby affirms that he is aware that the terms of
this Agreement permit certain amendments hereof to be effected and
certain other actions to be taken or omitted by or with respect to the
Partnership with the approval or Consent of fewer than all of the
Limited Partners. If, as and when
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<PAGE> 44
(1) an amendment of this Agreement is proposed or an action is
proposed to be taken or omitted by or with respect to the
Partnership which requires, under the terms hereof, the approval
or Consent of fewer than all of the Limited Partners,
(2) sufficient Limited Partners as required under this Agreement for
such amendment or action have approved or Consented to such
amendment or action in the manner contemplated by this Agreement,
and
(3) one or more Limited Partners have failed or refused to approve or
Consent to such amendment or action,
then each Limited Partner hereby agrees that if from time to time he is a
Limited Partner referred to in Subsection B(3) of this Section 13.1, then
the attorney-in-fact specified in Subsection A of this Section 13.1, with
full power of substitution, is hereby authorized and empowered to execute,
acknowledge, makes swear to, consent to, verify, deliver, record, file,
and/or publish, for and on his behalf, and in his name, place, and stead,
any and all instruments and documents which may be necessary or appropriate
to permit such amendment to be lawfully made or such action to be lawfully
taken or omitted.
Each Limited Partner is fully aware that he and each other Limited Partner
have executed this special power of attorney, and that each Limited Partner
will rely on the effectiveness of such powers with a view to the orderly
administration of the Partnership's affairs.
C. The grant of authority in Subsections A and B of this Section 13.1:
(1) is a special power of attorney coupled with an interest, is
irrevocable, and shall survive any Incapacity of the Limited
Partner to the extent he may legally contract for such survival;
(2) may be exercised by a signature for each Limited Partner or by
listing the names of all the Limited Partners executing this
Agreement with a single signature of any such Person acting as
attorney-in-fact for all of them;
(3) shall survive the Transfer by a Limited Partner of the whole or
any portion of his Interest; PROVIDED that where the Transferee
thereof has been approved by the General Partners for admission
to the Partnership as a Substitute Limited Partner, this special
power of attorney shall survive such Transfer for the sole
purpose of enabling the General Partners to execute, acknowledge
and file any instrument necessary to effect such substitution and
shall thereafter terminate.
D. Any Person dealing with the Partnership may conclusively presume and
rely upon the fact that any certificate, instruments document or
conveyance referred to in this Section 13.1, executed by such Person
acting as attorney-in-fact, is authorized, regular and binding,
without further inquiry.
40
<PAGE> 45
Section 13.2 Notices, Approvals, and Consents
--------------------------------
All notices, approvals, Consents or other communications hereunder shall be
in writing and signed by the party giving the same and shall be deemed to have
been given when the same are (i) deposited in the United States mail and sent by
certified or registered mail, postage prepaid, or (ii) delivered -- in each case
to the parties at the addresses referred to below or at such other addresses as
such parties may designate by notice to the Partnership:
(1) if to the Partnership or to the General Partners, at the Principal
office of the Partnership, with a copy of such notice by first class
mail to the General Partners at their addresses listed in, Section
2.5, or to such other address or addresses as may be designated by
notice from the Partnership or the General Partners;
(2) if to the Limited Partners, at their addresses as set forth on Exhibit
A attached hereto, with a copy of such notice by first class mail to
the Partnership at its principal office, or to such other address or
addresses as may be designated by notice from the Limited Partners or
the Partnership or any of them.
Except as otherwise expressly stated in this Agreement, all approvals and
Consents hereunder shall not be unreasonably withheld or delayed.
Section 13.3 Binding Provisions
------------------
The covenants and agreements contained herein shall be binding upon and
shall inure to the benefit of the legal representatives, heirs, executors,
administrators, successors and, subject to the provisions hereof, the assigns of
the respective parties hereto.
Section 13.4 Applicable Law
--------------
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the-State.
Section 13.5 Entire Agreement
----------------
Except as otherwise expressly set forth in this Agreement, this Agreement
constitutes the entire agreement among the parties with respect to the
Partnership. This Agreement supersedes any prior agreement or understanding
among the parties and may not be modified or amended in any manner other than
as; set forth herein.
Section 13.6 Further Assurances
------------------
The Partners will execute, acknowledge and deliver such further instruments
and do such further acts and things as may be required to carry out the intent
and purpose of this Agreement.
Section 13.7 Captions
--------
Captions contained in this Agreement are inserted only as a matter of
convenience and in no way define, limit the extent, or describe the scope Of
this Agreement or the intent of any of the provisions thereof.
41
<PAGE> 46
Section 13.8 Effect on Creditors
-------------------
Except to the extent required under the Act, none of the provisions of this
Agreement shall be for the benefit of or be enforceable by any creditor of the
Partnership, other than a Partner or an Affiliate of a Partner as a creditor.
Section 13.9 Separability
------------
If one or more of the provisions of this Agreement or any application
thereof shall be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein and any
other application thereof shall not in any way be affected or impaired thereby.
Section 13.10 Counterparts
------------
This Agreement may be signed by each party hereto in several counterparts,
in which event all such counterparts shall constitute one agreement, binding on
all the parties hereto, except that no counterpart shall be binding; unless
signed by the General Partners.
Section 13.11 Jurisdiction
------------
At the request of the General Partners, any Limited Partner who is not a
Massachusetts resident shall execute any documents necessary to designate the
Secretary of the State or any other Person chosen by the General Partners, in
their sole discretion, for service of process on him in any, action or
proceeding brought by any party to this Agreement against him or 'Arising out of
this Agreement or in breach thereof.
Section 13.12 Attorneys' Fees
---------------
A Partner shall pay all reasonable attorneys' fees and expenses of the
Partnership incurred in the successful enforcement by the Partnership of any of
the obligations of such Partner under this Agreement. If the obligations of'
more than one Partner are the subject of such successful enforcement, by the
Partnership, then the responsibility for payment of such fees and expenses shall
be allocated between or among such Partners in proportion to their respective
Partnership Interests.
The Partnership shall pay all reasonable attorneys' fees and expenses of a
Partner or Partners incurred in the successful enforcement by such Partner or
Partners of any of the obligations of the Partnership under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed under seal and sworn
to this Agreement on the dates set opposite their respective signatures below,
but effective as of the date first above written.
42
<PAGE> 47
Date: 8/29/85 /s/ James F. Carlin
- ------------- ------------------------------------
James F. Carlin, General Partner
and Limited Partner
Date: 8/29/85 /s/ William A. Yetman
- ------------- ------------------------------------
William A. Yetman, General Partner
and Limited Partner
Date:
- ------------- ------------------------------------
Craig L. Burr, Limited Partner
Date:
- ------------- ------------------------------------
Jean Deleage, Limited Partner
Date:
- ------------- ------------------------------------
John J. Egan, Limited Partner
Date:
- ------------- ------------------------------------
William P. Egan, Limited Partner
Date:
- ------------- ------------------------------------
James W. Intinarelli, Limited
Partner
Telco Systems, Inc., Limited Partner
Date: 8/29/85 By: /s/ Kent L. Robertson, CFO
- ------------- ------------------------------------
President, hereunto duly
authorized
43
<PAGE> 48
Richard R. Vazza, Francis M. Vazza and Nahatan Street Development
Corporation hereby confirm and recognize that their respective interests in the
Partnership are fully redeemed by the Partnership effective herewith so that the
same are no longer partners in the Partnership.
IN WITNESS WHEREOF, the undersigned have executed under seal and. sworn to
this Agreement on the dates set opposite their respective signatures below, but
effective as of the date first above written.
Date: AUG 29, 1985 /s/ Richard R. Vazza,
- ------------------ -------------------------------------
Richard R. Vazza, withdrawing
general partner
Date: AUG 29, 1985 /s/ Francis M. Vazza,
- ------------------ -------------------------------------
Francis M. Vazza, withdrawing
general partner
NAHATAN STREET DEVELOPMENT
CORPORATION, withdrawing general
partner
Date: AUG 29, 1985 /s/ Richard R. Vazza, President
- ------------------ -------------------------------------
, hereunto duly
authorized
44
<PAGE> 49
COMMONWEALTH OF MASSACHUSETTS
Suffolk ,ss. August 29, 1985
Then personally appeared before me, James F. Carlin, who, being duly sworn,
acknowKedged that he executed the foregoing instrument. as his free act: and
deed as general Partner and Limited Partner of Nahatan Street Associates Limited
Partnership, and that the statements set forth therein are true to the best of
his Knowledge and belief,
[Seal] /s/ Saul Weber
----------------------------------
Notary Public
My commission expires: 2/11/88
COMMONWEALTH OF MASSACHUSETTS
Suffolk ,ss. August 29, 1985
Then personally appeared before me, William A. Yetman, who, being duly
sworn, acknowledged that he executed the foregoing instrument as his free act
and deed as General Partner and Limited Partner of Nahatan Street Associates
LIMITED Partnership, and that the statements set forth therein are true to the
best of his knowledge and belief,
[Seal] /s/ Cynthia A. Bacon
----------------------------------
Notary Public
CYNTHIA A. BACON, Notary Public
My commission expires: My Commission Expires April 7 1989
COMMONWEALTH OF MASSACHUSETTS
,ss. , 1985
Then personally appeared before me, Craig L. Burr, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
----------------------------------
Notary Public
My commission expires:
45
<PAGE> 50
STATE OF CALIFORNIA
,ss. , 1985
Then personally appeared before me, Jean Deleage, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act: and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
----------------------------------
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
,ss. , 1985
Then personally appeared before me, John J. Egan, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
----------------------------------
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
,ss. , 1985
Then personally appeared before me, William P. Egan, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
----------------------------------
Notary Public
My commission expires:
46
<PAGE> 51
COMMONWEALTH OF MASSACHUSETTS
,ss. , 1985
Then personally appeared before me, James W. Intinarelli, who, being duly
sworn, acknowledged that he executed the foregoing instrument as his free act
and deed as Limited Partner of Nahatan Street Associates Limited Partnership,
and that the statements set forth therein are true to the best of his knowledge
and belief,
----------------------------------
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
Suffolk ,ss. August 29, 1985
Then personally appeared before me, Kent L. Robertson, the President of
Telco Systems, Inc., who, being duly sworn, acknowledged that he executed the
foregoing instrument as the free act and deed of Telco Systems, Inc. as Limited
Partner of Nahatan Street Associates Limited Partnership, and that the
statements set forth therein are true to the best of his knowledge and belief,
[Seal] /s/ Cynthia A. Bacon
----------------------------------
Notary Public
CYNTHIA A. BACON, Notary Public
My commission expires: My Commission Expires April 7 1989
47
<PAGE> 52
COMMONWEALTH OF MASSACHUSETTS
Suffolk ,ss. August 29, 1985
Then personally appeared before me, Richard R. Vazza, who, being duly
sworn, acknowledged that he executed the foregoing instrument as his free act
and deed as general partner of Nahatan Street Associates Limited Partnership,
and that the statements set forth therein are true to the best of his knowledge
and belief,
/s/ William R. Rody
----------------------------------
Notary Public
My commission expires: 11/2/90
COMMONWEALTH OF MASSACHUSETTS
Suffolk ,ss. August 29, 1985
Then personally appeared before me, Francis M. Vazza, who, being duly
sworn, acknowledged that he executed the foregoing instrument as his free act
and deed as general partner of Nahatan Street Associates Limited Partnership,
and that the statements set forth therein are true to the best of his knowledge
and belief,
/s/ William R. Rody
----------------------------------
Notary Public
My commission expires: 11/2/90
COMMONWEALTH OF MASSACHUSETTS
Suffolk ,ss. August 29, 1985
Then personally appeared before me, the President of Nahatan Street
Development corporation, being duly sworn, acknowledged that he executed the
foregoing instrument as the free act and deed of Nahatan Street Development
Corporation, as general partner of Nahatan Street Associates Limited
Partnership, and that the statements set forth therein are true to the best of
his knowledge and belief,
/s/ William R. Rody
----------------------------------
Notary Public
My commission expires: 11/2/90
48
<PAGE> 53
Date: 8/29/85 /s/ James F. Carlin
- ------------- ------------------------------------
James F. Carlin, General Partner
and Limited Partner
Date: 8/29/85 /s/ William A. Yetman
- ------------- ------------------------------------
William A. Yetman, General Partner
and Limited Partner
Date:
- ------------- ------------------------------------
Craig L. Burr, Limited Partner
Date: 8/26/85 /s/ Jean Deleage
- ------------- ------------------------------------
Jean Deleage, Limited Partner
Date:
- ------------- ------------------------------------
John J. Egan, Limited Partner
Date:
- ------------- ------------------------------------
William P. Egan, Limited Partner
Date:
- ------------- ------------------------------------
James W. Intinarelli, Limited
Partner
Date:
- ------------- ------------------------------------
James A. Radley, Limited Partner
Telco Systems, Inc., Limited Partner
Date: By:
- ------------- ---------------------------------
, hereunto duly
authorized
43
<PAGE> 54
Date: 8/29/85 /s/ James F. Carlin
- ------------- ------------------------------------
James F. Carlin, General Partner
and Limited Partner
Date: 8/29/85 /s/ William A. Yetman
- ------------- ------------------------------------
William A. Yetman, General Partner
and Limited Partner
Date:
- ------------- ------------------------------------
Craig L. Burr, Limited Partner
Date:
- ------------- ------------------------------------
Jean Deleage, Limited Partner
Date:
- ------------- ------------------------------------
John J. Egan, Limited Partner
Date:
- ------------- ------------------------------------
William P. Egan, Limited Partner
Date: 8/22/95 /s/ James W. Intinarelli
- ------------- ------------------------------------
James W. Intinarelli, Limited
Partner
Date:
- ------------- ------------------------------------
James A. Radley, Limited Partner
Telco Systems, Inc., Limited Partner
Date: 8/29/85 By:
- ------------- ---------------------------------
, hereunto duly
authorized
43
<PAGE> 55
Date: 8/29/85 /s/ James F. Carlin
- ------------- ------------------------------------
James F. Carlin, General Partner
and Limited Partner
Date: 8/29/85 /s/ William A. Yetman
- ------------- ------------------------------------
William A. Yetman, General Partner
and Limited Partner
Date:
- ------------- ------------------------------------
Craig L. Burr, Limited Partner
Date:
- ------------- ------------------------------------
Jean Deleage, Limited Partner
Date: 8/23/85 /s/ John J. Egan
- ------------- ------------------------------------
John J. Egan, Limited Partner
Date: 8/26/85 /s/ William P. Egan
- ------------- ------------------------------------
William P. Egan, Limited Partner
Date:
- ------------- ------------------------------------
James W. Intinarelli, Limited
Partner
Date:
- ------------- ------------------------------------
James A. Radley, Limited Partner
Telco Systems, Inc., Limited Partner
Date: 8/29/85 By:
- ------------- ---------------------------------
, hereunto duly
authorized
43
<PAGE> 56
Date: 8/29/85 /s/ James F. Carlin
- ------------------ ------------------------------------
James F. Carlin, General Partner
and Limited Partner
Date: 8/29/85 /s/ William A. Yetman
- ------------------ ------------------------------------
William A. Yetman, General Partner
and Limited Partner
Date: Aug 26, 1985 /s/ Craig L. Burr
- ------------------ ------------------------------------
Craig L. Burr, Limited Partner
Date:
- ------------------ ------------------------------------
Jean Deleage, Limited Partner
Date:
- ------------------ ------------------------------------
John J. Egan, Limited Partner
Date:
- ------------------ ------------------------------------
William P. Egan, Limited Partner
Date:
- ------------------ ------------------------------------
James W. Intinarelli, Limited
Partner
Date:
- ------------------ ------------------------------------
James A. Radley, Limited Partner
Telco Systems, Inc., Limited Partner
Date: By:
- ------------------ ---------------------------------
, hereunto duly
authorized
43
<PAGE> 57
COMMONWEALTH OF MASSACHUSETTS
Suffolk ,ss. August 29, 1985
Then personally appeared before me, James F. Carlin, who, being duly sworn,
acknowKedged that he executed the foregoing instrument. as his free act: and
deed as general Partner and Limited Partner of Nahatan Street Associates Limited
Partnership, and that the statements set forth therein are true to the best of
his Knowledge and belief,
[Seal] /s/ Saul Weber
----------------------------------
Notary Public
My commission expires: 2/11/88
COMMONWEALTH OF MASSACHUSETTS
,ss. , 1985
Then personally appeared before me, William A. Yetman, who, being duly
sworn, acknowledged that he executed the foregoing instrument as his free act
and deed as General Partner and Limited Partner of Nahatan Street Associates
LIMITED Partnership, and that the statements set forth therein are true to the
best of his knowledge and belief,
----------------------------------
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
Suffolk ,ss. August 26, 1985
Then personally appeared before me, Craig L. Burr, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
/s/ Rochelle A. Bennett
----------------------------------
Notary Public
My commission expires:
ROCHELLE A. BENNETT
Notary Public
MY COMMISSION EXPIRES FEBRUARY 23, 1990
45
<PAGE> 58
STATE OF CALIFORNIA, COUNTY OF SAN FRANCISCO
,ss. AUGUST 26, 1985
Then personally appeared before me, Jean Deleage, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act: and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
OFFICIAL SEAL
DIANE R. IMAI /s/ Diane R. Imai
NOTARY PUBLIC - CALIFORNIA -----------------------------------
San Francisco County Notary Public
My Commission Expires Jan 18 1988
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
,ss. , 1985
Then personally appeared before me, John J. Egan, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
----------------------------------
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
,ss. , 1985
Then personally appeared before me, William P. Egan, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
----------------------------------
Notary Public
My commission expires:
46
<PAGE> 59
STATE OF CALIFORNIA
,ss. , 1985
Then personally appeared before me, Jean Deleage, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act: and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
----------------------------------
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
Suffolk County,ss. August 23, 1985
Then personally appeared before me, John J. Egan, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
/s/ Francis F. Kingsley Jr.
----------------------------------
Notary Public
FRANCIS F. KINGSLEY JR.
My commission expires: My Commission Expires July 16, 1987
COMMONWEALTH OF MASSACHUSETTS
Suffolk County,ss. August 26, 1985
Then personally appeared before me, William P. Egan, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
/s/ Francis F. Kingsley Jr.
----------------------------------
Notary Public
FRANCIS F. KINGSLEY JR.
My commission expires: My Commission Expires July 16, 1987
46
<PAGE> 60
COMMONWEALTH OF MASSACHUSETTS
Suffolk, ss. August 22, 1985
Then personally appeared before me, James W. Intinarelli, who, being duly
sworn, acknowledged that he executed the foregoing instrument as his free act
and deed as Limited Partner of Nahatan Street Associates Limited Partnership,
and that the statements set forth therein are true to the best of his knowledge
and belief
Sanford M. McDonald
----------------------------------
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
, ss. 1985
Then personally appeared before me. James A. Radley, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
----------------------------------
Notary Public
My commission expires:
STATE OF CALIFORNIA
, ss. 1985
Then personally appeared before me, the President of Telco Systems, Inc.',
who, being duly sworn, acknowledged that he executed the foregoing instrument as
the free act and deed of Telco Systems, Inc. as Limited Partner of Nahatan
Street Associates Limited Partnership, and that the statements set forth therein
are true to the best of his knowledge and belief,
----------------------------------
Notary Public
My commission expires:
47
<PAGE> 61
SCHEDULE A
----------
<TABLE>
The initial Capital Contributions and the initial Capital Accounts of the
Partners are as follows:
<CAPTION>
Initial Capital Initial Capital
Partner Contribution Account
- ------- ------------ -------
<S> <C> <C>
James F. Carlin $10.25 $10.25
(as General Partner)
William A. Yetman $10.25 $10.25
(as General Partner)
Craig L. Burr 8.25 $ 8.25
Jean Deleage $ 8.25 $ 8.25
John J. Egan $ 1.00 $ 1.00
William P. Egan $ 8.25 $ 8.25
James W. Intinarelli $ 2.50 $ 2.50
James F. Carlin $ 0.50 $ 0.50
(as Limited Partner)
William A. Yetman $ 0.75 $ 0.75
(as Limited Partner)
Telco Systems, Inc. $50.00 $50.00*
<FN>
* Subject to adjustment to reflect the Capital Account of TSFOC, its
predecessor in interest.
</TABLE>
49
<PAGE> 62
EXHIBIT A
---------
<TABLE>
The names and addresses of the Limited Partners of the Partnership and
their respective Partnership Interests are as follows:
<CAPTION>
NAME and ADDRESS PARTNERSHIP INTEREST
- ---------------- --------------------
<S> <C>
Craig L. Burr 8.25%
237 West Street
Carlisle, MA 01741
Jean Deleage 8.25%
98 Sotello Avenue
San Francisco, CA 94116
John J. Egan 1.00%
Ocean Drive
Newport, RI 02840
William P. Egan 8.25%
Nine Phillips Pond
South Natick, MA 01760
James W. Intinarelli 2.50%
27 Chamberlain Street
Hopkinton. MA 01748
James F. Carlin 0.50%
99 Woodland Street
Natick, MA 01760
William A. Yetman 0.75%
5 Bryant Lane
Dover, MA 02030
Telco Systems, Inc. 50.00%
1040 Marsh Road
Suite 100
Menlo Park, CA 94025
</TABLE>
50
<PAGE> 63
SUPPLEMENTARY AGREEMENT
TO
AMENDED AND RESTATED AGREEMENT AND CERTIFICATE OF
NAHATAN STREET ASSOCIATES LIMITED PARTNERSHIP
LIMITED PARTNERSHIP OF
This supplementary Agreement to the Amended and Restated Agreement and
Certificate of Limited Partnership of Nahatan Street Associates Limited
Partnership is made as of this day of August, 1985, by and among James F.
Carlin, William A. Yetman, Craig L. Burr, Jean Deleage, John J. Egan, William P.
Egan, James W. Intinarelli, James A. Radley (the above referred to herein
collectively as the "Crosspoint Group") and Telco Systems, Inc. ("Telco"), all
of whose addresses are set forth on the signature pages hereof.
RECITALS:
---------
A. 'Reference is made to the Amended and Restated Agreement and Certificate
of Limited Partnership of Nahatan Street Associates Limited Partnership of even
date herewith (the "Agreement"). Terms used herein which are defined in the
Agreement and not otherwise defined herein shall have the same meanings herein
as therein.
B. The parties view the payment of the Excess Rent to TSFOC as a rebate of
the Excess Rent so that, to the extent such payment does occur, such Excess Rent
shall not be included in the gross income of the Partnership.
C. The undersigned, being all the Partners in the Partnership, wish to
clarify the intent of the Agreement (in the event that the intended treatment of
the Excess Rent described immediately above is not determinative) regarding the
allocations of Profits and Losses set forth in the Agreement as such allocations
pertain to the Partnership's receipt from and/or payment to TSFOC of the Excess
Rent. Furthermore, the Partners wish to provide for the making of a certain
preferential payment to the Crosspoint Group by the Partnership in the event
that such allocations are not effective, for whatever reason, in achieving in
whole the intent of the Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and legal
sufficiency of which are hereby acknowledged, the undersigned hereby amend the
Agreement as follows:
1. Section 4.1.B is amended by inserting after the word and numerals
"Section 4.1" in the first line thereof (and before the comma) thefollowing
words and numerals:'
"and to Section 4.4".
<PAGE> 64
2. Section 4.2.B is amended by inserting after the word and numerals
"Section 4.2.D in the first line thereof the following word and numerals:
", Section 4.5".
3. Section 4.2.C is amended by inserting after the word and numerals
"Section 4.2.1)" in the first line thereof the following word and numerals;
", Section 4.5".
4. New section 4.4 and new Section 4.5 are added to the Agreement as
follows:
"Section 4.4 Treatment of Excess Rent
------------------------
The Partners confirm and agree that the Crosspoint Group shall be allocated
Profits and Losses in accordance with this Agreement so that such allocations
shall be unaffected by the Partnership's receipt from and/or payment to TSFOC of
the Excess Rent (including, for purposes of this Section 4.4, any portion
thereof) -- that is, the allocations to the Crosspoint Group shall be determined
and made as if the Excess Rent were neither received nor paid out by the
Partnership. Accordingly, the Partners agree that, in the event that the
Partnership's treatment of the receipt from and the payment to TSFOC of the
Excess Rent is not effective, for whatever reason, in excluding such Excess Rent
from Partnership gross income for federal income tax purposes, and
notwithstanding any other provision of this Agreement, all items, if any, of
income, gain and ,deduction of the Partnership for federal income tax purposes
relating to the Partnership's receipt from and/or payment to TSFOC of the Excess
Rent shall be allocated to Telco (such allocation hereinafter referred to as the
"Allocation"). All other items of income, gain, loss, deduction, credit or the
like shall be allocated in accordance with Section 4.1.
"Section 4.5 Required Payment Amount
-----------------------
In the event that the Allocation set forth in Section 4.4 is not effective,
for whatever reason, in achieving in whole the purpose set forth in Section 4.4,
the Partners agree that;
(i) the General Partners shall promptly give notice of such fact to
all Partners;
(ii) each member of the Crosspoint Group shall deliver to the General
Partners accurate copies of the portions of his federal, state
and local income tax returns showing taxable income and
applicable rate of tax for the relevant period; and
2
<PAGE> 65
(iii) the Partnership shall determine, in conjunction with the
Accountant and with reference to the portions of the income tax
returns delivered in accordance with clause (ii) immediately
above, and shall pay to each Person comprising the Crosspoint
Group the amount of cash (the "Required Payment Amount")
necessary to compensate such Person for federal, state and local
income tax liability with respect to (1) the excess, if any, of
(a) the increase in such Person's share of Partnership income and
gain attributable to the Partnership's receipt from TSFOC of the
Excess Rent over (b) such Person's share of the Partnership
deduction, if any, attributable to the Partnership's payment to
TSFOC of the Excess Rent and (2) the payment to such Person in a
prior year or years of the Required Payment Amount (such excess
and such payment hereinafter referred to collectively as the
"Income").
If the Partnership's treatment for income tax purposes ofthe Excess Rent is
challenged by the Internal Revenue Service or by. any state or local taxing
authority or enforcement agency, either at the Partnership level or at the level
of any Partner, then Telco shall have the right to select and retain qualified,
independent counsel, at its own expense, for the purpose of defending, in
concert with Partnership counsel or counsel for such Partner, as the case may
be, such treatment against such challenge. If the Partnership's treatment for
income tax purposes as to a prior Fiscal Year(s) of the Excess Rent is
disallowed or adjusted either at the Partnership level or at the level of any
Partner, then the Income and the Required Payment Amount as to such prior Fiscal
Year(s) and as to each Person comprising the Crosspoint Group shall be
determined or redetermined, as the case may. be, in accordance with such
disallowance or adjustment (and taking into account interest and penalties
assessed or imposed with respect thereto) and any increases) in the Required
Payment Amount of any such Person (that is, any increase in the Required Payment
Amount as determined or redetermined for such prior Fiscal Year(s) over the
Required Payment Amount, if any, previously calculated as to such prior Fiscal
Year(s)) shall be paid to such Person within thirty (30) days after such
disallowance or adjustment. Otherwise, the determination and payment of the
Required Payment Amount with respect to each Person comprising the Crosspoint
Group shall occur on a yearly basis not later than thirty (30) days after such
Person delivers to the General Partners copies of appropriate portions of his
federal, state and local income tax returns in accordance with clause (ii)
above.
Notwithstanding any other provision of this Section 4.5, if, in the case of
any Person comprising the Crosspoint Group,
3
<PAGE> 66
the Income or any portion thereof is sheltered from federal, state and/or local
income taxation by net operating losses of the Partnership and/or otherwise
(that is, such Person does not have taxable income in such taxable year or such
taxable income is less than the Income), then the determination and payment of
the Required Payment Amount with respect to such sheltered Income shall occur
with respect to the taxable year or years of such Person as to which such
sheltered Income or portion thereof is no longer so sheltered (that is, the
first taxable year(s) in which such Person has taxable income equal at least to
such sheltered Income).
The Required Payment Amount shall be paid to the Crosspoint Group
preferentially out of Distributable Cash and/or Excess Cash Proceeds before any
Distributions are made pursuant to Section 4.2 or Section 4.3. If Distributable
Cash and Excess Cash Proceeds are not sufficient in any Fiscal Year to pay the
Required Payment Amount to the Crosspoint Group, then the amount by which (a)
the Required Payment Amount exceeds (b) the amount, if any, actually paid to the
Crosspoint Group in such Fiscal Year by the Partnership pursuant to this Section
4.5 shall be paid by Telco in accordance with this Section 4.5.
The costs of Partnership counsel in defending the Partnership's treatment
for income tax purposes of the Excess Rent and all costs with respect to
determining the Required Payment Amount shall be expenses of the Partnership but
shall not be taken into account as such for the purposes of Section 5.3.B.(7).".
--------------------
The provisions of this Supplementary Agreement shall bind and inure to the
benefit of the undersigned and their respective heirs, executors,
administrators, legal representatives, successors and assigns and shall not be
affected by any amendment or other modification of the Agreement except by
express written reference hereto in such amendment or modification.
This Supplementary Agreement may be signed by each party hereto in several
counterparts, in which event all such counterparts shall constitute one
agreement, binding on all the parties hereto, except that no counterpart shall
be binding unless signed by the General Partners.
In all other respects and to the extent not inconsistent herewith the terms
of the Agreement remain in full force and effect and are incorporated herein by
reference.
IN WITNESS WHEREOF, the undersigned have sworn to and have executed this
Supplementary Agreement as a sealed instrument on the dates set opposite their
respective signatures below, but effective as of the date first above written.
4
<PAGE> 67
ADDRESS:
99 Woodland Street /s/ James F. Carlin
------------------------------------
Natick , MA 01760 James F. Carlin
Date: Partner and Limited Partner
Five Bryant Lane /s/ William A. Yetman
------------------------------------
Dover, MA 02030 William A. Yetman , General
Date: Partner and Limited Partner
237 West Street
------------------------------------
Carlisle, MA 01741 Craig L. Burr, Limited Partner
Date:
98 Sotello Avenue
------------------------------------
San Francisco, CA 94116 Jean Deleage, Limited Partner
Date:
Ocean Drive
------------------------------------
Newport, RI 02840 John J. Egan, Limited Partner
Date:
Nine Phillips Pond
------------------------------------
South Natick, MA 01760 William P. Egan, Limited
Date: Partner
27 Chamberlain Street
------------------------------------
Hopkinton, MA 01748 James W. Intinarelli, Limited
Date: Partner
One Phillips Pond
------------------------------------
South Natick, MA 01760 James A. Radley, Limited
Date: Partner
1040 Marsh Road Telco Systems, Inc., Limited
Suite 100 Partner
Menlo Park, Ca 94025
Date:
By:
---------------------------------
, hereunto
duly authorized
5
<PAGE> 68
COMMONWEALTH OF MASSACHUSETTS
Suffolk, ss. August 29, 1985
Then personally appeared before me, James F. Carlin, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as General Partner and Limited Partner of Nahatan Street Associates Limited
Partnership, and that the statements set forth therein are true to the best of
his knowledge and belief,
/s/ Saul Weber
-------------------------------
Notary Public
My commission expires: 2/11/88
COMMONWEALTH OF MASSACHUSETTS
Suffolk, ss. August 29, 1985
Then personally appeared before me, William A. Yetman, who, being duly
sworn, acknowledged that he executed the foregoing instrument as his free act
and deed as General Partner and Limited Partner of Nahatan Street Associates
Limited Partnership, and that the statements set forth. therein are true
to the best of his knowledge and belief,
/s/ Cynthia A. Bacon
-------------------------------
Notary Public
CYNTHIA A. BACON, Notary Public
My commission expires: My Commission Expires Apr 7 1989
COMMONWEALTH OF MASSACHUSETTS
, ss. , 1985
Then personally appeared before me, Craig L. Burr, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
-------------------------------
Notary Public
My commission expires:
6
<PAGE> 69
STATE OF CALIFORNIA
,ss. , 1985
Then personally appeared before me, Jean Deleage, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act: and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
----------------------------------
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
,ss. , 1985
Then personally appeared before me, John J. Egan, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
----------------------------------
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
,ss. , 1985
Then personally appeared before me, William P. Egan, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
----------------------------------
Notary Public
My commission expires:
7
<PAGE> 70
COMMONWEALTH OF MASSACHUSETTS
, ss. , 1985
Then personally appeared before me, James W. Intinarelli, who, being duly
sworn, acknowledged that he executed the foregoing instrument as his free act
and deed as Limited Partner of Nahatan Street Associates Limited Partnership,
and that the statements set forth therein are true to the best of his knowledge
and belief
----------------------------------
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
, ss. 1985
Then personally appeared before me. James A. Radley, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
----------------------------------
Notary Public
My commission expires:
STATE OF CALIFORNIA
, ss. 1985
Then personally appeared before me, the President of Telco Systems, Inc.',
who, being duly sworn, acknowledged that he executed the foregoing instrument as
the free act and deed of Telco Systems, Inc. as Limited Partner of Nahatan
Street Associates Limited Partnership, and that the statements set forth therein
are true to the best of his knowledge and belief,
----------------------------------
Notary Public
My commission expires:
8
<PAGE> 71
ADDRESS:
99 Woodland Street /s/ James F. Carlin
------------------------------------
Natick , MA 01760 James F. Carlin
Date: 8/29/85 Partner and Limited Partner
-------------
Five Bryant Lane /s/ William A. Yetman
------------------------------------
Dover, MA 02030 William A. Yetman , General
Date: 8/29/85 Partner and Limited Partner
-------------
237 West Street /s/ Craig L. Burr
------------------------------------
Carlisle, MA 01741 Craig L. Burr, Limited Partner
Date:
-------------
98 Sotello Avenue
------------------------------------
San Francisco, CA 94116 Jean Deleage, Limited Partner
Date:
-------------
Ocean Drive
------------------------------------
Newport, RI 02840 John J. Egan, Limited Partner
Date:
-------------
Nine Phillips Pond
------------------------------------
South Natick, MA 01760 William P. Egan, Limited
Date: Partner
-------------
27 Chamberlain Street
------------------------------------
Hopkinton, MA 01748 James W. Intinarelli, Limited
Date: Partner
-------------
One Phillips Pond
------------------------------------
South Natick, MA 01760 James A. Radley, Limited
Date: Partner
-------------
1040 Marsh Road Telco Systems, Inc., Limited
Suite 100 Partner
Menlo Park, Ca 94025
Date:
-------------
By:
---------------------------------
, hereunto
duly authorized
5
<PAGE> 72
ADDRESS:
99 Woodland Street /s/ James F. Carlin
------------------------------------
Natick , MA 01760 James F. Carlin
Date: Partner and Limited Partner
-------------
Five Bryant Lane /s/ William A. Yetman
------------------------------------
Dover, MA 02030 William A. Yetman , General
Date: Partner and Limited Partner
-------------
237 West Street
------------------------------------
Carlisle, MA 01741 Craig L. Burr, Limited Partner
Date:
-------------
98 Sotello Avenue /s/ Jean Deleage
------------------------------------
San Francisco, CA 94116 Jean Deleage, Limited Partner
Date: 8/26/85
-------------
Ocean Drive
------------------------------------
Newport, RI 02840 John J. Egan, Limited Partner
Date:
-------------
Nine Phillips Pond
------------------------------------
South Natick, MA 01760 William P. Egan, Limited
Date: Partner
-------------
27 Chamberlain Street
------------------------------------
Hopkinton, MA 01748 James W. Intinarelli, Limited
Date: Partner
-------------
One Phillips Pond
------------------------------------
South Natick, MA 01760 James A. Radley, Limited
Date: Partner
-------------
1040 Marsh Road Telco Systems, Inc., Limited
Suite 100 Partner
Menlo Park, Ca 94025
Date:
-------------
By:
---------------------------------
, hereunto
duly authorized
5
<PAGE> 73
ADDRESS:
99 Woodland Street /s/ James F. Carlin
------------------------------------
Natick , MA 01760 James F. Carlin
Date: 8/29/85 Partner and Limited Partner
-------------
Five Bryant Lane /s/ William A. Yetman
------------------------------------
Dover, MA 02030 William A. Yetman , General
Date: 8/29/85 Partner and Limited Partner
-------------
237 West Street
------------------------------------
Carlisle, MA 01741 Craig L. Burr, Limited Partner
Date:
-------------
98 Sotello Avenue
------------------------------------
San Francisco, CA 94116 Jean Deleage, Limited Partner
Date:
-------------
Ocean Drive /s/ John J. Egan
------------------------------------
Newport, RI 02840 John J. Egan, Limited Partner
Date: 8/26/85
-------------
Nine Phillips Pond /s/ William P. Egan
------------------------------------
South Natick, MA 01760 William P. Egan, Limited
Date: 8/26/85 Partner
-------------
27 Chamberlain Street
------------------------------------
Hopkinton, MA 01748 James W. Intinarelli, Limited
Date: Partner
-------------
One Phillips Pond
------------------------------------
South Natick, MA 01760 James A. Radley, Limited
Date: Partner
-------------
1040 Marsh Road Telco Systems, Inc., Limited
Suite 100 Partner
Menlo Park, Ca 94025
Date: 8/29/85
-------------
By: /s/ Kent L. Robertson CFO
---------------------------------
, hereunto
duly authorized
5
<PAGE> 74
ADDRESS:
99 Woodland Street /s/ James F. Carlin
------------------------------------
Natick , MA 01760 James F. Carlin
Date: 8/29/85 Partner and Limited Partner
-------------
Five Bryant Lane /s/ William A. Yetman
------------------------------------
Dover, MA 02030 William A. Yetman , General
Date: 8/29/85 Partner and Limited Partner
-------------
237 West Street
------------------------------------
Carlisle, MA 01741 Craig L. Burr, Limited Partner
Date:
-------------
98 Sotello Avenue
------------------------------------
San Francisco, CA 94116 Jean Deleage, Limited Partner
Date:
-------------
Ocean Drive
------------------------------------
Newport, RI 02840 John J. Egan, Limited Partner
Date:
-------------
Nine Phillips Pond
------------------------------------
South Natick, MA 01760 William P. Egan, Limited
Date: Partner
-------------
27 Chamberlain Street /s/ James W. Intinarelli
------------------------------------
Hopkinton, MA 01748 James W. Intinarelli, Limited
Date: 8/22/85 Partner
-------------
One Phillips Pond
------------------------------------
South Natick, MA 01760 James A. Radley, Limited
Date: Partner
-------------
1040 Marsh Road Telco Systems, Inc., Limited
Suite 100 Partner
Menlo Park, Ca 94025
Date: 8/29/85
-------------
By: /s/ Kent L. Robertson, CFO
---------------------------------
, hereunto
duly authorized
5
<PAGE> 75
COMMONWEALTH OF MASSACHUSETTS
Suffolk ,ss. August 29, 1985
Then personally appeared before me, James F. Carlin, who, being duly sworn,
acknowKedged that he executed the foregoing instrument. as his free act: and
deed as general Partner and Limited Partner of Nahatan Street Associates Limited
Partnership, and that the statements set forth therein are true to the best of
his Knowledge and belief,
[Seal] /s/ Saul Weber
----------------------------------
Notary Public
My commission expires: 2/11/88
COMMONWEALTH OF MASSACHUSETTS
,ss. , 1985
Then personally appeared before me, William A. Yetman, who, being duly
sworn, acknowledged that he executed the foregoing instrument as his free act
and deed as General Partner and Limited Partner of Nahatan Street Associates
LIMITED Partnership, and that the statements set forth therein are true to the
best of his knowledge and belief,
----------------------------------
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
Suffolk ,ss. August 26, 1985
Then personally appeared before me, Craig L. Burr, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
/s/ Rochelle A. Bennett
----------------------------------
Notary Public
My commission expires:
ROCHELLE A. BENNETT
Notary Public
MY COMMISSION EXPIRES FEBRUARY 23, 1990
6
<PAGE> 76
STATE OF CALIFORNIA, COUNTY OF SAN FRANCISCO
,ss. AUGUST 26, 1985
Then personally appeared before me, Jean Deleage, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act: and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
OFFICIAL SEAL
DIANE R. IMAI /s/ Diane R. Imai
NOTARY PUBLIC - CALIFORNIA -----------------------------------
San Francisco County Notary Public
My Commission Expires Jan 18 1988
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
,ss. , 1985
Then personally appeared before me, John J. Egan, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
-----------------------------------
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
,ss. , 1985
Then personally appeared before me, William P. Egan, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
-----------------------------------
Notary Public
My commission expires:
7
<PAGE> 77
STATE OF CALIFORNIA
,ss. , 1985
Then personally appeared before me, Jean Deleage, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act: and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
-----------------------------------
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
Suffolk County,ss. August 23, 1985
Then personally appeared before me, John J. Egan, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
/s/ Francis F. Kingsley Jr.
-----------------------------------
Notary Public
FRANCIS F. KINGSLEY JR.
My commission expires: My Commission Expires July 16, 1987
COMMONWEALTH OF MASSACHUSETTS
Suffolk County,ss. August 26, 1985
Then personally appeared before me, William P. Egan, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
/s/ Francis F. Kingsley Jr.
-----------------------------------
Notary Public
FRANCIS F. KINGSLEY JR.
My commission expires: My Commission Expires July 16, 1987
7
<PAGE> 78
COMMONWEALTH OF MASSACHUSETTS
Suffolk, ss. August 22, 1985
Then personally appeared before me, James W. Intinarelli, who, being duly
sworn, acknowledged that he executed the foregoing instrument as his free act
and deed as Limited Partner of Nahatan Street Associates Limited Partnership,
and that the statements set forth therein are true to the best of his knowledge
and belief
Sanford M. McDonald
----------------------------------
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS
, ss. 1985
Then personally appeared before me. James A. Radley, who, being duly sworn,
acknowledged that he executed the foregoing instrument as his free act and deed
as Limited Partner of Nahatan Street Associates Limited Partnership, and that
the statements set forth therein are true to the best of his knowledge and
belief,
----------------------------------
Notary Public
My commission expires:
STATE OF CALIFORNIA
, ss. 1985
Then personally appeared before me, the President of Telco Systems, Inc.',
who, being duly sworn, acknowledged that he executed the foregoing instrument as
the free act and deed of Telco Systems, Inc. as Limited Partner of Nahatan
Street Associates Limited Partnership, and that the statements set forth therein
are true to the best of his knowledge and belief,
----------------------------------
Notary Public
My commission expires:
8
<PAGE> 79
August 29, 1985
Mr. Kent Robertson
Chief Financial Officer
Telco Systems, Inc.
1040 Marsh Road - Suite 100
Menlo Park, California 94025
Dear Mr. Robertson:
As consideration for your execution of that certain Amended and Restated
Agreement of Limited Partnership of Nahatan Street Associates Limited
Partnership (the "Agreement"), we hereby agree to vote to amend the Agreement as
set forth below.
1. The definition of "Affiliate" shall be amended and restated in its
entirety as follows:
"AFFILIATE: with respect to any specified Person, any other Person
directly controlling or controlled by or under direct common control
with such specified Person. For the purposes of this definition, the
term control when used with respect to any specified Person means the
power to direct the management and policies of such Person, whether
through the ownership of voting securities, by contract or otherwise;
and the terms CONTROLLING and CONTROLLED BY have the meaning
correlative to the foregoing.
2. The definition of "Substantial Majority In Interest" shall be amended
by deleting the term "seventy-five percent MU" and substituting the
term "seventy-two percent (72%)".
3. Section 5.3.B.(2) shall be amended by inserting the phrase "or any
other material asset of the Partnership" after the word "Premises" in
the first line thereof.
4. Section 7.5A shall be amended by deleting clause (iii) and
substituting the following language therefor:
"(iii) otherwise, only with the Consent of the General Partners and a
Majority in Interest of the Limited Partners which may not be withheld
unreasonably"
<PAGE> 80
5. A new Section 13.13 shall be added which states as follows:
"Section 13.13 No Partition. No Partner shall cause or permit the
Premises to be partitioned or otherwise divided except as expressly
permitted hereunder."
-----------------------
With your approval, the Agreement will be amended as set forth above on or
before September 15, 1985.
Very truly yours,
/s/ William A. Yetman
---------------------
William A. Yetman
/s/ James F. Carlin
---------------------
James F. Carlin
<PAGE> 1
Exhibit 10.35
SENIOR EXECUTIVE TERMINATION BENEFITS AGREEMENT
AGREEMENT, dated as of October 4, 1989 between TELCO SYSTEMS, INC., a
Delaware corporation (the "Company"), and John A. Ruggiero (the "Executive").
RECITALS
A. The Company considers it essential to the best interests of the Company
and its stockholders that its management be encouraged to remain with the
Company and to continue to devote full attention to the Company's business in
the event that an effort is made to obtain control of the Company through a
tender offer or otherwise. In this connection, the Company recognizes that the
possibility of a change in control and the uncertainty and questions which it
may raise among management may result in the departure or distraction of
management personnel to the detriment of the Company and its stockholders.
Accordingly, the Company's board of directors (the "Board") has determined that
appropriate steps should be taken to reinforce and encourage the continued
attention and dedication of members of the Company's management to their
assigned duties without distraction in the fact of the potentially disturbing
circumstances arising from the possibility of a change in control of the
Company.
B. The Executive is a key executive of the Company, and the Company
believes that the Executive has made valuable contributions to the productivity
and profitability of the Company.
C. in the event that the Company receives any proposal from a third person
concerning a possible business combination with,
<PAGE> 2
or acquisition of equity securities of, the Company, the Board believes it
imperative that the Company-and the Board be able to rely upon the Executive to
continue in his position and that the Company be able to receive and rely upon
his advice, if so requested, as to the best interests of the Company and its
stockholders without concern that he might be distracted by the personal
uncertainties and risks created by such a proposal.
D. should the Company receive any such proposal, in addition to the
Executive's regular duties, he may be called upon to assist in the assessment of
such proposals, advise management and the "Board as to whether such proposals
would be in the best interests of the Company and its stockholders, and to take
such other actions as the Board might determine to be appropriate.
NOW, THEREFORE, to assure the Company that it will have the continued
undivided attention and services of the Executive and the availability of his
advice and counsel notwithstanding the possibility, threat or occurrence of a
bid to take over Control of the Company, and to induce the Executive to remain
in the employ of the Company, and for other good and valuable consideration, the
Company and the Executive agree as follows:
1. Services During Certain Events
------------------------------
In the event that a third person begins a tender or exchange offer,
circulates a proxy to stockholders, or takes other steps seeking to effect a
Change-in Control (as hereafter defined), the Executive agrees that he will not
voluntarily leave the employ of the Company, and will render the services
contemplated in the recitals to this Agreement, until the third person has
abandoned
-2-
<PAGE> 3
or terminated his or its efforts to effect a Change in Control or until after
such a Change in Control has been effected.
2. Change in Control
-----------------
For purposes of this Agreement, a Change in Control of the Company shall be
deemed to have taken place if: (a) a third person, including a "group" as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becomes the
beneficial owner of shares of any class of the Company's stock having 40% or
more of the total number of votes that may be cast for the election of directors
of the Company; or (b) the stockholders of the Company approve a definitive
agreement for the sale or other disposition of all or substantially all of the
assets of the Company, the merger or other business combination of the Company
with or into another corporation pursuant to which the Company will riot survive
or will-survive only as a subsidiary of another corporation, in either case with
the stockholders of the Company prior to the merger or other business
combination holding less than 50% of the voting shares of the merged or combined
companies after such merger or other business combination, or any combination of
the foregoing.
3. Circumstances Triggering Receipt of Severance Benefits
------------------------------------------------------
(a) The Company shall provide the Executive with the benefits set forth in
sections 5 and 6 upon any termination, of the Executive's employment by the
Company within three years following a Change in Control for any reason except
the following
(i) Termination by reason of the Executive's death, provided the Executive
has not previously given a valid
-3-
<PAGE> 4
Notice Of Termination (as defined in Section 4) pursuant to Subsection
3(b);
(ii) Termination by reason of the Executive's disability. For the purposes
hereof, "disability" shall be defined as the Executive's inability by
reason of illness or other physical or mental disability to perform
the duties required by his employment for any consecutive period of
180 calendar days, provided that notice of any termination by the
Company because of the Executive's disability shall have been given to
the Executive prior to the full resumption by him of the performance
of such duties;
(iii) Termination for cause. For the purposes hereof, "cause" shall be
defined as the willful and continued failure of the Executive to
perform substantially his duties or action by the Executive involving
willful misfeasance, gross negligence or the commission of any
felonious action; provided, however, that termination for cause based
on the Executive's willful and continued failure to substantially
perform his duties shall not.be effective unless the Executive shall
have received written notice from the Board of such failure
(specifying in detail the facts and circumstances on which the Board
is relying) and a demand for substantial performance 30 days prior to
such termination and the Board determines that the Executive shall
have
-4-
<PAGE> 5
failed during such 30-day period to resume the diligent performance of
his,duties.
(b) The Company shall also provide the Executive with the benefits set
forth in Sections 5 and 6 upon any termination of the Executive's employment
with the Company at the option of the Executive within three years after a
Change in Control followed by the occurrence of any one of the following events:
(i) Without the express written consent of the Executive, the assignment
of the Executive to any duties substantially inconsistent with his
positions, duties, responsibilities or status with the Company
immediately prior to the Change in Control, a substantial reduction of
his duties or responsibilities or assignment of the Executive to a
business location more than 20 miles from the regular business
location of the Executive prior to the Change in Control, in each case
as determined in good faith by the Executive;
(ii) A reduction by the Company in the amount of the Executives salary as
compared to that which was paid immediately prior to the Change in
Control, or any failure to maintain or provide benefit plans covering
the Executive providing benefits at least equal to the level of
benefits paid or available to the Executive under the Company's
benefit plans immediately prior to the Change in Control;
-5-
<PAGE> 6
(iii) The failure of the Company to obtain the assumption of the obligation
to perform this Agreement by any successor as required by Section 11;
(iv) The failure by the Company or its stockholders, as the case may be, to
re-elect the Executive to a corporate office held by him immediately
prior to the Change in Control or his removal from any such office
including any seat held at such time on the Board; or
(v) Any material breach by the Company of any of the provisions of this
Agreement or any material failure by the Company to carry out any of
its obligations hereunder.
4. Notice of Termination
---------------------
Any termination of the Executive's employment with the Company by the
Company.as contemplated by Subsection 3(a) or by the Executive as contemplated
by Subsection 3(b) shall be communicated by written Notice of Termination to the
other part,. Any Notice of Termination given by the Executive pursuant to
Subsection 3(b) or given by the Company in connection with a termination as to
which the Company believes it is not obligated to provide the Executive with the
benefits set forth herein shall set forth the effective date of termination (the
"Termination Date"), the specific provision in this Agreement relied upon and,
in reasonable detail, the facts and circumstances claimed to provide a basis for
such termination.
-6-
<PAGE> 7
5. Termination Benefits
--------------------
Subject to the conditions set forth in Sections 3 and 10, the following
benefits (subject to any applicable payroll or similar taxes required to be
withheld) shall be paid in a lump sum, or in the case of fringe benefits shall
continue to be provided, to the Executive:
(a) Compensation
------------
The sum of (i) one and one-half times the Executive's effective annual
base salary as of the Termination Date plus (ii) an amount equal to
the highest annual. bonus paid or payable under the Company's
Management Incentive Compensation Plan, or otherwise paid or payable
to the Executive by the Company as a bonus, with respect to any
consecutive 12-month period during the -three years prior to the
Termination Date.
(b) Insurance Benefits, etc.
-----------------------
The Executive's participation (including dependent coverage) in the
life, accident, disability, health and dental insurance plans, vision
care plans, and, any other fringe benefits of the Company in effect
immediately prior to the Change in Control (including, but not limited
to, tax preparation service and financial planning service) shall be
continued, or equivalent benefits provided, by the Company, at no cost
to the Executive, for a period of 18 months commencing on the
Termination Date.
-7-
<PAGE> 8
(c) Company Automobile
------------------
The Executive shall be entitled to purchase, within 30 days after the
Termination Date, the Company-owned automobile assigned to the
Executive for a purchase price equal to the projected book value of
the vehicle as of the end of three years from the date of its
acquisition by the Company. If this option is not exercised, such
automobile shall be returned to the Company at the end of such 30-day
period.
6. Stock Options
-------------
In the event of a Change in Control, each outstanding option held by the
Executive pursuant to any stock option plan of the Company shall, without
further action by the Company., accelerate and become immediately exercisable in
full not later than 15 days prior to the effective date of such Change in
Control, and shall remain exercisable until 15 days after such effective date,
without. regard to the terms of the plan or of any such stock option requiring
the passage of time as a condition precedent to the right to the exercise of the
option to purchase a portion of the optioned shares. other terms and conditions
of the applicable stock option agreements shall not be affected by such
acceleration.
7. "Gross-Up" for Excise or Surtax Payable
---------------------------------------
In the event that the aggregate of the payments to be made to
the-Executive, and the compensation deemed to be received by the Executive,
pursuant to or by reason of the provisions of Sections 5 and 6 of this Agreement
give rise to any excise tax or
-8-
<PAGE> 9
surtax payable by the Executive pursuant to Sections 280G or 4999 of the
Internal Revenue Code of 1986 or any similar federal tax law, the Company shall
pay an additional amount to the Executive so that, after payment or provision
for payment of such excise tax or surtax, the net amount realized by the
Executive shall equal the aggregate amount payable or deemed to have been
received by the Executive under Sections 5 and 6 without regard to such excise
tax or surtax.
8. Effect of Subsequent Employment
-------------------------------
None of the benefits provided for or payable pursuant to this Agreement
shall be affected or reduced in the event that the Executive obtains other
employment after the Termination Date.
9. Continuing obligations
----------------------
In order to induce the Company to enter into this Agreement, the Executive
hereby ratifies and confirms his Invention, NonDisclosure and Non-Competition
Agreement with the Company. Without limiting the generality of the foregoing,
the Executive agrees that all documents, records, techniques, business secrets
and other information which have come into his possession from time to time
during his employment hereunder shall be deemed to be confidential and
proprietary to the Company and that. he shall retain in confidence any
confidential information known to him concerning the Company and its
subsidiaries and their respective businesses so long as such information is not
publicly disclosed.
10. Successors
- --------------
(a) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to
<PAGE> 10
all or substantially all of the business and/or assets of the Company, by
agreement in form and substance satisfactory to the Executive, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that Company would be required to perform it if no such transaction had
taken place. Failure of the Company to obtain such agreement prior to the
effective date of any such transaction shall be a breach of this Agreement and
shall entitle the Executive to compensation from the Company in the same amount
and on the same terms as the Executive would be entitled hereunder if he were to
terminate his employment pursuant to Subsection 3(b), except that for purposes
of implementing the foregoing, the date on which any such transaction becomes
effective shall be deemed the Termination Date. As used in this Agreement,
"Company" shall mean the Company as defined herein and any successor to its
business and/or assets as aforesaid which executes and delivers the agreement
provided for in this Section 10 or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law.
(b) This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive should
die while any amounts are payable to him hereunder, all such amounts, unless
other-wise provided herein, shall be paid in accordance with the terms; of this
Agreement to his designee or, if there be no such designee, to his estate.
_-10-
<PAGE> 11
11. Notices
-------
For the purposes of this Agreement; notices and all other communications
provided for herein shall be in writing anti shall be deemed to have been duly
given when delivered or mailed by United States registered or certified mail,
return receipt: requested, postage prepaid, addressed as follows:
If-to the Executive: John A. Ruggiero
13 Commonwealth Avenue
Apt. 4F
Boston, MA 02116
If to the Company: Telco Systems, Inc.
63 Nahatan Street
Norwood, MA 02062
Attention: Secretary
or to such- other address as either party may have furnished to the other in
accordance herewith, except that notices of change of address shall be effective
only upon receipt.
12. Governing Law
-------------
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware.
13. Arbitration
-----------
Any controversy or claim arising out of or relating to this Agreement or
the breach thereof shall be settled by arbitration to be conducted in Boston,
Massachusetts in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. The
arbitrators shall award costs and reasonable fees of counsel to
-11-
<PAGE> 12
the Executive if the arbitrators consider the,. Executive to be the prevailing
party in any such arbitration proceeding.
14. Miscellaneous
-------------
No provisions of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing signed by
the Executive and on behalf of the Company. No waiver by either party hereto of,
or compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of the same or any other provisions
or conditions at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement.
15. Separability
------------
The invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provisions of this
Agreement, all of which shall remain in full force and effect.
16. Non-Assignability
-----------------
This Agreement is personal in nature and neither of the parties hereto
shall, without the consent of the other, assign or transfer this Agreement or
any rights or obligations hereunder, except as provided-in Section 10. Without
limiting the foregoing, the Executive's right to receive payments hereunder
shall not be assignable or transferable, whether by pledge, creation of a
security interest or otherwise, other than to a person or per-
-12-
<PAGE> 13
sons designated in writing by the Executive or-a transfer by his will or by the
laws of descent or distribution, and in the event of any attempted assignment or
transfer contrary.to this Section the Company shall have no liability to pay any
amount so attempted to be assigned or transferred.
17. Termination
-----------
The Company may terminate this Agreement at any time by 30 days' written
notice of such termination given to the Executive; EXCEPT THAT such termination
shall not be made, and if made shall have-no effect, (a) within three years
after the Change in Control in question or (b) during any period of time when
the Company has knowledge that any third person has taken steps reasonably
calculated to effect a Change in Control until, in the opinion of the Board, the
third person has abandoned or terminated his efforts to effect a Change in
Control. Any decision by the Board that the third person has abandoned or
terminated his efforts to effect a change in control shall be conclusive and
binding on the Executive.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the day and year first above set forth.
TELCO SYSTEMS, INC.
By /s/ Paul D. Lazay
--------------------------
President
/s/ John M. Ruggiero
-----------------------------
John M. Ruggiero
-13-
<PAGE> 1
STANDARD TRIPLE NET INDUSTRIAL LEASE
BETWEEN
PACTEL PROPERTIES, AS Landlord
AND
TELCO SYSTEMS, INC., as Tenant
FOR
NORTHPORT Business Park
DATED
3 MAY 1990
<PAGE> 2
SCHEDULE A
BASIC LEASE INFORMATION
PARAGRAPH
REFERENCE
Preamble LANDLORD: PacTel Properties, a California
corporation
Preamble TENANT: Telco Systems, Inc., a
___________ corporation
1.3 BUILDING: Building known as Building 10
located at the corner of
Cushing Parkway and Northport
Loop East within the project
commonly known as Northport
Business Park, Fremont,
California, as shown on the
site plan attached as Exhibit
A.
1.4; 2.1 PREMISES: The Building.
1.5 NET RENTABLE AREA
OF PREMISES; approximately 62,261 rentable
square feet
1.6 TENANT'S PERCENTAGE
SHARE: 100%
1.7 ESTIMATED OPERATING
EXPENSES for calendar 1990: $1,500
ESTIMATED REAL PROPERTY
TAX for calendar 1990: $63,000
3.1 TERM: 5 years
3.1 ESTIMATED August 1, 1990
COMMENCEMENT DATE:
3.1 ESTIMATED
EXPIRATION DATE: July 30, 1995
4.1 BASE MONTHLY RENT:
Month of Term monthly Base Rent
------------- -----------------
1 through 5 Free
6 through 36 $46,073 ($.74
per rentable
sq.ft.)
37 through 60 $49,186 ($.79
per rentable
sq.ft.)
20 SECURITY DEPOSIT: S 49,186
5. 1 PERMITTED USE: general office, research and
development and light assembly
5.2 CC&R's:
<PAGE> 3
Estate
22 LANDLORD'S ADDRESS PacTel Properties
FOR NOTICES: 111 Pine Street
Suite 1700
San Francisco, CA 94111
Attn: Asset Manager
with a copy to:
Jane Greenwald, Esq.
PacTel Corporation
Legal Department
130 Kearny Street
Suite 2759
San Francisco, CA 94108
22 TENANT'S ADDRESS
FOR NOTICES:
prior to occupancy:
--------------------------------
--------------------------------
--------------------------------
after occupancy:
to the Premises
24 PARKING: 242 spaces
45 OPTION: one 5-year option at 95% of
fair market rent
<PAGE> 4
Table of Contents
Page
----
1. Definitions .........................................
2. Premises ............................................
3. Term 3.1 Term. ......................................
3.1 Term ..........................................
3.2 Delay in Commencement .........................
3.3 Early Possession ..............................
4. Rent ................................................
4.1 Base Rent .......................................
4.2 Additional Rent ...............................
4.3 Operating Expenses ............................
5. Use .................................................
5.1 Use .............................................
5.2 Compliance with Law ...........................
5.3 Condition of Premises .........................
5.4 Hazardous Substances ..........................
6. Maintenance, Repairs and Alterations ................
6.1 Landlord's obligations ........................
6.2 Tenant's Obligations ..........................
6.3 Alterations ...................................
7. Indemnity; Insurance ................................
7.1 Indemnity .....................................
7.2 Tenant's Insurance ............................
7.3 Landlord's Insurance ..........................
7.4 Payment of Premiums ...........................
7.5 Waiver of Subrogation .........................
8. Damage or Destruction ...............................
8.1 Definitions ...................................
8.2 Partial Damage - Insured Loss .................
8.3 Partial Damage - Uninsured Loss ...............
8.4 Total Destruction .............................
8.5 Damage Neat End of Term .......................
8.6 Abatement of Rent: Tenant's ...................
Remedies ....................................
8.7 Termination - Advance Payments ................
8.8 Waiver ........................................
9. Real Property Taxes .................................
9.1 Payment of Tax ................................
9.2 Additional Improvements .......................
9.3 Definition of Real Property Tax ...............
9.4 Personal Property Taxes .......................
10. Utilities ...........................................
11. Assignment and Subletting ...........................
11.1 Landlord's Consent Required ...................
11.2 Tenant Affiliate ..............................
11.3 No Release of Tenant ..........................
11.4 Notice of Assignment or .......................
Subletting ..................................
11.5 Condition to Landlord's .......................
Consent .....................................
11.6 Landlord's Expenses ...........................
12. Defaults; Remedies ..................................
12.1 Defaults ......................................
12.2 Remedies ......................................
12.3 Default by Landlord ...........................
12.4 Late Charges ..................................
12.5 Landlord's Right to ...........................
Cure Defaults ...............................
13. Condemnation ........................................
14. Real Estate Brokers .................................
15. Estoppel Certificate ................................
16. Landlord's Liability ................................
17. Severability ........................................
18. Interest on Past-due Obligations ....................
19. Time of Essence .....................................
20. Security Deposit ....................................
21. Incorporation of Prior Agreements; ..................
Amendments ........................................
4
<PAGE> 5
22. Notices .............................................
23. Waivers ..............................................
24. Parking ..............................................
25. Holding Over .........................................
26. Cumulative Remedies ..................................
27. Convenants and Conditions ............................
28. Binding Effect; Choice of Law ........................
29. Subordination ........................................
30. Attornment ...........................................
31. Landlord's Access ....................................
32. Signs ................................................
33. merger ...............................................
34. No Light, Air or View Easement .......................
35. Guarantor; Co-Tenants ................................
36. Quiet Possession .....................................
37. Landlord's Rules and Regulations .....................
38. Security Measures ....................................
39. Landlord's Reservation of Rights .....................
41.1 Easements .......................................
41.2 Building Rights .................................
40. Authority ............................................
41. Conflict .............................................
42. Attorneys' Fees ......................................
43. Exhibits .............................................
44. Lender Provisions ....................................
45. Extension Option .....................................
46. Options ..............................................
EXHIBITS
--------
A Site Plan
B Premises
C Form of Estoppel Certificate
D Initial Improvements of Premises
E Rules and Regulations for Tenant Contractors
F Plans and Specifications
G Pension Plans
<PAGE> 6
THIS LEASE, dated as of _______________ 1990, is made by and between PacTel
Properties, a California corporation (herein called "Landlord') and Telco
Systems, Inc., a _____________ (herein called "Tenant").
1. Definitions.
-----------
1.1 BASE MONTHLY RENT: the amount specified on Schedule A which Tenant is
to pay each amount pursuant to Paragraph 4.1 and subject to adjustment
as provided on Schedule A.
1.2 COMMENCEMENT DATE: the date on which the term of this Lease is to
begin, which shall be the date specified in Schedule A, subject to
adjustment pursuant to Paragraphs 3.2 and 3.3.
1.3 BUILDING: the building indicated on Schedule A.
1.4 PREMISES: the Building and the land on which it is located.
1.5 NET RENTABLE AREA OF PREMISES: that area comprising the Premises which
is hereby stipulated for all purposes to contain the square footage
indicated on Schedule A.
1.6 TENANT'S PERCENTAGE SHARE: The percentage indicated on Schedule A.
Such Tenant's Percentage Share is derived by dividing the Net Rentable
Area of the Premises by the total rentable area of the Building.
Landlord reserves the right in the future to readjust Tenant's
Percentage Share to reflect the addition or removal of buildings or
improvements to the total space on which expenses passed through to
Tenant will be calculated. Any adjustments will be made on a
reasonable basis and so as not to prejudice Tenant.
1.7 The following terms shall have the meanings specified where indicated:
a. ADDITIONAL RENT: Paragraph 4.2
b. ALTERATIONS: Paragraph 6.3
C. (Intentionally deleted)
d. EXPIRATION DATE: Paragraph 3.1
e. INITIAL IMPROVEMENTS: Paragraph 6.1(b), Exhibit C
f. INSURED LOSS: Paragraph 8.1(c)
g. OPERATING EXPENSES: Paragraph 4.3(a). An estimate of Operating
Expenses (other than any Real Property Tax) for the year in which this
Lease commences is set forth in Schedule A.
h. PREMISES PARTIAL DAMAGE; PREMISES BUILDING PARTIAL DAMAGE: Paragraph
8.1(a)
i. PREMISES TOTAL DESTRUCTION; PREMISES BUILDING TOTAL DESTRUCTION:
Paragraph 8.1(b)
j. REAL PROPERTY TAX: Paragraph 9.1. An estimate of the Real Property Tax
for the year in which this Lease commences is set forth in Schedule A.
k. UTILITY INSTALLATIONS; Paragraph 6.3
2. PREMISES. Landlord hereby leases to Tenant and Tenant leases from Landlord
the Premises on the terms and conditions set forth herein.
3. TERM.
6
<PAGE> 7
3.1 TERM. This Lease shall be for the Term specified on Schedule A,
commencing on the Estimated Commencement Date specified on such Schedule A, or,
if later, the date upon which the initial Improvements to be installed by
Landlord are substantially completed and the Premises ready for occupancy or use
and expiring on the Estimated Expiration Date specified on such Schedule A (or
such later date as may result from a delayed Commencement Date), unless sooner
terminated pursuant to any provision hereof. The Initial Improvements shall be
deemed, to be substantially complete upon the earliest to occur of the
following: (a) the date on which all improvements to be constructed by Landlord
have been completed except for punch list items which do not prevent Tenant from
using the Premises for their intended use, (b) the date of issuance of a
temporary certificate of occupancy for the Premises, or (c) the date Tenant
opens for business in the Premises. The parties shall, after the Lease
Commencement Date has occurred, execute an instrument specifying the actual
Lease Commencement Date and Expiration Date.
3.2 DELAY IN POSSESSION. Notwithstanding said Commencement Date, if for any
reason Landlord cannot deliver possession of the Premises to Tenant on said
date, Landlord .shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease or the obligations of Tenant hereunder
:but in such case, Tenant shall not be obligated to pay rent until possession of
the Premises is tendered to Tenant and the Expiration Date shall be
automatically extended; provided, however, that if Landlord shall not have
delivered possession of the Premises within 60 days from said Commencement Date,
Tenant may, at Tenant's option, by notice in writing to Landlord within ten (10)
days thereafter, cancel this Lease, in which event the parties shall be
discharged from all obligations hereunder; provided that such 60-day period
shall be subject to extension for any delays (i) caused by Tenant requests for
changes in Landlord's construction, if any, or due to fault or neglect of Tenant
or Tenant's agents or contractors, or (ii) due to acts of God, strikes, fires,
weather, casualty, war, acts of governmental bodies, inability to obtain labor
or materials or other causes:beyond Landlord's reasonable control.
3.3 EARLY POSSESSION. If Tenant occupies the Premises prior to said
Commencement Date,. such occupancy shall be subject to all provisions hereof,
such occupancy shall not advance the Expiration Date, and Tenant shall pay rent
for such period at the initial Base Monthly Rent set forth in Schedule A for the
period following any free rent period.
4. Rent.
----
4.1 BASE RENT. Tenant shall pay to Landlord as Base Monthly Rent for the
Premises, the amount specified on Schedule A. Rent shall be payable in advance,
on the first day of each month of the term hereof. Rent for any period during
the term hereof which is for less than one month shall be a pro rate portion of
the monthly installment. Rent shall be payable in lawful money of the United
States to Landlord without deduction, offset, prior notice or demand at the
address stated herein or to such other persons or at. such other places as
Landlord may designate in writing.
4.2 ADDITIONAL RENT. As rent for the Premises in addition to the Base
Monthly Rent, Tenant shall pay to Landlord, in the amounts and at the times
provided, all of the other charges and payments provided for in this Lease
("Additional Rent"), such as (but not limited to) Operating Expenses, late
charges, and interest ("Additional Rent") . Unless otherwise specified herein,
all payments of Additional Rent shall be payable in full on the date that the
next installment of Base Monthly Rent is payable.
4.3 OPERATING EXPENSES
7
<PAGE> 8
(a) Tenant shall pay to Landlord as Additional Rent Tenant's Percentage
Share (as specified on Schedule A) of all Operating Expenses as hereinafter
defined during each calendar year or part thereof during the term of this Lease,
in accordance with the following provisions. "Operating Expenses" shall mean the
total cost and expenses paid or incurred by Landlord in the exercise of its
discretion in connection with the management, operation, maintenance and repair
of the Building, and other costs of the project as allocated to the Building by
Landlord in its reasonable good faith determination. Such operating Expenses
shall include, without limitation, (1) the cost of air conditioning,
electricity, beating, mechanical, ventilating systems and all other utilities,
(to the extent not separately charged or metered to Tenant) and the cost of
supplies and equipment and maintenance and service contracts in connection
therewith (to the extent the HVAC systems in the Premises are not maintained by
Tenant at Tenant's sole cost); (ii) all costs, charges and fees associated with
all water and sewer service supplied but not separately metered to Tenant and
all costs of any other utility not separately assessed to Tenant; (iii) the cost
of assessments and other charges for which Landlord is obligated to the
Northport Business Park Owners' Association as owner of the Premises; (iv) the
cost of repairs (including, without limitation, roof repairs and maintenance and
repair of the structural components of the Building), general maintenance,
plumbing service, and fire protection systems; (v) the cost of fire, extended
coverage, boiler, sprinkler, public liability, property damage, rent,
earthquake, and other insurance paid by Landlord; (vi) fees, charges and other
costs, including management fees, consulting fees, legal fees and accounting
fees, of all independent contractors engaged by Landlord or reasonably charged
by Landlord if Landlord performs management services in connection with the
Building or project provided, however.. that if Landlord performs such
management services Landlord's management fee shall not exceed 3% of gross
revenues from the Building ; (vii) license, permit and inspection fees; (viii)
all costs and expenses of contesting by appropriate legal proceedings any matter
concerning operating or managing the Building; ( ix) all costs associated with
the operation, management, maintenance and repair of the common areas, including
landscaping and gardening, signs, maintenance, repairs, resurfacing, repaving,
painting, refinishing, lighting, cleaning, storm drainage and sanitary sewer
systems, refuse removal, snow, ice and ash removal; (x) the cost of any capital
improvements made to the Building or project after completion of its
construction as a labor-saving device or to effect other economies in the
operation or maintenance of the Building or project, or made to the Building or
project after the date of this Lease, that are required under any governmental
law or regulation that was not applicable to the Building or project at the time
that permits for the construction thereof were obtained, such cost to be
amortized over such reasonable period as Landlord shall determine, together with
interest on the unamortized balance a t the rate of ten percent (10%) per annum
or such higher rate as may have been-paid by Landlord on funds borrowed for the
purpose of constructing such capital improvements; (XI) the cost of all Real
Property Tax paid by Landlord pursuant to Paragraph 9; and (XI) any other
expense of any other kind whatsoever reasonably incurred in managing, operating,
maintaining and repairing the Building or project. The determination of
operating Expenses and their allocation shall be in accordance with generally
accepted accounting principles applied on a consistent basis. The specific
examples of operating Expenses stated in this Paragraph are in no way intended
to and shall not limit the costs comprising operating Expenses, nor shall such
examples be deemed to obligate Landlord to incur such costs or to provide such
services or to take such actions except as Landlord may be expressly required in
other portions of this Lease, or except as Landlord, in its sole discretion, may
elect.
(b) Tenant shall pay to Landlord as Additional Rent during each calendar
year or part thereof during the
8
<PAGE> 9
calendar year on or before the first day of each calendar month, in advance, in
an amount estimated by Landlord and billed by Landlord to Tenant; provided that
Landlord shall have the right initially to determine monthly estimates and to
revise such estimates from time to time. With reasonable promptness after the
expiration of each calendar year Landlord shall furnish Tenant with a statement
(herein called "Landlord's Expense Statement"), setting forth in reasonable
detail the Operating Expenses for such calendar year and Tenant's Percentage
Share, if any, of such Operating Expenses. If the actual Operating Expenses for
the Building for such calendar year exceed the estimated operating Expenses paid
by Tenant for such calendar year, Tenant shall pay to Landlord the difference
between the amount paid by Tenant land the actual Operating Expenses within
fifteen (15) days after the receipt of Landlord's Expense Statement, and if the
total amount paid by Tenant for any such calendar year shall exceed the actual
Operating Expenses for such calendar year, such excess shall be credited against
the next installment of the estimated increased Operating Expenses due from
Tenant to Landlord hereunder.
(c) As an alternative to the provisions of (b) above, Landlord may change
the method of Tenant's payment of Operating Expenses at any time and from time
to time to require Tenant to pay Operating Expenses actually incurred or paid by
Landlord but not previously billed to Tenant as invoiced by Landlord. Such
invoices shall be payable by Tenant within 10 days of receipt of Landlord's
invoice, but not more often than once each calendar month.
(d) If the expiration date fixed for this Lease shall occur on a date other
than the end of a calendar year, Tenant's Percentage Share of Operating Expenses
for the calendar year in which the expiration date falls shall be prorated on an
annual basis; provided, however, Landlord may, at its option, pending the
determination of the amount of Operating Expenses for such partial calendar
year, furnish Tenant with statements of estimated excess Operating Expenses, and
Tenant's Percentage Share thereof for such partial calendar year. Within fifteen
(15) days after receipt of such estimated statement, Tenant shall remit to
Landlord, as Additional Rent, the amount of Tenant's Percentage Share of such
increase in Operating Expenses. After such Operating Expenses have been finally
determined and Landlord's Expense Statement furnished to Tenant pursuant to this
Paragraph, if there has been an underpayment of Tenant's Percentage Share of
Operating Expenses, Tenant shall remit the amount of such underpayment to
Landlord within fifteen (15) days of receipt of such statements, and if there
has been an overpayment, Landlord shall remit the amount of any such overpayment
to Tenant within fifteen (15) days of the issuance of such statement.
5. Use.
---
5.1 USE. The Premises shall be used and occupied only for the permitted use
stated on Schedule A and for related purposes.
5.2 Compliance with Law and Restrictions.
------------------------------------
(a) Tenant shall, at Tenant's expense, comply promptly with all
applicable statutes, ordinances, rules, regulations, orders, easements,
covenants and restrictions of record, and requirements in effect during the term
or any part of the term hereof, regulating the use by Tenant of the Premises,
including the Covenants, Conditions and Restrictions specified on Schedule A, a
copy of which Tenant acknowledges having received and read. Tenant shall not use
nor permit the use of the Premises in any manner that will tend to create waste
or a nuisance or result in any increase in any insurance premiums payable on
insurance carried on the Premises, or, if there shall be more than one tenant in
the Building containing the Premises, shall tend to disturb such other tenants.
Tenant shall not cause, maintain or permit any outside storage on or about the
Premises. Tenant shall
9
<PAGE> 10
5.3 Condition of Premises.
---------------------
(a) Landlord shall deliver the Premises to Tenant clean and free of
debris on the Lease Commencement Date (unless Tenant is already in possession).
Except as otherwise provided in this Lease, Tenant shall be deemed to have
accepted the Premises in their "as is" condition existing as of the Lease
Commencement Date or the date Tenant takes possession of the Premises, whichever
is earlier, subject to all applicable zoning, municipal, county and state laws,
ordinances and regulations governing the use of the Premises, and any covenants
or restrictions of record, and accepts this Lease subject thereto and to all
matters disclosed thereby and by any exhibits attached hereto. Tenant
acknowledges that neither Landlord nor any real estate broker or other agent of
Landlord has made any representation or warranty as to the present or future
suitability of the Premises for the conduct of Tenant's business.
(b) Landlord shall have no obligation to construct or install in the
Premises any improvements, fixtures or equipment whatsoever, except to the
extent otherwise provided in Exhibit C attached hereto, if any. By taking
possession of the Premises, Tenant is deemed to have accepted Initial
improvements to be constructed by Landlord (if any) as being completed in
accordance with the plans and specifications for such improvements, subject only
to completion of items on Landlord's punch list.
5.4. HAZARDOUS SUBSTANCES. Except in strict compliance with all government
approvals, applicable Laws and regulations pertaining to Hazardous materials (as
defined below), and in accordance with the additional provisions of this
Paragraph 5.4, Tenant shall not cause or permit the presence, use, handling,
generation, emission, release, discharge, storage or disposal of any Hazardous
Materials on, under, in or about the Premises; and shall not cause or permit the
transportation of any Hazardous Materials to or from the Premises. Tenant shall
indemnify, protect, defend, and hold harmless Landlord from and against all
liability, and foreseeable consequential damages, penalties, expenses and costs
of any required or necessary remediation, repair, removal, cleanup or
detoxification, of the Premises and surrounding properties, and from and against
the preparation of any cleanup, remediation, closure or other required plans,
whether such action is required or necessary prior to or following the
termination of this Lease, to the full extent that the same is attributable to
the presence, use, handling, generation, emission, release, discharge, storage
or disposal of Hazardous Materials by Tenant, its agents, employees, or
contractors. Neither the written consent by Landlord to the handling, use,
presence, generation, emission, release, discharge, storage, or disposal of
Hazardous materials nor the strict compliance by Tenant with all Laws and
government approvals pertaining to Hazardous Materials shall excuse Tenant from
Tenant's obligations of indemnification pursuant to this Paragraph. Tenant shall
at all times notify Landlord of any Hazardous materials present, used,
generated, handled, emitted, released, discharged, stored or disposed of on or
from the Premises. Notwithstanding the foregoing, notice shall not be required
for Hazardous materials present on the Premises in reasonable quantities which
are commonly used in business offices including, but not limited to, cleaning
materials, correcting fluids, and toner used in photocopy machines, provided
such Hazardous Materials are used and disposed of in accordance with law. Tenant
shall also observe any additional requirements imposed by Landlord from time to
time in the presence, use, handling, generation, emission, release, discharge,
storage or disposal of Hazardous Materials, and shall institute operating
procedures designed to handle Hazardous Materials consistent with prudent
industry practice. Landlord shall have the right to inspect the Premises on
24-hours' prior notice for compliance with the provisions of this Paragraph. If
Landlord in its
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with the provisions of this Paragraph. If Landlord insists reasonable judgment
decides that the manner or extent'-of Tenant's activities Involving. Hazardous
Materials so require or that Tenant is violating its obligations under this
Paragraph in its handling of Hazardous Materials, Landlord may hire an
independent expert to develop a Hazardous Materials program for Tenant and
monitor Tenant's compliance therewith. Tenant shall reimburse, Landlord for the
cost of such independent consultant promptly upon demand.
The term "Hazardous Materials" shall mean any toxic substance, hazardous
substance, hazardous material, or hazardous waste, pollutant or contaminant
which is or becomes regulated by any local governmental authority, the State of
California, or the United States government, including, but not limited to, any
material: or substance which is (1) defined as a "hazardous waste", "extremely
hazardous waste" or "restricted hazardous waste" under Sections 25115, 25117 or
25122.7, or listed pursuant to Section 25140 of the California Health and Safety
Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii) defined as a
"hazardous substance" under Section 25316 of the California Health and Safety
Code, Division 20, Chapter 6.8 (Carpenter -Presley-Tanner Hazardous Substance
Account Act), (iii) listed as a chemical known to cause cancer or reproductive
toxicity pusuant to Section 25249.8 of the California Health and Safety Code,
Division 20 Chapter 6.6 (Safe Drinking Water and Toxic Enforcement Act), (iv)
designated as a "hazardous substance" pursuant to Section 6380 of the California
Labor Code, Division 5, Chapter 2.5 (Hazardous Substances information and
Training Act); (v) defined as a "hazardous waste" pursuant to Section 1104 of
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq. (42
U.S.C. Section 6903) or (vi) defined as a "hazardous substance" pursuant to
Section 101 of the Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601).
6. Maintenance, Repairs and Alterations.
------------------------------------
6.1 Landlord's Obligations.
----------------------
(a) subject to the provisions of Paragraphs 5, 6.2 and 8 and except
for damage caused by any negligent or intentional act or omission of Tenant,
Tenant's agents, employees, or invitees in which event Tenant shall repair the
damage, Landlord, at Landlord's expense, shall keep in good order, condition and
repair (1) the gross structural components of the Premises and the Building,
namely the foundations, subflooring, exterior walls, bearing walls, and
structural roof components; (ii) the common areas, including landscaping,
driveways, parking lots, fences and signs located on the Building site and all
sidewalks and parkways adjacent to the Building, and (iii) Building systems and
utility installations, to the outlets; the expenses of which shall be recovered
from Tenant for Tenant's Percentage Share as specified on Schedule A in
accordance with Paragraph 4.3. Landlord shall have no obligation to make repairs
under this Paragraph 6.1 until a reasonable time after receipt of written notice
of the need for such repairs, but shall make diligent efforts to commence such
repairs within 3O days of receipt of such notice. Their shall be no abatement of
rent or liability of Landlord on account of any injury or interference with
Tenant's business with respect to any improvements, alterations or repairs made
by Landlord to any part of the Building or the Premises. Tenant expressly waives
the benefit of any statute now or hereafter in effect which would otherwise
afford Tenant the right to make repairs at Landlord's expense or to terminate
this Lease because of Landlord's failure to keep the Premises in good order,
condition and repair.
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and 8, Tenant, at Tenant's expense, shall keep in good order, condition and
repair the Premises and every part thereof (whether or not the damaged portion
of the Premises or the means of repairing the same are reasonably or readily
accessible to Tenant) including, without limiting the generality of the
foregoing, any and all telephone and telecommunications wiring and equipment,
fixtures, interior walls, and interior surface of exterior walls, roof surface,
ceilings, windows, doors, plate glass, showcases, skylights and entrances
located within the Premises, and the electrical, plumbing, lighting, heating and
air conditioning systems (unless Landlord has elected to keep and maintain the
HVAC systems pursuant to Paragraph 6.1). Tenant shall enter into a service
contract to maintain such HVAC systems and shall deliver to Landlord, every six
months during the Lease Term, a certificate of maintenance or its equivalent,
signed by a licensed HVAC repair and maintenance contractor and stating that the
heating and air conditioning systems servicing the Premises have been inspected,
serviced and are in good order, condition and repair.
(b) If Tenant fails to perform Tenant's obligations under this
Paragraph 6.2 or under any other Paragraph of this Lease, Landlord may, at
Landlord's option, enter upon the Premises after ten (10) days' prior written
notice to Tenant (except in the case of emergency, in which case no notice shall
be required), to perform such obligations on Tenant's behalf and put the
Premises in good order, condition and repair, and the cost thereof together with
interest thereon at the maximum rate then allowable by law shall be due and
payable as Additional Rent to Landlord together with Tenant's next rental
installment.
(c) On the Expiration Date of the term hereof, or on any earlier
termination, Tenant shall surrender the Premises to Landlord in the same
condition as received, clean and free of debris, ordinary wear and tear
excepted. Any damage or deterioration of the Premises shall not be deemed
ordinary wear and tear if the same could have been avoided by good maintenance
practices by Tenant. Tenant shall repair any damage to the Premises, occasioned
by the installation or removal of its trade fixtures, furnishings and equipment.
Notwithstanding anything to the contrary stated in this Lease, Tenant shall
leave the air lines, power panels, electrical distribution systems, lighting
fixtures, space heaters, heating and air conditioning systems, window coverings,
wall coverings, carpets, panelling, ceilings, and plumbing on the Premises in
good order and operating condition.
6.3 Alterations.
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(a) Tenant shall not, without Landlord's prior written consent, make
any Alterations or Utility Installations or repairs in, on or about the Premises
or attach any fixtures or equipment thereto, except for interior decorative and
nonstructural Alterations not exceeding $10,000 annually during the term of this
Lease. As used in this Paragraph 6.3, the term "Alterations" shall mean any
alterations, additions, improvements, construction, maintenance, repair,
replacement, installation, removal or decoration undertaken by Tenant in
connection with the Premises. The term "Utility Installations" shall mean
carpeting, window and wall coverings, air lines, power panels, electrical
distribution systems, lighting fixtures, space heaters, air conditioning,
plumbing, and telephone and telecommunications wiring and equipment and any
other system. Landlord may require that Tenant remove any or all of said
Alterations or Utility Installations at the expiration of the term, and restore
the Premises to their prior condition provided that Landlord has notified Tenant
that removal of such Alterations or Utility installations will be required at
the time Landlord approves the specific plans therefor. Landlord may require
Tenant to provide Landlord, at Tenant's sole cost and expense, a lien and
completion bond in an amount equal to one and one-half times
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against any liability for mechanics' and materialmen's liens and to insure
completion of the work. Should Tenant make any Alterations or Utility
Installations without the prior approval of Landlord, Landlord may require that
Tenant remove any and all of the same.
(b) Any Alterations or Utility Installations in, on or about the
Premises that Tenant shall desire to make and which requires the consent of the
Landlord shall be presented to Landlord in written form, with complete plans and
specifications. If Landlord shall give its consent, the consent shall be deemed
conditioned upon Tenant acquiring a permit to do so from appropriate
governmental agencies, the furnishing of a copy thereof to Landlord prior to the
commencement of the work and the compliance by Tenant with all conditions of
said permit in a prompt and expeditious manner. The contractor or person
selected by Tenant to make such Alterations or Utility Installations must be
approved in writing by Landlord prior to commencement of any work and such
contractor or person shall at all times be subject to Landlord's control while
in the Building and shall comply with Landlord's Rules and Regulations for
Tenant Contractors, the current version of which is attached hereto as Exhibit
E. Tenant shall also require its contractor to maintain insurance in amounts and
in such form as Landlord may reasonably require and naming Landlord as an
additional insured. Any Alterations or Utility Installations shall be completed
in substantial accordance with the plans and specifications approved by
Landlord, shall be carried out in a good, workmanlike and prompt manner, shall
be of good and sufficient quality and materials, shall comply with all
applicable laws and shall be subject to reasonable supervision by Landlord or
its authorized representatives. Without Landlord's prior written consent, which
shall not be unreasonably withheld, Tenant shall not use any portion of the
common areas in connection with the making of any Alterations or Utility
Installations.
(c) Tenant shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Tenant at or for use in
the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Tenant shall
give Landlord not less than fifteen (15) days' notice prior to the commencement
of any work in the Premises, and Landlord shall have the right to post notices
of non-responsibility in or on the Premises as provided by law. If Tenant shall,
in good faith, contest the validity of any such lien, claim or demand, then
Tenant shall, at its sole expense, defend itself and Landlord against the same
and shall pay and satisfy any adverse judgment that may be rendered thereon
before the enforcement thereof against the Landlord or the Premises, upon the
condition that if Landlord shall require, Tenant shall furnish to Landlord a
surety bond satisfactory to Landlord in an amount equal to such contested lien,
claim or demand indemnifying Tenant against liability for the same and holding
the Premises free from the effect of such lien or claim. In addition, Landlord
may require Tenant to pay Landlord's reasonable outside counsel attorneys' fees
and costs in participating in such action if Landlord shall decide it is to its
best interest to do so.
(d) Unless Landlord requires their removal, as set forth in Paragraph
6.3(a), all Alterations and Utility Installations (whether or not they
constitute trade fixtures of Tenant), which may be made on the Premises,
including but not limited to the floor coverings, panelings, doors, drapes,
built-ins, moldings, soundproofing and lighting and telephone or communications
systems, conduit, wiring and outlets, shall become the property of Landlord and
remain upon and be surrendered with the Premises at the expiration of the term.
Notwithstanding the provisions of this Paragraph 6.3(d), Tenant's machinery and
equipment, other than that which is affixed to the Premises so that it cannot be
removed without material damage to the Premises, shall
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subject to the provisions of Paragraph 6.2(a).
(e) Tenant shall provide Landlord with as-built plans and
specifications for any Alterations or Utility Installations.
7. Indemnity; Insurance.
--------------------
7.1 INDEMNITY. Tenant shall indemnify and hold harmless Landlord from and
against any and all claims arising from Tenant's use or occupancy of the
Premises, or from the conduct of Tenant's business or from any activity, work or
things done, permitted or suffered by Tenant in, on or about the Premises other
than claims arising solely by reason of negligence or wilful acts of Landlord,
its agent, employees or contractors, and shall further indemnify and hold
harmless Landlord from and against any and all claims arising from any breach or
default in the performance of any obligation on Tenant's part to be performed
under the terms of this Lease, or arising from the negligent or intentional acts
or omissions of the Tenant, or any of Tenant's agents, contractors, or
employees, and from and against all costs, attorneys' fees, expenses and
liabilities incurred in the defense of any such claim or any action or
proceeding brought thereon; and in the case of any action or proceeding brought
against Landlord by reason of any such claim, Tenant upon notice from Landlord
shall defend the same at Tenant's expense by counsel satisfactory to Landlord.
Tenant, as a material part of the consideration to Landlord, hereby assumes all
risk of injury to Tenant's business, loss of income, damage to property or
injury to persons, in, on or about the Premises arising from any cause other
than Hazardous Materials existing in the soil on the Premises prior to the date
hereof and Tenant hereby waives all claims ,in respect thereof against Landlord.
7.2 TENANT'S INSURANCE. During the term of this Lease, Tenant shall at
Tenant's expense, obtain and keep in force the following policies of insurance:
(a) Comprehensive General Liability Insurance protecting Tenant
against any liability for injury or death to any person or persons or damage to
property arising out of Tenant's exclusive use, occupancy or maintenance of the
Premises. The limits of such liability insurance shall not be less than Two
million Dollars ($2,000,000.00) combined single limit per occurrence, such limit
to be increased upon Landlord's request whenever Landlord determines that such
an increase is required adequately to protect Landlord from the matters insured
against.
(b) All-Risk Property Insurance covering loss or damage to Tenant's
fixtures, equipment or tenant improvements.
All insurance required under this Paragraph 7.2 shall be written on an
occurrence basis and be (i) issued by such good and responsible companies
qualified to do and doing business in the state where the Premises are located
as may be approved by Landlord, which approval shall not be unreasonably
withheld, and (ii) name Landlord as a named additional insured by an additional
insured endorsement. Tenant shall deliver to Landlord certificates evidencing
the existence and amounts of insurance required above and, if requested by
Landlord, copies of the insurance policies. No such policy shall be cancellable
or subject to reduction of coverage except upon thirty (30) days' written notice
to Landlord. Tenant shall, within thirty (30) days of expiration of such
policies, furnish Landlord with certificates of renewal or "binders" therefor.
7.3 LANDLORD'S INSURANCE. Landlord shall, at Tenant's expense, obtain and
keep in force during the term of this Lease the following insurance:
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covering bodily injury and property damage liabilities arising out of the
Landlord's ownership, use, occupancy or maintenance of the Premises and all
areas appurtenant thereto in an amount not less than Two Million Dollars
($2,000,000.00) combined single limit per occurrence.
(b) Property Insurance covering loss or damage to the Building, but
not Tenant's fixtures, equipment or tenant improvements in an amount not to
exceed the full replacement value thereof, as the same may exist from time to
time, providing protection against all perils included within the classification
"all risk", as such term is used in the insurance industry, including vandalism
and malicious mischief, but excluding flood or earthquake coverage unless
required by a lender having a lien on the Premises. In addition, Landlord may
obtain and keep in force during the term of this Lease, a policy of rental value
insurance covering a period of one year, with loss payable to Landlord, which
insurance shall also cover all real estate taxes and insurance costs for said
period..
(c) Such other insurance (including flood or earthquake coverage) as
Landlord deems necessary and prudent.
Notwithstanding the foregoing, Landlord may at any time and from time to time as
an alternative to maintaining the insurance required in this Paragraph 7.3
itself, require Tenant to maintain the policies of insurance specified under (b)
and (c) above in accordance with the requirements of Paragraph 7.2.
7.4 PAYMENT OF PREMIUM. Tenant shall pay to Landlord during the term
hereof, as Additional Rent, Tenant's Percentage Share of the amount of premiums
for the insurance required under Paragraph 7.3, in accordance with Paragraph
4.3.
7.5 WAIVER OF SUBROGATION. Landlord and Tenant each hereby release and
relieve the other, and waive their entire right of recovery against the other
for loss or damage arising out of or incident to risks insured against under all
policies of fire and extended coverage, public liability, workers' compensation
and other insurance now or hereafter existing during the term hereof and
covering any portion of the Premises or any operations therein, regardless of
cause, including negligence of the other party, its agents, employees and
contractors. Landlord and Tenant shall, upon obtaining the policies of insurance
required hereunder advise each insurance carrier that the foregoing mutual
waiver of subrogation is contained herein, and each party covenants that no
insurer shall hold any right of subrogation against such other party.
8. Damage or Destruction.
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8.1 Definitions.
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(a) "Premises Partial Damage' shall herein mean damage or destruction
to the Premises to the extent that the cost of repair is less than fifty percent
(50%) of the fair market value of the Premises immediately prior to such damage
or destruction. 'Premises Building Partial Damage" shall herein mean damage or
destruction to the Building of which the Premises are a part to the extent that
the cost of repair is less than fifty percent (50%) of the fair market value of
such Building as a whole immediately prior to such damage or destruction.
(b) "Premises Total Destruction' shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is fifty
percent (SO%) or-more of the fair market value of the Premises immediately prior
to such damage or destruction. "Premises Building Total Destruction" shall
herein mean damage or destruction to the Building of which the Premises are a
part to the extent that the cost of repair is fifty percent (50%) or more of the
fair market value of
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(c) "Insured Loss" shall herein mean damage or destruction which was
caused by an event required to be covered by the insurance described in
Paragraph 7.3(b).
8.2 PARTIAL DAMAGE - INSURED LOSS. Subject to the provisions or Paragraphs
8.4, 8.5 and 8.6, if at any time during the term of this Lease there is damage
which is an Insured Loss and which falls into the classification of Premises
Partial Damage or Premises Building Partial Damage, then Landlord shall, at
Landlord's sole cost, repair such damage to the Building, and Tenant, at
Tenant's sole cost, shall repair and restore Tenant's fixtures, equipment or
tenant improvements, as soon as reasonably possible and this Lease shall
continue in full force and effect.
8.3 PARTIAL DAMAQE - UNINSURED LOSS. Subject to the provisions of
Paragraphs 8.4, 8.5, and 8.6, if at any time during the term of this Lease there
is damage which is not an Insured Loss and which falls within the classification
of Premises Partial Damage or Premises Building Partial Damage, unless caused by
a negligent or willful act of Tenant (in which event Tenant shall make the
repairs at Tenant's expense), Landlord may, at Landlord's option, either (i)
repair such damage as soon as reasonably possible at Landlord's expense, in
which event this Lease shall continue in full force and effect with rent
abatement during such repair period, or (ii) give written notice to Tenant
within sixty (60) days after the date of the occurrence of such damage of
Landlord's intention to cancel and terminate this Lease, as of the date of the
occurrence of such damage. In the event this Lease does not terminate, Landlord
shall repair and restore all portions of the Building and the Promises excluding
Tenant's fixtures, equipment and Tenant improvements, which Tenant shall repair
and restore at Tenant's sole cost. In the event Landlord elects to give such
notice of Landlord's intention to cancel and terminate this Lease, Tenant shall
have the right within ten (10) days after the receipt of such notice to give
written notice to Landlord of Tenant's intention to repair such damage at
Tenant's expense, without reimbursement from Landlord, in which event this Lease
shall continue in full force and effect, and Tenant shall proceed to make such
repair as soon as reasonably possible. If Tenant does not give such notice
within such ten (10) day period this Lease shall be cancelled and terminated as
of the date of the occurrence of such damage.
8.4 TOTAL DESTRUCTION. If at any time during the term of this Lease there
is damage, whether or not an Insured Loss (including destruction required by any
authorized public authority), which falls into the classification of Premises
Total Destruction or Premises Building Total Destruction, Landlord may, at
Landlord's option, either (i) repair such damage as soon as reasonably possible
at Landlord's expense, in which event this Lease shall continue in full force
and effect with rent abatement during such repair period, or (ii) give written
notice to Tenant within sixty (60) days after the date of the occurrence of such
damage of Landlord's intention to cancel and terminate this Lease, as of the
date of the occurrence of such damage. In the event this Lease does not
terminate, Landlord shall repair and restore all portions of the Building and
the Premises excluding Tenant's fixtures, equipment and Tenant improvements,
which Tenant shall repair and restore at Tenant's sole cost.
8. 5 Damage Near End of Term.
-----------------------
(a) If at any time during the last six (6) months of the term of this
Lease there is damage, whether or not an Insured Loss, which falls within the
classification of Premises Partial Damage, Landlord may., at Landlord's option,
cancel and terminate this Lease as of the date of occurrence of such damage by
giving written notice to Tenant of
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the date of occurrence of such damage.
(b) Notwithstanding Paragraph 8.5(a), in the event that Tenant has an
option to extend or renew this Lease, and the time within which said option may
be exercised has not yet expired, Tenant shall exercise such option, if it is to
be exercised at all, no later than twenty (20) days after the occurrence of an
Insured Loss falling within the classification of Premises Partial Damage during
the last six (6) months of the term of this Lease. If Tenant duly exercises such
option during said twenty (20) day period, Landlord shall, at Landlord's
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Tenant fails to exercise such option
during said twenty (20) day period, then Landlord may at Landlord's option,
terminate and cancel this Lease as of the expiration of said twenty (20) day
period by giving written notice to Tenant of Landlord's election to do so within
ten (10) days after the expiration of said twenty (20) day period,
notwithstanding any term or provision in the grant of option to contrary.
8.6 Abatement of Rent; Tenant's Remedies.
------------------------------------
(a) In the event of damage described in Paragraphs 8.2 or 8.3, and
Landlord or Tenant repairs or restores the Premises pursuant to the provisions
of this Paragraph 8, the rent payable hereunder for the period during which such
damage, repair or restoration continues shall be abated in proportion to the
area of the Premises unusable during such period. Except for abatement of rent,
if any, Tenant shall have no claim against Landlord for any damage suffered by
reason of such damage, destruction, repair or restoration.
(b) If Landlord shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 8 and shall not commence preparations for
such repair or restoration within ninety (90) days after such obligations shall
accrue, Tenant may, at Tenant's option, cancel and terminate this Lease by
giving Landlord written notice of Tenant's election to do so at any time prior
to the commencement of such repair or restoration. in such event this Lease
shall terminate as of the date of such notice.
8.7 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant
to this Paragraph 8, an equitable adjustment shall be made concerning advance
rent and any advance payments made by Tenant to Landlord. Landlord shall, in
addition, return to Tenant so much of Tenant's security deposit as has not
theretofore been applied by Landlord.
8.8 WAIVER. Landlord and Tenant waive the provisions of any statutes which
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.
9. Real Property Taxes.
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9.1 PAYMENT OF TAX. Landlord shall pay the Real Property Tax, as defined in
Paragraph 9.3, applicable to the Building and the land upon which it is located;
provided, however, that Tenant shall pay, as an item of operating Expenses
Tenant's Percentage Share of such Real Property Tax, in the manner provided for
Operating Expenses in Paragraph 4.3, or, at Landlord's election, within thirty
(30) days after receipt of Landlord's written statement setting forth the amount
of such pro rata share. If the term of this Lease shall not expire concurrently
with the expiration of the tax fiscal year, Tenant's liability for taxes for the
last partial lease year shall be prorated on an annual basis.
9.2 ADDITIONAL IMPROVEMENTS. Notwithstanding Paragraph 9.1 hereof , Tenant
shall pay to Landlord within thirty (30) days of receipt of Landlord's demand
therefor the entirety of any increase in Real Property Tax if assessed solely by
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Tenant or at Tenant's request.
9.3 DEFINITION OF REAL PROPERTY TAX. As used herein, the term "Real
Property Tax" shall include (to the extent any of the following are not paid by
Tenant pursuant to Paragraphs 9.2 and 9.5) any form of real estate tax or
assessment, general, special, ordinary or extraordinary, any service payments in
lieu of taxes, any personal property taxes, sales and/or use taxes, employee
taxes, and any excises, license fee, commercial rental tax, gross receipts t ax,
improvement bond or bonds, transit charges, housing fund assessments or other
housing charges, parking facilities assessments o r other parking charges,
environmental surcharges, levy or tax, foreseen or unforeseen (other than
inheritance, personal income or estate taxes) imposed on the Premises by any
authority having the direct or indirect power to tax, including any city, state
or federal government, or any school, agricultural, sanitary, fire, street,
drainage or other improvement district thereof, as against any legal or
equitable interest of Landlord in the Premises or in the real property of which
the Premises are a part, as against Landlord's right to rent or other income
therefrom, and as against Landlord's business of leasing the Premises. The term
"Real Property Tax" shall also include any tax, fee, levy, assessment or charge
(i) in substitution of, partially or totally, any tax, fee, levy, assessment or
charge hereinabove included within the definition of Real Property Tax, or (ii)
the nature of which was hereinbefore included within the definition of Real
Property Tax, or (iii) all other governmental, quasi-governmental or special
district impositions of any kind, present or future, whether or not customary or
within the contemplation of the parties hereto and regardless of whether
resulting from increased rate and/or valuation, or (iv) which is imposed as a
result of a transfer, either partial or total, of Landlord's interest in the
Premises or which is added to a tax or charge herinbefore e fore included within
the definition of Real Property Tax by reason of such transfer, or (v) which is
imposed by reason of this transaction, any modifications or changes hereto, or
any transfers hereof, and any interest or penalty charged on account of any such
Real Property Tax. Real Property Tax shall also include Landlord's cost of
contesting by appropriate proceedings the amount or validity of any such taxes.
9.4 Personal Property Taxes.
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(a) Tenant shall pay, prior to delinquency, all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other personal
property of Tenant contained in the Premises. When possible, Tenant shall cause
said trade fixtures, furnishings, equipment and all other personal property to
be assessed and billed separately from the real property of Landlord.
(b) If any of Tenant's said personal property shall be assessed with
Tenant's real property, Tenant shall pay Landlord the taxes attributable to
Tenant within ten (10) days after receipt of a written statement setting forth
the taxes applicable to Tenant's property.
10. UTILITIES. Tenant shall pay for all water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. Such services shall be separately metered to the
Premises.
11. Assignment and Subletting.
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11.1 LANDLORD'S CONSENT REQUIRED. Tenant shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Tenant's interest in this Lease or in the Premises,
without Landlord's prior written consent, which shall not be unreasonably
withheld. Any attempted assignment, transfer, mortgage, encumbrance or
subletting
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Landlord's option constitute a breach of this Lease that entitles Landlord to
terminate this Lease. Tenant agrees that the instrument by which any assignment
or subletting consented to by Landlord is accomplished shall be in a form
satisfactory to Landlord and shall expressly provide that the assignee or
subtenant will perform and observe all the agreements, covenants, conditions and
provisions to be performed and observed by Tenant under this Lease as and when
performance and observance is due and that Landlord will have the right to
enforce such agreements, covenants, conditions and provisions directly against
such assignee or subtenant. Any subtenant shall, by reason of entering into a
sublease under this Lease, be deemed, for the benefit of Landlord, to have
assumed and agreed to conform and comply with each and every obligation of
Tenant hereunder other than such obligations as are contrary to provisions
contained in a subleas e to which Landlord has expressly consented in writing .
For purposes hereof, in the event Tenant is a partner ship, a withdrawal or
change of partners owning more than twenty-five percent (25%) of the general
partnership interests in the partnership, or, if Tenant is a corporation, any
transfertra of more than twenty-five percent (25%) of its voting stock shall
constitute a voluntary assignment of this Lease.
11.2 TENANT AFFILIATE. Notwithstanding the provisions of Paragraph 11.1
hereof, Tenant may assign or sublet the Premises, or any portion thereof ,
without Landlord's consent, to any corporation which wholly controls, is
controlled by or is under common control with Tenant, or to any corporation
resulting from the merger or consolidation with Tenant, or to any person or
entity which acquires all the assets of Tenant as a going concern of the
business that is being conducted on the Premises, provided that said assignee
assumes, in full, the obligations of Tenant under this Lease. Any such
assignment shall not, in any way, affect or limit the liability of Tenant under
the terms of this Lease.
11.3 NO RELEASE OF TENANT. Regardless of Landlord's consent, no subletting
or assignment shall release Tenant of Tenant's obligation or alter the primary
liability of Tenant to pay the rent and to perform all other obligations to be
performed by Tenant hereunder, whether accruing before or after such subletting
or assignment, except as provided in Paragraph 11.6 below. The acceptance of
rent by Landlord from any other person shall not be deemed to be a waiver by
Landlord of any provision hereof. Consent to one assignment or subletting shall
not be deemed consent to any subsequent assignment or subletting. In the event
of default by any assignee of Tenant or any successor of Tenant in the
performance of any of the terms hereof, Landlord may proceed directly against
Tenant without the necessity of exhausting remedies against said assignee.
Landlord may consent to subsequent assignments or subletting of this Lease or
amendments or modifications to this Lease with assignees of Tenant without
notifying Tenant or any successor of Tenant, and without obtaining its or their
consent thereto and such action shall not relieve Tenant of liability under this
Lease.
11.4 NOTICE OF ASSIGNMENT OR SUBLETTING. Before entering into any
assignment of this Lease or into a sublease of all or a part of the Premises,
Tenant shall give written notice to Landlord (a) identifying the intended
assignee or subtenant by name and address, (b) describing the nature of the pro
posed business to be carried on in the Premises, (c) specifying the terms of the
intended assignment or sublease, and (d) providing such financial and other
business information as Landlord may reasonably request concerning the propose
assignee or subtenant (including, without limitation, a bank reference and
financial statements for the two most recently completed fiscal years). Landlord
shall respond to Tenant's request for consent within forty-five (45) clays of
submission of all requested information. For a period of forty-five (45) days
after such notice, accompanied by all supporting documents, is given, Landlord
shall have
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the right by written notice to Tenant to terminate this Lease as of the date
specified in such notice, which date shall not be less than thirty (30) days nor
more than sixty (60) days after such notice is given. If Landlord terminates
this Lease, Landlord may, if it elects, enter into a new lease covering the
Premises with the intended assignee or subtenant on such terms as Landlord and
such person may agree, or enter into a hew lease covering the Premises with any
other persons In such event Tenant shall not be entitled to any portion of
profit, if any, which Landlord may realize on account of such termination and
reletting. From and after the date of such termination of this Lease, Tenant
shall have no further obligation to Landlord hereunder, except for matters
occurring or obligations arising hereunder prior to the date of such
termination.
11.5 CONDITION TO LANDLORD'S CONSENT. As a condition to Landlord's consent
to any assignment or subletting, Landlord shall be entitled to receive, in the
case of a subletting, 50% of the rent (however denominated and paid) payable by
the subtenant to Tenant in excess of that payable by Tenant to Landlord
hereunder and, in the case of an assignment, all of the consideration given,
directly or indirectly, by the assignee to Tenant in connection with such
assignment, after Tenant has first recovered its unamortized costs of tenant
improvements in the Premises (based upon a five year amoritization on period)
and any direct costs incurred by it in such assignment or sublease such as
brokerage commissions and tenant improvements made for the sublessee or
assignee. For purposes of this Paragraph, the term "rent" shall mean all
consideration paid or given, directly or indirectly, for the use of the Premises
or any portion thereof. The term "consideration" shall mean and include money,
services, property or any other thing of value such as payment of costs,
cancellation of indebtedness, discounts, rebates and the like. The rent or other
consideration which is to be passed through to Landlord by Tenant pursuant to
this Paragraph shall be paid to Landlord promptly upon receipt by Tenant and
shall be paid in cash, irrespective of the form in which received by Tenant from
any subtenant or assignee. if any rent or other consideration received by Tenant
from a subtenant or assignee is in a form other than cash, Tenant shall pay to
Landlord in cash the fair value of such consideration.
11.6 LANDLORD'S EXPENSES. In the event Tenant shall assign or sublet the
Premises or request the consent of Landlord to any assignment or subletting or
if Tenant shall request the consent of Landlord for any act Tenant proposes t
do, then Tenant shall pay Landlord's reasonable costs and expenses incurred in
connection therewith, including, without limitation, attorneys' fees, and
Landlord may condition its consent on the payment thereof.
12. Defaults; Remedies.
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12.1 DEFAULTS. The occurrence of any one or more of the following events
shall constitute a material default and breach of this Lease by Tenant:
(a) The vacating or abandonment of the Premises by Tenant.
(b) The failure by Tenant to make payment of Base Monthly Rent,
Additional Rent, or any other payment required to be made by Tenant hereunder,
as and when due.
(c) The failure by Tenant to observe or perform any of the convenants,
conditions or provisions of this Lease to be observed or performed by Tenant,
other than described in Subparagraph (b) or (f), where such failure shall
continue for a period of ten (10) days after written notice thereof from
Landlord to Tenant; provided, however, that if the nature of Tenant's default is
such that more than ten (10) days are reasonably required for its cure, then
Tenant shall not be deemed to be in default if Tenant commences such cure
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within said ten (10) day period and thereafter diligently prosecutes such cure
to completion.
(d) (i) The making by Tenant of any general arrangement or assignment
for the benefit of creditors; (ii) Tenant's becoming a "debtor" as defined in 11
U.S.C. Section 101 or any successor statute thereto (unless, in the case of a
petition filed against Tenant, the same is dismissed within sixty (60) days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where possession is not restored to Tenant within thirty
30 days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this lease, where such seizure is not discharged within thirty (30)
days. in the event that any provision of this Paragraph 12.1(d) is contrary to
any applicable law, such provision shall be of no force or effect.
(e) The discovery by Landlord that any financial statement given to
Landlord by Tenant, any assignee of Tenant, any subtenant of Tenant, any
successor in interest of Tenant or any guarantor of Tenant's obligations
hereunder, and any of them, was materially false.
(f) An assignment, subletting or other transfer or attempted transfer
in violation of Paragraph 11.
12.2 REMEDIES. in the event of any such material default or breach by
Tenant, Landlord may at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have by reason of such default or breach:
(a) Terminate Tenant's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession to the Premises to Landlord. In such event
Landlord shall be entitled to recover from Tenant all damages incurred by
Lanlord by reason of Tenant's default including, but not limited to, (i) the
cost of recovering possession of the Premises; (ii) expenses of reletting,
including necessary renovation and alteration of the Premises, reasonable
attorney , fees, and any real estate commission actually paid; ( i ii) the worth
at the time of the award by the court having jurisdiction thereof of the unpaid
rent earned at the time of termination of Tenant's right to possession of the
Premises; (iv) the worth at the time of the award of the amount by which the
unpaid rent that would have been earned after the date of termination of
Tenant's right to possession until the time of award exceeds the amount of the
loss of rent for the same period that Tenant proves could be reasonably avoided;
(v) 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 such award exceeds the amount of such
rental loss for the same period that Tenant proves could be reasonably avoided;
and (vi) that portion of any leasing commission paid by Landlord applicable to
the unexpired term of the Lease.
(b) Maintain Tenant's right to possession in which case this Lease
shall continue in effect whether or not Tenant shall have abandoned the
Premises. In such event Landlord shall be entitled to enforce all of Landlord's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Landlord
under the laws or judicial decisions of the state wherein the Promises are
located- Unpaid installments of rent and other unpaid monetary obligations of
Tenant under the terms of this Lease shall bear interest from the date due at
the maximum rate then allowable by law.
12.3 DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord
fails to perform obligations required
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of Landlord within a reasonable time, but in no event later than thirty (30)
days after written notice by Tenant to Landlord, specifying where Landlord has
failed to perform such obligation; provided, however, that if the nature of
Landlord's obligation is such that more than thirty (30) days are required for
performance then Landlord shall not be in default if Landlord commences
performance within such thirty (30) day period and thereafter diligently
prosecutes the same to completion.
12.4 LATE CHARGES. Tenant hereby acknowledges that late payment by Tenant
to Landlord of rent and other sums due thereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or any other sum due from Tenant shall
not be received by Landlord or Landlord's designee within ten (10) days after
such amount shall be due, Tenant shall pay to Landlord a late charge equal to
ten percent (10%) of such overdue amount. The parties hereby agree that such
late charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of late payment by Tenant. Acceptance of such late charge by
Landlord shall in no event constitute a waiver of Tenant's default with respect
to such overdue amount, nor prevent Landlord from exercising any of the other
rights and remedies granted hereunder. Any overdue rent and other payments due
from Tenant under this Lease and not paid when due shall bear interest at the
maximum rate per annum to which parties are permitted to agree under applicable
law on that due date.
12.5 LANDLORD'S RIGHT TO CURE DEFAULTS. All agreements, convenants,
conditions and provisions to be performed or observed by Tenant under this Lease
shall be at its sole cost and expense and without any abatement of rent. If
Tenant shall fail to pay any sum of money, other than rent, required to be paid
by it hereunder or shall fail to perform any other act on its part to be
performed hereunder, Landlord may, but shall not be obligated to do so, and
without having or releasing Tenant from any obligations of Tenant, make any such
payment or perform any such other act on Tenant's part to be male or performed
as provided in this Lease. All sums so paid by Landlord and all necessary
incidental costs shall be deemed Additional Rent hereunder and shall be payable
to Landlord on demand, together with interest thereon at the maximum rate per
annum to which parties are permitted to agree under applicable law at the time
of expenditure by Landlord from the date of expenditure to the date of repayment
by Tenant, and Landlord shall have (in addition to any other right or remedy of
Landlord) the same rights and remedies in the event of the nonpayment thereof by
Tenant as in the case of default by Tenant in the payment of rent.
13. CONDEMNATION. If the Premises or any portion thereof or of the Building
are taken under the power of eminent domain, or sold under the threat of the
exercise of said power (all of which are herein called "condemnation"), this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs. If more than
twenty-five percent (25%) of the floor area of the Premises is taken, or if so
much of the common areas of the Building is taken as would render the Premises
untenantable, as reasonably determined by Landlord, Tenant may, at Tenant's
option, to be exercised in writing only within tan (10) days after Landlord
shall have given Tenant written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession), terminate this Lease as of the date the condemning authority takes
such possession. If Tenant does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the the
portion of the Premises remaining, except that the rent shall be reduced in the
proportion that the floor area of the Premises taken bears to
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Premises, or areas not within the Building are taken. Any award for the taking
of all or any part of the Premises under the power of eminent domain or any
payment made under threat of the exercise of such power shall be the property of
Landlord, whether such award shall be made as compensation for diminution in
value of the leasehold or for the taking of the fee, or as severance damages;
provided, however, that Tenant shall be entitled to any award for loss of or
damage to Tenant's trade fixtures and removable personal property. In the event
that this Lease is not terminated by reason of such condemnation, Landlord
shall, to the extent of severance damages received by Landlord in connection
with such condemnation,-repair any damage to the Premises caused by such
condemnation except to the extent that Tenant has been reimbursed therefor by
the condemning authority. Tenant shall pay any amount in excess of such
severance damages required to complete such repair.
14. REAL ESTATE BROKERS. Tenant represents and warrants that it has not
authorized or employed, or acted by implication to authorize or to employ, any
real estate broker or salesman to act for Tenant in connection with this Lease
except as otherwise noted in Schedule A. Tenant shall hold Landlord harmless
from and indemnify and defend Landlord against any and all claims by any real
estate broker or salesman for a commission or finder's fee as a result of
Tenant's entering into this Lease.
15. Estoppel Certificate.
--------------------
(a) Tenant shall at any time upon not less than ten (I ) days' prior
written request from Landlord execute, acknowledge and deliver to Landlord a
statement in writing in the form of Exhibit C (i) certifying that this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification and certifying that this Lease, as so modified, is in full
force and effect) and the date to which the rent and other charges are paid in
advance, if any, (ii) acknowledging that there are not, to Tenant's knowledge,
any uncured defaults on the part of Landlord hereunder, or specifying such
defaults if any are claimed, and (iii) certifying or acknowledging facts as to
such other matters as Landlord may reasonably require. Any such statement may be
conclusively relied upon by any prospective purchaser or encumbrancer of the
Premises.
(b) At Landlord's option, Tenant's failure to deliver such statement
within such time shall be conclusive upon Tenant (i) that this Lease is in full
force and effect, without modification except as may be represented by Landlord,
(ii) that there are no uncured defaults in Landlord's performance, (iii) that
not more than one month's rent has been paid in advance, and (iv) that such
other matters as to which Landlord has requested information are as represented
by Landlord, or such failure may be considered by Landlord as a default by
Tenant under this Lease.
16. LANDLORD'S LIABILITY. The term "Landlord" as used herein shall mean only the
owner or owners at the time in question of the fee title or a tenant's interest
in a ground lease of the Premises, and in the event of any transfer of such
title or interest, Landlord herein named (and in case of any subsequent
transfers then the grantor) shall be relieved from and after the date of such
transfer of all liability as respects Landlord's obligations thereafter to be
performed, provided that any funds in the hands of Landlord or the then grantor
at the time of such transfer, in which Tenant has an interest, shall be
delivered to the grantee. The obligations contained in this Lease to be
performed by Landlord shall, subject as aforesaid, be binding on Landlord's
successors and assigns only during their respective periods of ownership.
17. SEVERABILITY. The invalidity of any provision of this Lease as determined by
a court of competent jurisdiction,
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shall in no way affect the validity of any other provision hereof.
18. INTEREST ON PAST-DUE OBLIGATIONS. Except as otherwise expressly herein
provided, any amount due to Landlord not paid when due shall bear interest at
the maximum rate then allowable by law from the date due. Payment of such
interest shall hot excuse or cure any default by Tenant under this Lease,
provided, however, that interest shall not be payable on late charges incurred
by Tenant nor on any amounts upon which late charges are paid by Tenant.
19. TIME OF ESSENCE. Time is of the essence.
20. SECURITY DEPOSIT. Upon execution of this Lease, Tenant shall deposit with
Landlord the sum specified on Schedule A, if any as security for Tenant's
faithful performance of Tenant s, if any, obligations hereunder. If Tenant fails
to make any payment when due hereunder, or otherwise defaults with respect to
any provisions of this Lease, Landlord may use, apply or retain all or any
portion of said deposit for the payment of such payment in default or for the
payment of any other sum to which Landlord may become obligated by reason of
Tenant's default, or to compensate Landlord for any loss or damage which
Landlord may suffer thereby. If Landlord so uses or applies all or any portion
of said deposit, Tenant shall within ten (10) days after written demand therefor
deposit cash with Landlord in an amount sufficient to restore said deposit to
the full amount hereinabove stated and Tenant's failure to do so shall be a
breach of this Lease. If Tenant performs all of Tenant's obligations hereunder,
said deposit, or so much thereof as has not theretofore been applied by
Landlord, shall be returned to Tenant (or at Landlord's option, to the last
assignee, if any, of Tenant's interest hereunder) at the expiration of the term
hereof, and after Tenant has vacated the Premises. Landlord shall not be
required to keep this security deposit separate from its general funds, and
Tenant shall not be entitled to interest on such deposit. Upon terminatin of the
original Landlord's or any successor Landlord's interest in the Premises, the
original Landlord or such successor Landlord shall be relieved of further
liability with respect to the security deposit, provided that the amount thereof
in the hands of the original Landlord or such successor Landlord has been
delivered to the new owner of the Premises. No trust relationship is created
hereby between Landlord and Tenant with respect to said security deposit.
21. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements, oral or written, of the parties with respect to any matter mentioned
herein. No prior agreement or understanding pertaining to any such matter shall
be effective. There are no representations between Landlord and Tenant or
between any real estate broker and Tenant other than those contained in this
Lease. This Lease may be modified in writing only, signed by the parties in
interest at the time of the modification.
22. NOTICES. Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery, nationally-recognized overnight
delivery service, or by registered or certified mail, return receipt requested.
if given personally such notice shall be deemed sufficiently given it delivered
to any person apparently in charge or authorized to receive mail, or if given by
mail, shall be deemed sufficiently given if addressed to Tenant or to Landlord,
at the address noted in Schedule A or, if sent to Tenant subsequent to Tenant's
taking possession of the Premises, at the Premises. Any notice shall be deemed
to have been given upon the date of personal delivery or, if mailed, three (3)
days after the date of mailing as provided herein. Either party may by notice to
the other specify a different address for notice purposes. A copy of all notices
required or permitted to be given to Landlord hereunder shall be concurrently
transmitted to such party or parties at such
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addresses as Landlord and Tenant may from time to time hereafter designate by
notice to the other party.
23 WAIVERS. No waiver by Landlord or Tenant of any provision hereof shall be
deemed a waiver of any other provision hereof or of any subsequent breach by
Landlord or Tenant of the same or any other provision. Landlord's consent to, or
approval of any act, shall not be deemed to render unnecessary the obtaining of
Landlord's consent to or approval of any subsequent act by Tenant. The
acceptance of rent hereunder by Landlord shall not be a waiver of any preceding
breach by Tenant of any provision hereof, other than the failure of Tenant to
pay the particular rent so accepted, regardless of Landlord's knowledge of such
preceding breach at the time of acceptance of such rent.
24. PARKINQ. Tenant shall be entitled to park in common with other tenants of
Landlord and shall have the nonexclusive right to use of the number of parking
places set forth on Schedule A, or any lesser number which is now or hereafter
required under applicable laws or regulations affecting parking space
requirements. Tenant agrees not to overburdenden the parking facilities and
agrees to cooperate with Landlord and other tenants in the use of parking
facilities Landlord reserves the right in its absolute discretionto determine
whether parking facilities are becoming crowded and, in such event, to allocate
or reallocate parking spaces among Tenant and other tenants.
25. HOLDING OVER. if Tenant, with Landlord's consent, remains in possession of
the Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month at a rental in the amount of
twice the last Base Monthly Rent installment plus all other Additional Rent and
charges payable hereunder during the option term, and upon all the other
provisions of this Lease pertaining to the obligations of Tenant, but all
options and rights; of first refusal, if any, granted under the terms of this
Lease shall be deemed terminated and be of no further effect during said month
to month tenancy. Each party shall give t hi other written notice at least one
month prior to the date of termination of such monthly tenancy of its intention
to terminate.
26. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
27. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Tenant
shall be deemed both a covenant and a condition.
28. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting
assignment or subletting by Tenant and subject to the provisions of Paragraph
16, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State of
California.
29. Subordination.
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(a) This Lease, at Landlord's option, shall be subordinate to any ground
lease, mortgage, deed of trust, or any other hypothecation for security now or
hereafter placed upon the real property of which the Premises are a part, or to
any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Tenant's right to quiet possession of the
Premises shall not be disturbed so long as Tenant shall pay the rent and observe
and perform all the provisions of this Lease, unless this Lease is otherwise
terminated pursuant to its terms. If any mortgagee, trustee or ground lessor
shall elect to have this Lease prior to the lien of its mortgage, deed of trust
or ground lease, and shall give written notice thereof to Tenant, this Lease
shall be deemed prior to such mortgage, deed of trust, or ground lease, whether
this Lease is dated
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prior or subsequent to the date of said mortgage, deed of trust, or ground lease
or the date of recording thereof.
(b) Tenant agrees to execute any documents reasonably required to
acknowledge or effectuate an attornment, a subordination or to make this Lease
prior to the lien of any mortgage, deed of trust or ground lease, as the case
may be, and failing to do so within ten (10) days after written demand does
hereby make, constitute and irrevocably appoint Landlord as Tenant's attorney in
fact and in Tenant's name, place and stead, to do so.
30. ATTORNMENT. In the event of foreclosure or the exercise of the power of sale
under any deed of trust made by Landlord covering the Premises (or a transfer
under a deed in lieu of foreclosure), Tenant shall attorn to the purchaser upon
any such foreclosure or sale (or to the grantee of such deed in lieu of
foreclosure), and Tenant shall recognize such purchaser or grantee as Landlord
under this Lease, provided such purchaser or grantee agrees in writing to
recognize all of Tenant's rights hereunder and to perform all of Landlord's
obligations hereunder from the date of the attornment.
31. LANDLORD'S ACCESS. Landlord and Landlord's agents shall have the right to
enter the Premises at reasonable times (including, in an emergency, immediate
entry without notice) for the purpose of inspecting the same, showing the same
to prospective purchasers, lenders, or tenants, making such alterations,
repairs, improvements or additions to the Premises or to the Building as
Landlord may deem necessary or desirable, and the erecting, use and maintenance
of ut utilities, services, pipes and conduits through the Premises, as long as
there is no material adverse effect upon Tenant's use of the Premises. Landlord
may at any time place on or about the Premises any ordinary "For Sale" signs and
Landlord may at, any time during the last ninety (90) days of the term hereof
place on or about the Premises any ordinary "For Lease" signs, all without
rebate of rent or liability to Landlord. Landlord shall retain a key to all
locked portions of the Premises (except vaults and locked file or storage
cabinets) at all times and shall have the right to unlock all doors. Tenant may
not change locks upon the Premises unless Tenant furnishes Landlord with a key
thereto. Tenant waives any claim or charges for damages or interference with
Tenant's property or business, any loss of quiet enjoyment or other Is
occasioned by Landlord's entry.
32. SIGNS. Tenant may install on the Premises signs which identify Tenant and
the business Tenant conducts on the Premises, provided Tenant's signs comply
with (a) applicable requirements of governmental authorities, (b) applicable
recorded restrictions, and (c) Landlord's reasonable requirements, which may
included limitations on the number and placement of signs. Tenant shall not
install its signs without Landlord's prior written approval, which shall not be
unreasonably withheld. Tenant shall maintain its signs in neat condition and
repair throughout the Lease term. Tenant shall repair any damage which
maintenance, alterations or renovation of its signs may cause during or at the
expiration of the Lease term.
33. MERGER. The voluntary or other surrender of this Lease by Tenant, or a
mutual cancellation thereof, or a termination by Landlord, shall not work a
merger, and shall, at the option of Landlord, terminate all or any existing
subtenancies or may, at the option of Landlord, operate as an assignment to
Landlord of any or all of such subtenancies.
34. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off of light, air
or view by any structure which may be erected on lands adjacent to the Premises
shall in no way affect this Lease or impose any liability on Landlord.
35. GUARANTOR; CO-TENANTS. In the event that there is a guarantor of this Lease,
said guarantor shall have the same obligations as Tenant under this Lease. If
there be more
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than one Tenant, the obligations herein imposed upon Tenant shall be joint and
several.
36. QUIET POSSESSION. Upon Tenant paying the rent for the Premises and observing
and performing all of the covenants, conditions and provisions on Tenant's part
to be observed and performed hereunder, Tenant shall have quiet possession of
the Premises for the entire term hereof subject to all of the provisions of this
Lease. The individuals executing this Lease on behalf of Landlord represent and
warrant to Tenant that they are fully authorized and legally capable of
executing this Lease on behalf of Landlord and that such execution is binding
upon all parties holding an ownership interest in the Premises.
37. LANDLORD'S RULES AND REGULATIONS. Tenant agrees that it will abide by, keep
and observe all reasonable rules and regulations which Landlord may make from
time to time for the management, safety, care and cleanliness of the Building
and grounds, the parking of vehicles and the preservation of good order therein
as well as for the convenience of other occupants and tenants of the Building.
Landlord's current Rules and Regulations, if any, are attached as Exhibit D to
this Lease and Tenant shall faithfully comply with all such rules and
regulations and all modifications thereof and additions thereto from time to
time promulgated in writing by Landlord. The violation of any such rules and
regulations by Tenant shall be deemed a material breach of this Lease. Landlord
shall not be responsible to Tenant for the nonperformance of any such rules and
regulations by any other tenant of the Building or another Building within the
same Complex.
38. SECURITY MEASURES. Tenant hereby acknowledges that the rental payable to
Landlord hereunder does not include the cost of guard service or other security
measures, and that Landlord shall have no obligation whatsoever to provide the
same. tenant assumes all responsibility for the protection of Tenant, its agents
and invitees from acts of third parties. Nothing contained herein shall prevent
Landlord, at Landlord's sole option, from providing security protection for the
Building or any part thereof, in which event the cost thereof shall be included
within the definition of Operating Expenses as set forth in Paragraph 4.3.
39. Landlord's Reservation of Rights.
--------------------------------
39.1 EASEMENTS. Landlord reserves to itself the right, from time to time,
to grant such easements, rights and dedications that Landlord deems necessary or
desirable and to cause the recordation of Parcel Maps and restrictions, so long
as such easements, rights, dedications, maps and restrictions do not
unreasonably interfere with the use of the Premises by Tenant. Tenant shall sign
any of the aforementioned documents upon request of Landlord and failure to do
so shall constitute a material breach of this Lease.
39.2 BUILDING RIGHTS. Landlord shall have the right (i) to permit any
tenant the exclusive right to conduct any business as long as such exclusive
right does not conflict with any rights expressly granted herein; and (ii) to
place such signs, notices or displays as Landlord deems appropriate upon or
about the exterior of the Building.
40. AUTHORITY. If Tenant is a corporation, trust, or general or limited
partnership, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and deliver
this Lease on behalf of such entity.
41. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
42. ATTORNEYS' FEES. In the event of any action or proceeding at law or in
equity between Landlord and Tenant to
27
<PAGE> 28
enforce any provision of this Lease or to protect or establish any right or
remedy of either Landlord or Tenant hereunder, the unsuccessful party to such
action or proceeding shall pay to the prevailing party all costs and expenses,
including reasonable attorneys' fees, incurred in such action or proceeding and
in any appeal in connection therewith, and if such prevailing party shall
recover judgment in any such action, proceeding or appeal, such costs, expenses
and attorneys' fees shall be included in and as part of such judgment.
43 EXHIBITS; The following exhibits are attached to this Lease and herein
incorporated by reference: Exhibit A (Site Plan); Exhibit B (Premises); Exhibit
C (Initial Improvements of Premises); Exhibit D (Rules and Regulations); Exhibit
E (Rules and Regulations for Tenant Contractors); and Exhibit F (Plans and
Specifications).
44. Lender Provisions.
-----------------
44.1 BACKGROUND. Tenant acknowledges that Landlord has agreed to sell the
Premises, Building and the land on which the Building is located to The National
Bank of Washington as trustee Of The National Bank of Washington MultiEmployer
Trust (the "Trust") and that the Trust (as landlord) will master lease the
Premises, Building and such land to Landlord (as tenant) for a period of time
following the sale (the "Master Lease").
44.2 ERISA. Tenant has received a current listing of the names of each
pension plan whose interest in the Trust, together with the interests of any
other pension plan maintained by the same employer or employee organization,
exceeds five percent (5%) of the total of all assets in the Trust. A copy of
that listing is attached as Exhibit G and is relied on by Tenant in providing
the certifications appearing in this subparagraph. Tenant certifies to the
Landlord and the Trust that no party-in-interest relationship exists between one
or more of the pension plans identified on Exhibit G and the tenant or any
person or entity so situated with respect to Tenant such that a non-exempt,
prohibited transaction under ERISA or the Code will result on purchase of the
Premises, Building, and the land on which the Building is located by the Trust.
Neither Tenant, nor any Tenant's affiliate, are employers in relation to any one
or more of the pension plans listed on Exhibit C. The terms "party-in-interest"
and "employer" shall have the meaning assigned to them in Sections (14) and (5)
respectively of ERISA. The term "affiliate" shall have the meaning assigned to
it in Section 407(a)(7) of ERISA. ERISA shall mean the Employee Retirement
Income Security Act of 1974, as amended. The Code shall mean the Internal
Revenue Code, as amended.
44.3 MASTER LEASE. Notwithstanding anything to the contrary contained in
this Lease, the Tenant and Landlord agree that (a) this Lease is subordinate to
the master Lease; (b) this Lease will not terminate upon expiration or
termination of the Master Lease but will automatically be converted into a
direct lease between the Trust (as landlord) and the Tenant (as tenant);
provided that the party executing this Lease as Landlord will remain responsible
for any breach or default of Landlord occurring prior to the expiration or
termination of the Master Lease; (c) on and after the expiration or termination
of the master Lease, the Tenant will attorn to the Trust and render all
performances required by this Lease to the Trust; and (d) Tenant agrees not to
prepay base rent or other sums due under this Lease more than one month in
advance; provided that Tenant may pay the last month's rent as a security
deposit.
44.4 DISCRIMINATION. The Tenant herein covenants by and for himself, his
heirs, executors, administrators, and assigns, and all persons claiming under or
through him that this Lease is made and accepted upon and subject to the
following conditions:
28
<PAGE> 29
That there shall be no discrimination against or segregation of any person
or group of persons, on account of race, color, creed, religion, sex,
marital status, national origin, or ancestry, in the leasing, subleasing,
transferring, use, occupancy, tenure or enjoyment of the Premises, nor
shall the Tenant himself, or any person claiming under or through him,
establish or permit any such practice or practices of discrimination or
segregation with reference to the selection, location, number, use, or
occupancy of tenants, sublessees, subtenants, or vendees in the Premises.
45. Extension Option.
----------------
(a) Landlord hereby grants to Tenant the option to extend the term of this
Lease (the "Option") for one additional five-year period. Tenant shall exercise
such Option by giving written notice of exercise to Landlord at least six (6)
months prior to the Expiration Date; provided, however, that such Option shall
not be exercisable if Tenant is then in default hereunder or if the other
conditions set forth in the Lease have not been met. All of the terms and
conditions of this Lease shall govern such extended term insofar at applicable,
and all references in this Lease to the term hereof shall be deemed to include
such extended term unless the context clearly indicates to the contrary.
(b) The Base monthly Rent for the Option term shall be 95% of the fair
market rate as of the commencement of the Option term as determined by the
agreement of the parties or, if the parties are unable to agree on or before
ninety (90) days rior to the expiration of the term, then by an appraisal
conducted pursuant to Subparagraph (b) below. Notwithstanding the above, the
Base Monthly Rent for the no event less than the Base Monthly of the original
lease term. The Base into account the duration of the provide for reasonable
periodic such term.
(c) if it becomes necessary to determine the fair market rate for the
Premises by appraisal, then real estate appraisers), all of whom shall be
members of the American Institute of Real Estate Appraisers and each having at
least two years experience appraising commercial and industrial real property
located within the vicinity of the Premises, shall be appointed and shall act in
accordance with the following procedures:
(i) if Landlord and Tenant are unable to agree on the base rent for the
Option term, then either party may demand an appraisal by giving written notice
to the other party, which demand to be effective must state the name, address
and qualifications of an appraiser selected by the party demanding an appraisal
(the "Notifying Party"). Within ten (10) days following the Notifying Party's
appraisal demand, the other party (the "Non-Notifying Party") shall either
approve the appraiser selected by the Notifying Party or select a second
properly qualifled appraiser by giving written notice of the name, address and
qualifications of said appraiser to the Notifying Party. If the Non-Notifying
Party fails to select an appraiser within the ten (10) day period, then the
appraiser selected by the Notifying Party shall be deemed selected by both
parties and no other appraiser shall be selected. If two appraisers are
selected, they shall select a third appropriately qualified appraiser. If the
two appraisers fail to select a third qualified appraiser within ten (10) days,
then, upon application by either party, the third appraiser shall be appointed
by the President (or person serving in comparable position, if there is no
President) of the local Real Estate Board (or any successor entity or body of
comparable standing if such Board does not then exist) or the person to whom the
President may delegate that function.
29
<PAGE> 30
(ii) If only one appraiser is selected, then that appraiser shall notify
the parties in simple letter form of its determination of the fair market rate
for the Premises within thirty (30) days of his selection, which appraisal shall
be conclusively determinative and binding on the parties as the fair market rent
for the Premises.
(iii) If multiple appraisers are selected, then the appraisers shall meet
not later than ten (10) days following selection of the last appraiser. At such
meeting, the appraisers shall attempt to determine the fair market rate for the
Premises as of the commencement date of the Option period by the agreement of at
least two of the appraisers.
(iv) The appraisers' determination of the fair market rate shall be based
on a building of the same age, construction, size and location as the Premises
and shall take into account Tenant's obligation to pay additional rent under the
terms of this Lease. in determining the fair market rate, the appraisers shall
not consider any improvements, alterations, additions, fixtures or equipment
installed in the Premises at Tenant's expense but shall include improvements,
Alterations, additions, fixtures of equipment installed at Landlord's expense.
If two or more of the appraisers agree on the fair market rate for the Premises
at the ini t ial meeting, then such agreement shall be determinative and binding
on the parties hereto and the agreeing appraisers shall, in simple letter from
executed by the Agreeing appraisers, forthwith notify both Landlord and Tenant
of the amount set by such agreement.
(v) If multiple appraisers are selected and the agreement of at least two
appraisers cannot be obtained w ithin ten (10) days after the initial meeting,
then, within five (5) days after the expiration of said ten (10) day period, all
appraisers shall submit to Landlord and Tenant and independent appraisal, in
simple letter form, of the fair market rent for the Premises. The parties shall
then determine the appraised fair market rent for the Premises by averaging the
appraisals; provided, however, that (i) if the lowest appraisal is less than
eighty-five percent (85%) of the middle appraisal, then such lowest appraisal
shall be disregarded, and (ii) if the highest appraisal is greater than one
hundred fifteen percent (115%) of the middle appraisal, then such highest
appraisal shall be disregarded. If any appraisal is so disregarded, then the
average shall be determined by computing the average of the appraisals that have
not been disregarded.
(vi) Nothing contained herein shall prevent Landlord and Tenant from
jointly selecting a single appraiser to determine the fair market rate of the
Premises, in which event the determination of such appraisal shall be
conclusively deemed to be the fair market rate of the Premises for the option
term in question.
(vii) If only one appraiser is selected, then each party shall pay half of
the fees and expenses of that appraiser. If three appraisers are selected, then
each party shall bear the fees and expenses of the appraiser it selects, plus
half of the fees and expenses of the third appraiser.
46. Options.
-------
46.1 OPTIONS PERSONAL. Any Options granted to Tenant in this Lease are
personal to Tenant and may not be exercised or be assigned, voluntarily or
involuntarily, by or to any person or entity other than Tenant, provided,
however, the options may be exercised by or assigned to any Tenant Affiliate as
defined in Paragraph 11.2 of this Lease.
46.2 Effect of Default on Option.
---------------------------
(a) Tenant shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option -to the! contrary, (i) during the time
commencing from the date Landlord gives to Tenant a notice of default pursuant
to
30
<PAGE> 31
Paragraph 12.1(c) and continuing until the default alleged in said notice of
default is cured, or (ii) during the period of time commencing on the day after
a monetary obligation to Landlord is due from Tenant and unpaid (following 15
days' written notice thereof to Tenant) continuing until the obligation is paid,
or (iii) at any time after an event of default described in Paragraph 12.1(a),
12.1(d), or 12.1(e) (without any necessity of Landlord to give notice of such
default to Tenant).
(b) The period of time within which an option may be exercised shall
not be extended or enlarged by reason of Tenant's inability to exercise an
Option because of the provisions of Subparagraph (a) above.
(c) All rights of Tenant under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Tenant's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Tenant fails to pay to Landlord a monetary obligation of Tenant
for a period of fifteen (15) days after such obligation becomes due and fails to
cure same following 15 days written notice thereof from Landlord, or (ii) Tenant
fails to commence to cure a default specified in Paragraph 12.1(c) within thirty
(30) days after the date that Landlord gives notice to Tenant of such default
and/or Tenant fails thereafter to diligently prosecute said cure to completion,
or (iii) Tenant commits a default described in Paragraph 12.1(a), 12.1(d),
12.1(e), or 12.1(f) (without any necessity of Landlord to give notice of such
default to Tenant).
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the date
first above written.
LANDLORD:
PACTEL PROPERTIES
By:
-----------------------------------
Title:
--------------------------------
Date:
---------------------------------
By:
-----------------------------------
Title:
--------------------------------
Date:
---------------------------------
TENANT:
TELCO SYSTEMS, INC.
By: John C. Kempf
-----------------------------------
Title: Vice President- Controller, NAC
--------------------------------
Date: 3 May 1990
---------------------------------
By:
-----------------------------------
Title:
--------------------------------
Date:
---------------------------------
31
<PAGE> 32
EXHIBIT "A"
[Diagram of premises on corner of Cushing Parkway and Northport Loop East]
<PAGE> 33
PREMISES
--------
The Building and Improvements located on A.P. #525-1350-19
EXHIBIT "B"
<PAGE> 34
EXHIBIT C
TENANT ESTOPPEL CERTIFICATE
---------------------------
THIS IS TO CERTIFY:
1. That the undersigned is the Tenant under that certain Lease dated
______________ and, if applicable, amended on _____________, by and between
PacTel Properties, a California corporation ("Landlord"), and the undersigned
("Tenant") covering those certain premises located as shown on the exhibit of
the premises made a part of the Lease (the "Premises").
2. That said Lease is in full force and effect and, except as noted in
paragraph 1 above, has not been modified, changed, altered or amended in any
respect, and is the only lease or agreement between the Tenant and the Landlord
affecting the Premises.
3. To the best of Tenant's knowledge, the information set forth below is
true and correct:
(a) Square footage of the Premises:
-------------------------
(b) Base rent as of the Commencement of Lease:
$____________ per month/year
(c) Current base rent (if different
than at Commencement): $____________ per month/year
(d) Lease term commenced:
-------------------------
(e) Lease termination date:
-------------------------
(f) Rent paid to and including:
-------------------------
(g) Security Deposit: $
-------------------------
(h) Prepaid rent for and in amount of: $
------------------------
(i) Amount of currently monthly estimated payment obligation with
respect to Operating Expenses under paragraph 4.3(b) of the Lease:
$
-----------------------------------------------------------------
(j) Date through which Tenant has paid monthly estimated
payments:
-------------------------
<PAGE> 35
Exhibit D
Initial Improvements of Premises
1. LANDLORD'S WORK
---------------
1.1 Landlord, through its general contractor, shall furnish and
install within the Premises those items of general const - ruction Mandlord's
Work') shown on the plans and specifications finally approved by Landlord and
Tenant (the 'Final Plans and Specifications'), in compliance with all.
applicable codes and regulations.
2. COST OF LANDLORD'S WORK
-----------------------
2.1 As its contribution to the cost of Landlord's work, Landlord shall
provide to Tenant a tenant improvement allowance of up to a maximum of
$1,245,220.00 (based on $20.00 per rentable sq. ft. specified in the Lease
Provisions) as its contribution to the cost of Landlord's Work. Tenant shall pay
the cost of all Landlord's Work in excess of such tenant improvement allowance
as provided in this Article 2.
2.2 Prior to commencing Landlord's Work, Landlord shall submit to
Tenant a written estimate of the cost of Landlord's Work, including contractor's
overhead and profit and all fees. Tenant shall approve or disapprove such
estimate within 15 days. If Tenant shall fail to give written approval to any
such estimate within 15 days after submission thereof, such failure shall be
deemed disapproval thereof, and Landlord shall not be obligated to proceed with
Landlord's Work.
2.3 Tenant shall bear the cost of Landlord's work in excess of that
portion of Landlord's Work paid for by Landlord pursuant to paragraph 2.1 above,
and in addition a fee for Landlord's construction administration not to exceed
15% of such excess.
2.4 Tenant shall bear the cost of any changes requested by Tenant in
Landlord's work as shown on the Final Plans and Specifications and, in addition,
a fee for Landlord's construction administration in an amount not to exceed 1S%
of the cost of such changes.
2.5 Landlord's obligation to perform Landlord's Work shall not require
Landlord to incur overtime costs and expenses and shall be subject to
unavoidable delays due to acts of God, governmental restrictions, strikes, labor
disturbances, shortages of material or supplies and any other cause or event
beyond Landlord's reasonable control.
2.6 Tenant shall promptly pay Landlord during the course of
construction the cost of the work to be paid by Tenant under this Article 2,
based on invoices submitted by Landlord's contractor and certified by Landlord's
architect, so as to enable Landlord to pay Landlord's contractor without
advancing Landlord's funds for the cost of the work to be paid by Tenant.
2.7 it is understood and agreed by Tenant that any minor changes from
any plans and specifications that may be reasonably necessary during
construction of the Premises shall not affect, change or invalidate this Lease.
3. PLANS AND SPECIFICATIONS
------------------------
<PAGE> 36
3.1 Landlord, through its architect and engineer, shall furnish all
architectural and engineering plans and specifications ("Plans and
Specifications') required for the construction of Landlord's work. Tenant at its
own expense shall within 5 days of the date of Lease execution provide
instructions to Landlord's architect and engineer sufficient to enable
Landlord's architect and engineer to complete Plans, and Specifications.
3.2 All Plans and Specifications are subject to Tenant's and
Landlord's approval, which shall not be unreasonably withheld. Tenant shall
approve all Plans and Specifications, whether preliminary or Final, within 5
days of submission to Tenant by Landlord.
3.3 Landlord shall bear the cost of architectural and engineering
services for Landlord's Work to the extent to be constructed through the
expenditure of the Tenant improvement allowance specified in paragraph 2.1
above.
3.4 Tenant shall pay the cost of architectural and engineering
services for Landlord's work in excess of the Tenant improvement allowance not
borne by Landlord under paragraph 3.3 above. In addition, Tenant shall pay for
any revisions required by Tenant to Plans and Specifications previously approved
by Tenant.
4. TENANT'S WORK
-------------
4.1 Any items or work not shown in the approved Final Plans and
Specifications, such as telephone service, furnishings 0 r floor coverings, for
which Tenant contracts separately (hereinafter "Tenant's Work"), shall be
subject to Landlord's policies and schedules and shall be conducted in such as
way as not to hinder, cause any disharmony with, or delay work in the
Building(s). Tenant's suppliers, contractors, workmen and mechanics shall be
subject to pproval by Landlord prior to the commencement of their work :nd shall
be subject to Landlord's administrative control while performing their work. If
at any time any supplier, contractor, workman or mechanic performing Tenant's
Work hinders or delays any other work in the Building(s) or performs any work
which may or does impair the quality, integrity or performance of any portion of
the Building(s), Tenant shall cause such supplier, contractor, workman or
mechanic to leave the Building(s) and remove all his tools, equipment and
materials immediately upon Landlord's notice delivered to Tenant. Tenant shall
reimburse Landlord for any repairs or corrections of Landlord's work or of
Tenant's Work or of any portion of the Building(s) caused by or resulting from
the work of any supplier, contractor, workman or mechanic with whom Tenant
contracts. Tenant shall bear the cost of Landlord's expenses resulting from the
performance of Tenant's work, including without limitation the cost of hoisting,
cleaning, security, administration and coordination by Landlord or Landlord's
contractor. Tenant shall reimburse Landlord for Landlord's reasonable costs for
design reviews and approvals and reviews of construction progress, and for the
cost of all utilities and the services provided by Landlord to or for the
Premises during the performance of Tenant's Work. Landlord shall provide access
to Tenant's suppliers, contractors, workmen and mechanics so as to achieve
timely completion and occupancy of the Premises.
5. (RESERVED)
6. COMPLETION DATE
---------------
6.1 Landlord shall, when construction progress so permits, notify
Tenant in advance of the approximate date on
<PAGE> 37
which Landlord's Work will be substantially completed and will notify Tenant
when Landlord's Work is in fact substantially completed, which latter notice
shall constitute delivery of possession of the Premises to Tenant. If any
dispute shall arise as to whether the Premises are substantially completed and
ready for Tenant's occupancy, a certificate furnish d by anlindependent a
rchitect mutually agreed by Landlord :nd Tenant certifying the date of
substantial completion shall be conclusive. If Landlord shall be delayed in
substantially completing said work as a result of: -
(a) Tenant's failure to furnish complete and timely instructions
or approvals,
(b) Tenant's changes to any Plans and Specifications after
approval thereof,
(c) Tenant's request for materials, finishes or installations
other than Landlord's Building standard except as expressly provided in approved
Plans and Specifications, or
(d) Hindrance or disruption of the work of Landlord's contractor
resulting from Tenant's Work,
then the Commencement Date under the Lease shall be advanced by the number of
days of such delay.
6.2 Failure by Tenant to meet any of the time requirements specified
in this Exhibit D shall, at Landlord's option, constitute a a default under the
Lease. Tenant shall not be entitled to a cure period with respect to any such
default.
6.3 Except as expressly provided in the Lease, failure of Landlord to
deliver possession of the Premises within the time and in the condition provided
for in the Lease will not give rise to any claim for damages by Tenant against
Landlord or Landlord's contractor.
7. PAYMENT
-------
7.1 Tenant shall pay to Landlord all amounts due from or payable by
Tenant under the terms of this Exhibit D within 20 days following delivery of
Landlord's invoice therefor, and the provisions of Section 4 of the Lease with
respect to late charges and interest on late payments shall apply as to interest
payable on amounts not paid within such period.
8. TIME PERIODS
------------
8.1 All time periods referred to in this Exhibit D shall be computed
on a calendar basis with no allowance for holidays, weekends or other customs.
9. BASE BUILDING DESIGN
--------------------
9.1 Tenant may request changes to Base Building Design (as hereinafter
defined). Landlord shall have no obligation to make any such changes. If
Landlord in its sole discretion shall agree to any such chance, Landlord shall
prepare Plans and Spe c ifications and obtain an estimate of -the cost for
approval by Tenant. Tenant shall pay in advance Landlord's estimate of any and
all costs of such changes (including without limitation the costs of labor,
materials, ecuipment, supervision and a management fee) subject to adjustment of
costs upon completion.
<PAGE> 38
EXHIBIT E
RULE AND REGULATIONS
FOR TENANT'S CONTRACTOR(S)
1. Tenant's contractor will be responsible for making arrangements with
Landlord as to time for the use of and equipment such as elevators and
loading areas. The delivery of materials, equipment and supplies, to the
building or Premises must be coordinated with Landlord at least two (2)
business days prior to delivery. The building debris box is not to be used
for waste produced by Tenant's contractor.
2. Tenant's contractor shall not interfere with the Landlord's contractor and
sub-trades in any way and will cooperate fully with same.
3. All Tenant's contractor's waste and debris must be removed from the
Premisses and Building regularly and promptly. All combustible waste and
debris must be stored in a covered, fire-proof container prior to removal.
4. Tenant's contractor and sub-trades shall take all precautions to ensure the
security and the site condition of the Premises and Building in which the
work is being performed, including their own tools, equipment and
materials, and are responsible for any damage caused by employees and
sub-trades to any part of the Building or Premises.
5. (reserved)
6. (reserved)
7. Tenant's contractor shall remove and properly replace underfloor duct
access covers as required for Tenant's trades and services. Any damage to
underfloor duct access coverings shall be repaired or replaced by Tenant's
contractor to the satisfaction of Landlord.
8. Tenant's contractor must provide their own fire protection equipment, have
same on premises at all times and conform to any requirements of Landlord
or Landlord''s contractor regarding fire protection.
9. Tenant's contractor shall carry out all work in compliance with all
Federal, State, county and City Building codes and applicable Acts,
Ordinances and statutes.
10. Tenant's contractor shall provide all their own protective devices and
coverings, so as to protect the Building finishes provided by Landlord in
the Building.
11. No attachments to or use of window frames and mirrors, ceiling systems,
glass, ceiling frame or Building frame, will be permitted without the
expressed written consent of Landlord.
12. All Tenant's contractors, employees and trades must be confined to the area
in which work is being performed.
13. tenant or Tenant's contractor shall carry builder's risk insurance with
limits of not less than the amount requested by Landlord, insurance
covering loss or damage to the work during the course of construction;
worker's compensation, employer's liability insurance covering all
employees of contractor and subcontractor. all such policies shall name
Landlord and Tenant as additional insureds. A certificate of insurance must
be provided to Landlord prior to commencement of work.
14. Any construction, alteration, maintenance, repair, replacement, removal or
decoration undertaken by Tenant's contractor shall be carried out in a
good, workmanlike, and prompt manner, shall comply with all applicable
statutes, laws, ordinances, regulations, rules, orders and requirements of
the authorities having jurisdiction thereof, and shall be subject to
supervision by Landlord or its employees, agents, or contractors. all
constructions shall be performed in a timely manner without delays or
interruptions.
15. Tenant's contractor shall not use excessive quantities of electricity or
water and shall not shut off any water, electricity, sprinkler systems or
other services without first obtaining Landlord's express authorization.
<PAGE> 1
Exhibit 10.46
RESTATED EMPLOYMENT AND CONSULTING AGREEMENT
--------------------------------------------
This Agreement is dated as of March 26, 1996 is by and between John A.
Ruggiero of 13 Commonwealth Avenue, Boston, Massachusetts (the "Executive") and
Telco Systems, Inc., a Delaware corporation with its principal place of business
at 63 Nahatan Street, Norwood Massachusetts 02062 (the "Company").
R E C I T A L S
- - - - - - - -
The Executive is currently employed full time as vice chairman of the
board of directors of the Company. It is contemplated that the Executive will
continue in this capacity until January 1, 1997, on which date he will become a
consultant to the Company. The purpose of this agreement is to formalize these
relationships and to provide for the specific terms of the Executive's
employment and consulting arrangement. This Agreement supersedes in all respects
the Employment and Consulting Agreement between the parties dated as of March
15, 1995.
1. Continued Employment.
---------------------
The Executive shall continue to be employed on a full-time basis until
such employment is terminated pursuant to the provisions of section 2 hereof.
During such employment period, the Executive shall be subject to the supervision
of, and shall have such authority as is delegated to him by, the Company's board
of directors in a manner consistent with the terms of this agreement. The
Executive agrees that during such employment he will devote his full business
time, attention and energies to the business and interests of the Company, and
will faithfully, competently and to
<PAGE> 2
the best of his skill and ability serve in such capacity or capacities as he may
occupy with the Company from time to time.
2. Termination of Employment.
--------------------------
The Executive's employment by the Company under section 1 shall continue
until terminated in accordance with one of the following provisions:
2.1 VOLUNTARY TERMINATION. The Executive may voluntarily terminate his
employment hereunder at any time prior to January 1, 1997 by giving the Company
30 days' notice of termination. Upon the effective date of such termination, the
Executive shall become a consultant to the Company under the terms and
provisions of section 4 hereof, except that the initial two-year consulting term
shall commence on the effective date of such termination and all payment and
other dates provided for in section 4 shall be correspondingly advanced.
2.2 TERMINATION BY THE COMPANY WITHOUT CAUSE PRIOR TO DECEMBER 31, 1996.
The Company may terminate the Executive's employment hereunder without cause at
any time prior to December 31, 1996, upon written notice to the Executive, which
termination shall be effective immediately or on such date as is specified in
the notice. Any material reduction in the title, or the compensation and
benefits, of the Executive shall be deemed to be a termination by the Company
without cause under the provisions of this section 2.2. In the event of
termination under the provisions of this section 2.2, the Executive shall
forthwith become a consultant under the consulting arrangements described in
section 4 hereof (with appropriate advancement of the term and dates as
-2-
<PAGE> 3
described in section 2.1), and the Company shall in addition make the payments
described in section 3.3 hereof.
2.3 TERMINATION FOR CAUSE. The Executive's employment hereunder may be
terminated by the Company at any time for cause, effective upon written notice
thereof to the Executive. For purposes of this agreement, the term "cause" shall
have the meaning as set forth in section 3(a)(iii) of the Senior Executive
Benefits Agreement dated as of October 4, 1989 between the Company and the
Executive (the "Golden Parachute Agreement"). In the event of termination
pursuant to this section 2.3, the Company shall be under no further obligation
to the Executive, under the consulting arrangements described in section 4 or
otherwise, other than to pay the Executive his then current salary through the
effective date of such termination.
2.4 TERMINATION ON DEATH OR DISABILITY. The Executive's employment
pursuant to section 1 hereof shall terminate on the death or disability of the
Executive. For purposes of this agreement, the term "disability" shall mean the
Executive's inability by reason of illness or other physical or other mental
disability to perform the duties required by his employment hereunder for any
consecutive period of 180 calendar days, provided that notice of any termination
by the company because of the Executive's disability shall have been given to
the Executive prior to the full resumption by him of the performance of such
duties. In the event of termination under this section 2.4, the Company shall
pay to the Executive or his estate, as the case may be, the payments described
in section 3.3 hereof and the Execu-
-3-
<PAGE> 4
tive's salary and bonus, if any, prorated through the effective date of
termination of employment, in full discharge of all of the Company's further
obligations to the Executive hereunder.
2.5 CHANGE OF CONTROL. This agreement shall terminate in all respects,
and be of no further force and effect, if at any time prior to January 1, 1997
the Executive shall become entitled to severance benefits under the
circumstances and as described in section 3 of the Golden Parachute Agreement.
3. COMPENSATION AND BENEFITS RELATING TO EMPLOYMENT.
The provisions of this section 3 shall apply so long as the Executive
continues to be employed pursuant to section 1 hereof.
3.1 SALARY AND BONUS. During such employment, the Executive shall be
entitled to a salary at an annual rate fixed by the Company's board of
directors, but not less than the rate in effect as of the date of this
agreement. The Executive shall during such employment be entitled to full
participation in the Company's Management Incentive Plan at the target MIP
percentage participation as in effect as of the date of this agreement;
provided, however, that the determination of the amount of the payments to be
actually made to the Executive with respect to any period subsequent to August
25, 1996, if any, shall be determined by the Company's Compensation Committee,
in its sole discretion.
3.2 BENEFITS. During the period of his employment under section 1 hereof,
the Executive shall be entitled to all executive fringe benefits to which he is
presently entitled, subject only to such changes in such benefits as shall
affect all senior executives of the Company.
-4-
<PAGE> 5
3.3 SEVERANCE PAY. In the event that the Executive's employment by the
Company pursuant to section 1 is terminated by the Company under section 2.2 or
terminates under section 2.4 hereof, the Company shall pay the Executive or his
legal representative a severance amount equal to 1.5 times his annual salary as
then in effect, payable in equal installments bi-weekly over the one-year period
commencing with the date of termination of such employment. Such payment shall
be made notwithstanding that the Executive shall in the event of termination
under section 2.2 be concurrently being paid as a consultant under section 4
hereof.
4. Consulting Services.
--------------------
The provisions of this section 4 shall apply in the event that, and at
such time as, the Executive becomes a consultant to the Company upon termination
of his employment under section 2.1 or 2.2 hereof.
4.1 TERM OF CONSULTING SERVICES. The initial term of the Executive's
consulting services shall be two years, commencing on January 1, 1997 or, if
applicable, such earlier date on which the Executive's employment under section
1 is terminated under section 2.1 or 2.2 hereof. The Executive shall continue to
perform consulting services for consecutive one-year periods after the end of
the initial two-year term of such services unless not less than 30 days prior to
the end of a consulting year one party shall give the other written notice of
the termination of such consulting services at the end of such consulting year.
During any such consulting year subsequent to the initial term, the Executive
shall
-5-
<PAGE> 6
perform services on the same basis as was applicable to the initial term.
4.2 DESCRIPTION OF SERVICES. During the initial two-year term of the
consulting period, the Executive shall perform such services as shall be
assigned to him by the board of directors or chief executive officer of the
Company, including without limitation performing the duties of chief financial
officer of the Company, on a temporary basis, and services involving shareholder
relations and strategic planning. Such services shall be performed at such times
and places, within or outside the United States, and in such a manner, as shall
be agreed by the Executive and the Company; provided, however, that the
Executive shall not be required to devote more than one-half of his business
time (an average of 20 hours per week) in performing consulting services.
4.3 COMPENSATION. As full compensation for consulting services under
this section 4, the Company shall pay the Executive a fee for each full year of
such services equal to $165,375. The fee for the first full year of such
services shall be paid in a lump sum on the first day of the initial two-year
term of the Executive's consulting services. Subsequent to such first year and
during the balance of the term of his consulting services hereunder, the
Executive shall receive his consulting fee in equal monthly installments of
$13,781.25 on the first day of each month, in advance. The aforesaid lump sum
payment for the first year shall be non-refundable (except as set forth in
section 4.10) under any circumstances, including the death of the Executive
during such year. The fees provided for in this section 4.3 shall
-6-
<PAGE> 7
be payable notwithstanding that the Executive may perform, or may have
performed, no services whatsoever on behalf of the Company during a payment
period.
4.4 BENEFITS. During the period that the Executive is acting as a
consultant under this section 4, he shall receive at no cost to him the benefits
to which he is entitled pursuant to section 3.2 hereof, subject only to such
changes in such benefits as shall affect all senior executives of the Company.
4.5 EXPENSES. The Company shall reimburse the Executive for all
reasonable out-of-pocket expenses incurred in performing consulting services
hereunder, including reasonable travel expenses. Reimbursement by the Company as
aforesaid shall occur upon submission to the Company by the Executive of an
itemized account thereof in reasonable detail.
4.6 NO AGENCY. In performing services hereunder the Executive shall be
an independent contractor and shall have no power or authority to bind the
Company or create any obligation or responsibility, express or implied, in the
name or on behalf of the Company.
4.7 STOCK OPTIONS. Each outstanding stock option held by the Executive
at the commencement of his consulting pursuant to this section 4, and each
option granted to the Executive during his performance of consulting services
hereunder, shall continue to vest during the period of his consulting services
hereunder, and shall remain exercisable until 30 days after the date of
termination of such consulting services.
-7-
<PAGE> 8
4.8 SERVICES AS A DIRECTOR. In the event and to the extent that the
Executive continues to act as a director of the Company while he is performing
consulting services under this section 4, he shall (in addition to the
consulting fees payable pursuant to section 4.3) receive such fees and expenses
for services as a director as are paid to the Company's outside directors;
provided, however, that the Executive shall not be entitled to the annual
retainer, if any, payable to outside directors.
4.9 OFFICE. During the period that he is performing consulting services
under this section 4, the Company shall at its expense provide the Executive
with an executive office in the Boston financial district, at such location and
on such terms as the Company and the Executive shall agree.
4.10 EFFECT OF SUBSEQUENT EMPLOYMENT. In the event that the Executive
obtains full-time employment at any time during the initial two year term of his
consulting services hereunder, the Company shall pay the Executive an amount
equal to one-half of the aggregate consulting fees payable with respect to the
balance of such two-year period, in a single payment with appropriate credit for
the pre-payment of the first year's fee, and the Executive's consulting services
under this section 4 shall forthwith terminate and neither party shall have any
further obligation to the other with respect thereto. Such services shall also
terminate at such time, after the initial two-year term of his consulting
services hereunder, as the Executive obtains full-time employment as aforesaid.
-8-
<PAGE> 9
4.11 ILLNESS, INCAPACITY OR DEATH OF THE EXECUTIVE. In the event that
during the initial two-year term of his consulting services hereunder, the
Executive dies or is unable to perform his services by reason of disability (as
defined in section 2.5 hereof), the Company shall continue to make payments
pursuant to section 4.3 hereof to the Executive or his estate, as the case may
be, for the balance of such two-year period. Subsequent to the initial two-year
term of the Executive's consulting services hereunder, such services shall
terminate on the date of his death or disability.
5. Miscellaneous.
5.1 INVALIDITY. The invalidity or unenforceability of any provision of
this agreement shall not affect the validity or enforceability of any other
provision hereof.
5.2 ENTIRE AGREEMENT. This agreement supersedes all prior agreements,
written or oral between the Executive and the Company relating the subject
matter of this agreement, including without limitation the Employment and
Consulting Agreement between the parties dated as of March 15, 1995; provided,
however, that the Golden Parachute Agreement and the Executive's Invention,
Non-disclosure and Non-competition Agreement with the Company shall each remain
in full force and effect. It is acknowledged and agreed that the Golden
Parachute Agreement shall terminate in all respects on termination of the
Executive's employment under section 1 of this agreement.
5.3 AMENDMENTS. This agreement may not be amended, and no provision of
this agreement may be waived, in any respect except
-9-
<PAGE> 10
by a writing executed by the Executive and on behalf of the Company.
5.4 SUCCESSORS AND ASSIGNS. This agreement shall be binding upon and
inure to the benefit of the successors, assigns, executors, administrators and
personal representatives of the parties hereto.
5.5 GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the laws of The Commonwealth of Massachusetts.
5.6 NOTICES. For purposes of this agreement, all notices and other
communications provided for herein shall be in writing and shall be deemed been
duly given when delivered, or mailed by certified mail, return receipt
requested, postage prepaid, addressed to a party at his or its addresses as set
forth on the first page of this agreement, or to such other address that either
party may furnish to the other in accordance herewith.
5.7 WAIVER OF BREACH. The waiver by either party of a breach of any
provision of this agreement by the other party shall not operate or be construed
as a waiver of any subsequent breach by such other party.
5.8 BONUSES. Nothing contained in this agreement shall be construed to
prevent the Company from paying the Executive compensation in addition to that
provided for herein, in the form of bonuses or otherwise, in the event that the
board of directors of the Company shall deem it advisable to pay such
compensation. Nothing contained in this agreement shall, however, be construed
to obligate the Company to pay any such additional compensation.
-10-
<PAGE> 11
IN WITNESS WHEREOF, the Executive has executed this agreement, and the
Company has caused this agreement to be executed by a duly authorized officer,
as of the date first above written.
TELCO SYSTEMS, INC.
By /s/ Dean C. Campbell
-------------------------------
Chairman of the Compensation
Committee, Duly Authorized
/s/ John A. Ruggiero
-------------------------------
John A. Ruggiero
<PAGE> 1
Exhibit 10.49
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE (the "Third Amendment") is made and
entered into JANUARY 22, 1996 by and between RIGGS NATIONAL BANK OF WASHINGTON,
D.C. As TRUSTEE OF THE MULTI-EMPLOYER PROPERTY TRUST, A TRUST FORMED UNDER 12
C.F.R. [Section]9.18 ("Landlord"), and TELCO SYSTEMS, INC., A DELAWARE
CORPORATION ("Tenant").
RECITALS:
A. Landlord's predecessor-in-interest, Pactel Properties, a California
Corporation, and Tenant entered into that certain Standard Triple Net Industrial
Lease dated May 3, 1990 (the "Original Lease"), covering certain premises
consisting of approximately 62,261 rentable square feet (the "Original
Premises") located in Building 10 in the project commonly known as Northport
Business Park ("Project") and more particularly known as 4305 Cushing Parkway,
Fremont, California (the "Original Building").
B. Landlord and Tenant entered into that certain First Amendment To
Lease, dated March 31, 1995 (the "First Amendment"), covering certain Premises
consisting of approximately 85,000 rentable square feet (the "Premises") located
in a building to be constructed of approximately 115,000 rentable square feet
(the "Building"), and more particularly described in the First Amendment.
C. Landlord and Tenant entered into that certain Second Amendment to
Lease, dated May 8, 1995 (the "Second Amendment"), expanding the rentable square
feet to include the entire building, and more particularly described in the
Second Amendment.
D. Landlord and Tenant wish to agree on the rentable square feet in the
building, adjust the rent, adjust the Tenant Improvement Allowance, modify the
overage payment terms, and make other related changes as described below.
NOW, THEREFORE, for good and adequate consideration, receipt of which is
hereby acknowledged, Landlord and Tenant hereby amend the Lease and agree as
follows:
1. DEFINED TERMS. All capitalized terms used in this Third Amendment
shall have the meanings given in the Original Lease, unless otherwise defined in
the First Amendment, the Second Amendment, or herein. For purposes of this Third
Amendment, the term "Lease" shall be defined herein to include the Original
Lease, the First Amendment, the Second Amendment and this Third Amendment.
2. SCHEDULE A - BASIC LEASE INFORMATION. SCHEDULE A - BASIC LEASE
INFORMATION, which is attached to the Second Amendment shall be modified as
follows:
a. Paragraph 1.4; 2.1 Premises shall be deleted and replaced
with the following:
Premises shall be 118,348 rentable square feet.
b. Paragraph 4.1 Base Monthly Rent shall be deleted and
replaced with the following: Pursuant to the terms of
Paragraph 2.1 of Exhibit D. Initial Improvements Of Premises.
<PAGE> 2
Tenant hereby exercises its option to have Landlord amortize an additional $3.00
per square foot over the Lease Term as additional Rent at an interest rate of
10%, annually. The Monthly Base Rent shall be increased by $4,653 per month
throughout the Lease Term. and such increase (along with the increase due to the
revised square footage noted above) is reflected in the following Monthly Base
Rent schedule:
Month of Term Monthly Base Rent
------------- -----------------
1 through 36 $81,579.00
37 through 72 $90,810.00
73 through 108 $101,154.00
109 through 120 $112,728.00
<PAGE> 3
c. Paragraph 20 Security Deposit shall be deleted and replaced
with:
Upon substantial completion of Landlord's Work, Tenant shall
deposit with Landlord an amount such that the total Security
Deposit shall increase to $108,075.00.
3. EXHIBIT D. INITIAL IMPROVEMENTS OF PREMISES. The first sentence of
Paragraph 2.1 of EXHIBIT D. INITIAL IMPROVEMENTS OF PREMISES, as amended by
PARAGRAPH 4 of the Second Amendment, is hereby deleted and replaced with the
following: Pursuant to this EXHIBIT D. INITIAL IMPROVEMENTS OF PREMISES and the
terms of this Third Amendment, Tenant's hereby exercises its option to have
Landlord amortize an additional $3.00 per square foot over the Lease Term as
additional Rent at an interest rate of 10%, annually. Therefore, as its
contribution to the cost of Landlord's Work, Landlord shall provide to Tenant a
tenant improvement allowance of up to a maximum of $2,722,004 (based upon $23.00
per rentable square foot as specified in the Lease) ("Tenant Improvement
Allowance").
4. EXHIBIT D. INITIAL IMPROVEMENTS OF PREMISES. The last two sentences
of Paragraph 2.1 of EXHIBIT D. INITIAL IMPROVEMENTS OF PREMISES shall be deleted
and replaced with the following: Provided an acceptable financial security
vehicle is agreed to between Landlord and Tenant, in the event the tenant
improvement costs exceed the Tenant Improvement Allowance, Tenant shall have the
option to either pay for the difference between the tenant improvement costs and
the Tenant Improvement Allowance (the "Excess Cost") upon completion, or have
Landlord amortize the Excess Cost (not to exceed a total of $6.00 per square
foot) over the Lease Term as additional Rent at an interest rate of 10%,
annually. All amounts over $29.00 per square foot shall be paid by Tenant as
provided in section 7.1 of this Exhibit D.
5. AUTHORITY. This Third Amendment has been duly authorized and executed
on behalf of Tenant and Landlord and is valid, binding and enforceable on both
parties in accordance with its terms.
6. ORIGINAL LEASE. Except as amended hereby and in the First Amendment
or the Second Amendment, the terms and conditions of the Original Lease shall
remain in full force and effect in accordance with its terms.
LANDLORD:
RIGGS NATIONAL BANK OF WASHINGTON, D.C.
AS TRUSTEE OF THE MULTI-EMPLOYER PROPERTY TRUST,
A TRUST FORMED UNDER 12 C.F.R. [SECTION]9.18
By: /s/ Maria Fleming
-----------------------------
Maria Fleming
ITS: Senior Trust Officer
<PAGE> 4
TENANT:
TELCO SYSTEMS, INC.,
A DELAWARE CORPORATION
By: /s/ John C. Kempf
-----------------------------------
John C. Kempf
Vice President - Controller
Fremont Operations
2
<PAGE> 5
TENANT:
TELCO SYSTEMS, INC.,
A DELAWARE CORPORATION
By: /s/ John C. Kempf
-----------------------------------
John C. Kempf
Vice President - Controller
Fremont Operations
2
<PAGE> 1
Exhibit 22.1
Telco Systems, Inc.
Subsidiaries of the Registrant
NAME JURISDICTION INCORPORATED
---- -------------------------
Telco Security Corporation Massachusetts
Telco Systems, Ltd. United Kingdom
Telco Systems Asia/Pacific Hong Kong
TSI Exports, Ltd. Barbados
Telco Indemnity, Ltd. Bermuda
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the registration Statements
pertaining to the Telco Systems, Inc. 1983 Employee Stock Purchase Plan (Form
S-8 No. 33-26976); the Telco Systems, Inc. 1980 Stock Option Plan (Form S-8
Nos. 2-94474, 33-2024 and 33-10548); the Telco Systems, Inc. 1988
Non-Statutory Stock Option Plan (Form S-8 No. 33-28295) and the 1990 Stock
Option Plan (Form S-8 Nos. 33-42751 and 333-00959) of our report dated
October 16, 1996, with respect to the consolidated financial statements and
schedules of Telco Systems, Inc. included in the Annual Report (Form 10-K)
for the year ended August 25, 1996.
ERNST & YOUNG LLP
Boston, Massachusetts
November 25, 1996
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