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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended March 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________
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COMMISSION FILE NUMBER 0-15323
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NETWORK EQUIPMENT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 94-2904044
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(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or No.)
organization)
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800 SAGINAW DRIVE
REDWOOD CITY, CALIFORNIA 94063
(415) 366-4400
(Address of principal executive offices, including zip code, area code, and
telephone number)
Securities registered pursuant to Section 12(b) of the Act:
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
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(Title of each class) (Name of each exchange on which
registered)
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Securities registered pursuant to Section 12(g) of the Act:
7 1/4% CONVERTIBLE SUBORDINATED DEBENTURES
(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.
/X/ Yes / / 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. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant on May 30, 1997 was $359,211,516.
The number of shares outstanding of the Common Stock, $0.01 par value, on
May 30, 1997 was 21,066,880.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant's Annual Report to Stockholders for the fiscal year ended
March 31, 1997 is incorporated by reference in Parts I, II and IV of this Form
10-K to the extent stated herein. The registrant's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on August 12, 1997 is
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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PART I
ITEM 1. BUSINESS
GENERAL
Network Equipment Technologies, Inc. ("N.E.T." or "the Company") is
headquartered in Redwood City, California. The Company was incorporated in
California in 1983 and reincorporated in Delaware in 1986. Its common stock is
traded on the New York Stock Exchange. N.E.T. is a leading worldwide supplier of
multiservice wide-area networks to enterprises, government agencies and carriers
around the world, has more than 1,300 employees and has installed networks in
over 50 countries.
For over a decade, N.E.T. has manufactured and supported products for
wide-area networks ("WANs"). Solutions for mission-critical applications--those
requiring the highest availability or network "uptime"--are the Company's
specialty. Its product revenue is derived primarily from sales of networking
products known as multiservice bandwidth managers. Multiservice refers to their
diverse capabilities: integrating multiple applications such as video, voice,
image and data; using multiple technologies, providing support such as
switching, adaptation and aggregation for packets, frames, circuits and,
announced this calendar year, cells; and providing access to a variety of
different carrier services such as leased lines, frame relay and ATM. Carriers
around the globe use N.E.T.-TM- Multiservice Bandwidth Managers as edge switches
or access devices in their service provisioning networks, as they offer advanced
services to their business clients in an increasingly competitive environment.
Other carriers as well as enterprises and government agencies use these N.E.T.
products to construct public, private or hybrid multiservice wide-area networks.
Designed for reliability, flexibility and compliance with national and
international standards, the Company's products manage business communications
traffic across the wide area and are backed by an extensive service and support
infrastructure. Many carriers, enterprises and government agencies around the
world use N.E.T. solutions to provide cost-effective and reliable digital
communications services.
FORWARD-LOOKING STATEMENTS
All statements in this Form 10-K that are not historical are forward-looking
statements that involve risks and uncertainties including, but not limited to,
the risks and uncertainties discussed in this Form 10-K and in the Company's
other filings with the Securities and Exchange Commission or available at the
Company's worldwide web site (http://www.net.com). Actual results may differ
materially from those projected.
NETWORKING INDUSTRY
The Company believes that many factors in the worldwide economy in general
and in the telecommunications equipment industry in particular are likely to
result in continued growth for that industry. The global evolution and growth of
market economies is creating an environment that the Company believes is
conducive to investment in communications infrastructures in both the carrier
and enterprise segments. At the same time, deregulation of telecommunications
operators is occurring in numerous jurisdictions with increasing rapidity,
creating a series of overlapping transitions and highly competitive
environments. Increasingly, as formerly government-regulated carriers prepare
for or engage in highly competitive markets, they are increasing their
investment in carrier equipment to support a proliferation of innovative
services in the U.S. and abroad. Furthermore, continuing innovations in
semiconductor technology are enabling both a massive increase in computing power
and in a distribution of that power to the desktop. As desktops are linked,
there is a massive increase in the demand for data bandwidth in the local area;
as more and more of these desktops are geographically dispersed, there is a
corresponding increase in the demand for bandwidth across the wide area.
Finally, very recently the Internet, and in particular the World Wide Web, has
been the main driver for an acceleration in the growth of wide-area network data
traffic, initially focused on the Internet Service Providers ("ISPs"), but now
also
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extending to mainstream carriers as they take advantage of opportunities to
increase their data networking revenues. In turn, this increases opportunities
for companies like N.E.T. to supply carriers with wide-area network products.
Over the last two decades, the communications requirements of countless
organizations in developed countries have grown as a result of changes in both
the telecommunications and general business environments. In less developed
countries such as China, major investments in telecommunications infrastructure
are being made as they strive to improve their competitiveness and standard of
living. Telecommunications deregulation, beginning in the United States in the
early 1980s and advancing further following legislation in the mid-1990s,
coupled with increasing volumes and types of communications traffic within many
organizations, encouraged the growth of wide-area networks. More recently,
global alliances have been formed by major telecommunications carriers as
deregulation in Europe, Asia and Latin America opens new market opportunities.
The Company believes that these alliances and their offerings are having and are
likely to continue to have a major impact on the development of international
networking capabilities. Bandwidth managers and other products offered and soon
to be offered by the Company are sophisticated networking platforms that manage
these increasing amounts of bandwidth on wide-area enterprise and service
provisioning networks around the world.
In response to the expanding requirements for wide-area networking products
to support multiple technologies and application types and to provide access to
many different carrier services from a single communications platform,
multiservice bandwidth managers and related platforms have been developed. Such
devices enable the construction of multiservice wide-area networks. Benefits of
the multiservice capabilities include: users may avoid being restricted or
"locked-in" to a single technology or type of application; and such networks may
be customized to meet current needs and may allow the addition of technologies
and applications in the future.
N.E.T. provides multiservice wide-area networks to both main WAN market
segments: enterprise/ government and carrier. The enterprise, or private,
network segment generally refers to communications solutions whereby equipment
is owned and managed by enterprises and is located on their premises. This
segment generally includes the networks of government agencies. The carrier, or
public, network segment includes carrier-owned equipment and services provided
by carriers. Carrier network equipment is generally located on carriers'
premises. However, as carriers respond to market opportunities and deregulation,
there is a trend towards greater use of carrier offerings by enterprises. As a
result, equipment demand is shifting from that of pure enterprise network
equipment, as described above, to carrier-class network equipment that has
higher performance and capacity ratings and more stringent environmental
specifications, and also supports enterprise network requirements. This blurring
of the line between public and private networks has made hybrid networking more
common.
Carriers, or (more specifically) network service providers ("NSPs") and
ISPs, targeted by the Company, focus on the provision of advanced business
services. After having increased their wide-area networking market share with
their virtual private network ("VPN") offerings, NSPs, particularly in the U.S.,
are now expanding on that position with their frame-relay and Asynchronous
Transfer Mode ("ATM") strategies. As worldwide deregulation continues to
progress, leading carriers have teamed to form global consortia to provide
advanced network services to large businesses around the world. N.E.T. provides
service provisioning edge switches to many of these global carriers as they
expand and redefine their roles in the rapidly changing telecommunications
industry. Furthermore, the Company's recently announced ATM product family is
directed at the carrier market, and is intended to enable carriers, NSPs, ISPs
and large enterprises to expand their service offerings. The carrier segment of
the WAN equipment market is larger, and is expected to grow faster, than the
enterprise segment, providing growth opportunities for vendors such as N.E.T.
Around the world, there is a trend toward homogenization of network
applications and capabilities. However, network equipment standards, such as
those for interfaces, often have distinct and different
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specifications and implementations in different regions or countries. N.E.T.
provides multiservice wide-area networks to three main geographical market
segments: U.S., Europe and Asia Pacific/Latin America. The sequence of growth in
multiservice wide-area networking--with the U.S. leading the way, followed by
Europe and then Asia Pacific/Latin America--is a pattern that is expected to
hold for the deployment of ATM equipment and services in the WAN.
From a capacity-related perspective, networks are being extended at the high
and low end simultaneously. At the one end, there is a trend towards using
higher-bandwidth digital services, such as Synchronous Optical Network ("SONET")
and ATM, as high-capacity optical fiber becomes the backbone of carrier
networks. This drives demand for bandwidth management capabilities to be
incorporated within broadband network equipment. At the same time, and at the
other end of the scale, the benefits which have been realized by larger, central
sites are being desired by smaller, branch sites of information-intensive
organizations. Consequently, access equipment is one of the most rapidly growing
segments of the WAN equipment market.
As noted above, the proliferation of local area networks ("LANs") has driven
the need for greater connectivity of LANs and, over the past decade, the
proportion of LAN-originated traffic on the WAN has increased steadily. The
Company believes this trend will continue as more and more powerful computing
takes place at the desktop, and the increasing globalization of enterprise
activities results in users becoming less sensitive to distance considerations
and more accustomed to sharing data between geographically remote locations.
For the LAN, LAN internetworking and WAN equipment markets, ATM is
increasingly viewed as the fundamental networking technology of the future. As a
result, the evolution and implementation of ATM technology and standards related
to that technology are having, and are expected to continue to have, a
significant impact on the entire networking industry. Late in its fiscal year
1997, N.E.T. announced a new family of wide-area networking products, under the
name "Promina". The first members of this family include Promina-TM- ATM
switches, with initial availability for certain elements scheduled through the
Company's fiscal year 1998. This move confirms the importance of ATM technology
to N.E.T.'s business and, when combined with other planned announcements,
demonstrates the Company's commitment to significantly expanding its ability to
address broader networking markets while leveraging the opportunities presented
by the emerging ATM WAN market, particularly with respect to the carrier
segment.
In summary, the deregulation of telecommunications worldwide, the growth of
business traffic, the emergence of the Internet, and networking needs and
advancements in communications technology and capacity have all combined to
dramatically increase the complexity, opportunities and competitiveness of the
markets in which N.E.T. operates (see "Competition" below).
COMPANY STRATEGY
N.E.T.'s mission is to be the premier worldwide supplier of multiservice
wide-area networks to enterprises, government agencies and carriers, including
edge switches and access devices. The Company's strategy is to focus its
products, services and distribution capabilities to address the needs of these
market segments, and it believes that the key WAN market segments it has
selected offer a wide range of regional and global opportunities. Furthermore,
the Company's recent ATM product announcements and other announcements planned
for this year broaden its product line and are intended to broaden the markets
it can address while continuing to leverage N.E.T.'s experience and core
competencies.
The ATM WAN market provides opportunities for the Company within many
different market segments described under "Networking Industry". For example,
there exist opportunities within enterprise and carrier networks, in both
domestic and international segments. N.E.T. intends to initially focus its ATM
efforts on leveraging the more immediate deployment schedules and growth rates
of ATM WAN equipment in the U.S. carrier market. Since fiscal year 1997, the
Company has been adapting the skills and experience of its U.S. sales force, in
particular, to prepare for the launch of ATM products to carriers.
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The Company's networking products efficiently manage data and voice
bandwidth for enterprise, government and carrier customers. Its service
organization provides technical assistance, installation and maintenance
services as well as systems integration and project management capabilities,
thus providing the support necessary for total network solutions.
The Company's products and services allow enterprises the flexibility to
build multiservice wide-area networks in such a way as to leverage their network
alternatives. For instance, N.E.T. networks are designed in such a way that
enterprises may choose to use their own resources (i.e. services, equipment and
staff) along with those of other organizations, such as carriers and
outsourcers, if appropriate. Similarly, the Company provides government agencies
with sophisticated, reliable wide-area networks, systems integration and other
services.
The needs of carriers are addressed by the Company through the supply of
flexible multiservice switches and access devices. Today, they are used to build
multiservice network infrastructures, especially in developing countries, where
they are known as digital data networks ("DDNs"). These will be augmented by
N.E.T.'s recently announced Promina product family, especially its ATM switches,
featuring the critical design characteristics required for carrier, NSP and ISP
environments. These products may be used by carriers as service provisioning
edge switches--enabling carriers to easily add service overlays to their
existing network infrastructures and offer value-added network services to
businesses.
The Company offers a comprehensive set of narrowband and broadband products
for multiservice networking. It is in response to the long-term trend towards
broadband networking, and reflecting the importance of ATM technology and
standards as fundamental components of the networking industry, that the Company
is reinforcing and expanding on its strategic core competencies by developing
wide-area ATM products. N.E.T.'s Promina family furthers the fulfillment of the
Company's Vista Architecture, which, since 1995, has defined the framework for
implementation of the Company's long-term WAN product and service strategy.
Vista is a multiservice network architecture for the wide area. It provides
a cohesive framework for N.E.T.'s products and services for data and voice
networking. It incorporates solutions for narrowband and broadband applications,
leveraging cell, packet and circuit technologies, for carriers and enterprises.
Vista takes a systems view of wide-area networking, combining best-of-class
narrowband and broadband network elements with standards-based network
management. To further the Vista vision, enhanced N.E.T. Multiservice Bandwidth
Managers and other Multiservice Access Platforms and ATM Service Interfaces
("ASIs") have been defined to interoperate with the Company's ATM switching core
in order to address the need for incorporation of ATM capabilities within
multiservice wide-area networks. For example, the recently announced
CellXpress-TM- module for N.E.T.'s Multiservice Bandwidth Managers adapts and
aggregates legacy, frame and LAN traffic and provides access for that traffic to
an ATM backbone. The Company's partnership and alliance strategies take into
account its decision to offer superior products covering a wide range of
specific adaptation and aggregation functions for enterprise and carrier
markets. In addition, the Company's standards-based ATM switch, the Promina
4000, is designed to the levels of mission-critical availability, scalability
and advanced traffic management that carriers have said they require and
enterprises are coming to expect. So, the Vista architecture takes into account
that the increasing importance of data networking requires carrier-class
switches with ASIs or Integrated Access Devices ("IADs") to enable the provision
of advanced services.
The Company's strategic relationships continue to evolve in the context of
technology developments, telecommunications deregulation and consolidation among
equipment providers. Current relationships include links with equipment
manufacturers and resellers, global carriers, and network service providers.
Individual objectives of these relationships vary, ranging from technology
licensing agreements, through OEM and reseller agreements, to joint product
development plans and sales and marketing programs. Collectively, these
relationships are intended by the Company to promote the provision of superior
networking solutions for current and prospective customers, thereby enabling
enhanced financial results
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and shareholder value. Most of the Company's competitors have similar
relationships with their respective customers and other parties. Changes in the
Company's strategic relationships or changes in similar relationships among
competitors could have a material impact on competitive and other factors
described in this document, including the Company's operating results. Also,
litigation or other claims based on securities, intellectual property, patent,
product, regulatory or other factors could materially affect the Company's
business and operating results.
PRODUCTS
The Company maintains an integrated engineering and manufacturing
organization that is responsible for the design, development and manufacture of
its products. This organization produces hardware and software network systems
for enterprises and carriers. Internally developed products are integrated with
products acquired from other vendors to create systems that are sold to
customers. These systems combine to offer superior applications availability
with sophisticated bandwidth and traffic management as well as connectivity,
broadband transmission and unified network management across the wide area. More
specifically, the Company's products can be summarized as follows:
- multiservice bandwidth managers constitute the core business and, along
with a complementary frame-relay product line, provide solutions designed
to optimize use of T1, E1, T3 and E3 services;
- integrated frame relay switching products allow organizations to migrate
their data traffic to frame relay to take advantage of bandwidth savings
offered by this technology;
- integrated LAN internetworking products enhance connectivity and
interoperability among devices that transmit information between LANs
across WANs;
- integrated voice switching and compression products support new
applications, such as video conferencing, and offer substantial savings in
voice transmission;
- the initial members of the recently announced Promina product family
feature switching, multiplexing and access products, and are designed for
mission-critical, multiservice applications in the emerging ATM WAN
market;
- the broadband switch family provides transmission management solutions
targeted at T1, fractional T3, T3 and OC-3 traffic for major enterprises
and cellular network providers;
- access and low-end networking products provide cost-effective connectivity
from smaller locations with lighter traffic requirements; and
- network management systems enhance operator visibility into network
conditions providing functions such as fault correlation and diagnostics,
thereby permitting greater control and management of networks.
N.E.T.'s switching products are designed with a high degree of intelligence
that enables each switch to communicate with its peers. The switches can make
decisions and take appropriate action regarding the state of the network (and
applications being supported on it) without reference to any external network
controlling processor. Rapid response times provided by the switches' up-to-date
network knowledge and local nodal processing minimize network downtime and
maximize applications availability.
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N.E.T.'s different types of networking switches are described in the
following paragraphs. Simply put, many of the Company's main products perform
switching, multiplexing and routing (including rapid automatic re-routing), have
sophisticated network intelligence and are designed to facilitate hybrid
networking. In brief:
- switching is the process of directing streams of voice, data, image and/or
video from multiple sources to multiple destinations in a network based on
addressing information provided by the network administrator or embedded
within the information stream;
- multiplexing is the process of aggregating streams of voice, data, image
and/or video from multiple sources for transmission over circuits;
- routing refers to the selection of the path that most efficiently utilizes
the network depending on the priority of the transmission, the condition
of the network and the volume of network traffic;
- rapid automatic re-routing is the ability to dynamically route existing
network traffic around a failed circuit quickly enough to keep the
end-to-end connection intact; and
- network intelligence involves data collection, analysis, decision making
and presentation of information to allow the user to view, control and
manage the network's switching, multiplexing, routing and other functions
to its fullest operational and economic potential. Such intelligent
switches can pass information about the network to N.E.T.'s network
management systems that are based on industry-standard workstations and
provide further storage and processing capacity to enable the display and
analysis of conditions and parameters within the network.
MULTISERVICE BANDWIDTH MANAGERS
N.E.T.'s IDNX-Registered Trademark- Multiservice Bandwidth Managers allow
users of voice, data, image and video communications to achieve full potential
from wide-area networks in a highly cost-effective manner. These platforms offer
a wide range of interfaces to customer premise equipment ("CPE") and support
different types of applications, technologies and carrier services. Primary
transmission speeds of T1, E1, T3 and E3 are supported, and the family includes
devices for low-end networking and WAN access. Packet- and circuit-switching are
performed, along with the recently announced adaptation and aggregation of ATM
cells. Bandwidth-efficient algorithms are used to manage each traffic type and
combinations of these traffic types. Moreover, unlike many other time division
multiplexing products, N.E.T.'s multiservice platforms assign bandwidth only as
necessary to accommodate specific user requirements, rather than wasting
valuable bandwidth by allocating it in predetermined segments. The Company's
multiservice wide-area networks can be configured and automatically reconfigured
in a wide variety of complex network topologies including point-to-point, ring,
star and fully interconnected mesh to accommodate customers' evolving
requirements.
Completely integrated within these multiservice platforms is N.E.T.'s family
of packet processors. These modules provide support for internetworking and
switching activities and access to switched services, such as ISDN, as well as
frame relay and ATM carrier offerings. There are four main product types:
INTEGRATED MULTIPROTOCOL ROUTERS
The LAN/WAN Exchange-TM- module provides multiprotocol routing with
concurrent bridging support to interconnect geographically dispersed LANs
over a WAN. It is compatible with Cisco routers and supports connections to
local Ethernet or Token Ring interfaces, as well as to remote LWX modules,
standalone routers, packet-switching services or IBM controllers.
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INTEGRATED FRAME-RELAY SYSTEMS
The FrameXpress-TM- family of products, consisting of modules and
systems, is available in a variety of configurations. The FrameXpress
modules or systems provide frame-relay access to bridges, routers, front-end
processors and other CPE devices that support frame-relay interfaces, and
can also connect to public frame-relay networks. N.E.T.'s FrameXpress
products allow the integration of traffic from many different sources onto a
consolidated frame-relay or multiservice wide-area network and provide an
efficient, effective transport mechanism for a variety of bursty traffic
types.
INTEGRATED ISDN SYSTEMS
The PrimeVoice-TM- ISDN module supports ISDN circuit switching and
routing capabilities and enables a variety of devices such as PBXs, video
codecs, routers and front-end processors to connect to the multiservice
wide-area network via an industry-standard Primary Rate Interface ("PRI").
The signaling capabilities of this module provide an intelligent connection
and offer ISDN services to an attached ISDN device. The PrimeVoice ISDN
module provides special features for worldwide PBX networking over N.E.T.
multiservice wide-area networks. These include worldwide feature
transparency, increased interoperability and the potential for lower costs.
INTEGRATED ATM ACCESS
The CellXpress-TM- module announced this year provides integrated access
for N.E.T. multiservice wide-area networks connecting to ATM services and
networks. It aggregates legacy mission-critical traffic along with LAN and
frame relay traffic, adapting these traffic types for transport over ATM
services. It is designed to enable flexible provisioning of multiple
services, and extends the multiservice wide-area network to include ATM
interfaces.
INTEGRATED VOICE SYSTEMS
In addition to the modules based on packet processors and described above,
N.E.T. has integrated many other features within its Multiservice Bandwidth
Managers. Notable amongst these is its sophisticated support for voice traffic.
This year, the Company extended the integrated voice capabilities in its
PrimeVoice family. This product line includes a number of value-added features
such as voice compression, ISDN switching (described above under "Integrated
ISDN Systems"), echo cancellation and industry-standard voice interfaces. In
particular, the PrimeVoice compression modules made available this year are
significant in that they double the toll-quality voice capacity on wide-area
networks. This allows carriers and service providers a cost-effective way to
carry more subscriber traffic on their networks.
ATM SWITCHES
The Promina product family features ATM switching, multiplexing and access
products. The Promina 4000 ATM switch, a member of N.E.T.'s new family, is
classed as a carrier edge switch, supporting superior traffic management for
service offerings such as ATM, frame relay and circuit emulation. Scheduled for
availability in fiscal year 1998, it features critical design characteristics
required for the carrier, NSP and ISP environment: mission-critical
availability, a scalable architecture, advanced traffic management and a unified
network management capability. With a unique distributed switch fabric, allowing
in-service upgrades, "hot-swap" capability, redundancy options and compliance to
NEBS ("Network Equipment Building System") standards, the Promina 4000 switch is
well-suited to the stringent requirements of carriers, NSPs and ISPs. Initial
releases provide support for T3, E3, OC3 and STM1 interfaces, a variety of
ATM-standard traffic types and popular ATM protocols. Advanced traffic
management capabilities that simultaneously achieve high statistical gain with
high levels of service integrity differentiate this product from other ATM
switches currently on the market.
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SONET SWITCHES
SONET Transmission Manager-TM- ("STM-TM-") broadband switches provide
advanced networking functionality for broadband communications. The STM node
provides fast switching of wideband and broadband circuits utilizing a low-delay
SONET switching matrix, intelligent networking, inverse multiplexing and
compliance with T1, fractional T3, T3 and OC-3 carrier services. With its
service availability, network management operation through end-to-end connection
management and dynamic connection re-route and restoration, the STM switch
addresses the needs of carriers, and is particularly well-suited to the needs of
cellular service providers. STM broadband networks also provide wide-area
communications infrastructures capable of supporting mainframe channel
extension, high-speed router, CAD/CAM and other applications requiring high
capacity. Also, traffic from T1-based devices, such as videos, PBXs, routers and
T1 multiplexers can be integrated, making STM networks suited to large
enterprises.
NETWORK MANAGEMENT SYSTEMS
A range of NetOpen-TM- network management systems from N.E.T. operate on
Sun-TM- workstations and enhance the ability of customers to control and monitor
a network and to diagnose and respond to changes or failures in equipment and
transmission resources. They are designed to help increase the productivity and
responsiveness of customers' network management staff, increase operational
efficiency and reduce cost.
The PanaVue-TM- network management system, announced this calendar year, is
a standards-based HP OpenView-TM- application that uses Web technology for its
operator interface and provides a comprehensive set of SNMP-based network
management capabilities. As part of the N.E.T. Vista Architecture, it provides
integrated management through functions such as fault correlation and
diagnostics for the N.E.T. Promina ATM and IDNX product families.
N.E.T.'s network management systems provide multi-user real-time monitoring,
control and management for the Company's products. They offer various
capabilities, including: color graphical representations of network topology and
network elements, with object states that change color to reflect alarm
conditions; the ability to software partition a physical multiservice wide-area
network into multiple, independent virtual networks; and, for frame-relay
systems, collection and storage of information about network usage, enabling
detailed traffic analysis for billing and capacity planning purposes.
NEW PRODUCT INTRODUCTION
N.E.T. believes it must continue to develop and enhance its product lines to
add relevant value and meet the needs of its strategic markets as they evolve,
either through internal development, the acquisition of technology, or
association with entities whose technologies or product offerings complement its
own. The Company has entered into a number of agreements relating to the
development, license or purchase of technology to extend the reach and
functionality of the Company's product lines, and will continue to do so as
deemed appropriate by management. For example, N.E.T. markets a comprehensive
frame-relay product line which combines frame relay access products from another
vendor with the Company's own internally developed frame relay switching
products. Also, the Company's recently announced Promina family includes
products developed and manufactured by other vendors that are compatible with
N.E.T.'s Vista Architecture and its products and strategy.
Many products designed and manufactured by N.E.T. contain components or
intellectual property obtained from third parties. The Company's ability to
maintain and enhance the value of its intellectual property and technology and
third party licenses and relationships will affect future product and service
offerings. Moreover, the Company believes that operating results will depend on
successful development and introduction of new products and enhancements to
existing products and service offerings. There can be no assurance that the
Company will succeed in such efforts or that customers will accept new, enhanced
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and existing products and services in quantities and at prices and margins that
are consistent with the Company's expectations. Changes in the Company's
distribution, product and technology relationships with a number of entities
could have a material impact on competitive and other factors described herein,
including the Company's operating results.
The commercial availability of all of the Company's products and services in
a timely manner and their acceptance by customers are crucial to the future
success of the Company. Revenue generated from products designed and
manufactured by original equipment manufacturers is expected to increase
significantly in fiscal year 1998. The Company has invested and will continue to
invest in designing and delivering products that will function effectively well
into the next century. The Company expects these investments to be successful,
but, given the nature and complexity of the N.E.T. and third party products and
software offered by the Company and the complexity and mixed vendor nature of
equipment used in WANs, there can be no assurance that these development and
Year 2000 compliance efforts will be successful or that customer acceptance of
products or services will be achieved or maintained. Substantial delays in
availability or acceptance of the Company's products and services would
materially and adversely affect the Company's operating results and financial
condition.
MARKETING, DISTRIBUTION AND CUSTOMERS
N.E.T.'s marketing strategy focuses on information-intensive organizations
that have extensive voice, data, image and video communications needs and
carriers that provide services to these organizations. N.E.T. targets
enterprises, carriers and government agencies in four main market segments--U.S.
commercial, U.S. Federal, carriers and two geographic international segments.
Enterprises include, among many others, banks and other financial institutions,
airlines, retail chains and manufacturers. Carrier organizations include
telephone companies around the world (especially the evolving global consortia),
DDN operators, NSPs, ISPs, cellular network service providers and value-added
network ("VAN") suppliers. Government agencies include U.S. government defense,
intelligence and civilian agencies such as the State Department, as well as
similar agencies and entities in other countries. Increasingly, the Company has
been supplying its products to or through other entities, such as outsourcers,
distributors and systems integrators, as prospective customers turn to them to
provide network services and operational capabilities.
The Company employs a highly trained direct sales force in the U.S. and the
U.K., as well as leveraging sales through additional distribution channels
worldwide. As part of the sales process, N.E.T. or distributor personnel consult
extensively with customers concerning their network requirements. N.E.T.
maintains subsidiaries that focus on sales to the European market, and Asia,
Pacific and Latin American markets and to the U.S. government. In fiscal 1997,
the Company began refining the combined skill set of its U.S. sales force to
more effectively leverage the opportunities presented by N.E.T.'s recent product
announcements. As a result, a greater proportion of the Company's U.S. sales
organization is being geared towards supplying ATM WAN solutions to carriers.
There can be no assurance that the Company will succeed in gaining market
acceptance of its Promina product family or that introduction of new products
will not materially affect sale of products currently generating revenue.
As previously indicated by the Company, revenue in the first quarter of
fiscal year 1998 is expected to be lower than revenue in the fourth quarter of
fiscal year 1997. This is consistent with the Company's experience in recent
years. Historically, the majority of the Company's revenue in each quarter
results from orders received and shipped in that quarter. Because of these
ordering patterns and potential delivery schedule changes, the Company does not
believe that backlog is indicative of future revenue levels. In addition,
because a large portion of the Company's orders historically have been received
and filled in the last month of the quarter, forecasting sales during a quarter
is difficult, and there is a significant risk of excessive or inadequate
inventory if orders do not match forecast. Furthermore, if large orders do not
close when forecasted or if near-term demand weakens for the products the
Company has available to ship, the Company's operating results for that or
subsequent quarters would be adversely affected. For further
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information, please refer to "Business Environment and Risk Factors" in
"Management's Discussion and Analysis" on pages 20 through 22 of the Company's
1997 Annual Report.
INTERNATIONAL SALES
N.E.T. has established subsidiaries in the U.K. (N.E.T. Europe Ltd.), France
(N.E.T. Europe S.A.), and Germany (Network Equipment Technologies Europe GmbH),
with sales offices in other European countries, through which it markets and
supports its products to the regions of Europe, the Middle East and Africa. The
Company has also established subsidiaries in the U.S., Uruguay, China, Singapore
and Mexico that are focused on marketing and support of its products to these
and other countries in the regions of Asia Pacific and Latin America.
International sales represented 35%, 27% and 28% of the Company's revenue in
fiscal 1997, 1996 and 1995, respectively. Government ownership or control of the
telecommunications industries and regulatory standards in some foreign countries
could be a substantial barrier to the introduction of wide-area communications
products for use in private or hybrid networks in such countries. Financial
information regarding foreign operations and export sales is discussed in Note 4
in the "Notes to Consolidated Financial Statements" in the Company's 1997 Annual
Report to Stockholders ("Annual Report") filed as Exhibit 13 to this report.
RELATIONSHIP WITH ERICSSON
In December 1989, the Company entered into a systems integration and
distribution agreement with Ericsson Business Networks AB of Sweden
("Ericsson"). Under this agreement, as amended, Ericsson has the non-exclusive
right to purchase, resell, distribute and license the Company's IDNX
multiservice bandwidth manager products. Ericsson is responsible for providing
all service and support for the N.E.T. products it markets. The Company also
appointed certain Ericsson affiliates as non-exclusive distributors of the
Company's products.
RELATIONSHIP WITH IBM
N.E.T. entered into an agreement with International Business Machines
Corporation ("IBM") in June 1987 (the "IBM Agreement"). Pursuant to the IBM
Agreement, as amended, IBM has non-exclusive, worldwide marketing, installation
and service rights for current and future releases of N.E.T.'s IDNX multiservice
bandwidth manager products and certain related products. Under the IBM Agreement
and other agreements, IBM licensed to N.E.T. several of its technologies. IBM is
also an end-user customer of N.E.T.'s products under the IBM Agreement. The
current IBM Agreement is scheduled to expire at the end of December 1997 unless
renewed by mutual agreement.
SALES TO THE U.S. GOVERNMENT
N.E.T.'s wholly owned subsidiary, N.E.T. Federal, Inc., markets the
Company's products to United States governmental entities both directly and
through collaborative government contracting and subcontracting arrangements. It
has entered into several contracts under which it provides its products and
services to various government agencies (the "Government Contracts"). The
Government Contracts encompass varying periods, but most may be terminated by
such government agencies at their convenience or at annual intervals. In fiscal
1997, 1996 and 1995, sales to the U.S. government and its agencies accounted for
29%, 34% and 28%, respectively, of N.E.T.'s total revenue. These amounts include
sales, which amounted to 27%, 30% and 19% of revenue for fiscal years 1997, 1996
and 1995, respectively, under a contract with the Department of Defense under
which various government agencies can order products, installation and service
from N.E.T. Discontinuance of orders from, or disqualification of the Company
by, the Defense Department or other significant federal customers would
materially affect the Company's operating results and financial condition.
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Apart from the U.S. government, no other single customer account was
responsible for ten percent or more of revenue during fiscal 1997, 1996 or 1995.
SALES TO AND RELATIONSHIPS WITH CARRIERS
Many of the Company's products are sold to carriers worldwide to provide
multiservice platforms used for services provisioning by the carriers. Sales to
the global carriers, such as Concert and GlobalOne amongst others, and to
emerging market carriers, such as those in China and Latin America, fall into
this category. The carrier services market is an increasingly important part of
the Company's business and is a key initiative of the Company's strategy. In
addition, the Company's relationships with carriers also expand the availability
of N.E.T. products and services to enterprise customers worldwide. These
relationships include joint marketing agreements with both AT&T and MCI, and a
systems integration agreement with Bell Atlantic Network Integration. The
Company's products are offered by other carriers around the world, such as US
WEST and Southwestern Bell in the U.S., and France Telecom, Telia and
Tele-Danmark in Europe.
RELATIONSHIP WITH DATACRAFT
The Company has entered into distribution and technology agreements with
many other companies, including Datacraft Asia. Datacraft Asia represents the
majority of N.E.T.'s overall sales into the Southeast Asia region and almost all
of N.E.T.'s sales into mainland China.
TECHNOLOGICAL CHANGE
Failure to keep pace with technological developments, marketing programs and
distribution capabilities of competitors would negatively and materially affect
the Company's performance. In particular, there can be no assurance that the
Company will gain market acceptance of its new and planned Promina product
family. The Company relies on non-exclusive distribution agreements with a
number of partners. Although these channels and their distribution capabilities
are extensive, their levels of sales activity and knowledge of N.E.T. products
vary widely and there can be no assurance that distributors will continue to
effectively promote and sell the Company's products.
CUSTOMER SERVICE AND SUPPORT
N.E.T.'s service strategy is to provide superior support for its own
products and other vendors' products when deemed appropriate by the Company. The
Company provides a wide range of service and support options for its products
including installation, a choice of different hardware and software maintenance
programs, upgrades and repairs, technical assistance and training for many
categories of network staff. N.E.T. has also performed a significant amount of
systems integration business for the U.S. Department of Defense ("DoD"), and
N.E.T.'s strategy includes leveraging the experience gained to extend this
aspect of its service business--thus adding professional services that go beyond
the traditional installation and maintenance services typically offered. In this
regard, a "template" for systems integration services and network operations
services has been developed by N.E.T. Federal to meet the needs of the DoD, and
management intends to use this template to extend variations on these
capabilities to commercial customers over time. In the past year, for example,
in response to customer requirements and market opportunities, the Company has
developed Professional Services, designed to enable customers to augment their
own internal networking resources with the expertise of technical specialists
through N.E.T. Professional Services include remote network monitoring, project
management, network design, and staging, integration and documentation services.
The Company employs a highly trained N.E.T. service and support organization
in the U.S. and the U.K., including a Technical Assistance Center ("TAC") in
North America and another in Europe, and leverages service and support
capabilities of authorized service agents, many of whom are also authorized
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to sell N.E.T.'s products around the world. In addition, the Company is
developing service and support capabilities via third-party agreements to
address the requirements of smaller organizations and in areas remote from
N.E.T. facilities. The cost-effective success of these third-party relationships
is dependent upon many factors and cannot be assured.
A high level of continuing customer service is integral to both the
Company's strategy of providing long-term support and developing long-term
relationships with customers and to its financial plans and performance. N.E.T.
has recently consolidated its North American TAC operations on the East Coast,
to form a single organization with broader capabilities. It has also established
a new Call Coordinator function (in Ashburn, VA) to qualify and route calls
according to severity. These changes reflect input from customers and are
examples of N.E.T.'s intent to continue providing superior service options in
its industry. N.E.T. trains customer personnel to operate its products and, in
some cases, to perform routine maintenance and repair of these systems. Service
at customers' facilities may be handled either by N.E.T. personnel operating out
of N.E.T.'s service locations or by IBM, Ericsson, Datacraft, other distributors
or authorized service organizations who are trained by or under contract with
N.E.T. Customers around the world can access one of N.E.T.'s TACs. TAC support
is fee-based and TACs are staffed year-round and available 24 hours a day. TAC
engineers provide assistance over the telephone or, when authorized, by dialing
into customers' networks. N.E.T. products are generally sold with limited
warranties on equipment and software ranging in length from 90 days to one year
that, when sold by N.E.T. to end-users, generally commence upon completion of
installation or acceptance. Certain products have different warranty periods and
conditions. As the Company adds OEM products to its portfolio with different
price points and service options from those typical of N.E.T., the service
organization will need to adapt to the change in product mix and different
warranty and service terms and conditions will be developed and offered to
customers. A significant amount of the Company's revenues and profits are
generated by its service and support offerings. There can be no assurance that
customer acceptance of such current and future offerings will be maintained or
achieved.
RESEARCH AND DEVELOPMENT
N.E.T. engages in research and development ("R&D") to develop new products
and enhancements to existing products as technology and the Company's
performance permits and as markets evolve. The Company's development efforts are
focused on its strategic market segments, providing multiservice platforms for
information-intensive enterprises, government agencies and carriers worldwide.
Product development priorities include those intended to enable N.E.T. to occupy
a leadership position in the ATM WAN solutions market; to enhance the
carrier-compatibility of certain products; and to introduce product enhancements
which meet the evolving requirements of specific markets and distribution
channels.
Management believes that product and technology leadership are keys to
long-term success in an industry and markets that evolve as rapidly as
networking does today. Furthermore, it believes that the Company's future
operating results will depend on its ability to continue to enhance existing
products as well as to develop and timely bring to market new products that meet
market and customer requirements.
Research and development expense increased by $4.6 million (12.7%) in fiscal
year 1997 to a total of $41.0 million, from $36.4 million in fiscal year 1996.
The increase in R&D expense in fiscal 1997 was due to an increase in direct
project funding, primarily salary-related expenses and purchases of direct
materials and hardware and software tools to support product development. The
Company's R&D expense as a percentage of total revenue increased to 12.7% in
fiscal 1997 from 10.8% in fiscal 1996. In addition, $2.8 million, $1.9 million
and $2.0 million in fiscal 1997, 1996 and 1995, respectively, of software
production costs were capitalized and have since been partially amortized or
written-down to net realizable value. For further information on accounting
policies relating to software production costs, please refer to Note 1 in the
"Notes to Consolidated Financial Statements" in the Company's 1997 Annual Report
filed as Exhibit 13 to this report. Management plans to continue funding R&D
efforts at levels necessary to
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advance product programs and expects R&D spending to increase in fiscal 1998,
while remaining fairly constant as a percentage of planned revenue.
MANUFACTURING
N.E.T. manufactures its products from components and assemblies designed to
meet the Company's quality and reliability requirements. The Company also
resells certain complementary products that are manufactured by outside vendors.
To date, N.E.T. has not experienced any significant delays in the delivery of
material or products from either subcontractors or vendors, but availability
limitations could adversely affect operating results. The Company's products
include components, assemblies and subassemblies that are currently available
from single sources and, in some cases, are in short supply. Although N.E.T.
believes alternative sources or substitutes for most of such single-sourced
items are available or, in most cases, could be developed if necessary, any
delay or difficulties in developing such alternatives or substitutes could
result in shipment delays and could adversely affect operating results. The
N.E.T. manufacturing process consists of the production of mechanical and
electrical subassemblies as well as custom system assembly. N.E.T. uses custom
fabricated printed circuit boards and subassemblies, standard and custom
integrated circuits, custom power supplies and mechanical hardware purchased
from outside suppliers. Certain relatively simple fabrication, assembly and test
processes are performed by subcontractors in the United States, and Southeast
Asia; final assembly and testing of N.E.T. products are performed at the
Company's manufacturing facilities, currently located in Redwood City,
California, and moving to Fremont, California in 1998 when the relocation of
corporate headquarters is planned to take place (see "Item 2. Properties"
below). Availability limitations, price increases, or business interruptions
could adversely impact financial performance.
The Company has initiated a Total Quality Management process and is focusing
efforts on enhancing the quality of products and services delivered to customers
worldwide. This includes activities to improve the quality of supplied
components, subassemblies and internal company processes. The Company has
completed the ISO 9000 International Quality System certification process for
its operations worldwide. N.E.T. is certified to ISO 9001, which covers quality
standards for design and development, production, installation and servicing. In
addition, N.E.T. has received TickIT certification for complying with quality
standards for software development.
The Company has entered into software escrow arrangements and has granted to
certain customers manufacturing rights that are exercisable by the customer in
limited circumstances, such as upon material default by the Company of its
obligations under its agreement with such customers.
The Company seeks to maintain inventory in quantities sufficient to ship
product quickly (normally within 15 to 60 days) after receipt of order. It
schedules some production and supply of products based on internal sales
forecasts. Many of N.E.T.'s customer agreements provide that delivery dates may
be rescheduled or orders canceled, although in certain circumstances a charge
may be assessed upon rescheduling or cancellation. Because of these and other
factors, there are risks of excess or inadequate inventory that could materially
impact expenses, revenue and, to a greater degree, net earnings. N.E.T. does not
believe that backlog at any specific time is indicative of actual revenues that
will be recognized in any succeeding period.
COMPETITION
The communications industry in general, including the specific segments
within which N.E.T. competes, is intensely competitive and is characterized by
advances in technology that frequently result in the introduction of new
products and services with improved performance characteristics. The Company
believes that the principal competitive factors in its target markets are
product capabilities, including efficient multiservice bandwidth management, ATM
switching and traffic management and standards compliance, technical services
and support, quality and reliability, vendor reputation and long-term
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prospects, distribution capabilities and price. The Company believes that it
currently competes favorably with respect to many of these factors. However,
many of the Company's current and potential competitors have greater name
recognition, a larger installed base of networking products, more extensive
engineering, manufacturing, marketing, distribution and support capabilities in
addition to greater financial, technological and personnel resources. Failure to
keep pace with technological advances or other competitive factors would
adversely affect the Company's competitive position and could adversely affect
N.E.T.'s future revenue levels and operating results.
In both the public and enterprise communications markets, the Company
competes with other WAN communications equipment vendors. With respect to
multiservice platforms and related services, including internetworking,
frame-relay and fast packet-based implementations, N.E.T. competes directly with
products and services from vendors such as Ascend, Ascom Timeplex, Cisco,
General DataComm, Newbridge Networks and Nortel. Consolidation in the networking
industry has recently accelerated through strategic alliances, mergers and
acquisitions and joint technology and marketing agreements. In the process,
distinctions between different industry segments are blurring. Continued or
successful consolidation could result in stronger competitors and may adversely
affect the Company's competitive position and operations.
As the market for products implementing ATM technology evolves, it is
expected that the Company's ATM WAN product line, with various components being
scheduled for availability through fiscal 1998, will face significant
competition. In the WAN segment of the ATM marketplace, the Company expects to
continue to compete with the equipment vendors listed above. Many other vendors
have introduced, or announced plans to develop, ATM networking equipment for
WANs, resulting in very intense competition in the markets that will be
addressed by N.E.T.'s ATM products and services.
N.E.T.'s enterprise WAN solutions compete with certain public carrier
network services and VANs. Most of these carriers enjoy substantially greater
marketing resources and customer recognition than the Company.
IBM and Ericsson are not prohibited by their Agreements from manufacturing,
marketing or servicing products that compete directly with N.E.T.'s IDNX or
other products. N.E.T.'s operating results could be adversely affected if either
entity announced the availability of or successfully introduced such products or
services.
As discussed below under "Government Regulation", in the United States, the
Telecommunications Act of 1996 removes restrictions that had been imposed on the
Regional Bell Operating Companies ("RBOCs") by the AT&T divestiture decree thus
allowing them, under certain conditions, to manufacture telecommunications
equipment or customer premises equipment. Competition from carriers that decide
to manufacture such equipment, with their far greater resources and large
customer bases, or from other competitors as discussed above, could cause a
severe reduction in selling prices or volumes for multiservice platforms and
other communications products or services, which would have a material adverse
affect on the Company's operating results and financial condition.
GOVERNMENT REGULATION
The telecommunications industry is regulated by governments around the
world. The details and extent of regulation and progress of deregulation vary on
a state, country or regional basis, but there is generally a long-term trend
towards deregulation. Government regulatory policies are likely to continue to
have a major impact on N.E.T.'s business by affecting the availability of voice
and data communications services and equipment, the prices and terms of
carriers' competitive offerings and the ability of the RBOCs directly to
manufacture and market equipment and services that compete with N.E.T.'s
offerings (see "Competition" above).
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In February 1996 the Telecommunications Act of 1996 ("the 1996 Legislation")
became law. This is the first major change in U.S. telecommunications law since
the Communications Act of 1934. This far-reaching legislation will influence the
U.S. telecommunications industry in many ways. Certain changes could have a
direct impact on N.E.T.'s business. For example, the 1996 Legislation removes
restrictions on RBOC activities that had been imposed in the AT&T divestiture
decree. Now, under certain conditions, the RBOCs may be permitted to manufacture
telecommunications equipment or customer premises equipment. If any RBOCs
manufacture or form alliances with other manufacturers to develop such
equipment, N.E.T. could be materially and adversely affected by direct
competition with the RBOCs. However, the Company expects that the 1996
Legislation is also likely to increase demand for certain network services and
equipment.
In addition, N.E.T. customers usually are carriers or use carrier network
services, the rates and terms of which are subject to varying degrees of public
utility-type government regulation. For example, in the U.S., decisions at the
federal and state level have, in some instances, provided certain carriers with
increased flexibility in structuring and pricing their services. Changes in the
rates or terms of carrier-provided service and equipment offerings may adversely
affect the demand for enterprise network products and services, including those
provided by N.E.T.
Similarly, many international telecommunications markets are undergoing, and
are impacted by, deregulation. The regulatory policies of foreign governments
and regulatory bodies may affect the demand for N.E.T.'s products and the
ability of N.E.T. to market its products outside the United States. As an
example, within the European Union ("EU") there exists a telecom authority which
requires member country public telecommunications operators ("PTOs") in Europe
to adopt or offer certain transmission services and behaviors. These changes
could adversely affect the demand for or limit the usability of enterprise
network solutions which N.E.T. provides.
The Federal Communications Commission ("FCC") and foreign governments
require that N.E.T.'s products comply with certain rules and regulations,
including technical rules designed to prevent harm to the telephone network and
avoid interference with radio-based communications. The Company believes it
complies with or is exempt from all applicable rules and regulations with
respect to the sale of its existing products in the United States and in certain
foreign countries. Failure to comply with FCC or similar governmental
requirements may result in the disconnection of installed equipment from common
carrier-provided circuits. Any delays in complying with FCC or foreign
requirements with respect to future products could delay their introduction or
affect the Company's ability to produce and market its products. Sales to the
U.S. government are subject to compliance with applicable regulations (e.g.,
Federal Acquisition Regulations).
PROPRIETARY RIGHTS AND LICENSES
N.E.T. has obtained patents in the United States and other countries on
inventions relating to its products and has applied for others. While possession
of patents, copyrights and trade secrets could affect the ability of other
companies from introducing products competitive with the Company's products,
N.E.T. believes that its success does not depend primarily on the ownership of
intellectual property rights, but primarily on its innovative skills, technical
competence and marketing abilities, and, accordingly, that patents, copyrights
and trade secrets will not constitute an assurance of N.E.T.'s future success.
N.E.T. is aware that the laws of some other countries do not protect proprietary
rights to the same extent as the laws of the United States.
Because of the existence of a large number of third-party patents in the
telecommunications field and the rapid rate of issuance of new patents, some of
the Company's products, or the use thereof, could infringe third-party patents.
If any such infringement exists, the Company believes that, based upon
historical industry practice, it or its customers should be able to obtain any
necessary licenses or rights under such patents on terms which would not be
materially adverse to the Company. However, there can
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<PAGE>
be no assurance in the future that actual or alleged infringement will not
materially affect the Company's operating results or financial condition.
The Company regards elements of its software and engineering as proprietary
and relies upon non-disclosure obligations, copyright laws and software
licensing agreements for protection. Despite these restrictions, it is possible
that competitors may obtain information that N.E.T. regards as proprietary. Some
of the technology incorporated in certain of the Company's products is licensed
from third parties. In the event of termination or expiration of the licensing
agreements for such technology, the Company's ability to market those products
could be adversely affected.
EMPLOYEES
As of March 31, 1997, the Company had 1,367 employees. None of the Company's
domestic employees are represented by a collective bargaining agreement. Certain
of the Company's employees outside the United States are governed by national
collective bargaining or similar agreements. The Company has never experienced
any work stoppage. The Company believes that its employee relations are good.
ITEM 2. PROPERTIES
N.E.T. currently leases approximately 287,000 square feet of office,
research and development, and manufacturing space in a modern industrial park in
Redwood City, California, which is leased until October 1998. In order to
provide the Company with greater flexibility in terms of managing space within
its corporate headquarters, as well as accommodating growth more effectively,
N.E.T. plans to relocate its headquarters to Fremont, California in mid-1998
under a new 12-year lease agreement for three buildings totaling approximately
290,000 square feet of space, with an exclusive option to lease another 200,000
square feet of space. The custom-built Fremont facility will initially include
two buildings configured for office space and research and development, and one
designed for manufacturing and other functions. N.E.T. and its subsidiaries also
lease sales and service offices at other locations in the United States, China,
France, Germany, Mexico, Norway, Singapore, Uruguay, the United Kingdom and
other countries. The Company believes that its current and planned facilities
are, in all material respects, suitable and adequate for its anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material legal proceedings pending or
threatened against it at this time. The Company's federal income tax returns for
certain prior years are under examination by the Internal Revenue Service
("IRS"). Certain adjustments previously proposed by the IRS which related
substantially to the timing (years) of tax deductions have been resolved in the
Company's favor. The Company believes that all substantive issues in this
examination have been resolved and that any necessary adjustments will not have
a material affect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers (or "Corporate Officers") of the Company and their
ages at June 1, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- --------------------------------------------------------------------------
<S> <C> <C>
Roger A. Barney 57 Vice President, Human Resources and Corporate Services
James B. De Golia 47 Vice President, General Counsel and Assistant Corporate Secretary
Samuel H. Ezekiel 53 Senior Vice President, Marketing
Joseph J. Francesconi 54 President, Chief Executive Officer and Director
Craig M. Gentner 50 Senior Vice President, Chief Financial Officer and Corporate Secretary
David P. Owen 56 Vice President, Strategy and Technology
Raymond E. Peverell 49 Senior Vice President, Sales and Support
G. Michael Schumacher 58 Senior Vice President, Product Operations
Charles S. Shiverick 53 Vice President, Information Services and Reengineering
</TABLE>
Roger A. Barney joined the Company in October 1987 as Vice President of
Human Resources and in 1992, became Vice President of Human Resources and
Corporate Services. Prior to joining the Company, Mr. Barney held numerous
management positions, including Director of Human Resources for Verbatim
Corporation. He also founded his own management consulting business, which he
ran from 1983 to 1987.
James B. De Golia joined the Company in December 1988 and has served as its
General Counsel and Assistant Secretary since 1991. From 1982 to 1988, Mr. De
Golia served as Corporate Counsel to a number of high technology and federal
divisions and subsidiaries of Xerox Corporation. Prior to joining Xerox, he
practiced law with the San Francisco office of Thelen, Marrin, Johnson &
Bridges.
Samuel H. Ezekiel joined the Company in June 1996 as Vice President of
Marketing and in April 1997 he was appointed Senior Vice President of Marketing.
From 1991 until joining N.E.T., Mr. Ezekiel was Vice President of Acquisitions &
Alliances at Amdahl Corporation, and from 1980 to 1991, he served as Vice
President and General Manager of the Communications Products Division. Prior to
that, he held a number of sales management, marketing, and business development
positions with companies such as British Telecom, Sperry Univac, Computer
Communications, Inc. and IBM/Rolm.
Joseph J. Francesconi has served as a Director and as President and Chief
Executive Officer since March 1994. From 1977 until he joined the Company, Mr.
Francesconi served in a number of management capacities at Amdahl Corporation, a
leading mainframe manufacturer, most recently as Executive Vice President. Prior
to joining Amdahl Corporation, Mr. Francesconi spent 12 years with IBM
Corporation.
Craig M. Gentner joined the Company in July 1989 as Vice President, Finance.
In July 1990, Mr. Gentner was appointed Vice President, Chief Financial Officer
and Corporate Secretary, and in May of 1992, he was appointed Senior Vice
President. From 1985 to 1989, Mr. Gentner was employed by Xidex, a manufacturer
of computer peripheral products, most recently as Senior Vice President and
Chief Financial Officer.
David P. Owen joined the Company in April 1990 as Director, Strategy and
Marketing. In 1992 he became Vice President of Corporate Marketing, and in 1994,
he became Vice President of Corporate Development and Strategy. More recently,
in 1997 Mr. Owen became Vice President, Strategy and Technology. Prior to
joining the Company, Mr. Owen was Director of Product Marketing at StrataCom. In
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1983 he founded the fast packet development organization at Packet Technologies,
StrataCom's predecessor company. Prior to that, Mr. Owen spent 15 years at
Control Data in a variety of product strategy, architecture and software
development positions.
Raymond E. Peverell joined the Company in 1993 as Senior Vice President of
Worldwide Sales, and in 1996, became Senior Vice President of Sales and Support.
From 1983 to 1992, Mr. Peverell was employed by Tandem Computers, Inc. holding
various positions, his last being Vice President, Strategic Partnership
Development. Prior to 1983, Mr. Peverell held several positions over a 12 year
span with Burroughs Corporation.
G. Michael Schumacher joined the Company in January 1995 as Senior Vice
President of Engineering and Operations and in 1996, became Senior Vice
President of Product Operations. Prior to joining the Company, Mr. Schumacher
was Vice President and General Manager of the UNIX Systems Division of Unisys
Corporation from 1993 to 1994. He also served at Mentor Graphics as General
Manager of front-end CAE Tools from 1991 to 1993, and at Solbourne Computers as
the Vice President of Engineering from 1989 through 1990.
Charles S. Shiverick, Vice President of Information Services and
Reengineering, joined the Company in 1989. Mr. Shiverick has held various senior
management positions including Senior Director of Corporate Quality and Vice
President of Operations. Prior to 1989, Mr. Shiverick spent 22 years at IBM
Corporation in a variety of management positions.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The section captioned "Common Stock Dividends and Price Range" of the
Registrant's 1997 Annual Report is incorporated herein by reference and included
in this filing as Exhibit 13. At March 31, 1997, there were 850 stockholders of
record of the Company.
ITEM 6. SELECTED FINANCIAL DATA
The section captioned "Five Year Financial Summary" of the Registrant's 1997
Annual Report is incorporated herein by reference and included in this filing as
Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The section captioned "Management's Discussion and Analysis" of the
Registrant's 1997 Annual Report is incorporated herein by reference and included
in this filing as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements together with the Notes thereto and
the Independent Auditors' Report thereon and the section captioned "Quarterly
Financial Data" of the Registrant's 1997 Annual Report are incorporated herein
by reference and included in this filing as Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Form 10-K
because the Company will file its definitive proxy statement (the "Proxy
Statement") pursuant to Regulation 14A within 120 days after the end of its
fiscal year covered by this Report, and certain information included in the
Proxy Statement is incorporated by reference into this Part III.
18
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to Directors is incorporated by reference from
the section captioned "Election of Directors" at page 2 of the Proxy Statement.
The information regarding Executive Officers is set forth in Item 4 of Part
I of this Form 10-K.
The information required by Item 405 of Regulation S-K is incorporated by
reference from the section captioned "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" at page 20 of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding compensation of the Company's Executive Officers
contained in the sections captioned "Election of Directors: Board Committees,
Meetings, and Remuneration" (at pages 5 and 6 of the Proxy Statement) and
"Executive Compensation and Related Information" (at pages 12 to 15 of the Proxy
Statement), is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management from the section captioned "Stock Ownership" at pages 3 and 4 of the
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding transactions with the Company's Directors and
Executive Officers from the section captioned "Executive Compensation and
Related Information" at pages 12 to 15 of the Proxy Statement is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C> <C>
(a) (1) Financial Statements--See "Index to Financial Statements and Financial Statement Schedule" at
page 24 of this Report.
(2) Financial Statement Schedules--See "Index to Financial Statements and Financial Statement
Schedule" at page 24 of this Report.
(3) Exhibits - See "Exhibit Index" at page 20 of this Report.
(b) The Registrant filed no reports on Form 8-K during the fourth quarter of the fiscal year ended March 31,
1997.
</TABLE>
19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION NOTE
- --------------- -------------------------------------------------------------------------------------------- -----
<S> <C> <C>
3.1 Registrant's Restated Certificate of Incorporation, as amended.............................. 1
3.2 Registrant's Bylaws, as amended............................................................. 1
4.1 Indenture dated as of May 15, 1989 between Registrant and Morgan Guaranty Trust Company of
New York.................................................................................... 2
4.2 Rights Agreement dated as of August 15, 1989 between Registrant and The First National Bank
of Boston, as amended....................................................................... 3
4.3 Certificate of Designations of Series A Junior Participating Preferred Stock filed with the
Secretary of State of Delaware on August 24, 1989 (Exhibit 4.1 in the Registrant's Form S-8
Registration Statement)..................................................................... 4
10.1 Headquarters Facilities Lease Agreements between Sobrato Interests III and Network Equipment
Technologies, Inc. dated April 10, 1997.....................................................
10.2 Seaport Centre Phase Three Industrial Net Lease Agreement dated August 12, 1987 between
Registrant and Lincoln Property N.C., Inc................................................... 5
10.7 Officer Employment and Continuation Agreement dated October 27, 1995 between Registrant and
Joseph J. Francesconi.*..................................................................... 6
10.8 Officer Employment and Continuation Agreement dated October 30, 1995 between Registrant and
Raymond E. Peverell.*....................................................................... 6
10.9 Officer Employment and Continuation Agreement dated October 27, 1995 between Registrant and
G. Michael Schumacher.*..................................................................... 6
10.10 Officer Employment and Continuation Agreement dated October 27, 1995 between Registrant and
Craig M. Gentner.*.......................................................................... 6
10.11 Officer Employment and Continuation Agreement dated June 3, 1996 between Registrant and
Samuel H. Ezekiel.*.........................................................................
10.12 Employment Agreement dated October 5, 1994 between Registrant and
Walter J. Gill.*............................................................................ 6
10.13 Form of Officer Employment and Continuation Agreement as signed by all other Executive
Officers of the Company in October 1995.*................................................... 6
10.14 Form of Director Indemnification Agreement as signed by all Directors of the Company........ 6
10.15 Form of Officer Indemnification Agreement as signed by all Executive Officers of the
Company.*................................................................................... 6
10.16 Corporate Director Compensation Deferral Election Program and 1996 Deferral Form............ 6
10.17 Corporate Officer Compensation Deferral Election Program and 1996 Deferral Form.*........... 6
10.18 Corporate Officers Long-Term Variable Compensation Program.*................................ 6
11.1 Statement Regarding Computation of Per Share Income.........................................
13 Portions of 1997 Annual Report to Stockholders..............................................
21.1 Subsidiaries of Registrant as of June 1, 1997...............................................
23.1 Independent Auditors' Consent...............................................................
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION NOTE
- --------------- -------------------------------------------------------------------------------------------- -----
<S> <C> <C>
27 Financial Data Schedule.....................................................................
99.1 Registrant's 1983 Stock Option Plan, as amended.*........................................... 7
99.2 Registrant's 1988 Restricted Stock Award Plan.*............................................. 8
99.3 Rules of Registrant's 1988 U.K. Stock Option Scheme.*....................................... 9
99.4 Registrant's 1989 U.K. Stock Option Plan.*.................................................. 8
99.5 Registrant's 1990 Employee Stock Purchase Plan.*............................................ 10
99.6 Registrant's 1993 Stock Option Plan, as amended.*........................................... 11
</TABLE>
- ------------------------
*A management contract or compensatory plan required to be filed as an Exhibit
to Form 10-K.
21
<PAGE>
NOTES
(1) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Form 10-Q (Commission File No. 0-15323) for the fiscal quarter
ended December 24, 1995, originally filed with the Securities and Exchange
Commission on February 7, 1996.
(2) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Form 8 Amendment No. 1 to Annual Report on Form 10-K
(Commission File No. 0-15323) for the fiscal year ended March 31, 1989,
filed with the Securities and Exchange Commission on July 25, 1989.
(3) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1990, filed with the Securities and Exchange
Commission on June 29, 1990.
(4) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Registration Statement on Form S-8 (Nos. 33-33013 and
33-33063), filed with the Securities and Exchange Commission on January 19,
1990.
(5) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1988, filed with the Securities and Exchange
Commission on June 29, 1988.
(6) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1996, filed with the Securities and Exchange
Commission on June 21, 1996.
(7) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1993, filed with the Securities and Exchange
Commission on June 25, 1993.
(8) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1991, filed with the Securities and Exchange
Commission on June 28, 1991.
(9) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Annual Report on Form 10-K (Commission File No. 0-15323) for
the fiscal year ended March 31, 1989, originally filed with the Securities
and Exchange Commission on May 1, 1989.
(10) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Registration Statement on Form S-8 (No. 33-68860), filed with
the Securities and Exchange Commission on September 15, 1993.
(11) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Registration Statement on Form S-8 (No. 33-65157), filed with
the Securities and Exchange Commission on December 19, 1995.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 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.
NETWORK EQUIPMENT TECHNOLOGIES, INC.
(Registrant)
By: /s/ JOSEPH J. FRANCESCONI
-----------------------------------------
Joseph J. Francesconi
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
Date: June 23, 1997 DIRECTOR
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ DIXON R. DOLL
- ------------------------------ Director June 23, 1997
Dixon R. Doll
/s/ JAMES K. DUTTON
- ------------------------------ Director June 23, 1997
James K. Dutton
President, Chief Executive
/s/ JOSEPH J. FRANCESCONI Officer and Director
- ------------------------------ (Principal Executive June 23, 1997
Joseph J. Francesconi Officer)
Senior Vice President,
Chief Financial Officer
/s/ CRAIG M. GENTNER and Corporate Secretary
- ------------------------------ (Principal Financial June 23, 1997
Craig M. Gentner Officer and Principal
Accounting Officer)
/s/ WALTER J. GILL
- ------------------------------ Director June 23, 1997
Walter J. Gill
/s/ HANS A. WOLF
- ------------------------------ Chairman of the Board June 23, 1997
Hans A. Wolf
23
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
PAGE IN
1997 ANNUAL REPORT*
-------------------
Consolidated Balance Sheets as of March 31, 1997 and 1996................. 23
<S> <C>
Consolidated Statements of Income for the years ended March 31, 1997, 1996
and 1995................................................................ 24
Consolidated Statements of Cash Flows for the years ended March 31, 1997,
1996 and 1995........................................................... 25
Consolidated Statements of Stockholders' Equity for the years ended March
31, 1997, 1996 and 1995................................................. 26
Notes to Consolidated Financial Statements................................ 27-35
Independent Auditors' Report.............................................. 36
</TABLE>
- ------------------------
*Incorporated herein by reference and included in this filing as Exhibit 13.
<TABLE>
<CAPTION>
FINANCIAL STATEMENT SCHEDULE
PAGE IN
1997 FORM 10-K
-------------------
Independent Auditors' Report.............................................. 25
<S> <C>
Schedule II--Valuation and Qualifying Accounts............................ 26
</TABLE>
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the Consolidated Financial
Statements or notes thereto.
Separate financial statements of the Registrant are omitted because the
Registrant is primarily an operating company and all subsidiaries included in
the Consolidated Financial Statements filed, in the aggregate, do not have a
minority equity interest and/or long-term indebtedness to any person outside the
consolidated group in an amount which together exceeds 5% of total consolidated
assets at March 31, 1997.
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Network Equipment Technologies, Inc.:
We have audited the consolidated financial statements of Network Equipment
Technologies, Inc. and subsidiaries as of March 31, 1997 and 1996, and for each
of the three years in the period ended March 31, 1997, and have issued our
report thereon dated April 16, 1997; such financial statements and report are
included in your 1997 Annual Report to Stockholders and are incorporated herein
by reference. Our audits also included the financial statement schedule of
Network Equipment Technologies, Inc. listed in the accompanying index to
financial statements and financial statement schedule. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
April 16, 1997
25
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER DEDUCTION/ BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE OFF END OF PERIOD
- --------------------------------------------------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
For the year ended March 31, 1995:
Accounts receivable allowances................... $ 3,195 -- $ 1,762(1) $ (2,443) $ 2,514
For the year ended March 31, 1996:
Accounts receivable allowances................... $ 2,514 -- $ 4,615(1) $ (2,596) $ 4,533
For the year ended March 31, 1997:
Accounts receivable allowances................... $ 4,533 -- $ 1,237(1) $ (1,860) $ 3,910
</TABLE>
- ------------------------
(1) Amount represents additions to accounts receivable allowances which were
charged primarily to revenue.
26
<PAGE>
EXHIBIT 10.1
LEASE BETWEEN
SOBRATO INTERESTS III AND NETWORK EQUIPMENT TECHNOLOGIES
(OFFICE BUILDING 1)
Section Page #
Parties.............................................................. 1
Premises............................................................. 1
Use.................................................................. 1
PERMITTED USES....................................................... 1
USES PROHIBITED...................................................... 1
ADVERTISEMENTS AND SIGNS............................................. 2
Term and Rental...................................................... 2
BASE MONTHLY RENT.................................................... 2
RENTAL ADJUSTMENT.................................................... 2
LATE CHARGES......................................................... 3
SECURITY DEPOSIT..................................................... 3
Construction and Possession.......................................... 4
BUILDING SHELL CONSTRUCTION.......................................... 4
TENANT IMPROVEMENT PLANS............................................. 5
FINAL PRICING........................................................ 5
CHANGE ORDERS........................................................ 5
BUILDING SHELL COSTS................................................. 5
TENANT IMPROVEMENT COSTS............................................. 6
CONSTRUCTION......................................................... 6
GENERAL CONTRACTOR OVERHEAD & PROFIT................................. 6
TENANT DELAYS........................................................ 6
INSURANCE............................................................ 7
PUNCH LIST & WARRANTY................................................ 7
OTHER WORK BY TENANT................................................. 7
Acceptance of Possession and Covenants to Surrender.................. 7
DELIVERY AND ACCEPTANCE.............................................. 7
CONDITION UPON SURRENDER............................................. 8
FAILURE TO SURRENDER................................................. 8
Alterations and Additions............................................ 9
TENANT'S ALTERATIONS................................................. 9
EXEMPTED ALTERATIONS................................................. 10
FREE FROM LIENS...................................................... 10
COMPLIANCE WITH GOVERNMENTAL REGULATIONS............................. 10
Maintenance of Premises.............................................. 10
LANDLORD'S OBLIGATIONS............................................... 10
TENANT'S OBLIGATIONS................................................. 11
LANDLORD AND TENANT'S OBLIGATIONS REGARDING COMMON AREA COSTS........ 11
COMMON AREA COSTS.................................................... 11
TENANT'S ALLOCABLE SHARE............................................. 12
WAIVER OF LIABILITY.................................................. 12
Hazard Insurance..................................................... 13
TENANT'S USE......................................................... 13
LANDLORD'S INSURANCE................................................. 13
TENANT'S INSURANCE................................................... 13
WAIVER............................................................... 14
Taxes................................................................ 14
Utilities............................................................ 14
Toxic Waste and Environmental Damage................................. 14
TENANT'S RESPONSIBILITY.............................................. 15
TENANT'S INDEMNITY REGARDING HAZARDOUS MATERIALS..................... 15
ACTUAL RELEASE BY TENANT............................................. 15
ENVIRONMENTAL MONITORING............................................. 16
Page 1
<PAGE>
Tenant's Default..................................................... 16
REMEDIES............................................................. 17
RIGHT TO RE-ENTER.................................................... 17
ABANDONMENT.......................................................... 17
NO TERMINATION....................................................... 18
NON-WAIVER........................................................... 18
PERFORMANCE BY LANDLORD.............................................. 18
Landlord's Liability................................................ 18
LIMITATION ON LANDLORD'S LIABILITY................................... 18
LIMITATION ON TENANT'S RECOURSE...................................... 19
INDEMNIFICATION OF LANDLORD.......................................... 19
Destruction of Premises.............................................. 19
DESTRUCTION BY AN INSURED CASUALTY................................... 19
DESTRUCTION BY AN UNINSURED CASUALTY................................. 20
TENANT'S RIGHT TO CANCEL ADJACENT LEASES............................. 20
Condemnation......................................................... 20
Assignment or Sublease............................................... 21
CONSENT BY LANDLORD.................................................. 21
ASSIGNMENT OR SUBLETTING CONSIDERATION............................... 21
NO RELEASE........................................................... 22
REORGANIZATION OF TENANT............................................. 22
PERMITTED TRANSFERS.................................................. 22
EFFECT OF DEFAULT.................................................... 22
EFFECTS OF CONVEYANCE................................................ 23
SUCCESSORS AND ASSIGNS............................................... 23
Option to Extend the Lease Term...................................... 23
GRANT AND EXERCISE OF OPTION......................................... 23
DETERMINATION OF FAIR MARKET RENTAL.................................. 23
RESOLUTION OF A DISAGREEMENT OVER THE FAIR MARKET RENTAL............. 24
PERSONAL TO TENANT................................................... 24
Option to Lease, Option to Purchase.................................. 25
General Provisions................................................... 25
ATTORNEY'S FEES...................................................... 25
AUTHORITY OF PARTIES................................................. 25
BROKERS.............................................................. 25
CHOICE OF LAW........................................................ 25
DISPUTE RESOLUTION................................................... 25
ENTIRE AGREEMENT..................................................... 26
ENTRY BY LANDLORD.................................................... 26
ESTOPPEL CERTIFICATES................................................ 26
EXHIBITS............................................................. 27
INTEREST............................................................. 27
MODIFICATIONS REQUIRED BY LENDER..................................... 27
NO PRESUMPTION AGAINST DRAFTER....................................... 27
NOTICES.............................................................. 27
RENT................................................................. 27
REPRESENTATIONS...................................................... 27
RIGHTS AND REMEDIES.................................................. 27
SEVERABILITY......................................................... 28
SUBORDINATION........................................................ 28
SUBMISSION OF LEASE.................................................. 28
SURVIVAL OF INDEMNITIES.............................................. 28
TIME................................................................. 28
TRANSPORTATION DEMAND MANAGEMENT PROGRAMS............................ 28
WAIVER OF RIGHT TO JURY TRIAL........................................ 29
USE OF ROOF.......................................................... 29
Page 2
<PAGE>
RECORDATION.......................................................... 29
EXHIBIT A - Project.................................................. 31
EXHIBIT B-2 - Shell Plans and Specifications......................... 32
EXHIBIT C - Building Shell Definition................................ 33
BUILDING STRUCTURE................................................... 33
SITEWORK............................................................. 33
PLUMBING............................................................. 34
ELECTRICAL........................................................... 34
FIRE SPRINKLER....................................................... 34
SITE AMENITIES....................................................... 34
EXHIBIT C - Building Shell Definition................................ 34
EXHIBIT D - Tenant Improvement Plans and Specifications.............. 35
EXHIBIT E - Option to Lease.......................................... 36
GRANT OF OPTION...................................................... 36
TERM OF OPTION....................................................... 36
EXERCISE OF OPTION................................................... 36
CONDITIONS PRECEDENT................................................. 36
LEASE OF THE OPTION BUILDING......................................... 36
CONSTRUCTION OF SHELL AND TENANT IMPROVEMENTS........................ 38
SUCCESSORS........................................................... 38
EXHIBIT D - Tenant Improvement Plans and Specifications.............. 39
Page 3
<PAGE>
1. PARTIES: THIS LEASE, is entered into on this ____ day of April, 1997,
between SOBRATO INTERESTS III, a California Limited Partnership, whose address
is 10600 North De Anza Boulevard, Suite 200, Cupertino, CA 95014 and NETWORK
EQUIPMENT TECHNOLOGIES, a Delaware Corporation, whose address is 800 Saginaw
Drive, Redwood City, California, 94063, hereinafter called respectively
Landlord and Tenant.
2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from
Landlord those certain Premises with the appurtenances, situated in the City
of Fremont, County of Alameda, State of California, consisting of a two-story
office building of approximately 100,000 square feet ("Building 1") and 350
parking places which shall be available for Tenant's exclusive use but shall
not be designated or segregated from the balance of the parking area, in a
project initially consisting of 3 buildings totaling approximately 280,000
square feet on an approximately 17.5-acre first phase portion of a larger
33.5-acre site ("Project) as outlined in red on EXHIBIT "A". In addition,
Tenant shall have the non-exclusive right to use the common area ("Common
Area") surrounding the Building and additional buildings constructed within
the Project. Unless expressly provided otherwise, the term Premises as used
herein shall include the Tenant Improvements (defined in Section 5.B)
constructed by Tenant pursuant to Section 5.B. Tenant acknowledges
Landlord's right to and hereby consents to construction of additional
building(s) on adjacent land in the Project owned by Landlord, so long as
such construction does not involve the removal of site amenities such as the
volleyball court and outdoor seating or a reduction in size of the
approximately 79,000 square foot amphitheatre area and water feature ("Quad")
adjacent to the Building.
Notwithstanding the provisions of this Section 2, Tenant shall be
permitted to schedule with Landlord and reserve the Quad for its exclusive
use from time to time for the purpose of conducting company meetings and
events.
3.USE:
A. PERMITTED USES: Tenant shall use the Building only for the following
purposes and shall not change the use of the Building without the prior
written consent of Landlord: Office, research and development, marketing,
light manufacturing, storage and other incidental uses such as training
rooms, cafeteria and health club. Tenant shall use only the
Page 4
<PAGE>
number of parking spaces allocated to Tenant. All trucks and delivery
vehicles shall (i) be parked at the rear of the Building near the loading
areas, (ii) loaded and unloaded in a manner which does not interfere with the
businesses of other occupants of the Project, and (iii) permitted to remain
on the Project only so long as is reasonable necessary to complete the
loading and unloading. Landlord makes no representation or warranty that any
specific use of the Premises desired by Tenant is permitted pursuant to any
Laws.
B. USES PROHIBITED: Tenant shall not commit or suffer to be committed
on the Premises any waste, nuisance, or other act or thing which may
unreasonably disturb the quiet enjoyment of any other tenant in or around the
Premises, nor allow any sale by auction or any other use of the Premises for
an unlawful purpose. Tenant shall not (i) damage or overload the electrical,
mechanical or plumbing systems of the Premises, (ii) attach, hang or suspend
anything from the ceiling, walls or columns of the building in excess of the
load limits for which such items are designed or set any load on the floor in
excess of the load limits for which the floor is designed, or (iii) generate
dust, fumes or waste products which create a fire or health hazard or damage
the Premises or in the soils surrounding the Building. No materials,
supplies, equipment, finished products or semi-finished products, raw
materials or articles of any nature, or any waste materials, refuse, scrap or
debris, shall be stored upon or permitted to remain on any portion of the
Premises outside of the Building without Landlord's prior approval, which
approval may be withheld in its sole discretion.
C. ADVERTISEMENTS AND SIGNS: Tenant will not place or permit to be
placed, in, upon or about the Premises (excluding the interior of the
Building) any signs not approved by the city or other governing authority.
Tenant will not place or permit to be placed upon the Premises any signs,
advertisements or notices without the written consent of Landlord as to type,
size, design, lettering, coloring and location, which consent will not be
unreasonably withheld. Any sign placed on the Premises shall be removed by
Tenant, at its sole cost, prior to the Expiration Date or promptly following
the earlier termination of the lease, and Tenant shall repair, at its sole
cost, any damage or injury to the Premises caused thereby, and if
Page 5
<PAGE>
not so removed, then Landlord may have same so removed at Tenant's expense.
Landlord hereby approves the general size and location of the exterior signs
as shown in green on Exhibit "B-1".
4.TERM AND RENTAL:
A. BASE MONTHLY RENT: The term ("Lease Term") shall be for one hundred
forty-four (144) months, commencing on the Commencement Date, estimated to
occur on April 1, 1998, but finally determined pursuant to Section 5.G, and
ending one hundred forty-four (144) months thereafter ("Expiration Date").
In addition to all other sums payable by Tenant under this Lease, Tenant
shall pay as base monthly rent ("Base Monthly Rent") for the Premises an
amount equal to the product of multiplying One Dollar and Twenty-Five Cents
($1.25) by the Rentable Square Footage (as hereinafter defined) of the
Building. "Rentable Square Footage" is defined as the square footage of the
Building when measured from outside exterior wall/glass to outside exterior
wall/glass of each floor, including covered docks, covered entries, covered
patios and covered balconies, but excluding roof overhangs. The Rentable
Square Footage shall be derived based on Exhibit "B-2" as defined below and
attached hereto. Base Monthly Rent shall be due in advance on or before the
first day of each calendar month during the Lease Term. All sums payable by
Tenant under this Lease shall be paid to Landlord in lawful money of the
United States of America, without offset or deduction, except as set forth
herein, and without prior notice or demand, at the address specified in
Section 1 of this Lease or at such place or places as may be designated by
Landlord during the Lease Term. Base Monthly Rent for any period less than a
calendar month shall be a pro rata portion of the monthly installment.
B. RENTAL ADJUSTMENT: Beginning twenty four (24) months after the
Commencement Date, and every twenty four (24) months thereafter (an
"Adjustment Date"), the then-payable Base Monthly Rent shall be subject to
adjustment based on the increase, if any, in the Consumer Price Index that
has occurred during the twenty four (24) months preceding the
then-applicable Adjustment Date. The basis for computing the adjustment
shall be the U.S. Department of Labor, Bureau of Labor Statistic's Consumer
Price Index for All Urban Consumers, All Items, 1982-84=100, for the San
Francisco-Oakland-San Jose area ("Index"). The Index most recently published
preceding the Commencement Date for the first Adjustment (or previous
Adjustment Date, as applicable), shall be considered the "Base Index". If
the Index most recently published preceding the Adjustment Date ("Comparison
Index") is greater than the Base Index, the then-payable Base Monthly Rent
shall be increased by multiplying the then-payable Base Monthly Rent by a
fraction, the numerator of which is the Comparison Index and the denominator
of which is the Base Index. Notwithstanding
Page 6
<PAGE>
any subsequent decrease in the Index, the increase in the CPI for any
calendar year shall never be less than three percent (3%) nor more than eight
percent (8%) per year compounded annually. On adjustment of the Base Monthly
Rent, Landlord shall notify Tenant by letter stating the new Base Monthly
Rent. Landlord's calculation of the Base Monthly Rent escalation shall be
conclusive and binding unless Tenant objects to said calculation within sixty
(60) days of Tenant's receipt from Landlord of such calculation. Landlord's
failure to adjust Base Monthly Rent on an Adjustment Date shall not prevent
Landlord from retroactively adjusting Base Monthly Rent at any subsequent
time during the Lease Term. If the Index base year is changed so that it
differs from 1982-84=100, the Index shall be converted in accordance with the
conversion factor published by the United States Department of Labor, Bureau
of Labor Statistics. If the Index is changed, revised or discontinued for
any reason, there shall be substituted in lieu thereof and the term "Consumer
Price Index" shall thereafter refer to the most nearly comparable official
price index of the United States Government in order to obtain substantially
the same result as would have been obtained had the original Consumer Price
Index been not been discontinued, revised or changed, which alternative index
shall be selected by Landlord and shall be subject to Tenant's written
approval.
C. LATE CHARGES: Tenant hereby acknowledges that late payment by Tenant
to Landlord of Base Monthly Rent and other sums due hereunder will cause
Landlord to incur costs not contemplated by this Lease, the exact amount of
which is extremely difficult to ascertain. Such costs include but are not
limited to: administrative, processing, accounting, and late charges which
may be imposed on Landlord by the terms of any contract, revolving credit,
mortgage, or trust deed covering the Premises. Accordingly, if any
installment of Base Monthly Rent or other sum due from Tenant shall not be
received by Landlord or its designee within five (5) days after that Rent is
due, Tenant shall pay to Landlord a late charge equal to five (5%) percent of
such overdue amount, which late charge shall be due and payable on the same
date that the overdue amount was due. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of late payment by Tenant, excluding interest and attorneys fees and
costs. If any rent remains delinquent for a period in excess of thirty (30)
days then, in addition
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to such late charge, Tenant shall pay to Landlord interest on any rent that
is not paid when due at the Agreed Interest Rate specified in Section 19.J
and calculated from the date thirty (30) days following the date such amount
became due until the date such rent is paid. Acceptance by Landlord of such
late charge shall not 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.
Notwithstanding the foregoing, Tenant shall be granted one exception per
calendar year when Base Monthly Rent may be received by Landlord up to ten
(10) days after notice to Tenant that such Base Monthly Rent is past due
before Tenant incurs the 5% late charge.
D. SECURITY DEPOSIT: Prior to the Lease Commencement Date, Tenant shall
deposit with Landlord the sum of One Hundred Twenty Five Thousand and No/100
Dollars ($125,000.00) ("Security "Deposit"). Landlord agrees that in lieu of
a cash Security Deposit, Tenant may deposit a letter of credit in a form
reasonably acceptable to Landlord. Landlord shall be entitled to draw
against the letter of credit at any time provided only that Landlord
certifies to the issuer of the letter of credit that Tenant is in default
under the Lease. Tenant shall keep the letter of credit in effect during the
entire Lease Term, as the same may be extended, plus a period of four (4)
weeks after expiration of the Lease Term. At least thirty (30) days prior to
expiration of any letter of credit, the term thereof shall be renewed or
extended for a period of at least one (1) year. Tenant's failure to so renew
or extend the letter of credit shall be a material default of this Lease by
Tenant. In the event Landlord draws against the letter of credit, Tenant
shall replenish the existing letter of credit or cause a new letter of credit
to be issued such that the aggregate amount of letters of credit available to
Landlord at all times during the Lease Term is the amount of the Security
Deposit originally required.
Landlord shall not be deemed a trustee of the Security Deposit, may use the
Security Deposit in business, and shall not be required to segregate it from
its general accounts. Tenant shall not be entitled to interest on the
Security Deposit.. If Tenant defaults with respect to any provisions of the
Lease, including but not limited to the provisions relating to payment of
Base Monthly Rent or other charges, Landlord may, to the extent reasonably
necessary to remedy Tenant's default, use any or all of the Security Deposit
towards payment of the following: (i) Base Monthly Rent or other charges in
default; (ii) any other amount which Landlord may spend or become obligated
to spend by reason of Tenant's default; and (iii) any other loss or damage
which Landlord may suffer by reason of Tenant's default. If any portion of
the Security Deposit is so
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used or applied, Tenant shall, within ten (10) days after written demand from
Landlord, deposit cash with Landlord in an amount sufficient to restore the
Security Deposit to its full original amount, and shall pay to Landlord such
other sums as necessary to reimburse Landlord for any sums paid by Landlord.
If Tenant shall default more than three (3) times in any twelve (12) month
period, irrespective of whether or not such default is cured, then the
Security Deposit shall, within ten (10) days after demand by Landlord, be
increased by Tenant to an amount equal to three (3) times the Base Monthly
Rent. Tenant waives the provisions of California Civil Code Section 1950.7,
and all other provisions of law now in force or that become in force after
the date of execution of this Lease, that provide that Landlord may claim
from a security deposit only those sums reasonably necessary to remedy
defaults in the payment of Rent, to repair damage caused by Tenant, or to
clean the Premises. Landlord and Tenant agree that Landlord may, in
addition, claim those sums reasonably necessary to compensate Landlord for
any other foreseeable or unforeseeable loss or damage caused by the act or
omission of Tenant or Tenant's agents, employees, contractors and invitees
("Tenant's Agents"). Tenant may not assign or encumber the Security Deposit
without the consent of Landlord. any attempt to do so shall be void and
shall not be binding on Landlord. If Tenant performs every provision of this
Lease to be performed by Tenant, the Security Deposit shall be returned to
Tenant within thirty (30) days after the Expiration Date and surrender of the
Premises to Landlord, less any amount deducted in accordance with this
Section, together with Landlord's written notice itemizing the amounts and
purposes for such deduction. In the event of termination of Landlord's
interest in this Lease, Landlord may deliver or credit the security Deposit
to Landlord's successor in interest in the Premises and thereupon be relieved
of further responsibility with respect to the Security Deposit.
5. CONSTRUCTION AND POSSESSION:
A. BUILDING SHELL CONSTRUCTION: Landlord shall cause the shell of the
Building ("Building Shell") to be constructed by independent contractors to
be employed by and under the supervision of South Bay Construction ("General
Contractor"), in general accordance with preliminary shell and site plans
attached hereto as EXHIBIT "B-1" ("Preliminary Site
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Plan and Specifications"). Final Building Shell plans and guideline
specifications shall be prepared by Arctec ("Architect") consistent with
Exhibit "B-1" and approved by Landlord and Tenant for attachment by June 15,
1997 as EXHIBIT "B-2" ("Shell Plans and Specifications"). Landlord shall
pay for all costs and expenses associated with the construction of the
Building Shell. The Building Shell shall include those items set forth in
the attached EXHIBIT "C" ("Building Shell Definition").
B. TENANT IMPROVEMENT PLANS: Tenant, at Tenant's sole cost and expense,
has hired Gensler & Associates ("Gensler") to prepare plans and outline
specifications ("Tenant Improvement Plans and Specifications") which shall be
attached as EXHIBIT "D" by August 29, 1997 with respect to the construction
of improvements to the interior premises ("Tenant Improvements"). In
addition, Gensler shall provide the Architect no later than April 21, 1997
with the interior stair and elevator locations and any other information
related to the Tenant Improvement Plans and Specifications that Tenant wishes
to be incorporated into the Shell Plans and Specifications. The Tenant
Improvements shall consist of all items not included within the scope of the
Building Shell Definition. The Tenant Improvement Plans and Specifications
shall be prepared in sufficient detail to allow General Contractor to
construct the Tenant Improvements. The General Contractor shall contract
directly with Tenant for construction of the Tenant Improvements and shall
construct the Tenant Improvements in accordance with all Tenant Improvement
Plans and Specifications. Landlord shall provide Tenant a work allowance to
be utilized by Tenant for the construction of Tenant Improvements ("Work
Allowance") in an amount equal to the product of multiplying the Rentable
Square Footage by Twenty-Five Dollars and Twenty-Five Cents ($25.25). The
Work Allowance shall be paid by Landlord to Tenant as payments become due
from Tenant to General Contractor. The Tenant Improvements shall not be
removed or altered by Tenant without the prior written consent of Landlord as
provided in Section 7. Tenant shall have the right to depreciate and claim
and collect any investment tax credits in the Tenant Improvements during the
initial Lease Term. Upon expiration of the Lease Term or any earlier
termination of the Lease, the Tenant Improvements shall become the property
of Landlord and shall remain upon and be surrendered with the Premises, and
title thereto shall automatically vest in Landlord without any payment
therefore.
C. PRICING: Within ten (10) days after completion of the Tenant
Improvements Plans and Specifications, General Contractor shall submit to
Tenant competitive bids from at least three (3) subcontractors for each
aspect of the work related to the Tenant improvements. General Contractor
must
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utilize the low bid in each case unless Tenant approves General Contractor's
use of another subcontractor, and the cost of the Tenant Improvements shall
be based upon construction expenses equal to the sum of the bid amounts as
approved by Tenant. Upon Tenant's written approval of the contract bids,
which approval shall not be unreasonably withheld or delayed, Landlord and
Tenant shall be deemed to have given their respective approvals of the final
Tenant Improvement Plans and Specifications on which the cost estimate was
made, and General Contractor shall proceed with the construction of the
Tenant Improvements in accordance with the terms of Section 5.G below. If
Tenant does not specifically approve or disapprove the bids within seven (7)
days, Tenant shall be deemed to have approved the bids.
D. CHANGE ORDERS: Tenant shall have the right to order changes in the
manner and type of construction of the Building Shell or the Tenant
Improvements. Upon request and prior to Tenant's submitting any binding
change order, General Contractor shall promptly provide Tenant with written
statements of the cost to implement and the time delay and increased
construction costs associated with any proposed change order, which
statements shall be binding on Landlord. If no time delay or increased
construction cost amount is noted on the written statement, the parties agree
that there shall be no adjustment to the construction cost or the
Commencement Date associated with such change order. If ordered by Tenant,
General Contractor shall implement such change order and the cost of
constructing the Tenant Improvements shall be paid by Tenant in accordance
with the cost statement previously delivered by General Contractor to Tenant
for any such change order.
E. BUILDING SHELL COSTS: Landlord shall pay all costs associated with
the Building Shell.
F. TENANT IMPROVEMENT COSTS: The cost of Tenant Improvements shall
consist of only the following to the extent actually incurred by General
Contractor in connection with the construction of Tenant Improvements:
construction costs, all permit fees, construction taxes or other costs
imposed by governmental authorities related to the Tenant Improvements, and
Landlord overhead as described in Section 5.H below. During the course of
construction of Tenant Improvements, General Contractor may deliver to Tenant
not more than once each calendar month a
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written request for payment which shall include and be accompanied by General
Contractor's certified statements setting forth the amount requested,
certifying the percentage of completion of each item for which reimbursement
is requested, and certifying that the progress payment requested is due to a
subcontractor of General Contractor pursuant to a contract between General
Contractor and the subcontractor. Tenant shall pay General Contractor, within
fifteen (15) days after Tenant's receipt of the above items, the costs
incurred by General Contractor in connection with Tenant Improvements
installed in the Building in accordance with the Tenant Improvement Plans and
Specifications, minus the retention set forth below. Tenant shall be
entitled to retain ten percent (10%) of the amount invoiced by General
Contractor until the Tenant Improvements are Substantially Complete as
defined in Section 5.G below. Tenant shall pay the retained balance owing to
General Contractor within fifteen (15) days following the date that the
Tenant Improvements are Substantially Complete. All costs for Tenant
Improvements shall be fully documented to and verified by Tenant.
G. CONSTRUCTION: Landlord shall use its reasonable efforts to obtain a
building permit from the City of Fremont as soon as possible after Tenant's
approval of the Shell Plans and Specifications and to "Substantially
Complete" construction of the Premises by April 1, 1998. The Building Shell
and Tenant Improvements shall be deemed substantially complete
("Substantially Complete" or "Substantial Completion") when the Building
Shell and Tenant Improvements have been substantially completed in accordance
with the Shell Plans and Specifications and Tenant Improvement Plans and
Specifications, and the issuance of a certificate of occupancy or its
equivalent by the appropriate governmental authority for the Building Shell
and Tenant Improvements, as well as the issuance of a certificate by the
Architect certifying that the Building Shell has been substantially completed
in accordance with the plans and the issuance of a certificate by Gensler
certifying that the Tenant Improvements have been substantially completed in
accordance with the plans. Completion of the landscaping shall not be
required to deem the Premises "Substantially Complete" if inclement weather
prevents Landlord from finishing this portion of the work. Any prevention,
delay or stoppage due to strikes, lockouts, inclement weather, labor
disputes, inability to obtain labor, materials, fuel or reasonable
substitutes therefor, governmental restrictions, regulations, controls,
action or inaction, civil commotion, fire or other act of God, and another
causes beyond the reasonable control of Landlord (except financial inability)
shall extend the dates contained in this Section 5.G by a period equal to the
period of any said prevention, delay or stoppage.
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H. GENERAL CONTRACTOR PROFIT: As compensation to General Contractor for
its services related to construction of the Building Shell and Tenant
Improvements, General Contractor shall receive as profit a fee of 3% of the
total construction costs incurred by General Contractor. The General
Contractor's fee for profit and overhead related to construction of the
Building Shell shall be the same percentage rate as the fee charged by the
General Contractor to Tenant for construction of the Tenant Improvements.
I. TENANT DELAYS: A "Tenant Delay" shall mean any delay in Substantial
Completion of the Building as a result of any of the following: (i) Tenant's
failure to complete or approve the Tenant Improvement Plans by the dates set
forth in Section 5.B, (ii) Tenant's failure to approve the bids for
construction by the dates set forth in Section 5.C, (iii) changes requested
by Tenant to either the Shell Plans and Specifications or the Tenant
Improvement Plans and Specifications which delay the progress of the work,
(iv) Tenant's request for materials components, or finishes which are not
available in a commercially reasonable time given the anticipated
Commencement Date, (v) Tenant's failure to pay, when due, any amounts
requested to be paid by Tenant pursuant hereto, (vi) Tenant's request for
more than one (1) rebidding of the cost of all or a portion of the work, and
(vii) any errors or omissions in the Tenant Improvement Plans provided by
Gensler. Notwithstanding anything to the contrary set forth in this Lease,
and regardless of the actual date the Premises are Substantially Complete,
the Commencement Date shall be deemed to be the date Commencement Date would
have occurred if no Tenant Delay had occurred as reasonable determined by
Landlord. In addition, if a Tenant Delay results in an increase in the cost
of the labor or materials, Tenant shall pay the cost of such increases.
J. INSURANCE: General Contractor shall procure (as a cost of the Building
Shell) a "Broad Form" liability insurance policy in the amount of Three
Million Dollars ($3,000,000.00). Landlord shall also procure (as a cost of
the Building Shell) builder's risk insurance for the full replacement cost of
the Building Shell and Tenant Improvements while the Building and Tenant
Improvements are under construction, up until the date that the fire
insurance
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policy described in Section 9 is in full force and effect.
K. PUNCH LIST & WARRANTY: After the Building Shell and Tenant
Improvements are Substantially Complete, Landlord shall cause the General
Contractor to immediately correct any construction defect or other "punch
list" item which Tenant brings to General Contractor's attention. All such
work shall be performed so as to reasonably minimize the interruption to
Tenant and its activities on the Premises. General Contractor shall provide
a standard contractor's warranty with respect to the Premises for one (1)
year from the Commencement Date. Such warranty shall exclude routine
maintenance, damage caused by Tenant's negligence or misuse, and acts of God.
L. OTHER WORK BY TENANT: All work not described in the Shell Plans and
Specifications or Tenant Improvement Plans and Specifications, such as
furniture, telephone equipment, telephone wiring and office equipment work,
shall be furnished and installed by Tenant. When the construction of the
Tenant Improvements has proceeded to the point where Tenant's work of
installing its fixtures and equipment in the Premises can be commenced,
General Contractor shall notify Tenant and shall permit Tenant and its
authorized representatives and contractors access to the Premises before the
Commencement Date for the purpose of installing Tenant's trade fixtures and
equipment. Any such installation work by Tenant or its authorized
representatives and contractor shall be undertaken upon the following
conditions: (i) if the entry into the Premises by Tenant or its
representatives or contractors interferes with or delays General Contractor's
work, Tenant shall cause the party responsible for such interference or delay
to leave the Premises; and (ii) any contractor used by Tenant in connection
with such entry and installation shall not interfere with General
Contractor's work.
6. ACCEPTANCE OF POSSESSION AND COVENANTS TO SURRENDER:
A. DELIVERY AND ACCEPTANCE: On the Commencement Date, Landlord shall
deliver and Tenant shall accept possession of the Premises and enter into
occupancy of the Building on the Commencement Date. Except as otherwise
specifically provided herein, Tenant agrees to accept possession of the
Premises in its then existing condition with the Building Shell and Tenant
Improvements substantially complete, excepting only latent defects. Tenant's
taking possession of any part of the Premises shall be deemed to be an
acceptance of any work of improvement done by Landlord in such part as
complete and in accordance with the terms of this Lease except for "Punch
List" type items of which Tenant has given Landlord written notice prior to
the time Tenant takes possession. At the time Landlord
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delivers possession of the Premises to Tenant, Landlord and Tenant shall
together execute an acceptance agreement. Landlord shall have no obligation
to deliver possession, nor shall Tenant be entitled to take occupancy, of the
Premises until such acceptance agreement has been executed, and Tenant's
obligation to pay Base Monthly Rent and Additional Rent shall not be excused
or delayed because of Tenant's failure execute such acceptance agreement.
Within one hundred eighty (180) days after the Commencement Date, Tenant
agrees to be in occupancy of at least fifty percent (50%) of the rentable
square footage of the Premises.
B. CONDITION UPON SURRENDER: Tenant further agrees on Expiration Date
or on the sooner termination of this Lease, to surrender the Premises to
Landlord in good condition and repair, normal wear and tear excepted. In
this regard, "normal wear and tear" shall be construed to mean wear and tear
caused to the Premises by the natural aging process which occurs in spite of
prudent application of the best standards for maintenance, repair
replacement, and janitorial practices, and does not include items of
neglected or deferred maintenance. In any event, Tenant shall cause the
following to be done prior to the Expiration Date or sooner termination of
this Lease: (i) all holes in interior walls shall be patched and painted so
as to match the wall, (ii) all tiled floors shall be cleaned and waxed, (iii)
all carpets shall be cleaned and shampooed, (iv) all broken, marred, stained
or nonconforming acoustical ceiling tiles shall be replaced, (v) all cabling
placed above the ceiling by Tenant shall be removed, (vi) all windows shall
be washed; (vii) the HVAC system shall be serviced by a reputable and
licensed service firm and left in good operating condition and repair as so
certified by such firm, (viii) the plumbing and electrical systems and
lighting shall be placed in good order and repair (including replacement of
any burned out, discolored or broken light bulbs, ballasts, or lenses. On or
before the Expiration Date or sooner termination of this Lease, Tenant shall
remove all its personal property and trade fixtures from the Premises. All
property and fixtures not so removed shall be deemed as abandoned by Tenant.
If Landlord requires pursuant to Section 7 below, Tenant shall, at Tenant's
sole cost and expense, remove such Alterations as Landlord requires and shall
repair and restore said Premises or such parts thereof before the Expiration
Date. Such repair and restoration shall include causing the Premises to be
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brought into compliance with all applicable building codes and laws in effect
at the time of the removal to extent such compliance is necessitated by the
repair and restoration work; provided however, that (i) Tenant shall not be
required to pay for any work related to bringing the foundation, exterior
load bearing walls and roof structure of the Building into compliance with
applicable building codes and laws then in effect; and (ii) Tenant shall not
be required to pay for any work which may be required to bring areas outside
the Building into compliance with then-applicable building codes and laws. .
C. FAILURE TO SURRENDER: If the Premises are not surrendered at the
Expiration Date or sooner termination of this Lease in the condition required
by this Section 6, Tenant shall be deemed in a holdover tenancy pursuant to
this Section 7.C and Tenant shall indemnify, defend, and hold Landlord
harmless against loss or liability resulting from delay by Tenant in so
surrendering the Premises including, without limitation, any claims made by
any succeeding tenant founded on such delay and costs incurred by Landlord in
returning the Premises to the required condition, plus interest at the Agreed
Interest Rate. Any holding over after the termination or Expiration Date
with Landlord's express written consent, shall be construed as month-to-month
tenancy, terminable on thirty (30) days written notice from either party, and
Tenant shall pay as Base Monthly Rent to Landlord a rate equal to one hundred
twenty five percent (125%) of the Base Monthly Rent due in the month
preceding the termination or Expiration Date, plus all other amounts payable
by Tenant under this Lease. Any holding over shall otherwise be on the terms
and conditions herein specified, except those provisions relating to the
Lease Term and any options to extend or renew, which provisions shall be of
no further force and effect following the expiration of the applicable
exercise period. If Tenant remains in possession of the Premises after
expiration or earlier termination of this Lease without Landlord's consent,
Tenant's continued possession shall be on the basis of a tenancy at
sufferance and Tenant shall pay as rent during the holdover period an amount
equal to one hundred fifty percent (150%) of the Base Monthly Rent due in the
month preceding the termination or Expiration Date, plus all other amounts
payable by Tenant under this Lease. This provision shall survive the
termination or expiration of the Lease.
7. ALTERATIONS AND ADDITIONS:
A. TENANT'S ALTERATIONS: With the exception of Tenant Improvements
installed as part of initial construction of the Premises, Tenant shall not
make, or suffer to be made, any alteration or addition to the Premises
("Alterations"), or any part thereof, without
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obtaining Landlord's prior written consent and delivering to Landlord the
proposed architectural and structural plans for all such Alterations at least
fifteen (15) days prior to the start of construction. After receipt of
Tenant's architectural and structural plans, Landlord shall have a period of
ten (10) business days thereafter to grant its consent, which consent shall
not be unreasonably withheld. Landlord shall indicate to Tenant at the time
of Tenant's request, whether or not Landlord will require Tenant to remove
such Alterations at the Expiration Date. Tenant shall, at Tenant's sole cost
and expense, remove such Alterations as Landlord requires and shall repair
and restore said Premises or such parts thereof before the Expiration Date,
unless exempted pursuant to Section 7.B below. Such repair and restoration
shall include causing the Premises to be brought into compliance with all
applicable building codes and laws in effect at the time of the removal to
extent such compliance is necessitated by the repair and restoration work;
provided, however, that (i) Tenant shall not be required to pay for any work
related to bringing the foundation, exterior load bearing walls and roof
structure of the Building into compliance with applicable building codes and
laws then in effect; and (ii) Tenant shall not be required to pay for any
work which may be required to bring areas outside the Building into
compliance with then-applicable building codes and laws. If such Alterations
affect the structure of the Building, Tenant additionally agrees to reimburse
Landlord its reasonable out-of-pocket costs incurred in reviewing Tenant's
plans. After obtaining Landlord's consent, Tenant shall not proceed to make
such Alterations until Tenant has obtained all required governmental
approvals and permits, and provided Landlord reasonable security, in form
reasonably approved by Landlord, to protect Landlord against mechanics' lien
claims. Tenant agrees to provide Landlord written notice of the anticipated
and actual start-date of the work, and a complete set of half-size (15" X
21") vellum as-built drawings. All Alterations shall be constructed in
compliance with applicable building codes and laws. Any Alterations, except
movable furniture and trade fixtures, shall become at once a part of the
realty and belong to Landlord but shall nevertheless be subject to removal by
Tenant as provided in Section 6 above. Alterations which are not deemed as
trade fixtures include heating, lighting, electrical systems, air
conditioning, partitioning, carpeting, or any other installation
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which has become an integral part of the Premises. All Alterations shall be
maintained, replaced or repaired by Tenant at its sole cost and expense.
Notwithstanding the foregoing, Tenant shall be entitled without obtaining
Landlord's consent, to make Alterations which do not affect the structure of
the Building or which do not cost more than Twenty Five Thousand Dollars
($25,000.00) per Alteration nor an aggregate of Fifty Thousand Dollars
($50,000.00) in any twelve (12) month period; provided, however, that Tenant
shall still be required to deliver to Landlord the proposed architectural and
structural plans for all such Alterations at least (15) days prior to the
start of construction and comply with all other provisions of the preceding
paragraph.
B. EXEMPTED ALTERATIONS: Notwithstanding the provisions of Section 7.A
above, Landlord shall not have the right to require Tenant to remove any
Alterations at the end of the term of the Lease unless: (i) such Alterations
were of a nature not typically found in manufacturing buildings; (ii) such
Alterations create private offices smaller than 10'x12'; or (iii) such
Alterations create hard wall partitioning that cover more than 35% of the
interior square footage of the Premises or the perimeter window space of the
Premises.
C. FREE FROM LIENS: Tenant shall keep the Premises free from all liens
arising out of work performed, materials furnished, or obligations incurred
by Tenant or claimed to have been performed for Tenant. In the event Tenant
fails to discharge any such lien within ten (10) days after receiving notice
of the filing, Landlord shall be entitled to discharge the lien at Tenant's
expense and all resulting costs incurred by Landlord, including attorney's
fees shall be due from Tenant as additional rent.
D. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: The term Governmental
Regulations shall include all federal, state, county, city or governmental
agency laws, statutes, ordinances, standards, rules, requirements, or orders
now in force or hereafter enacted, promulgated, or issued. The term also
includes government measures regulating or enforcing public access,
occupational, health, or safety standards for employers, employees,
landlords, or tenants. Tenant shall continuously and without exception
repair and maintain the Premises, including Tenant improvements, Alterations,
fixtures, and furnishings, in an order and condition in compliance with all
Governmental Regulations. Tenant, at its sole expense, shall make all
repairs, replacements, alterations, or improvements needed to comply with all
Governmental Regulations to the extent that the Governmental Regulations
relate to or are required by and Law because of (i) Tenant's particular use or
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change of use of the Premises, (ii) Tenant's application for any permit or
governmental approval, or (iii) Tenant's construction or installation of any
Alterations or Trade Fixtures. Landlord, at Landlord's sole expense, shall
promptly make all repairs, replacements, alterations, or improvements needed
to comply with all Governmental Regulations to the extent not required by
Tenant pursuant to the preceding sentence. The judgment of any court of
competent jurisdiction or the admission of Tenant in any action or proceeding
against Tenant (whether Landlord be a party thereto or not) that Tenant has
violated any such law, regulation or other requirement in its use of the
Premises shall be conclusive of that fact as between Landlord and Tenant.
8.MAINTENANCE OF PREMISES:
A. LANDLORD'S OBLIGATIONS: Landlord at its sole cost and expense, shall
maintain in good condition, order, and repair, and replace as and when
necessary, the foundation, exterior load bearing walls and roof structure of
the Building Shell. Landlord shall also, at Tenant's sole cost and expense
through reimbursement as provided in this Section 8, clean, maintain, repair
and replace when necessary the following parts of the Premises: (i) all
plumbing and sewage facilities, (ii) all heating ventilating and air
conditioning facilities and equipment (excluding adjustments to interior
zones after initial occupancy of the Premises and balancing of the
equipment), (iii) all exterior windows, door entrances, plate glass and
glazing systems including caulking, and skylights, (iv) all automatic fire
extinguisher equipment, (v) the parking lot and all underground utility
facilities servicing the Premises, (vi) all elevator equipment, (vii) the
roof membrane system, and (viii) all waterscape, landscaping and shrubbery.
With respect to items (ii), (vi) and (vii) above, Landlord shall provide
Tenant, upon request from Tenant, a copy of a service contract between
Landlord and a licensed service contractor providing for period maintenance
of all such systems or equipment in conformance with the manufacturer's
recommendations. Landlord shall provide Tenant a copy of such preventive
maintenance contracts and paid invoices for the recommended work if requested
by Tenant.
B. TENANT'S OBLIGATIONS: Unless required by Landlord pursuant to
Section 8.A above or unless such
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services are shared (in which event the provisions of Sections 8.C, 8.D and
8.D shall apply as to such shared services), Tenant shall clean, maintain,
repair and replace when necessary the Premises and every part thereof through
regular inspections and servicing, including but not limited to: (i) all
fixtures, interior walls, floors, carpets and ceilings, and (ii) all
electrical facilities and equipment. All wall surfaces and floor tile are to
be maintained in an as good a condition as when Tenant took possession free
of holes, gouges, or defacements.
C. LANDLORD AND TENANT'S OBLIGATIONS REGARDING COMMON AREA COSTS:
Tenant agrees to reimburse Landlord for Tenant's Allocable Share (as defined
in Section 8.E below) of the expenses resulting from Landlord's payment of
Common Area Costs (as defined in Section 8.D below). Tenant agrees to pay
its Allocable Share of the Common Area Costs as additional rental within
thirty (30) days of written invoice from Landlord.
D. COMMON AREA COSTS: For purposes of calculating Tenant's Allocable
Share of Building and Project Costs, the term "Common Area Costs" is defined
as all costs and expenses of the nature hereinafter described which are
incurred by Landlord in connection with ownership and operation of the
Project in which the Premises are located, together with such additional
facilities as may be determined by Landlord to be reasonably desirable or
necessary to the ownership and operation of the Building and/or Project. All
costs and expenses shall be determined in accordance with generally accepted
accounting principles which shall be consistently applied (with accruals
appropriate to Landlord's business), including but not limited to the
following: (i) common area utilities, including water, to the extent not
separately metered; (ii) common area maintenance and service agreements for
the Project and the equipment therein, including without limitation,
maintenance of the sidewalks, landscaping, waterscape, roof membrane, parking
areas, driveways, service areas, and the building exterior; (iii) insurance
premiums and costs, including without limitation, the premiums and cost of
fire, casualty and liability coverage and rental abatement and earthquake (if
required pursuant to Section 9.B) insurance applicable to the Building or
Project; (iv) repairs, replacements and general maintenance (excluding
repairs and general maintenance paid by proceeds of insurance or by Tenant or
other third parties, and repairs or alterations attributable solely to
tenants of the Building or Project other than Tenant); (v) all real estate
taxes and assessment installments or other impositions or charges which may
be levied on the Building or Project, upon the occupancy of the Building or
Project and including any substitute or additional charges which may be
imposed during, or applicable to the Lease Term including real estate tax
increases due to a sale, transfer or other
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change of ownership of the Building or Project, as such taxes are levied or
appear on the City and County tax bills and assessment rolls; and (vi) fees
for management services rendered by either Landlord or a third party manager
engaged by Landlord (which may be a party affiliated with Landlord), except
that the total amount charged for management services and included in the
expenses to be reimbursed by Tenant shall not exceed the monthly rate of 5%
of the Base Monthly Rent, which the parties acknowledge as a reasonable and
fair market value for such services. Landlord shall have no obligation to
provide guard services or other security measures for the benefit of the
Project. Tenant assumes all responsibility for the protection of Tenant and
Tenant's Agents from acts of third parties; provided, however, that nothing
contained herein shall prevent Landlord, at its sole option, from providing
security measures for the Project. This is a "Net" Lease, meaning that Base
Monthly Rent is paid to Landlord absolutely net of all costs and expenses.
The provision for payment of Common Area Costs by means of periodic payment
of Tenant's Allocable Share of Building and/or Project Costs is intended to
pass on to Tenant and reimburse Landlord for all costs of operating and
managing the Building and/or Project.
E. TENANT'S ALLOCABLE SHARE: For purposes of prorating Common Area
Costs which Tenant shall pay, Tenant's Allocable Share of Common Area Costs
shall be computed by multiplying the total Common Area Costs by a fraction,
the numerator of which is the Rentable Square Footage of the Building and the
denominator of which is either the total Rentable Square Footage of the
Building if the service is allocable only to the Building, or the total
square footage of the Project if the service is allocable to the entire
Project. Tenant's obligation to share in Common Area Costs shall be adjusted
to reflect the Lease Commencement and Expiration dates and is subject to
recalculation in the event of expansion of the Building or Project.
F. WAIVER OF LIABILITY: Failure by Landlord to perform any defined
services, if any, or any cessation thereof, when such failure is caused by
accident, breakage, repairs, strikes, lockout or other labor disturbances or
labor disputes of any character or by any other cause, similar or dissimilar,
shall not render Landlord liable to Tenant in any respect, including damages
to either person or property, nor be construed as an eviction of Tenant, nor
cause an
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abatement of rent, nor relieve Tenant from fulfillment of any covenant or
agreement hereof. Should any equipment or machinery utilized in supplying
the services listed herein break down or for any cause cease to function
properly, upon receipt of written notice from Tenant of any deficiency or
failure of any services, Landlord shall use reasonable diligence to repair
the same promptly, but Tenant shall have no right to terminate this Lease and
shall have no claim for rebate of rent or damages on account of any
interruptions in service occasioned thereby or resulting therefrom. Tenant
waives the provisions of California Civil Code Sections 1941 and 1942
concerning the Landlord's obligation of tenantability and Tenant's right to
make repairs and deduct the cost of such repairs from the rent. Landlord
shall not be liable for a loss of or injury to person or property, however
occurring, through or in connection with or incidental to furnishing, or its
failure to furnish, any of the foregoing.
Notwithstanding the foregoing, in the event Landlord fails to perform in its
obligation under Section 8.A above to maintain plumbing and sewage
facilities, HVAC equipment, exterior windows, door entrances, plate glass and
glazing systems, skylights, fire extinguisher equipment, the parking lot,
underground utilities, elevator equipment, the roof membrane or landscaping
related to the Premises, Tenant may, after providing Landlord thirty (30)
days' written notice, undertake such maintenance at its own cost if Landlord
has not commenced such maintenance and Landlord shall reimburse Tenant for
its expenditure. The provisions of this paragraph do not apply to items
about which Landlord and Tenant may disagree as to the scope or necessity of
work.
G. REVIEW: Landlord shall maintain at all times during the term of this
Lease, at the office of Landlord, accurate records with respect to Common
Area Costs for the previous two-year period of the Lease, and shall retain
such records and such other documents as are reasonably necessary to audit
the Common Area Costs. Upon two weeks prior notice from Tenant, Landlord
shall make available for Tenant's inspection (or inspection performed by
Tenant's accountant and/or consultants) at Landlord's office, during normal
business hours, Landlord's records relating to the Common Area Costs for the
most recent two years of the Lease. If an audit, review or inspection by a
Tenant or Tenant's accountant or consultant alleges an overbilling, Tenant
may submit a claim for the overbilled amount to Landlord, detailing the
nature of the overbilling, and Landlord shall have thirty (30) days to pay
such amount or contest the claim by giving notice thereof to Tenant,
detailing the nature of Landlord's contest of Tenant's claims. If Landlord's
statement is determined to be in error by 3% or more, Landlord shall
reimburse Tenant within thirty (30) days
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following such determination for any overpayment of Common Area Costs, as
well as the cost of Tenant's review of Landlord's books and records not to
exceed $2,500.00 (including the cost of Tenant's accountant or consultant,
neither of which cost may be included as Common Area Costs), together with
interest on such amount, calculated at the Interest Rate, from the dates such
amounts were initially paid by Tenant.
H. RECOVERY: Landlord shall not expend more than the reasonable and fair
market value for any goods, services, labor or materials purchased or
provided by Landlord in connection with the management, operation,
maintenance and repair of the Building or the Common Area.
9. HAZARD INSURANCE:
A. TENANT'S USE: Tenant shall not use or permit the Premises, or any
part thereof, to be used for any purpose other than that for which the
Premises are hereby leased; and no use of the Premises shall be made or
permitted, nor acts done, which will cause an increase in premiums or a
cancellation of any insurance policy covering the Premises or any part
thereof, nor shall Tenant sell or permit to be sold, kept, or used in or
about the Premises, any article prohibited by the standard form of fire
insurance policies. Tenant shall, at its sole cost, comply with all
requirements of any insurance company or organization necessary for the
maintenance of reasonable fire and public liability insurance covering the
Premises and appurtenances.
B. LANDLORD'S INSURANCE: Landlord agrees to purchase and keep in force
fire, extended coverage insurance in an amount equal to the replacement cost
of the Building (not including any Tenant Improvements or Alterations paid
for by Tenant from sources other than the Work Allowance) as determined by
Landlord's insurance company's appraisers. Tenant agrees to pay Landlord as
additional rent, on demand, the full cost of said insurance as evidenced by
insurance billings to Landlord, and in the event of damage covered by said
insurance, the amount of any deductible under such policy. Payment shall be
due to Landlord within thirty (30) days after written invoice to Tenant. If
required by the holder of the first deed of trust on the property, such fire
and property damage insurance may be endorsed to cover loss caused by such
additional perils against which Landlord may elect to insure,
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including earthquake and/or flood, and shall contain reasonable deductibles
which, in the case of earthquake and flood insurance may be up to 15% of the
replacement value of the property. Additionally Landlord may maintain a
policy of (i) commercial general liability insurance insuring Landlord (and
such others designated by Landlord) against liability for personal injury,
bodily injury, death and damage to property occurring or resulting from an
occurrence in, on or about the Premises or Project in an amount as Landlord
determines is reasonably necessary for its protection, and (ii) rental lost
insurance covering a twelve (12) month period. It is understood and agreed
that Tenant's obligation under this Section will be prorated to reflect the
Lease Commencement and Expiration Dates.
Notwithstanding the above, Tenant shall have no obligation to pay premiums
payable with respect to earthquake insurance covering the Premises, unless such
coverage is (i) required by the lender in whose favor a first deed of trust of
the Premises has been granted, and (ii) is also generally required by
institutional lenders on similar properties in Alameda County. In such event,
the amount of the earthquake insurance premium required to be paid by Tenant
shall be limited to an amount equal to four (4) times the premium for casualty
insurance for the Building.
C. TENANT'S INSURANCE: Tenant agrees, at its sole cost, to insure its
personal property, Tenant Improvements (for which it has paid from sources
other than the Work Allowance), and Alterations for their full replacement
value (without depreciation) and to obtain worker's compensation and public
liability and property damage insurance for occurrences within the Premises
with a combined single limit of not less than Five Million Dollars
($5,000,000.00). Tenant's liability insurance shall be primary insurance
containing a cross-liability endorsement, and shall provide coverage on an
"occurrence" rather than on a "claims made" basis. Tenant shall name
Landlord and Landlord's lender as an additional insured and shall deliver a
copy of the policies and renewal certificates to Landlord. All such policies
shall provide for thirty (30) days' prior written notice to Landlord of any
cancellation, termination, or reduction in coverage.
D. WAIVER: Landlord and Tenant hereby waive all rights each may have
against the other on account of any loss or damage sustained by Landlord or
Tenant, as the case may be, or to the Premises or its contents, which may
arise from any risk covered by their respective insurance policies (or which
would have been covered had such insurance policies been maintained in
accordance with this Lease) as set forth above. The parties shall use their
reasonable efforts to obtain from their respective insurance companies a
waiver of any right of subrogation which said insurance company
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may have against Landlord or Tenant, as the case may be.
10. TAXES: Tenant shall be liable for and shall pay as additional
rental, prior to delinquency, the following: (i) all taxes and assessments
levied against Tenant's personal property and trade or business fixtures;
(ii) all real estate taxes and assessment installments or other impositions
or charges which may be levied on the Premises or upon the occupancy of the
Premises, including any substitute or additional charges which may be imposed
applicable to the Lease Term; and (iii) real estate tax increases due to a
sale, transfer or other change of ownership of the Premises as it appears on
the City and County tax bills during the Lease Term. Tenant's obligation
under this Section shall be prorated to reflect the Lease Commencement and
Expiration Dates. If, at any time during the Lease Term a tax, excise on
rents, business license tax or any other tax, however described, is levied or
assessed against Landlord as a substitute or addition, in whole or in part,
for taxes assessed or imposed on land or Building, Tenant shall pay and
discharge its pro rata share of such tax or excise on rents or other tax
before it becomes delinquent; except that this provision is not intended to
cover net income taxes, inheritance, gift or estate tax imposed upon
Landlord. In the event that a tax is placed, levied, or assessed against
Landlord and the taxing authority takes the position that Tenant cannot pay
and discharge its pro rata share of such tax on behalf of Landlord, then at
Landlord's sole election, Landlord may increase the Base Monthly Rent by the
exact amount of such tax and Tenant shall pay such increase. If by virtue of
any application or proceeding brought by or on behalf of Landlord, there
results a reduction in the assessed value of the Premises during the Lease
Term, Tenant agrees to reimburse Landlord for all costs incurred by Landlord
in connection with such application or proceeding. Tenant at its cost shall
have the right, at any time, to seek a reduction in the assessed valuation of
the Premises or to contest any real property taxes that are to be paid by
Tenant, provided Tenant does not withhold or delay its required payment to
Landlord during such contention. Landlord shall not be required to join in
any such proceeding or contest unless the provisions of any law require that
the proceeding or contest be brought by or in the name of the owner of the
Premises. In such event, Landlord shall join in the proceeding or contest or
permit it to
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be brought in Landlord's name, provided that Landlord is not required to bear
any cost in connection therewith.
11. UTILITIES: Tenant shall pay directly to the providing utility all
water, gas, electric, telephone, and other utilities supplied to the
Premises. Landlord shall not be liable for loss of or injury to person or
property, however occurring, through or in connection with or incidental to
furnishing or failure to furnish utilities to the Premises, and Tenant shall
not be entitled to abatement or reduction of any portion of Base Monthly Rent
or any other amount payable under this Lease.
12. TOXIC WASTE AND ENVIRONMENTAL DAMAGE:
A. TENANT'S RESPONSIBILITY: Without the prior written consent of
Landlord, Tenant shall not bring, use, or permit upon the Premises, or
generate, create, release, emit, or dispose (nor permit any of the same) from
the Premises any chemicals, toxic or hazardous gaseous, liquid or solid
materials or waste, including without limitation, material or substance
having characteristics of ignitability, corrosivity, reactivity, or toxicity
or substances or materials which are listed on any of the Environmental
Protection Agency's lists of hazardous wastes or which are identified in
Division 22 Title 26 of the California Code of Regulations as the same may be
amended from time to time ("Hazardous Materials"). In order to obtain
consent, Tenant shall deliver to Landlord its written proposal describing the
toxic material to be brought onto the Premises, measures to be taken for
storage and disposal thereof, safety measures to be employed to prevent
pollution of the air, ground, surface and ground water. Landlord's approval
may be withheld in its reasonable judgment. In the event Landlord consents
to Tenant's use of Hazardous Materials on the Premises, Tenant represents and
warrants that it will do the following: (i) adhere to all reporting and
inspection requirements imposed by Federal, State, County or Municipal laws,
ordinances or regulations and will provide Landlord a copy of any such
reports or agency inspections; (ii) obtain and provide Landlord copies of all
necessary permits required for the use and handling Hazardous Materials on
the Premises; (iii) enforce Hazardous Materials handling and disposal
practices consistent with industry standards; (iv) surrender the Premises
free from any Hazardous Materials arising from Tenant's bringing, using,
permitting, generating, creating, releasing, emitting or disposing of
Hazardous Materials; and (v) properly close the facility with regard to
Hazardous Materials including the removal or decontamination of any process
piping, mechanical ducting, storage tanks, containers, or trenches which have
come into contact with Hazardous Materials and
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obtain a closure certificate from the local administering agency prior to the
Expiration Date.
B. TENANT'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Tenant shall, at
its sole cost and expense, comply with all laws pertaining to, and shall
with counsel reasonably acceptable to Landlord, indemnify, defend and hold
harmless Landlord and Landlord's shareholders, directors, officers,
employees, partners, affiliates, and agents from, any claims, liabilities,
costs or expenses incurred or suffered by Landlord arising from the bringing,
using, permitting, generating, emitting or disposing of Hazardous Materials
by Tenant through the surface soils of the Premises during the Lease Term or
the violation of any environmental law, by Tenant or Tenant's Agents.
Tenant's indemnification and hold harmless obligations include, without
limitation, the following: (i) claims, liability, costs or expenses
resulting from or based upon administrative, judicial (civil or criminal) or
other action, legal or equitable, brought by any private or public person
under common law or under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation
and Recovery Act of 1980 ("RCRA") or any other Federal, State, County or
Municipal law, ordinance or regulation; (ii) claims, liabilities, costs or
expenses pertaining to the identification, monitoring, cleanup, containment,
or removal of Hazardous Materials from soils, riverbeds or aquifers including
the provision of an alternative public drinking water source; (iii) all costs
of defending such claims; (iv) Losses attributable to diminution in the value
of the Premises or the Building; (v) Loss or restriction of use of rentable
space in the Building; (vi) Adverse effect on the marketing of any space in
the Building; and (All other liabilities, obligations, penalties, fines,
claims, actions (including remedial or enforcement actions of any kind and
administrative or judicial proceedings, orders or judgments), damages
(including consequential and punitive damages), and costs (including
attorney, consultant, and expert fees and expenses) resulting from the
release or violation. This indemnification shall survive the expiration or
termination of this Lease.
C. ACTUAL RELEASE BY TENANT:Tenant agrees to notify Landlord of any
lawsuits or orders of which it becomes aware which relate to the remedying of
or actual release of Hazardous Materials on or into the
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soils or ground water at or under the Premises. Tenant shall also provide
Landlord all notices required by Section 25359.7(b) of the Health and Safety
Code and all other notices required by law to be given to Landlord in
connection with Hazardous Materials. Without limiting the foregoing, Tenant
shall also deliver to Landlord, within twenty (20) days after receipt
thereof, any written notices received from any governmental agency alleging a
material violation of, or material failure to comply with, any federal, state
or local laws, regulations, ordinances or orders, the violation of which of
failure to comply with poses a foreseeable and material risk of contamination
of the ground water or injury to humans (other than injury solely to Tenant,
Tenant's Agents and employees within the Building).
In the event of any release on or into the Premises or into the soil or
ground water under the Premises of any Hazardous Materials used, treated,
stored or disposed of by Tenant, Tenant agrees to comply, at its sole cost,
with all laws, regulations, ordinances and orders of any federal, state or
local agency relating to the monitoring or remediation of such Hazardous
Materials. In the event of any such release of Hazardous Materials, Tenant
agrees to meet and confer with Landlord and its Lender to attempt to
eliminate and mitigate any financial exposure to such Lender and resultant
exposure to Landlord under California Code of Civil Procedure Section 736(b)
as a result of such release, and promptly to take reasonable monitoring,
cleanup and remedial steps given, inter alia, the historical uses to which
the Property has and continues to be used, the risks to public health posed
by the release, the then available technology and the costs of remediation,
cleanup and monitoring, consistent with acceptable customary practices for
the type and severity of such contamination and all applicable laws. Nothing
in the preceding sentence shall eliminate, modify or reduce the obligation of
Tenant under 12.B of this Lease to indemnify and hold Landlord harmless from
any claims liabilities, costs or expenses incurred or suffered by Landlord.
Tenant shall provide Landlord prompt written notice of Tenant's monitoring,
cleanup and remedial steps.
In the absence of an order of any federal, state or local governmental or
quasi-governmental agency relating to the cleanup, remediation or other
response action required by applicable law, any dispute arising between
Landlord and Tenant concerning Tenant's obligation to Landlord under this
Section 12.C concerning the level, method, and manner of cleanup, remediation
or response action required in connection with such a release of Hazardous
Materials shall be resolved by mediation and/or arbitration pursuant to the
provisions of Section 19.E of this Lease.
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D. ENVIRONMENTAL MONITORING: Landlord and its agents shall have the
right to inspect, investigate, sample and monitor the Premises including any
air, soil, water, ground water or other sampling or any other testing,
digging, drilling or analysis to determine whether Tenant is complying with
the terms of this Section 12. If Landlord discovers that Tenant is not in
compliance with the terms of this Section 12, any such costs incurred by
Landlord, including attorneys' and consultants' fees, shall be due and
payable by Tenant to Landlord within thirty (30) days following Landlord's
written demand therefore.
13. TENANT'S DEFAULT: The occurrence of any of the following shall
constitute a material default and breach of this Lease by Tenant: (i)
Tenant's failure to pay any rent due under this Lease within ten (10) days
after written receipt of notice from Landlord that such rent is past due,
(ii) the abandonment of the Premises by Tenant, as defined in California
Civil Code Section 1951.3; (iii) Tenant's failure to observe and perform any
other required provision of this Lease, where such failure continues for
thirty (30) days after written notice from Landlord; (iv) Tenant's making of
any general assignment for the benefit of creditors; (v) the filing by or
against Tenant of a petition to have Tenant adjudged a bankrupt or of a
petition for reorganization or arrangement under any law relating to
bankruptcy (unless, in the case of a petition filed against Tenant, the same
is dismissed after the filing); (vi) 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; (vii) 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; or (viii) any default by Tenant on other
buildings leased by Tenant within the Project.
A. REMEDIES: In the event of any such default by Tenant, then in
addition to other remedies available to Landlord at law or in equity,
Landlord shall have the immediate option to terminate this Lease and all
rights of Tenant hereunder by giving written notice of such intention to
terminate. In the event Landlord elects to so terminate this Lease, Landlord
may recover from Tenant all the following: (i) the worth at time
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of award of any unpaid rent which had been earned at the time of such
termination; (ii) the worth at time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss for the same period that Tenant
proves could have been reasonably avoided; (iii) the worth at time of award
of the amount by which the unpaid rent for the balance of the Lease Term
after the time of award exceeds the amount of such rental loss that Tenant
proves could be reasonably avoided; (iv) any other amount necessary to
compensate Landlord for all detriment proximately caused by Tenant's failure
to perform its obligations under this Lease, or which in the ordinary course
of things would be likely to result therefrom; including the following: (x)
expenses for repairing, altering or remodeling the Premises for purposes of
reletting, (y) broker's fees, advertising costs or other expenses of
reletting the Premises, and (z) costs of carrying the Premises such as taxes,
insurance premiums, utilities and security precautions. and (v) at Landlord's
election, such other amounts in addition to or in lieu of the foregoing as
may be permitted by applicable California law. The term "rent", as used
herein, is defined as the minimum monthly installments of Base Monthly Rent
and all other sums required to be paid by Tenant pursuant to this Lease, all
such other sums being deemed as additional rent due hereunder. As used in
(i) and (ii) above, "worth at the time of award" shall be computed by
allowing interest at a rate equal to the discount rate of the Federal Reserve
Bank of San Francisco plus five (5%) percent per annum. As used in (iii)
above, "worth at the time of award" shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at
the time of award plus one (1%) percent.
B. RIGHT TO RE-ENTER: In the event of any such default by Tenant,
Landlord shall have the right, after terminating this Lease, to re-enter the
Premises and remove all persons and property. Such property may be removed
and stored in a public warehouse or elsewhere at the cost of and for the
account of Tenant, and disposed of by Landlord in any manner permitted by law.
C. ABANDONMENT: If Landlord does not elect to terminate this Lease as
provided in Section 13.A or 13.B above, then the provisions of California
Civil Code Section 1951.4, (Landlord may continue the lease in effect after
Tenant's breach and abandonment and recover rent as it becomes due if Tenant
has a right to sublet and assign, subject only to reasonable limitations) as
amended from time to time, shall apply and Landlord may from time to time,
without terminating this Lease, either recover all rental as it becomes due
or relet the Premises or any part thereof for such term or terms and at such
rental or rentals and upon such other terms and conditions as Landlord in its
sole
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discretion may deem advisable, with the right to make alterations and repairs
to the Premises. In the event that Landlord elects to so relet, rentals
received by Landlord from such reletting shall be applied in the following
order to: (i) the payment of any indebtedness other than Base Monthly Rent
due hereunder from Tenant to Landlord; (ii) the payment of any cost of such
reletting; (iii) the payment of the cost of any alterations and repairs to
the Premises; and (iv) the payment of Base Monthly Rent due and unpaid
hereunder. The residual rentals, if any, shall be held by Landlord and
applied in payment of future Base Monthly Rent as the same may become due and
payable hereunder. Landlord shall have no obligation to relet the Premises
following a default if Landlord has other available space within the Building
or Project. In the event the portion of rentals received from such reletting
which is applied to the payment of rent hereunder during any month be less
than the rent payable during that month by Tenant hereunder, then Tenant
shall pay such deficiency to Landlord immediately upon demand. Such
deficiency shall be calculated and paid monthly. Tenant shall also pay to
Landlord, as soon as ascertained, any costs and expenses incurred by Landlord
in such reletting or in making such alterations and repairs not covered by
the rentals received from such reletting.
D. NO TERMINATION: Landlord's re-entry or taking possession of the
Premises pursuant to 13.B or 13.C shall not be construed as an election to
terminate this Lease unless written notice of such intention is given to
Tenant or unless the termination is decreed by a court of competent
jurisdiction. Notwithstanding any reletting without termination by Landlord
because of any default by Tenant, Landlord may at any time after such
reletting elect to terminate this Lease for any such default.
E. NON-WAIVER: Landlord may accept Tenant's payments without waiving any
rights under this Lease, including rights under a previously served notice of
default. No payment by Tenant or receipt by Landlord of a lesser amount than
any installment of rent due shall be deemed as other than payment on account
of the amount due. If Landlord accepts partial payments after serving a
notice of default, Landlord may nevertheless commence and pursue an action to
enforce rights and remedies under the previously served notice of default
without giving Tenant any further notice or demand.
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Furthermore, the Landlord's acceptance of Rent from the Tenant when the
Tenant is holding over without express written consent does not convert
Tenants Tenancy from a tenancy at sufferance to a month to month tenancy. No
waiver of any provision of this Lease shall be implied by any failure of
Landlord to enforce any remedy for the violation of that provision, even if
that violation continues or is repeated. Any waiver by Landlord of any
provision of this Lease must be in writing. Such waiver shall affect only
the provision specified and only for the time and in the manner stated in the
writing. No delay or omission in the exercise of any right or remedy by
Landlord shall impair such right or remedy or be construed as a waiver
thereof by Landlord. No act or conduct of Landlord, including, without
limitation, the acceptance of keys to the Premises, shall constitute
acceptance of the surrender of the Premises by Tenant before the Expiration
Date. Only written notice from Landlord to Tenant of acceptance shall
constitute such acceptance of surrender of the Premises. Landlord's consent
to or approval of any act by Tenant which requires Landlord's consent or
approvals shall not be deemed to waive or render unnecessary Landlord's
consent to or approval of any subsequent act by Tenant.
F. PERFORMANCE BY LANDLORD: If Tenant fails to perform any obligation
required under this Lease or by law or governmental regulation, Landlord in
its sole discretion may, without notice, without waiving any rights or
remedies and without releasing Tenant from its obligations hereunder, perform
such obligation, in which event Tenant shall pay Landlord as additional rent
all sums paid by Landlord in connection with such substitute performance,
including interest at the Agreed Interest Rate within ten (10) days of
Landlord's written notice for such payment.
14. LANDLORD'S LIABILITY:
A. LIMITATION ON LANDLORD'S LIABILITY: In the event of Landlord's
failure to perform any of its covenants or agreements under this Lease,
Tenant shall give Landlord written notice of such failure and shall give
Landlord thirty (30) days to cure or commence to cure such failure prior to
any claim for breach or resultant damages, provided, however, that if the
nature of the default is such that it cannot reasonably be cured within the
30-day period, Landlord shall not be deemed in default if it commences within
such period to cure, and thereafter diligently prosecutes the same to
completion. In addition, upon any such failure by Landlord, Tenant shall
give notice by registered or certified mail to any person or entity with a
security interest in the Premises ("Mortgagee") that has provided Tenant with
notice of its interest in the Premises, and shall provide Mortgagee a
reasonable opportunity to cure such failure, including such time to obtain
possession of the Premises by power of sale
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or judicial foreclosure, if such should prove necessary to effectuate a cure.
Tenant agrees that each of the Mortgagees to whom this Lease has been
assigned is an expressed third-party beneficiary hereof. Tenant waives any
right under California Civil Code Section 1950.7 or any other present or
future law to the collection of any payment or deposit from Mortgagee or any
purchaser at a foreclosure sale of Mortgagee's interest unless Mortgagee or
such purchaser shall have actually received and not refunded the applicable
payment or deposit. Tenant Further waives any right to terminate this Lease
and to vacate the Premises on Landlord's default under this Lease. Tenant's
sole remedy on Landlord's default is an action for damages or injunctive or
declaratory relief, with the sole exception that if Landlord fails to perform
in its obligation under Section 8.A to maintain plumbing and sewage
facilities, HVAC equipment, exterior windows, door entrances, plate glass and
glazing systems, skylights, fire extinguisher equipment, the parking lot,
underground utilities, elevator equipment, the roof membrane or landscaping
related to the Premises, Tenant may, after providing Landlord thirty (30)
days' written notice, undertake such maintainence at its own cost if Landlord
has not commenced such maintenance. This exception does not apply to items
about which Landlord and Tenant may disagree as to the scope or necessity of
work.
B. LIMITATION ON TENANT'S RECOURSE: If Landlord is a corporation trust,
partnership, joint venture, unincorporated association or other form of
business entity: (i) the obligations of Landlord shall not constitute
personal obligations of the officers, directors, trustees, partners, joint
venturers, members, owners, stockholders, or other principals or
representatives except to the extent of their interest in the Premises.
Tenant shall have recourse only to the interest of Landlord in the Premises
or for the satisfaction of the obligations of Landlord and shall not have
recourse to any other assets of Landlord for the satisfaction of such
obligations.
C. INDEMNIFICATION OF LANDLORD: As a material part of the consideration
rendered to Landlord, Tenant hereby waives all claims against Landlord for
damages to goods, wares and merchandise, and all other personal property in,
upon or about said Premises and for injuries to persons in or about said
Premises, from any cause arising at any time to the fullest extent
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permitted by law, and Tenant shall indemnify and hold Landlord exempt and
harmless from any damage or injury to any person, or to the goods, wares and
merchandise and all other personal property of any person, arising from the
use of the Premises, Building, and/or Project by Tenant and Tenant's Agents
or from the failure of Tenant to keep the Premises in good condition and
repair as herein provided, except to the extent due to the active negligence
or willful misconduct of Landlord. Further, in the event Landlord is made
party to any litigation due to the acts or omission of Tenant and Tenant's
Agents. Tenant will indemnify, defend (with counsel reasonably acceptable to
Landlord) and hold Landlord harmless from any such claim or liability
including Landlord's costs and expenses and reasonable attorney's fees
incurred in defending such claims.
15. DESTRUCTION OF PREMISES:
A. DESTRUCTION BY AN INSURED CASUALTY: In the event of a destruction of
the Premises during the Lease Term by a casualty for which Landlord has
received insurance proceeds sufficient to repair the damage or destruction,
Landlord shall repair the same to the extent of such proceeds. Such
destruction shall not annul or void this Lease; however, Tenant shall be
entitled to a proportionate reduction of Base Monthly Rent while repairs are
being made, such proportionate reduction to be based upon the extent to which
the repairs interfere with Tenant's business in the Premises, as reasonably
determined by Landlord. If the repairs cannot be made in 180 days from the
date of receipt of all governmental approvals necessary under the laws and
regulations of State, Federal, County or Municipal authorities, as reasonably
determined by Landlord, then Landlord or Tenant may terminate this Lease
within fifteen (15) days of Landlord's determination of the foregoing.
Notwithstanding the foregoing, either Landlord or Tenant shall have the
option to terminate the Lease in the event of a total destruction of the
Premises or in the event of a partial destruction occurs in the last year of
the Lease Term and will take more than sixty (60) days to repair. In no
event shall Landlord be required to replace or restore Alterations, Tenant
Improvements paid for by Tenant from sources other than the Work Allowance,
Tenant's fixtures or personal property. With respect to a destruction which
Landlord is obligated to repair or may elect to repair under the terms of
this Section, Tenant waives the provisions of Section 1932, and Section 1933,
Subdivision 4, of the Civil Code of the State of California, and any other
similarly enacted statute, and the provisions of this Section 15 shall govern
in the case of such destruction.
B. DESTRUCTION BY AN UNINSURED CASUALTY: In the event of a total or
partial destruction of the Premises during the Lease Term by a casualty for
which
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Landlord has not received insurance proceeds sufficient to repair the damage
or destruction, Landlord may elect to either (i) terminate this Lease by
giving written notice to Tenant within fifteen (15) days after determining
the replacement cost and furnishing reasonable evidence thereof to Tenant; or
(ii) rebuild the Premises, provided the damage can be repaired within one
hundred eighty (180) days from the date of receipt of all governmental
approvals necessary under the laws and regulations of State, Federal, County
or Municipal authorities, as reasonably determined by Landlord.
Notwithstanding the foregoing, if the cost to repair the damage from an
uninsured casualty is less than 5% of the then replacement cost of the
Building (excluding Tenant Improvements), then Landlord shall repair the
damage. If Landlord contributes to payment for an uninsured loss, the
contributed amount shall be amortized over the useful life of the
improvements and such amortized amount shall be reimbursed by Tenant to
Landlord as additional rent, together with interest at the prime rate of
Union Bank plus two percent (2%). If Landlord so elects to terminate this
Lease, Tenant, within fifteen (15) days after receiving Landlord's notice to
terminate, can elect to pay to Landlord at the time Tenant notifies Landlord
of its election, the actual cost of restoration, in which case Landlord shall
restore the Premises and this Lease shall not terminate.
C. TENANT'S RIGHT TO CANCEL ADJACENT LEASES: In the event the Lease is
terminated pursuant to Section 15.A or 15.B above, Tenant shall have the
right to simultaneously terminate its leases for the other buildings within
the first phase of the Project leased by Tenant.
16. CONDEMNATION: If any part of the Premises shall be taken for any
public or quasi-public use, under any statute or by right of eminent domain
or private purchase in lieu thereof, and only a part thereof remains which is
susceptible of occupation hereunder, this Lease shall, as to the part so
taken, terminate as of the day before title vests in the condemnor or
purchaser ("Vesting Date") and Base Monthly Rent payable hereunder shall be
adjusted so that Tenant is required to pay for the remainder of the Lease
Term only such portion of Base Monthly Rent as the value of the part
remaining after such taking bears to the value of the entire Premises prior
to such taking; but in such event, Landlord shall have the
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option to terminate this Lease as of the Vesting Date. If all of the
Premises or such part thereof be taken so that there does not remain a
portion susceptible for occupation hereunder, this Lease shall terminate on
the Vesting Date. If part or all of the Premises be taken, all compensation
awarded upon such taking shall go to Landlord, and Tenant shall have no claim
thereto; but Landlord shall cooperate with Tenant, without cost to Landlord,
to recover compensation for damage to or taking of any Alterations, Tenant
Improvements paid for by Tenant from sources other than the Work Allowance,
or for Tenant's moving costs. Tenant hereby waives the provisions of
California Code of Civil Procedures Section 1265.130 and any other similarly
enacted statue, and the provisions of this Section 16 shall govern in the
case of such taking.
17. ASSIGNMENT OR SUBLEASE:
A. CONSENT BY LANDLORD: Except as specifically provided in this Section
17, Tenant may not assign, sublet, hypothecate, or allow a third party to use
the Premises without the express written consent of Landlord, which consent
shall not be unreasonably withheld as defined below. In the event Tenant
desires to assign this Lease or any interest herein including, without
limitation, a pledge, mortgage or other hypothecation, or sublet the Premises
or any part thereof, Tenant shall deliver to Landlord (i) executed
counterparts of any agreement and of all ancillary agreements with the
proposed assignee/subtenant, (ii) current financial statements of the
transferee covering the preceding three years, (iii) the nature of the
proposed transferee's business to be carried on in the Premises, (v) all
consideration to be given on account of the Transfer, and (vi) a current
financial statement of Tenant. Landlord may condition its approval of any
Transfer to a certification from both Tenant and the proposed transferee of
all consideration to be paid to Tenant in connection with such Transfer. At
Landlord's request, Tenant shall also provide additional information
reasonably required by Landlord to determine whether it will consent to the
proposed assignment or sublease. Landlord shall have a ten (10) day period
following receipt of all the foregoing within which to notify Tenant in
writing that Landlord elects to: (i) permit Tenant to assign or sublet such
space to the named assignee/subtenant on the terms and conditions set forth
in the notice; or (ii) refuse consent. If Landlord should fail to notify
Tenant in writing of such election within the 10-day period, Landlord shall
be deemed to have elected option (ii) above. Landlord's written consent to
the proposed assignment or sublease shall not be unreasonably withheld,
provided and upon the condition that: (i) the proposed assignee or subtenant
is engaged in a business that is limited to the use expressly permitted under
this Lease; (ii) the proposed assignee is a company with sufficient financial
worth and management ability
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to undertake the financial obligation of this Lease and Landlord has been
furnished with reasonable proof thereof; (iii) the proposed assignment or
sublease is in form reasonably satisfactory to Landlord; and (iv) Tenant
reimburses Landlord on demand for any costs that may be incurred by Landlord
in connection with said assignment or sublease, including the costs of making
investigations as to the acceptability of the proposed assignee or subtenant
and legal costs incurred in connection with the granting of any requested
consent, not to exceed $2,500.00; and (vi) Tenant shall not have advertised
or publicized the availability of the Premises without prior notice to
Landlord. In the event all or any one of the foregoing conditions are not
satisfied, Landlord shall be considered to have acted reasonably if it
withholds its consent.
B. ASSIGNMENT OR SUBLETTING CONSIDERATION: Any rent or other economic
consideration realized by Tenant under any sublease and assignment, in excess
of the rent payable hereunder and reasonable subletting and assignment costs,
shall be divided and paid fifty percent (50%) to Landlord and fifty percent
(50%) to Tenant, after first deducting all direct costs incurred by Tenant in
connection with such transaction. Tenant's obligation to pay over Landlord's
portion of the consideration constitutes an obligation for additional rent
hereunder. The above provisions relating to Landlord's right to terminate
the Lease and relating to the allocation of bonus rent are independently
negotiated terms of the Lease which constitute a material inducement for the
Landlord to enter into the Lease, and are agreed by the parties to be
commercially reasonable. No assignment or subletting by Tenant shall relieve
it of any obligation under this Lease. Any assignment or subletting which
conflicts with the provisions hereof shall be void.
C. NO RELEASE: Any assignment or sublease, including assignments or
deemed assignments pursuant to Section 17.D below, shall be made only if and
shall not be effective until the assignee or subtenant shall execute,
acknowledge, and deliver to Landlord an agreement, in form and substance
satisfactory to Landlord, whereby the assignee or subtenant shall assume all
the obligations of this Lease on the part of Tenant to be performed or
observed and shall be subject to all the covenants, agreements, terms,
provisions and conditions in this Lease. Notwithstanding any such sublease
or assignment and the acceptance of rent by
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Landlord from any subtenant or assignee, Tenant and any guarantor shall
remain fully liable for the payment of Base Monthly Rent and additional rent
due, and to become due hereunder, for the performance of all the covenants,
agreements, terms, provisions and conditions contained in this Lease on the
part of Tenant to be performed and for all acts and omissions of any
licensee, subtenant, assignee or any other person claiming under or through
any subtenant or assignee that shall be in violation of any of the terms and
conditions of this Lease, and any such violation shall be deemed a violation
by Tenant. Tenant shall indemnify, defend and hold Landlord harmless from
and against all losses, liabilities, damages, costs and expenses (including
reasonable attorney fees) resulting from any claims that may be made against
Landlord by the proposed assignee or subtenant or by any real estate brokers
or other persons claiming compensation in connection with the proposed
assignment or sublease.
D. REORGANIZATION OF TENANT: If Tenant is a corporation, the following
shall be deemed a voluntary assignment of Tenant's interest in this Lease:
(i) any dissolution, merger, consolidation, or other reorganization of or
affecting Tenant, whether or not Tenant is the surviving corporation, and
(ii) if the capital stock of Tenant is not publicly traded, the sale or
transfer to one person or entity (or to any group of related persons or
entities) stock possessing more than 50% of the total combined voting power
of all classes of Tenant's capital stock issued, outstanding and entitled to
vote for the election of directors.
E. PERMITTED TRANSFERS: Notwithstanding anything contained in this
Section 17, so long as Tenant otherwise complies with the provisions of this
Article, Tenant may enter into any of the following transfers (a "Permitted
Transfer") without Landlord's prior consent, and Landlord shall not be
entitled to receive any part of any subrent resulting therefrom that would
otherwise be due. Tenant may sublease all or part of the Premises or assign
its interest in this Lease to (i) any corporation which controls, is
controlled by, or is under common control with the original Tenant to this
Lease by means of an ownership interest of more than 50%; (ii) a corporation
which results from a merger, consolidation or other reorganization in which
Tenant is not the surviving corporation, so long as such transaction is not
entered into as a subterfuge by Tenant to be relieved of or otherwise
diminish its obligations under this Lease; and (iii) a corporation which
purchases or otherwise acquires all or substantially all of the assets of
Tenant so long as such acquisition is not entered into as a subterfuge by
Tenant to be relieved of or otherwise diminish its obligations under this
Lease.
F. EFFECT OF DEFAULT: In the event of Tenant's default, Tenant hereby
assigns all rents due from any
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assignment or subletting to Landlord as security for performance of its
obligations under this Lease, and Landlord may collect such rents as Tenant's
Attorney-in-Fact, except that Tenant may collect such rents unless a default
occurs as described in Section 13 above. A Lease termination due to Tenant's
default shall not automatically terminate an assignment or sublease then in
existence; rather at Landlord's election, such assignment or sublease shall
survive the Lease termination, the assignee or subtenant shall attorn to
Landlord, and Landlord shall undertake the obligations of Tenant under the
sublease or assignment; except that Landlord shall not be liable for prepaid
rent, security deposits or other defaults of Tenant to the subtenant or
assignee, or for any acts or omissions of Tenant and Tenant's Agents.
G. CONVEYANCE BY LANDLORD: As used in this Lease, the term "Landlord"
is defined only as the owner for the time being of the Premises, so that in
the event of any sale or other conveyance of the Premises or in the event of
a master lease of the Premises, Landlord shall be entirely freed and relieved
of all its covenants and obligations hereunder, and it shall be deemed and
construed, without further agreement between the parties and the purchaser at
any such sale or the master tenant of the Premises, that the purchaser or
master tenant of the Premises has assumed and agreed to carry out any and all
covenants and obligations of Landlord hereunder. Such transferor shall
transfer and deliver Tenant's security deposit to the purchaser at any such
sale or the master tenant of the Premises, and thereupon the transferor shall
be discharged from any further liability in reference thereto.
F. SUCCESSORS AND ASSIGNS: Subject to the provisions this Section 17,
the covenants and conditions of this Lease shall apply to and bind the heirs,
successors, executors, administrators and assigns of all parties hereto; and
all parties hereto shall be jointly and severally liable hereunder.
18. OPTION TO EXTEND THE LEASE TERM:
A. GRANT AND EXERCISE OF OPTION: Provided Tenant concurrently exercises
its options to extend the lease terms on all other buildings leased by Tenant
within the first phase portion of the Project, Landlord grants to Tenant,
subject to the terms and conditions
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set forth in this Section 18.A, two (2) options (the "Options") to extend the
Lease Term for an additional term (the "Option Term"). Each Option Term
shall be for a period of sixty (60) months and shall be exercised, if at all,
by written notice to Landlord no earlier than eighteen (18) months prior to
the Expiration Date but no later than twelve (12) months prior to the
Expiration Date. If Tenant exercises the Option, all of the terms, covenants
and conditions of this Lease except this Section shall apply during the
Option Term as though the expiration date of the Option Term was the date
originally set forth herein as the Expiration Date, provided that Base
Monthly Rent for the Premises payable by Tenant during the Option Term shall
be the greater of either the average of Base Monthly Rent paid during the
previous term, or the then Fair Market Rental as hereinafter defined.
Notwithstanding anything herein to the contrary, if Tenant is in monetary or
material non-monetary default under any of the terms, covenants or conditions
of this Lease either at the time Tenant exercises the Option or at any time
thereafter prior to the commencement date of the Option Term, Landlord shall
have, in addition to all of Landlord's other rights and remedies provided in
this Lease, the right to terminate the Option upon notice to Tenant, in which
event the expiration date of this Lease shall be and remain the Expiration
Date. As used herein, the term "Fair Market Rental" is defined as the rental
and all other monetary payments, including any escalations and adjustments
thereto (including without limitation Consumer Price Indexing) that Landlord
could obtain during the Option Term from a third party desiring to lease the
Premises, based upon the current use and other potential uses of the
Premises, as determined by the rents then being obtained for new leases of
space comparable in age and quality to the Premises in the locality of the
Building.
B. DETERMINATION OF FAIR MARKET RENTAL: If Tenant exercises the Option,
Landlord shall send Tenant a notice setting forth the Fair Market Rental for
the Option Term within thirty (30) days following the Exercise Date. If
Tenant disputes Landlord's determination of Fair Market Rental for the Option
Term, Tenant shall, within thirty (30) days after the date of Landlord's
notice setting forth Fair Market Rental for the Option Term, send to Landlord
a notice stating that Tenant either elects to terminate its exercise of the
Option, in which event the Option shall lapse and this Lease shall terminate
on the Expiration Date, or that Tenant disagrees with Landlord's
determination of Fair Market Rental for the Option Term and elects to resolve
the disagreement as provided in Section 18.C below. If Tenant does not send
Landlord a notice as provided in the previous sentence, Landlord's
determination of Fair Market Rental shall be the basis for determining the
Base Monthly Rent payable by Tenant during the Option Term. If Tenant elects
to resolve
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the disagreement as provided in Section 18.C and such procedures are not
concluded prior to the commencement date of the Option Term, Tenant shall pay
to Landlord as Base Monthly Rent the Fair Market Rental as determined by
Landlord in the manner provided above. If the Fair Market Rental as finally
determined pursuant to Section 18.C is greater than Landlord's determination,
Tenant shall pay Landlord the difference between the amount paid by Tenant
and the Fair Market Rental as so determined in Section 18.C within thirty
(30) days after such determination. If the Fair Market Rental as finally
determined in Section 18.C is less than Landlord's determination, the
difference between the amount paid by Tenant and the Fair Market Rental as so
determined in Section 18.C shall be credited against the next installments of
rent due from Tenant to Landlord hereunder.
C. RESOLUTION OF A DISAGREEMENT OVER THE FAIR MARKET RENTAL: Any
disagreement regarding Fair Market Rental shall be resolved as follows:
1. Within thirty (30) days after Tenant's response to Landlord's notice
setting forth the Fair Market Rental, Landlord and Tenant shall meet at least
two (2) times at a mutually agreeable time and place, in an attempt to
resolve the disagreement.
2. If within the 30-day period referred to above, Landlord and Tenant
cannot reach agreement as to Fair Market Rental, each party shall select one
appraiser to determine Fair Market Rental. Each such appraiser shall arrive
at a determination of Fair Market Rental and submit their conclusions to
Landlord and Tenant within thirty (30) days after the expiration of the
30-day consultation period described above.
3. If only one appraisal is submitted within the requisite time period, it
shall be deemed as Fair Market Rental. If both appraisals are submitted
within such time period and the two appraisals so submitted differ by less
than ten percent (10%), the average of the two shall be deemed as Fair Market
Rental. If the two appraisals differ by more than 10%, the appraisers shall
immediately select a third appraiser who shall, within thirty (30) days after
his selection, make and submit to Landlord and Tenant a determination of Fair
Market Rental. This third appraisal will then be averaged with the closer of
the two previous appraisals and the result shall be Fair Market Rental.
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4. All appraisers specified pursuant to this Section shall be members of
the American Institute of Real Estate Appraisers with not less than ten (10)
years experience appraising office and industrial properties in the Santa
Clara Valley. Each party shall pay the cost of the appraiser selected by
such party and one-half of the cost of the third appraiser.
D. PERSONAL TO TENANT: All Options provided to Tenant in this Lease are
personal and granted to Network Equipment Technologies and any entity
resulting from a permitted transfer as set forth in Section 17.E above and
are not exercisable by any third party should Tenant assign or sublet all or
a portion of its rights under this Lease, unless Landlord consents to permit
exercise of any option by any assignee or subtenant, in Landlord's sole and
absolute discretion. In the event Tenant has multiple options to extend this
Lease, a later option to extend the Lease cannot be exercised unless the
prior option has been so exercised.
19. OPTION TO LEASE : Landlord has granted Tenant an option to lease
addition buildings on the terms set forth in EXHIBIT "E".
20. GENERAL PROVISIONS:
A. ATTORNEY'S FEES: In the event a suit or alternative form of dispute
resolution is brought for the possession of the Premises, for the recovery of
any sum due hereunder, to interpret the Lease, or because of the breach of
any other covenant herein; then the losing party shall pay to the prevailing
party reasonable attorney's fees including the expense of expert witnesses,
depositions and court testimony as part of its costs which shall be deemed to
have accrued on the commencement of such action. The prevailing party shall
also be entitled to recover all costs and expenses including reasonable
attorney's fees incurred in enforcing any judgment or award against the other
party. The foregoing provision relating to post-judgment costs is severable
from all other provisions of this Lease.
B. AUTHORITY OF PARTIES: Each party represents and warrants to the other
party that it is duly formed and in good standing, and is duly authorized to
execute and deliver this Lease on behalf of it, and that this Lease is
binding upon the signing party in accordance with its terms. At either
party's request, the other party shall provide the requesting party with
proof in a form acceptable to the requesting party, authorizing the execution
of the Lease.
C. BROKERS: Tenant represents it has not utilized or contacted a real
estate broker or finder with respect to this Lease other than Julien J.
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Studley, Inc. and Tenant agrees to indemnify, defend and hold Landlord harmless
against any claim, cost, liability or cause of action asserted by any other
broker or finder claiming through Tenant.
D. CHOICE OF LAW: This Lease shall be governed by and construed in
accordance with California law. Venue shall be Alameda County.
E. DISPUTE RESOLUTION: Landlord and Tenant and any other party that
may become a party to this Lease or be deemed a party to this Lease including
any subtenants agree to and shall mediate any controversy, dispute, or claim
of whatever nature arising out of, in connection with, or in relation to the
interpretation, performance or breach of this Lease, including any claim
based on contract, tort, or statute,, except for any claim by Landlord for
unlawful detainer, or any action within the jurisdiction of the small claims
court. The mediation shall be held prior to any court action or arbitration.
The mediation shall be confidential and in accordance with California
Evidence Code Section1152.5. In the event the parties are not able to agree
on a mediator within thirty days JAMS or another judicial and mediation
service mutually acceptable to the parties shall appoint a mediator. In the
event the mediator determines that a second mediation session is necessary,
it shall be conducted in accordance with this paragraph. Should the
prevailing party attempt an arbitration or a court action before attempting
to mediate, THE PREVAILING PARTY SHALL NOT BE ENTITLED TO ATTORNEYS FEES THAT
MIGHT OTHERWISE BE AVAILABLE TO THEM IN A COURT ACTION OR ARBITRATION, AND IN
ADDITION THERETO, THE PARTY WHO IS DETERMINED BY THE ARBITRATOR TO HAVE
RESISTED MEDIATION SHALL BE SANCTIONED BY THE ARBITRATOR OR JUDGE. Except
for any claim by Landlord for unlawful detainer or any claim within the
Jurisdiction of the small claims court (which for such claims the parties
agree shall be the sole court of competent jurisdiction), any controversy,
dispute, or claim of whatever nature arising out of, in connection with, or
in relation to the interpretation, performance or breach of this Lease,
including any claim based on contract, tort, or statute, shall be resolved at
the request of any party to this agreement through a two-step dispute
resolution process administered by JAMS or another judicial and mediation
service mutually acceptable to the parties involving first mediation,
followed, if necessary, by final and binding arbitration administered by and
in accordance with the
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then-existing rules and practice of the judicial and mediation service
selected, and judgment upon any award rendered by the arbitrator(s) may be
entered by any State or Federal Court having jurisdiction thereof. The
parties to the arbitration shall have those rights of discovery that the
arbitrator(s) deem necessary (after application to the arbitrator(s)) to a
full and fair hearing of the matter. However, in no event shall the parties
be entitled to propound interrogatories or requests for admissions during the
arbitration process. The arbitrator shall be a retired judge or a licensed
California Attorney. The venue for any such arbitration's or mediations
shall be in Santa Clara County.
F. ENTIRE AGREEMENT: This Lease contains all of the agreements and
conditions made between the parties hereto and may not be modified orally or
in any other manner other than by written agreement signed by all parties
hereto or their respective successors in interest. This Lease supersedes and
revokes all previous negotiations, letters of intent, lease proposals,
brochures, agreements, representations, promises, warranties, and
understandings, whether oral or in writing, between the parties or their
respective representatives or any other person purporting to represent
Landlord or Tenant.
G. ENTRY BY LANDLORD: Upon prior notice to Tenant and subject to
Tenant's reasonable security regulations, Tenant shall permit Landlord and
his agents to enter into and upon the Premises at all reasonable times, and
without any rent abatement or reduction or any liability to Tenant for any
loss of occupation or quiet enjoyment of the Premises thereby occasioned, for
the following purposes: (i) inspecting and maintaining the Premises; (ii)
making repairs, alterations or additions to the Premises; (iii) erecting
additional building(s) and improvements on the land where the Premises are
situated or on adjacent land owned by Landlord; and (iv) performing any
obligations of Landlord under the Lease including remediation of hazardous
materials if determined to be the responsibility of Landlord. Tenant shall
permit Landlord and his agents, at any time within one hundred eighty (180)
days prior to the Expiration Date (or at any time during the Lease if Tenant
is in default hereunder), to place upon the Premises "For Lease" signs and
exhibit the Premises to real estate brokers and prospective tenants at
reasonable hours.
H. ESTOPPEL CERTIFICATES: At any time during the Lease Term, Landlord
or Tenant shall, within ten (10) days following written notice from the other
party, execute and deliver to the requesting party a written statement
certifying, if true, the following: (i) that this Lease is unmodified and in
full force and effect (or, if modified, stating the nature of such
modification); (ii) the date to which rent and other
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charges are paid in advance, if any; (iii) acknowledging that there are not,
to such party's knowledge, any uncured defaults on either party's part
hereunder (or specifying such defaults if they are claimed); and (iv) such
other information as either party may reasonably request. Any such statement
may be conclusively relied upon by any prospective purchaser or encumbrancer
of Landlord's interest in the Premises. Landlord or Tenant's failure to
deliver such statement within such time shall be conclusive upon such party
that this Lease is in full force and effect without modification, except as
may be represented by such party, and that there are no uncured defaults in
such party's performance. Tenant agrees to provide, within fifteen (15) days
of Landlord's request, Tenant's most recent three (3) years of audited
financial statements for Landlord's use in financing the Premises or
Landlord's interest therein.
I. EXHIBITS: All exhibits referred to are attached to this Lease and
incorporated by reference.
J. INTEREST: All rent due hereunder, if not paid when due, shall bear
interest at the rate of the Reference Rate published by Bank of America, San
Francisco Branch, plus two percent (2%) per annum from that date until paid
in full ("Agreed Interest Rate"). This provision shall survive the
expiration or sooner termination of the Lease. Despite any other provision
of this Lease, the total liability for interest payments shall not exceed the
limits, if any, imposed by the usury laws of the State of California. Any
interest paid in excess of those limits shall be refunded to Tenant by
application of the amount of excess interest paid against any sums
outstanding in any order that Landlord requires. If the amount of excess
interest paid exceeds the sums outstanding, the portion exceeding those sums
shall be refunded in cash to Tenant by Landlord. To ascertain whether any
interest payable exceeds the limits imposed, any non-principal
payment(including late charges) shall be considered to the extent permitted
by law to be an expense or a fee, premium, or penalty rather than interest.
K. MODIFICATIONS REQUIRED BY LENDER: If any Lender of Landlord
requires a modification of this Lease that will not increase Tenant's cost or
expense or materially or adversely change Tenant's rights and obligations,
this Lease shall be so modified and Tenant
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shall execute whatever reasonable documents are required and deliver them to
Landlord within ten (10) days after the request.
L. NO PRESUMPTION AGAINST DRAFTER: Landlord and Tenant understand,
agree and acknowledge that this Lease has been freely negotiated by both
parties; and that in any controversy, dispute, or contest over the meaning,
interpretation, validity, or enforceability of this Lease or any of its terms
or conditions, there shall be no inference, presumption, or conclusion drawn
whatsoever against either party by virtue of that party having drafted this
Lease or any portion thereof.
M. NOTICES: All notices, demands, requests, or consents required to be
given under this Lease shall be sent in writing by U.S. certified mail,
return receipt requested, or by personal delivery addressed to the party to
be notified at the address for such party specified in Section 1 of this
Lease, or to such other place as the party to be notified may from time to
time designate by at least fifteen (15) days prior notice to the notifying
party. When this Lease requires service of a notice, that notice shall
replace rather than supplement any equivalent or similar statutory notice,
including any notices required by Code of Civil Procedure Section 1161 or any
similar or successor statute. when a statute requires service of a notice in
a particular manner, service of that notice (or a similar notice required by
this lease) shall replace and satisfy the statutory service-of-notice
procedures, including those required by Code of Civil Procedure Section 1162
or any similar or successor statute.
N. RENT: All monetary sums due from Tenant to Landlord under this
Lease, including, without limitation those referred to as "additional rent",
shall be deemed as rent.
O. REPRESENTATIONS: Tenant acknowledges that neither Landlord nor any
of its employees or agents have made any agreements, representations,
warranties or promises with respect to the Premises or with respect to
present or future rents, expenses, operations, tenancies or any other matter.
Except as herein expressly set forth herein, Tenant relied on no statement
of Landlord or its employees or agents for that purpose.
P. RIGHTS AND REMEDIES: All rights and remedies hereunder are
cumulative and not alternative to the extent permitted by law, and are in
addition to all other rights and remedies in law and in equity.
Q. SEVERABILITY: If any term or provision of this Lease is held
unenforceable or invalid by a court of competent jurisdiction, the remainder
of the Lease shall not be invalidated thereby but shall be
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enforceable in accordance with its terms, omitting the invalid or
unenforceable term.
R. SUBORDINATION: This Lease is subject and subordinate to ground and
underlying leases, mortgages and deeds of trust (collectively "Encumbrances")
which may now affect the Premises, to any covenants, conditions or
restrictions of record, and to all renewals, modifications, consolidations,
replacements and extensions thereof; provided, however, if the holder or
holders of any such Encumbrance ("Holder") require that this Lease be prior
and superior thereto, within seven (7) days after written request of Landlord
to Tenant, Tenant shall execute, have acknowledged and deliver all documents
or instruments, in the form presented to Tenant, which Landlord or Holder
deems necessary or desirable for such purposes. Landlord shall have the
right to cause this Lease to be and become and remain subject and subordinate
to any and all Encumbrances which are now or may hereafter be executed
covering the Premises or any renewals, modifications, consolidations,
replacements or extensions thereof, for the full amount of all advances made
or to be made thereunder and without regard to the time or character of such
advances, together with interest thereon and subject to all the terms and
provisions thereof; provided only, that in the event of termination of any
such lease or upon the foreclosure of any such mortgage or deed of trust,
Holder agrees to recognize Tenant's rights under this Lease as long as Tenant
is not then in default and continues to pay Base Monthly Rent and additional
rent and observes and performs all required provisions of this Lease. Within
ten (10) days after Landlord's written request, Tenant shall execute any
documents required by Landlord or the Holder to make this Lease subordinate
to any lien of the Encumbrance. If Tenant fails to do so, then in addition
to such failure constituting a default by Tenant, it shall be deemed that
this Lease is so subordinated to such Encumbrance. Notwithstanding anything
to the contrary in this Section, Tenant hereby attorns and agrees to attorn
to any entity purchasing or otherwise acquiring the Premises at any sale or
other proceeding or pursuant to the exercise of any other rights, powers or
remedies under such encumbrance.
Notwithstanding the foregoing, the subordination of this Lease shall be subject
to Tenant's receipt of a
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Nondisturbance and Attornment Agreement in a
commercially reasonable form.
S. SUBMISSION OF LEASE: Submission of this document for examination or
signature by the parties does not constitute an option or offer to lease the
Premises on the terms in this document or a reservation of the Premises in
favor of Tenant. This document is not effective as a lease or otherwise
until executed and delivered by both Landlord and Tenant.
T. SURVIVAL OF INDEMNITIES: All indemnification, defense, and hold
harmless obligations of Landlord and Tenant under this Lease shall survive
the expiration or sooner termination of the Lease.
U. TIME: Time is of the essence hereunder.
V. TRANSPORTATION DEMAND MANAGEMENT PROGRAMS: Should a government agency
or municipality require Landlord to institute TDM (Transportation Demand
Management) facilities and/or program, Tenant agrees that the cost of TDM
imposed facilities required on the Premises, including but not limited to
employee showers, lockers, cafeteria, or lunchroom facilities, shall be paid
by Tenant. Further, any ongoing costs or expenses associated with a TDM
program which are required for the Premises and not provided by Tenant, such
as an on-site TDM coordinator, shall be provided by Landlord with such costs
being included as additional rent and reimbursed to Landlord by Tenant within
thirty (30) days after demand.
W. WAIVER OF RIGHT TO JURY TRIAL: Landlord and Tenant waive their
respective rights to trial by jury of any contract or tort claim,
counterclaim, cross-complaint, or cause of action in any action, proceeding,
or hearing brought by either party against the other on any matter arising
out of or in any way connected with this Lease, the relationship of Landlord
and Tenant, or Tenant's use or occupancy of the Premises, including any claim
of injury or damage or the enforcement of any remedy under any current or
future law, statute, regulation, code, or ordinance.
X. USE OF ROOF: Tenant shall have the exclusive right to use the roof
of the Building at no charge to place and maintain telecommunications
antennas, microwave or satellite dishes and other communications equipment.
Such use of the roof shall be subject to receipt of all required government
approvals, at Tenant's sole cost. The placements of any such antennas or
satellite dishes or other communications equipment on the roofs, the
modifications of the roof to accommodate such equipment, and the installation
of any such equipment shall be subject to Landlord's reasonable prior
approval of the plans and methods therefore. Such use
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of the roof shall not restrict, impair or negate any warranty relating to the
roofs and Tenant shall be responsible for any and all damage, leakage or
extraordinary wear and tear to the roof occurring as a result of such use of
the roofs. Installation of such equipment shall be supervised by Landlord
and performed in a first class workmanlike manner. Prior to the Expiration
Date, Tenant shall, at its sole cost and expense, remove all such roof
equipment as Landlord desires and restore the roof to its condition as of the
Commencement Date. Such repair and restoration shall include causing the
roof to be brought into compliance with all applicable building codes and
laws in effect at the time of the removal to the extent such compliance is
necessitated by removal of the roof equipment and restoration work on the
roof.
Y. RECORDATION: Within forty-five (45) days after the execution and
delivery of this Lease by Landlord and Tenant, Landlord shall execute and
notarize a short form Memorandum of Lease, in recordable form, and shall
deliver the same to Tenant for Tenant's recording. Within (45) days
following the finalizing by Landlord of a new parcel map for the Project,
Landlord and Tenant shall execute all necessary documents to eliminate the
Short Form Memorandum of Lease and shall concurrently execute a new short
form Memorandum of Lease for recordation on the parcel affected by this
Lease. At such time, Landlord and Tenant shall also execute a Memorandum of
Lease for recordation on parcels affected by Tenant's Option to Lease
pursuant to Exhibit "E" of this Lease. Prior to the expiration or earlier
termination of the Lease and/or Option to Lease, Tenant agrees to promptly
execute all necessary documents to eliminate the Short Form Memorandum of
Lease as an exception to title.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day and
year first above written.
LANDLORD: Sobrato Interests IIITENANT:Network Equip-
a California Limited Partnershipment Technologies
a Delaware Corporation
By: _______/S/___________________By: ____________ /S/ ___________________
Its: General PartnerIts:Sr. Vice President
& CFO
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EXHIBIT - OPTION TO LEASE
RECITALS:
A. As part of the consideration for Tenant entering into the Lease,
Landlord is willing to grant to Tenant an option to lease a maximum of two
(2) buildings to be constructed on two adjacent parcels of land,
approximately 5.3 and 4.5 acres respectively, owned by Landlord and shown on
SCHEDULE 1 ("Option Properties). Such buildings currently do not exist, but
Landlord is willing, subject to the conditions set forth herein, to construct
such buildings if Tenant exercises such option to lease, all pursuant to the
terms and conditions set forth below. Such buildings and property is herein
referred to as the "Option Buildings".
B. The parties now wish to document the terms of such option to lease the
Option Buildings.
NOW, THEREFORE, in consideration of the execution of the Lease by both parties,
and in consideration of the mutual covenants set forth below, the parties agree
as follows:
1. GRANT OF OPTION. Landlord hereby grants to Tenant an option to lease
the Option Buildings (the "Option") subject to the terms and conditions set
forth in this Agreement.
2. TERM OF OPTION. Tenant shall be entitled, subject to paragraph 3
below, to exercise the Option at any time during the period commencing on the
execution date of the Lease and ending on June 1, 1999. Such period shall
herein be referred to as the "Option Period".
3. EXERCISE OF OPTION. Tenant shall exercise the Option only by
delivery of written notice to Landlord within the Option Period of such
exercise ("Exercise Date"). Tenant shall be entitled to exercise the Option
only if at the time of such exercise Tenant is not in default under the terms
of the Lease. In the event the Lease has been terminated for any reason,
this Option shall automatically terminate. At the time Tenant exercises the
Option, Tenant must notify Landlord of the amount of building square footage
it desires to lease pursuant to the Option.
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4. CONDITIONS PRECEDENT. Landlord's obligation to construct the Option
Buildings are expressly conditioned upon Landlord's ability to within one
hundred twenty (120) days of the Exercise Date to (i) secure a commitment by
an institutional lender to make a fixed rate non-recourse non-participating
loan to Landlord in a minimum amount equal to eighty-five percent (85%) of
Total Project Costs (as defined below), and (ii) obtain all permits and
governmental approvals necessary for the construction of the Option
Buildings.
5. LEASE OF THE OPTION BUILDING. Within thirty (30) days after Tenant's
exercise of the Option, Landlord and Tenant shall enter into a written lease
of the Option Buildings (the "Option Building Lease"). The Option Building
Lease shall be on the same terms as the Lease, except as follows:
(a) The Premises shall be Option Buildings. References in the Lease
format shall be changed in the Option Building Lease to refer to Option
Building.
(b) Landlord shall provide 3.5 parking spaces per 1,000 square feet of
leasable space within the Option Buildings.
(c) The term shall commence upon the date of Substantial Completion (as
the term is defined in the Lease) of the Building Shell and Tenant Improvements
for the Option Building ("Commencement Date"), and end on the twelfth (12th)
anniversary thereof, with options to extend pursuant to the Lease.
(d) Rent shall be payable beginning on the Commencement Date. Base
Monthly Rent shall be equal to one hundred thirty percent (130%) of (i) the
product of the (i) Total Project Costs as defined below and (ii) the best
non-participating twelve (12) year fixed rate permanent loan constant
available prior to the start of construction of the Option Building. In no
event shall the amortization period of the loan exceed twenty (20) years. In
the event that actual project costs have not been determined by the
Commencement Date, the rent shall be based on Landlord's reasonable estimate
of Project Costs until such time as actual Project Costs are available.
Total Project Costs shall be equal to the sum of (i) the Fair Market
Value of the Property, at the time Tenant exercises the Option determined by
appraisal as provided in the Lease, (ii) payments by Landlord for labor and
materials to contractors performing construction work in connection with the
Option Buildings, (iii) fees for building permits, licenses, inspection,
utility connections or extensions, and any other fees imposed by governmental
entities, (iv) fees of engineers, architects, consultants and others providing
professional services in connection with the
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construction of the Option Buildings, (v) construction loan interest paid by
Landlord including interest on Landlord's equity with respect to the
construction of the Option Buildings, calculated at the reference rate
charged by Union Bank plus one percent (1%), (vi) loan fees payable for the
construction and/or permanent loan for the Option Buildings (vii) real
property taxes and assessments levied against the Property during the period
the Option Buildings is constructed, (viii) liability and builders risk
insurance premiums and completion bond premiums paid by Landlord with respect
to the construction of the Option Buildings, (ix) real estate leasing
commissions or fees payable by Landlord with respect to the Option Buildings
in the event Tenant retains a broker; and (x) a sum equal to seven percent
(7%) of the Total Project Cost, for Landlord's construction and development
services including onsite and offsite supervision and management services
provided by Landlord.
The Base Monthly Rent shall then be increased on the same basis as
provided in Section 4.B of the Lease.
(e) The security deposit (in the form of a letter of credit) shall be
equal to the Base Monthly Rent amount for the Option Buildings for the first
month of the term.
(f) The Work Allowance shall be modified to (i) reflect a Work Allowance
of Twenty Five Dollars ($25.00) times the number of leasable square feet of
space in the Option Buildings, and (ii) require Tenant's submission to
Landlord of its Tenant Improvement Plans as set forth below in this Agreement.
(g) The Lease shall be amended (i) to extend the original Lease Term so as
to be co-terminus with the original term of Option Building Lease; and (ii)
to provide that a default under Lease shall be deemed a default under the
Option Building Lease; and that a default under the Option Building Lease
shall be deemed a default under the Lease. The rent for the Premises under
the Lease during the extended term shall be at Fair Market Value (as the term
is therein defined) but not less than the rent paid in the preceding period
6. CONSTRUCTION OF SHELL AND TENANT IMPROVEMENTS.
(a) Within sixty (60) days after Tenant's exercise of the Option, Landlord
shall deliver to Tenant plans
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and specifications for construction of the shell of Option Buildings
(together called the "Shell Plans"). The Shell Plans shall contemplate
construction of two buildings of 100,000 leasable square feet each.
"Leasable Square Feet" shall include all square footage within the Option
Buildings when measured from outside exterior wall/glass to outside exterior
wall/glass of each floor, including docks, entries, patios and balconies
covered by a structural roof, but excluding roof overhangs. The Shell Plans
shall contemplate construction of a Building Shell of a design and size
similar to the Building Shell of the Premises.
(b) Within ninety (90) days after Tenant's receipt of the Shell Plans,
Tenant shall submit to Landlord, for Landlord's approval, Tenant Improvement
Plans respecting Tenant Improvements that Tenant desires Landlord to
construct in the Option Buildings. General Contractor shall commence
construction of Option Buildings as soon as reasonably possible after removal
of the conditions precedent outlined in Section 4 of this Exhibit, and
continue diligently to construct the same until completion thereof in
accordance with the Shell Plans. All costs of construction of the Building
Shell of Option Buildings shall be borne solely by Landlord. The costs
included within the Building Shell construction shall be as set forth in
EXHIBIT "C" of the Lease. All costs of Tenant Improvements in excess of the
Work Allowance shall be borne solely by Tenant.
7. SUCCESSORS. The Option provided Tenant in this Exhibit is personal
and granted to Network Equipment Technologies and is not exercisable by any
third party should Tenant assign or sublet all or a portion of its rights
under this Lease, unless Landlord consents to permit exercise of any option
by any assignee or subtenant, in Landlord's sole discretion. Except as
previously provided, the terms and provisions hereof shall be binding upon
and inure to the benefit of the successors and assigns of the parties hereto.
In no event, however, shall any lender be obligated to perform the terms
this Option in the event of a foreclosure of Landlord's interest in the
Premises or the Property.
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LEASE BETWEEN
SOBRATO INTERESTS III AND NETWORK EQUIPMENT TECHNOLOGIES
(OFFICE BUILDING 2)
Section Page #
- ------- ------
Parties.............................................................. 1
Premises............................................................. 1
Use.................................................................. 1
PERMITTED USES....................................................... 1
USES PROHIBITED...................................................... 1
ADVERTISEMENTS AND SIGNS............................................. 2
Term and Rental...................................................... 2
BASE MONTHLY RENT.................................................... 2
RENTAL ADJUSTMENT.................................................... 2
LATE CHARGES......................................................... 3
SECURITY DEPOSIT..................................................... 3
Construction and Possession.......................................... 4
BUILDING SHELL CONSTRUCTION.......................................... 4
TENANT IMPROVEMENT PLANS............................................. 5
FINAL PRICING........................................................ 5
CHANGE ORDERS........................................................ 5
BUILDING SHELL COSTS................................................. 5
TENANT IMPROVEMENT COSTS............................................. 6
CONSTRUCTION......................................................... 6
GENERAL CONTRACTOR OVERHEAD & PROFIT................................. 6
TENANT DELAYS........................................................ 6
INSURANCE............................................................ 7
PUNCH LIST & WARRANTY................................................ 7
OTHER WORK BY TENANT................................................. 7
Acceptance of Possession and Covenants to Surrender.................. 7
DELIVERY AND ACCEPTANCE.............................................. 7
CONDITION UPON SURRENDER............................................. 8
FAILURE TO SURRENDER................................................. 8
Alterations and Additions............................................ 9
TENANT'S ALTERATIONS................................................. 9
EXEMPTED ALTERATIONS................................................. 10
FREE FROM LIENS...................................................... 10
COMPLIANCE WITH GOVERNMENTAL REGULATIONS............................. 10
Maintenance of Premises.............................................. 10
LANDLORD'S OBLIGATIONS............................................... 10
TENANT'S OBLIGATIONS................................................. 11
LANDLORD AND TENANT'S OBLIGATIONS REGARDING COMMON AREA COSTS........ 11
COMMON AREA COSTS.................................................... 11
TENANT'S ALLOCABLE SHARE............................................. 12
WAIVER OF LIABILITY.................................................. 12
Hazard Insurance..................................................... 13
TENANT'S USE......................................................... 13
LANDLORD'S INSURANCE................................................. 13
TENANT'S INSURANCE................................................... 13
WAIVER............................................................... 14
Taxes................................................................ 14
Utilities............................................................ 14
Toxic Waste and Environmental Damage................................. 14
TENANT'S RESPONSIBILITY.............................................. 15
TENANT'S INDEMNITY REGARDING HAZARDOUS MATERIALS..................... 15
ACTUAL RELEASE BY TENANT............................................. 15
ENVIRONMENTAL MONITORING............................................. 16
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Tenant's Default..................................................... 16
REMEDIES............................................................. 17
RIGHT TO RE-ENTER.................................................... 17
ABANDONMENT.......................................................... 17
NO TERMINATION....................................................... 18
NON-WAIVER........................................................... 18
PERFORMANCE BY LANDLORD.............................................. 18
Landlord's Liability................................................ 18
LIMITATION ON LANDLORD'S LIABILITY................................... 18
LIMITATION ON TENANT'S RECOURSE...................................... 19
INDEMNIFICATION OF LANDLORD.......................................... 19
Destruction of Premises.............................................. 19
DESTRUCTION BY AN INSURED CASUALTY................................... 19
DESTRUCTION BY AN UNINSURED CASUALTY................................. 20
TENANT'S RIGHT TO CANCEL ADJACENT LEASES............................. 20
Condemnation......................................................... 20
Assignment or Sublease............................................... 21
CONSENT BY LANDLORD.................................................. 21
ASSIGNMENT OR SUBLETTING CONSIDERATION............................... 21
NO RELEASE........................................................... 22
REORGANIZATION OF TENANT............................................. 22
PERMITTED TRANSFERS.................................................. 22
EFFECT OF DEFAULT.................................................... 22
EFFECTS OF CONVEYANCE................................................ 23
SUCCESSORS AND ASSIGNS............................................... 23
Option to Extend the Lease Term...................................... 23
GRANT AND EXERCISE OF OPTION......................................... 23
DETERMINATION OF FAIR MARKET RENTAL.................................. 23
RESOLUTION OF A DISAGREEMENT OVER THE FAIR MARKET RENTAL............. 24
PERSONAL TO TENANT................................................... 24
Option to Lease, Option to Purchase.................................. 25
General Provisions................................................... 25
ATTORNEY'S FEES...................................................... 25
AUTHORITY OF PARTIES................................................. 25
BROKERS.............................................................. 25
CHOICE OF LAW........................................................ 25
DISPUTE RESOLUTION................................................... 25
ENTIRE AGREEMENT..................................................... 26
ENTRY BY LANDLORD.................................................... 26
ESTOPPEL CERTIFICATES................................................ 26
EXHIBITS............................................................. 27
INTEREST............................................................. 27
MODIFICATIONS REQUIRED BY LENDER..................................... 27
NO PRESUMPTION AGAINST DRAFTER....................................... 27
NOTICES.............................................................. 27
RENT................................................................. 27
REPRESENTATIONS...................................................... 27
RIGHTS AND REMEDIES.................................................. 27
SEVERABILITY......................................................... 28
SUBORDINATION........................................................ 28
SUBMISSION OF LEASE.................................................. 28
SURVIVAL OF INDEMNITIES.............................................. 28
TIME................................................................. 28
TRANSPORTATION DEMAND MANAGEMENT PROGRAMS............................ 28
WAIVER OF RIGHT TO JURY TRIAL........................................ 29
USE OF ROOF.......................................................... 29
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RECORDATION.......................................................... 29
EXHIBIT A - Project.................................................. 31
EXHIBIT B-2 - Shell Plans and Specifications......................... 32
EXHIBIT C - Building Shell Definition................................ 33
BUILDING STRUCTURE................................................... 33
SITEWORK............................................................. 33
PLUMBING............................................................. 34
ELECTRICAL........................................................... 34
FIRE SPRINKLER....................................................... 34
SITE AMENITIES....................................................... 34
EXHIBIT C - Building Shell Definition................................ 34
EXHIBIT D - Tenant Improvement Plans and Specifications.............. 35
EXHIBIT E - Option to Lease.......................................... 36
GRANT OF OPTION...................................................... 36
TERM OF OPTION....................................................... 36
EXERCISE OF OPTION................................................... 36
CONDITIONS PRECEDENT................................................. 36
LEASE OF THE OPTION BUILDING......................................... 36
CONSTRUCTION OF SHELL AND TENANT IMPROVEMENTS........................ 38
SUCCESSORS........................................................... 38
EXHIBIT D - Tenant Improvement Plans and Specifications.............. 39
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1. PARTIES: THIS LEASE, is entered into on this ____ day of April,
1997, between SOBRATO INTERESTS III, a California Limited Partnership, whose
address is 10600 North De Anza Boulevard, Suite 200, Cupertino, CA 95014 and
NETWORK EQUIPMENT TECHNOLOGIES, a Delaware Corporation, whose address is 800
Saginaw Drive, Redwood City, California, 94063, hereinafter called
respectively Landlord and Tenant.
2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from
Landlord those certain Premises with the appurtenances, situated in the City
of Fremont, County of Alameda, State of California, consisting of a two-story
office building of approximately 100,000 square feet ("Building 1", as
highlighted in red on Exhibit "B-1) and 350 parking places which shall be
available for Tenant's exclusive use but shall not be designated or
segregated from the balance of the parking area, in a project initially
consisting of 3 buildings totaling approximately 280,000 square feet on an
approximately 17.5-acre first phase portion of a larger 33.5-acre site
("Project) as outlined in red on EXHIBIT "A". In addition, Tenant shall have
the non-exclusive right to use the common area ("Common Area") surrounding
the Building and additional buildings constructed within the Project. Unless
expressly provided otherwise, the term Premises as used herein shall include
the Tenant Improvements (defined in Section 5.B) constructed by Tenant
pursuant to Section 5.B. Tenant acknowledges Landlord's right to and hereby
consents to construction of additional building(s) on adjacent land in the
Project owned by Landlord, so long as such construction does not involve the
removal of site amenities such as the volleyball court and outdoor seating or
a reduction in size of the approximately 79,000 square foot amphitheatre area
and water feature ("Quad") adjacent to the Building.
Notwithstanding the provisions of this Section 2, Tenant shall be permitted
to schedule with Landlord and reserve the Quad for its exclusive use from
time to time for the purpose of conducting company meetings and events.
3. USE:
A. PERMITTED USES: Tenant shall use the Building only for the
following purposes and shall not change the use of the Building without the
prior written consent of Landlord: Office, research and development,
marketing, light manufacturing, storage and other incidental uses such as
training rooms, cafeteria and health club. Tenant shall use only the
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number of parking spaces allocated to Tenant. All trucks and delivery
vehicles shall (i) be parked at the rear of the Building near the loading
areas, (ii) loaded and unloaded in a manner which does not interfere with the
businesses of other occupants of the Project, and (iii) permitted to remain
on the Project only so long as is reasonable necessary to complete the
loading and unloading. Landlord makes no representation or warranty that any
specific use of the Premises desired by Tenant is permitted pursuant to any
Laws.
B. USES PROHIBITED: Tenant shall not commit or suffer to be
committed on the Premises any waste, nuisance, or other act or thing which
may unreasonably disturb the quiet enjoyment of any other tenant in or around
the Premises, nor allow any sale by auction or any other use of the Premises
for an unlawful purpose. Tenant shall not (i) damage or overload the
electrical, mechanical or plumbing systems of the Premises, (ii) attach, hang
or suspend anything from the ceiling, walls or columns of the building in
excess of the load limits for which such items are designed or set any load
on the floor in excess of the load limits for which the floor is designed, or
(iii) generate dust, fumes or waste products which create a fire or health
hazard or damage the Premises or in the soils surrounding the Building. No
materials, supplies, equipment, finished products or semi-finished products,
raw materials or articles of any nature, or any waste materials, refuse,
scrap or debris, shall be stored upon or permitted to remain on any portion
of the Premises outside of the Building without Landlord's prior approval,
which approval may be withheld in its sole discretion.
C. ADVERTISEMENTS AND SIGNS: Tenant will not place or permit to be
placed, in, upon or about the Premises (excluding the interior of the
Building) any signs not approved by the city or other governing authority.
Tenant will not place or permit to be placed upon the Premises any signs,
advertisements or notices without the written consent of Landlord as to type,
size, design, lettering, coloring and location, which consent will not be
unreasonably withheld. Any sign placed on the Premises shall be removed by
Tenant, at its sole cost, prior to the Expiration Date or promptly following
the earlier termination of the lease, and Tenant shall repair, at its sole
cost, any damage or injury to the Premises caused thereby, and if
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not so removed, then Landlord may have same so removed at Tenant's expense.
Landlord hereby approves the general size and location of the exterior signs
as shown in green on Exhibit "B-1".
4. TERM AND RENTAL:
A. BASE MONTHLY RENT: The term ("Lease Term") shall be for one
hundred forty-four (144) months, commencing on the Commencement Date,
estimated to occur on April 1, 1998, but finally determined pursuant to
Section 5.G, and ending one hundred forty-four (144) months thereafter
("Expiration Date"). In addition to all other sums payable by Tenant under
this Lease, Tenant shall pay as base monthly rent ("Base Monthly Rent") for
the Premises an amount equal to the product of multiplying One Dollar and
Twenty-Five Cents ($1.25) by the Rentable Square Footage (as hereinafter
defined) of the Building. "Rentable Square Footage" is defined as the square
footage of the Building when measured from outside exterior wall/glass to
outside exterior wall/glass of each floor, including covered docks, covered
entries, covered patios and covered balconies, but excluding roof overhangs.
The Rentable Square Footage shall be derived based on Exhibit "B-2" as
defined below and attached hereto. Base Monthly Rent shall be due in advance
on or before the first day of each calendar month during the Lease Term. All
sums payable by Tenant under this Lease shall be paid to Landlord in lawful
money of the United States of America, without offset or deduction, except as
set forth herein, and without prior notice or demand, at the address
specified in Section 1 of this Lease or at such place or places as may be
designated by Landlord during the Lease Term. Base Monthly Rent for any
period less than a calendar month shall be a pro rata portion of the monthly
installment. B. RENTAL ADJUSTMENT: Beginning twenty four (24) months
after the Commencement Date, and every twenty four (24) months thereafter (an
"Adjustment Date"), the then-payable Base Monthly Rent shall be subject to
adjustment based on the increase, if any, in the Consumer Price Index that
has occurred during the twenty four (24) months preceding the
then-applicable Adjustment Date. The basis for computing the adjustment
shall be the U.S. Department of Labor, Bureau of Labor Statistic's Consumer
Price Index for All Urban Consumers, All Items, 1982-84=100, for the San
Francisco-Oakland-San Jose area ("Index"). The Index most recently published
preceding the Commencement Date for the first Adjustment (or previous
Adjustment Date, as applicable), shall be considered the "Base Index". If
the Index most recently published preceding the Adjustment Date ("Comparison
Index") is greater than the Base Index, the then-payable Base Monthly Rent
shall be increased by multiplying the then-payable Base Monthly Rent by a
fraction, the numerator of which is the Comparison Index and the denominator
of which is the Base Index. Notwithstanding
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any subsequent decrease in the Index, the increase in the CPI for any
calendar year shall never be less than three percent (3%) nor more than eight
percent (8%) per year compounded annually. On adjustment of the Base Monthly
Rent, Landlord shall notify Tenant by letter stating the new Base Monthly
Rent. Landlord's calculation of the Base Monthly Rent escalation shall be
conclusive and binding unless Tenant objects to said calculation within sixty
(60) days of Tenant's receipt from Landlord of such calculation. Landlord's
failure to adjust Base Monthly Rent on an Adjustment Date shall not prevent
Landlord from retroactively adjusting Base Monthly Rent at any subsequent
time during the Lease Term. If the Index base year is changed so that it
differs from 1982-84=100, the Index shall be converted in accordance with the
conversion factor published by the United States Department of Labor, Bureau
of Labor Statistics. If the Index is changed, revised or discontinued for
any reason, there shall be substituted in lieu thereof and the term "Consumer
Price Index" shall thereafter refer to the most nearly comparable official
price index of the United States Government in order to obtain substantially
the same result as would have been obtained had the original Consumer Price
Index been not been discontinued, revised or changed, which alternative index
shall be selected by Landlord and shall be subject to Tenant's written
approval.
C. LATE CHARGES: Tenant hereby acknowledges that late payment by
Tenant to Landlord of Base Monthly Rent and other sums due hereunder will
cause Landlord to incur costs not contemplated by this Lease, the exact
amount of which is extremely difficult to ascertain. Such costs include but
are not limited to: administrative, processing, accounting, and late charges
which may be imposed on Landlord by the terms of any contract, revolving
credit, mortgage, or trust deed covering the Premises. Accordingly, if any
installment of Base Monthly Rent or other sum due from Tenant shall not be
received by Landlord or its designee within five (5) days after that Rent is
due, Tenant shall pay to Landlord a late charge equal to five (5%) percent of
such overdue amount, which late charge shall be due and payable on the same
date that the overdue amount was due. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of late payment by Tenant, excluding interest and attorneys fees and
costs. If any rent remains delinquent for a period in excess of thirty (30)
days then, in addition
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to such late charge, Tenant shall pay to Landlord interest on any rent that
is not paid when due at the Agreed Interest Rate specified in Section 19.J
and calculated from the date thirty (30) days following the date such amount
became due until the date such rent is paid. Acceptance by Landlord of such
late charge shall not 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.
Notwithstanding the foregoing, Tenant shall be granted one exception per
calendar year when Base Monthly Rent may be received by Landlord up to ten
(10) days after notice to Tenant that such Base Monthly Rent is past due
before Tenant incurs the 5% late charge.
D. SECURITY DEPOSIT: Prior to the Lease Commencement Date, Tenant
shall deposit with Landlord the sum of One Hundred Twenty Five Thousand and
No/100 Dollars ($125,000.00) ("Security "Deposit"). Landlord agrees that in
lieu of a cash Security Deposit, Tenant may deposit a letter of credit in a
form reasonably acceptable to Landlord. Landlord shall be entitled to draw
against the letter of credit at any time provided only that Landlord
certifies to the issuer of the letter of credit that Tenant is in default
under the Lease. Tenant shall keep the letter of credit in effect during the
entire Lease Term, as the same may be extended, plus a period of four (4)
weeks after expiration of the Lease Term. At least thirty (30) days prior to
expiration of any letter of credit, the term thereof shall be renewed or
extended for a period of at least one (1) year. Tenant's failure to so renew
or extend the letter of credit shall be a material default of this Lease by
Tenant. In the event Landlord draws against the letter of credit, Tenant
shall replenish the existing letter of credit or cause a new letter of credit
to be issued such that the aggregate amount of letters of credit available to
Landlord at all times during the Lease Term is the amount of the Security
Deposit originally required.
Landlord shall not be deemed a trustee of the Security Deposit, may use the
Security Deposit in business, and shall not be required to segregate it from
its general accounts. Tenant shall not be entitled to interest on the
Security Deposit.. If Tenant defaults with respect to any provisions of the
Lease, including but not limited to the provisions relating to payment of
Base Monthly Rent or other charges, Landlord may, to the extent reasonably
necessary to remedy Tenant's default, use any or all of the Security Deposit
towards payment of the following: (i) Base Monthly Rent or other charges in
default; (ii) any other amount which Landlord may spend or become obligated
to spend by reason of Tenant's default; and (iii) any other loss or damage
which Landlord may suffer by reason of Tenant's default. If any portion of
the Security Deposit is so
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used or applied, Tenant shall, within ten (10) days after written demand from
Landlord, deposit cash with Landlord in an amount sufficient to restore the
Security Deposit to its full original amount, and shall pay to Landlord such
other sums as necessary to reimburse Landlord for any sums paid by Landlord.
If Tenant shall default more than three (3) times in any twelve (12) month
period, irrespective of whether or not such default is cured, then the
Security Deposit shall, within ten (10) days after demand by Landlord, be
increased by Tenant to an amount equal to three (3) times the Base Monthly
Rent. Tenant waives the provisions of California Civil Code Section 1950.7,
and all other provisions of law now in force or that become in force after
the date of execution of this Lease, that provide that Landlord may claim
from a security deposit only those sums reasonably necessary to remedy
defaults in the payment of Rent, to repair damage caused by Tenant, or to
clean the Premises. Landlord and Tenant agree that Landlord may, in
addition, claim those sums reasonably necessary to compensate Landlord for
any other foreseeable or unforeseeable loss or damage caused by the act or
omission of Tenant or Tenant's agents, employees, contractors and invitees
("Tenant's Agents"). Tenant may not assign or encumber the Security Deposit
without the consent of Landlord. any attempt to do so shall be void and
shall not be binding on Landlord. If Tenant performs every provision of this
Lease to be performed by Tenant, the Security Deposit shall be returned to
Tenant within thirty (30) days after the Expiration Date and surrender of the
Premises to Landlord, less any amount deducted in accordance with this
Section, together with Landlord's written notice itemizing the amounts and
purposes for such deduction. In the event of termination of Landlord's
interest in this Lease, Landlord may deliver or credit the security Deposit
to Landlord's successor in interest in the Premises and thereupon be relieved
of further responsibility with respect to the Security Deposit.
5. CONSTRUCTION AND POSSESSION:
A. BUILDING SHELL CONSTRUCTION: Landlord shall cause the shell of the
Building ("Building Shell") to be constructed by independent contractors to
be employed by and under the supervision of South Bay Construction ("General
Contractor"), in general accordance with preliminary shell and site plans
attached hereto as EXHIBIT "B-1" ("Preliminary Site
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Plan and Specifications"). Final Building Shell plans and guideline
specifications shall be prepared by Arctec ("Architect") consistent with
Exhibit "B-1" and approved by Landlord and Tenant for attachment by June 15,
1997 as EXHIBIT "B-2" ("Shell Plans and Specifications"). Landlord shall
pay for all costs and expenses associated with the construction of the
Building Shell. The Building Shell shall include those items set forth in
the attached EXHIBIT "C" ("Building Shell Definition").
B. TENANT IMPROVEMENT PLANS: Tenant, at Tenant's sole cost and
expense, has hired Gensler & Associates ("Gensler") to prepare plans and
outline specifications ("Tenant Improvement Plans and Specifications") which
shall be attached as EXHIBIT "D" by August 29, 1997 with respect to the
construction of improvements to the interior premises ("Tenant
Improvements"). In addition, Gensler shall provide the Architect no later
than April 21, 1997 with the interior stair and elevator locations and any
other information related to the Tenant Improvement Plans and Specifications
that Tenant wishes to be incorporated into the Shell Plans and
Specifications. The Tenant Improvements shall consist of all items not
included within the scope of the Building Shell Definition. The Tenant
Improvement Plans and Specifications shall be prepared in sufficient detail
to allow General Contractor to construct the Tenant Improvements. The General
Contractor shall contract directly with Tenant for construction of the Tenant
Improvements and shall construct the Tenant Improvements in accordance with
all Tenant Improvement Plans and Specifications. Landlord shall provide
Tenant a work allowance to be utilized by Tenant for the construction of
Tenant Improvements ("Work Allowance") in an amount equal to the product of
multiplying the Rentable Square Footage by Twenty-Five Dollars and
Twenty-Five Cents ($25.25). The Work Allowance shall be paid by Landlord to
Tenant as payments become due from Tenant to General Contractor. The Tenant
Improvements shall not be removed or altered by Tenant without the prior
written consent of Landlord as provided in Section 7. Tenant shall have the
right to depreciate and claim and collect any investment tax credits in the
Tenant Improvements during the initial Lease Term. Upon expiration of the
Lease Term or any earlier termination of the Lease, the Tenant Improvements
shall become the property of Landlord and shall remain upon and be
surrendered with the Premises, and title thereto shall automatically vest in
Landlord without any payment therefore.
C. PRICING: Within ten (10) days after completion of the Tenant
Improvements Plans and Specifications, General Contractor shall submit to
Tenant competitive bids from at least three (3) subcontractors for each
aspect of the work related to the Tenant improvements. General Contractor
must
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utilize the low bid in each case unless Tenant approves General Contractor's
use of another subcontractor, and the cost of the Tenant Improvements shall
be based upon construction expenses equal to the sum of the bid amounts as
approved by Tenant. Upon Tenant's written approval of the contract bids,
which approval shall not be unreasonably withheld or delayed, Landlord and
Tenant shall be deemed to have given their respective approvals of the final
Tenant Improvement Plans and Specifications on which the cost estimate was
made, and General Contractor shall proceed with the construction of the
Tenant Improvements in accordance with the terms of Section 5.G below. If
Tenant does not specifically approve or disapprove the bids within seven (7)
days, Tenant shall be deemed to have approved the bids.
D. CHANGE ORDERS: Tenant shall have the right to order changes in
the manner and type of construction of the Building Shell or the Tenant
Improvements. Upon request and prior to Tenant's submitting any binding
change order, General Contractor shall promptly provide Tenant with written
statements of the cost to implement and the time delay and increased
construction costs associated with any proposed change order, which
statements shall be binding on Landlord. If no time delay or increased
construction cost amount is noted on the written statement, the parties agree
that there shall be no adjustment to the construction cost or the
Commencement Date associated with such change order. If ordered by Tenant,
General Contractor shall implement such change order and the cost of
constructing the Tenant Improvements shall be paid by Tenant in accordance
with the cost statement previously delivered by General Contractor to Tenant
for any such change order.
E. BUILDING SHELL COSTS: Landlord shall pay all costs associated
with the Building Shell.
F. TENANT IMPROVEMENT COSTS: The cost of Tenant Improvements shall
consist of only the following to the extent actually incurred by General
Contractor in connection with the construction of Tenant Improvements:
construction costs, all permit fees, construction taxes or other costs
imposed by governmental authorities related to the Tenant Improvements, and
Landlord overhead as described in Section 5.H below. During the course of
construction of Tenant Improvements, General Contractor may deliver to Tenant
not more than once each calendar month a
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written request for payment which shall include and be accompanied by General
Contractor's certified statements setting forth the amount requested,
certifying the percentage of completion of each item for which reimbursement
is requested, and certifying that the progress payment requested is due to a
subcontractor of General Contractor pursuant to a contract between General
Contractor and the subcontractor. Tenant shall pay General Contractor, within
fifteen (15) days after Tenant's receipt of the above items, the costs
incurred by General Contractor in connection with Tenant Improvements
installed in the Building in accordance with the Tenant Improvement Plans and
Specifications, minus the retention set forth below. Tenant shall be
entitled to retain ten percent (10%) of the amount invoiced by General
Contractor until the Tenant Improvements are Substantially Complete as
defined in Section 5.G below. Tenant shall pay the retained balance owing to
General Contractor within fifteen (15) days following the date that the
Tenant Improvements are Substantially Complete. All costs for Tenant
Improvements shall be fully documented to and verified by Tenant.
G. CONSTRUCTION: Landlord shall use its reasonable efforts to
obtain a building permit from the City of Fremont as soon as possible after
Tenant's approval of the Shell Plans and Specifications and to "Substantially
Complete" construction of the Premises by April 1, 1998. The Building Shell
and Tenant Improvements shall be deemed substantially complete
("Substantially Complete" or "Substantial Completion") when the Building
Shell and Tenant Improvements have been substantially completed in accordance
with the Shell Plans and Specifications and Tenant Improvement Plans and
Specifications, and the issuance of a certificate of occupancy or its
equivalent by the appropriate governmental authority for the Building Shell
and Tenant Improvements, as well as the issuance of a certificate by the
Architect certifying that the Building Shell has been substantially completed
in accordance with the plans and the issuance of a certificate by Gensler
certifying that the Tenant Improvements have been substantially completed in
accordance with the plans. Completion of the landscaping shall not be
required to deem the Premises "Substantially Complete" if inclement weather
prevents Landlord from finishing this portion of the work. Any prevention,
delay or stoppage due to strikes, lockouts, inclement weather, labor
disputes, inability to obtain labor, materials, fuel or reasonable
substitutes therefor, governmental restrictions, regulations, controls,
action or inaction, civil commotion, fire or other act of God, and another
causes beyond the reasonable control of Landlord (except financial inability)
shall extend the dates contained in this Section 5.G by a period equal to the
period of any said prevention, delay or stoppage.
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H. GENERAL CONTRACTOR PROFIT: As compensation to General Contractor
for its services related to construction of the Building Shell and Tenant
Improvements, General Contractor shall receive as profit a fee of 3% of the
total construction costs incurred by General Contractor. The General
Contractor's fee for profit and overhead related to construction of the
Building Shell shall be the same percentage rate as the fee charged by the
General Contractor to Tenant for construction of the Tenant Improvements.
I. TENANT DELAYS: A "Tenant Delay" shall mean any delay in
Substantial Completion of the Building as a result of any of the following:
(i) Tenant's failure to complete or approve the Tenant Improvement Plans by
the dates set forth in Section 5.B, (ii) Tenant's failure to approve the bids
for construction by the dates set forth in Section 5.C, (iii) changes
requested by Tenant to either the Shell Plans and Specifications or the
Tenant Improvement Plans and Specifications which delay the progress of the
work, (iv) Tenant's request for materials components, or finishes which are
not available in a commercially reasonable time given the anticipated
Commencement Date, (v) Tenant's failure to pay, when due, any amounts
requested to be paid by Tenant pursuant hereto, (vi) Tenant's request for
more than one (1) rebidding of the cost of all or a portion of the work, and
(vii) any errors or omissions in the Tenant Improvement Plans provided by
Gensler. Notwithstanding anything to the contrary set forth in this Lease,
and regardless of the actual date the Premises are Substantially Complete,
the Commencement Date shall be deemed to be the date Commencement Date would
have occurred if no Tenant Delay had occurred as reasonable determined by
Landlord. In addition, if a Tenant Delay results in an increase in the cost
of the labor or materials, Tenant shall pay the cost of such increases.
J. INSURANCE: General Contractor shall procure (as a cost of the
Building Shell) a "Broad Form" liability insurance policy in the amount of
Three Million Dollars ($3,000,000.00). Landlord shall also procure (as a
cost of the Building Shell) builder's risk insurance for the full replacement
cost of the Building Shell and Tenant Improvements while the Building and
Tenant Improvements are under construction, up until the date that the fire
insurance
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policy described in Section 9 is in full force and effect.
K. PUNCH LIST & WARRANTY: After the Building Shell and Tenant
Improvements are Substantially Complete, Landlord shall cause the General
Contractor to immediately correct any construction defect or other "punch
list" item which Tenant brings to General Contractor's attention. All such
work shall be performed so as to reasonably minimize the interruption to
Tenant and its activities on the Premises. General Contractor shall provide
a standard contractor's warranty with respect to the Premises for one (1)
year from the Commencement Date. Such warranty shall exclude routine
maintenance, damage caused by Tenant's negligence or misuse, and acts of God.
L. OTHER WORK BY TENANT: All work not described in the Shell Plans
and Specifications or Tenant Improvement Plans and Specifications, such as
furniture, telephone equipment, telephone wiring and office equipment work,
shall be furnished and installed by Tenant. When the construction of the
Tenant Improvements has proceeded to the point where Tenant's work of
installing its fixtures and equipment in the Premises can be commenced,
General Contractor shall notify Tenant and shall permit Tenant and its
authorized representatives and contractors access to the Premises before the
Commencement Date for the purpose of installing Tenant's trade fixtures and
equipment. Any such installation work by Tenant or its authorized
representatives and contractor shall be undertaken upon the following
conditions: (i) if the entry into the Premises by Tenant or its
representatives or contractors interferes with or delays General Contractor's
work, Tenant shall cause the party responsible for such interference or delay
to leave the Premises; and (ii) any contractor used by Tenant in connection
with such entry and installation shall not interfere with General
Contractor's work.
6. ACCEPTANCE OF POSSESSION AND COVENANTS TO SURRENDER:
A. DELIVERY AND ACCEPTANCE: On the Commencement Date, Landlord shall
deliver and Tenant shall accept possession of the Premises and enter into
occupancy of the Building on the Commencement Date. Except as otherwise
specifically provided herein, Tenant agrees to accept possession of the
Premises in its then existing condition with the Building Shell and Tenant
Improvements substantially complete, excepting only latent defects. Tenant's
taking possession of any part of the Premises shall be deemed to be an
acceptance of any work of improvement done by Landlord in such part as
complete and in accordance with the terms of this Lease except for "Punch
List" type items of which Tenant has given Landlord written notice prior to
the time Tenant takes possession. At the time Landlord
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delivers possession of the Premises to Tenant, Landlord and Tenant shall
together execute an acceptance agreement. Landlord shall have no obligation
to deliver possession, nor shall Tenant be entitled to take occupancy, of the
Premises until such acceptance agreement has been executed, and Tenant's
obligation to pay Base Monthly Rent and Additional Rent shall not be excused
or delayed because of Tenant's failure execute such acceptance agreement.
Within one hundred eighty (180) days after the Commencement Date, Tenant
agrees to be in occupancy of at least fifty percent (50%) of the rentable
square footage of the Premises.
B. CONDITION UPON SURRENDER: Tenant further agrees on Expiration
Date or on the sooner termination of this Lease, to surrender the Premises to
Landlord in good condition and repair, normal wear and tear excepted. In
this regard, "normal wear and tear" shall be construed to mean wear and tear
caused to the Premises by the natural aging process which occurs in spite of
prudent application of the best standards for maintenance, repair
replacement, and janitorial practices, and does not include items of
neglected or deferred maintenance. In any event, Tenant shall cause the
following to be done prior to the Expiration Date or sooner termination of
this Lease: (i) all holes in interior walls shall be patched and painted so
as to match the wall, (ii) all tiled floors shall be cleaned and waxed, (iii)
all carpets shall be cleaned and shampooed, (iv) all broken, marred, stained
or nonconforming acoustical ceiling tiles shall be replaced, (v) all cabling
placed above the ceiling by Tenant shall be removed, (vi) all windows shall
be washed; (vii) the HVAC system shall be serviced by a reputable and
licensed service firm and left in good operating condition and repair as so
certified by such firm, (viii) the plumbing and electrical systems and
lighting shall be placed in good order and repair (including replacement of
any burned out, discolored or broken light bulbs, ballasts, or lenses. On or
before the Expiration Date or sooner termination of this Lease, Tenant shall
remove all its personal property and trade fixtures from the Premises. All
property and fixtures not so removed shall be deemed as abandoned by Tenant.
If Landlord requires pursuant to Section 7 below, Tenant shall, at Tenant's
sole cost and expense, remove such Alterations as Landlord requires and shall
repair and restore said Premises or such parts thereof before the Expiration
Date. Such repair and restoration shall include causing the Premises to be
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brought into compliance with all applicable building codes and laws in effect
at the time of the removal to extent such compliance is necessitated by the
repair and restoration work; provided however, that (i) Tenant shall not be
required to pay for any work related to bringing the foundation, exterior
load bearing walls and roof structure of the Building into compliance with
applicable building codes and laws then in effect; and (ii) Tenant shall not
be required to pay for any work which may be required to bring areas outside
the Building into compliance with then-applicable building codes and laws. .
C. FAILURE TO SURRENDER: If the Premises are not surrendered at the
Expiration Date or sooner termination of this Lease in the condition required
by this Section 6, Tenant shall be deemed in a holdover tenancy pursuant to
this Section 7.C and Tenant shall indemnify, defend, and hold Landlord
harmless against loss or liability resulting from delay by Tenant in so
surrendering the Premises including, without limitation, any claims made by
any succeeding tenant founded on such delay and costs incurred by Landlord in
returning the Premises to the required condition, plus interest at the Agreed
Interest Rate. Any holding over after the termination or Expiration Date
with Landlord's express written consent, shall be construed as month-to-month
tenancy, terminable on thirty (30) days written notice from either party, and
Tenant shall pay as Base Monthly Rent to Landlord a rate equal to one hundred
twenty five percent (125%) of the Base Monthly Rent due in the month
preceding the termination or Expiration Date, plus all other amounts payable
by Tenant under this Lease. Any holding over shall otherwise be on the terms
and conditions herein specified, except those provisions relating to the
Lease Term and any options to extend or renew, which provisions shall be of
no further force and effect following the expiration of the applicable
exercise period. If Tenant remains in possession of the Premises after
expiration or earlier termination of this Lease without Landlord's consent,
Tenant's continued possession shall be on the basis of a tenancy at
sufferance and Tenant shall pay as rent during the holdover period an amount
equal to one hundred fifty percent (150%) of the Base Monthly Rent due in the
month preceding the termination or Expiration Date, plus all other amounts
payable by Tenant under this Lease. This provision shall survive the
termination or expiration of the Lease.
7. ALTERATIONS AND ADDITIONS:
A. TENANT'S ALTERATIONS: With the exception of Tenant Improvements
installed as part of initial construction of the Premises, Tenant shall not
make, or suffer to be made, any alteration or addition to the Premises
("Alterations"), or any part thereof, without
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obtaining Landlord's prior written consent and delivering to Landlord the
proposed architectural and structural plans for all such Alterations at least
fifteen (15) days prior to the start of construction. After receipt of
Tenant's architectural and structural plans, Landlord shall have a period of
ten (10) business days thereafter to grant its consent, which consent shall
not be unreasonably withheld. Landlord shall indicate to Tenant at the time
of Tenant's request, whether or not Landlord will require Tenant to remove
such Alterations at the Expiration Date. Tenant shall, at Tenant's sole cost
and expense, remove such Alterations as Landlord requires and shall repair
and restore said Premises or such parts thereof before the Expiration Date,
unless exempted pursuant to Section 7.B below. Such repair and restoration
shall include causing the Premises to be brought into compliance with all
applicable building codes and laws in effect at the time of the removal to
extent such compliance is necessitated by the repair and restoration work;
provided, however, that (i) Tenant shall not be required to pay for any work
related to bringing the foundation, exterior load bearing walls and roof
structure of the Building into compliance with applicable building codes and
laws then in effect; and (ii) Tenant shall not be required to pay for any
work which may be required to bring areas outside the Building into
compliance with then-applicable building codes and laws. If such Alterations
affect the structure of the Building, Tenant additionally agrees to reimburse
Landlord its reasonable out-of-pocket costs incurred in reviewing Tenant's
plans. After obtaining Landlord's consent, Tenant shall not proceed to make
such Alterations until Tenant has obtained all required governmental
approvals and permits, and provided Landlord reasonable security, in form
reasonably approved by Landlord, to protect Landlord against mechanics' lien
claims. Tenant agrees to provide Landlord written notice of the anticipated
and actual start-date of the work, and a complete set of half-size (15" X
21") vellum as-built drawings. All Alterations shall be constructed in
compliance with applicable building codes and laws. Any Alterations, except
movable furniture and trade fixtures, shall become at once a part of the
realty and belong to Landlord but shall nevertheless be subject to removal by
Tenant as provided in Section 6 above. Alterations which are not deemed as
trade fixtures include heating, lighting, electrical systems, air
conditioning, partitioning, carpeting, or any other installation
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which has become an integral part of the Premises. All Alterations shall be
maintained, replaced or repaired by Tenant at its sole cost and expense.
Notwithstanding the foregoing, Tenant shall be entitled without obtaining
Landlord's consent, to make Alterations which do not affect the structure of
the Building or which do not cost more than Twenty Five Thousand Dollars
($25,000.00) per Alteration nor an aggregate of Fifty Thousand Dollars
($50,000.00) in any twelve (12) month period; provided, however, that Tenant
shall still be required to deliver to Landlord the proposed architectural and
structural plans for all such Alterations at least (15) days prior to the
start of construction and comply with all other provisions of the preceding
paragraph.
B. EXEMPTED ALTERATIONS: Notwithstanding the provisions of Section
7.A above, Landlord shall not have the right to require Tenant to remove any
Alterations at the end of the term of the Lease unless: (i) such Alterations
were of a nature not typically found in manufacturing buildings; (ii) such
Alterations create private offices smaller than 10'x12'; or (iii) such
Alterations create hard wall partitioning that cover more than 35% of the
interior square footage of the Premises or the perimeter window space of the
Premises. C. FREE FROM LIENS: Tenant shall keep the Premises free
from all liens arising out of work performed, materials furnished, or
obligations incurred by Tenant or claimed to have been performed for Tenant.
In the event Tenant fails to discharge any such lien within ten (10) days
after receiving notice of the filing, Landlord shall be entitled to discharge
the lien at Tenant's expense and all resulting costs incurred by Landlord,
including attorney's fees shall be due from Tenant as additional rent.
D. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: The term Governmental
Regulations shall include all federal, state, county, city or governmental
agency laws, statutes, ordinances, standards, rules, requirements, or orders
now in force or hereafter enacted, promulgated, or issued. The term also
includes government measures regulating or enforcing public access,
occupational, health, or safety standards for employers, employees,
landlords, or tenants. Tenant shall continuously and without exception
repair and maintain the Premises, including Tenant improvements, Alterations,
fixtures, and furnishings, in an order and condition in compliance with all
Governmental Regulations. Tenant, at its sole expense, shall make all
repairs, replacements, alterations, or improvements needed to comply with all
Governmental Regulations to the extent that the Governmental Regulations
relate to or are required by and Law because of (i) Tenant's particular use or
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change of use of the Premises, (ii) Tenant's application for any permit or
governmental approval, or (iii) Tenant's construction or installation of any
Alterations or Trade Fixtures. Landlord, at Landlord's sole expense, shall
promptly make all repairs, replacements, alterations, or improvements needed
to comply with all Governmental Regulations to the extent not required by
Tenant pursuant to the preceding sentence. The judgment of any court of
competent jurisdiction or the admission of Tenant in any action or proceeding
against Tenant (whether Landlord be a party thereto or not) that Tenant has
violated any such law, regulation or other requirement in its use of the
Premises shall be conclusive of that fact as between Landlord and Tenant.
8. MAINTENANCE OF PREMISES:
A. LANDLORD'S OBLIGATIONS: Landlord at its sole cost and expense,
shall maintain in good condition, order, and repair, and replace as and when
necessary, the foundation, exterior load bearing walls and roof structure of
the Building Shell. Landlord shall also, at Tenant's sole cost and expense
through reimbursement as provided in this Section 8, clean, maintain, repair
and replace when necessary the following parts of the Premises: (i) all
plumbing and sewage facilities, (ii) all heating ventilating and air
conditioning facilities and equipment (excluding adjustments to interior
zones after initial occupancy of the Premises and balancing of the
equipment), (iii) all exterior windows, door entrances, plate glass and
glazing systems including caulking, and skylights, (iv) all automatic fire
extinguisher equipment, (v) the parking lot and all underground utility
facilities servicing the Premises, (vi) all elevator equipment, (vii) the
roof membrane system, and (viii) all waterscape, landscaping and shrubbery.
With respect to items (ii), (vi) and (vii) above, Landlord shall provide
Tenant, upon request from Tenant, a copy of a service contract between
Landlord and a licensed service contractor providing for period maintenance
of all such systems or equipment in conformance with the manufacturer's
recommendations. Landlord shall provide Tenant a copy of such preventive
maintenance contracts and paid invoices for the recommended work if requested
by Tenant.
B. TENANT'S OBLIGATIONS: Unless required by Landlord pursuant to
Section 8.A above or unless such
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services are shared (in which event the provisions of Sections 8.C, 8.D and
8.D shall apply as to such shared services), Tenant shall clean, maintain,
repair and replace when necessary the Premises and every part thereof through
regular inspections and servicing, including but not limited to: (i) all
fixtures, interior walls, floors, carpets and ceilings, and (ii) all
electrical facilities and equipment. All wall surfaces and floor tile are to
be maintained in an as good a condition as when Tenant took possession free
of holes, gouges, or defacements.
C. LANDLORD AND TENANT'S OBLIGATIONS REGARDING COMMON AREA COSTS:
Tenant agrees to reimburse Landlord for Tenant's Allocable Share (as defined
in Section 8.E below) of the expenses resulting from Landlord's payment of
Common Area Costs (as defined in Section 8.D below). Tenant agrees to pay
its Allocable Share of the Common Area Costs as additional rental within
thirty (30) days of written invoice from Landlord.
D. COMMON AREA COSTS: For purposes of calculating Tenant's
Allocable Share of Building and Project Costs, the term "Common Area Costs"
is defined as all costs and expenses of the nature hereinafter described
which are incurred by Landlord in connection with ownership and operation of
the Project in which the Premises are located, together with such additional
facilities as may be determined by Landlord to be reasonably desirable or
necessary to the ownership and operation of the Building and/or Project. All
costs and expenses shall be determined in accordance with generally accepted
accounting principles which shall be consistently applied (with accruals
appropriate to Landlord's business), including but not limited to the
following: (i) common area utilities, including water, to the extent not
separately metered; (ii) common area maintenance and service agreements for
the Project and the equipment therein, including without limitation,
maintenance of the sidewalks, landscaping, waterscape, roof membrane, parking
areas, driveways, service areas, and the building exterior; (iii) insurance
premiums and costs, including without limitation, the premiums and cost of
fire, casualty and liability coverage and rental abatement and earthquake (if
required pursuant to Section 9.B) insurance applicable to the Building or
Project; (iv) repairs, replacements and general maintenance (excluding
repairs and general maintenance paid by proceeds of insurance or by Tenant or
other third parties, and repairs or alterations attributable solely to
tenants of the Building or Project other than Tenant); (v) all real estate
taxes and assessment installments or other impositions or charges which may
be levied on the Building or Project, upon the occupancy of the Building or
Project and including any substitute or additional charges which may be
imposed during, or applicable to the Lease Term including real estate tax
increases due to a sale, transfer or other
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change of ownership of the Building or Project, as such taxes are levied or
appear on the City and County tax bills and assessment rolls; and (vi) fees
for management services rendered by either Landlord or a third party manager
engaged by Landlord (which may be a party affiliated with Landlord), except
that the total amount charged for management services and included in the
expenses to be reimbursed by Tenant shall not exceed the monthly rate of 5%
of the Base Monthly Rent, which the parties acknowledge as a reasonable and
fair market value for such services. Landlord shall have no obligation to
provide guard services or other security measures for the benefit of the
Project. Tenant assumes all responsibility for the protection of Tenant and
Tenant's Agents from acts of third parties; provided, however, that nothing
contained herein shall prevent Landlord, at its sole option, from providing
security measures for the Project. This is a "Net" Lease, meaning that Base
Monthly Rent is paid to Landlord absolutely net of all costs and expenses.
The provision for payment of Common Area Costs by means of periodic payment
of Tenant's Allocable Share of Building and/or Project Costs is intended to
pass on to Tenant and reimburse Landlord for all costs of operating and
managing the Building and/or Project.
E. TENANT'S ALLOCABLE SHARE: For purposes of prorating Common Area
Costs which Tenant shall pay, Tenant's Allocable Share of Common Area Costs
shall be computed by multiplying the total Common Area Costs by a fraction,
the numerator of which is the Rentable Square Footage of the Building and the
denominator of which is either the total Rentable Square Footage of the
Building if the service is allocable only to the Building, or the total
square footage of the Project if the service is allocable to the entire
Project. Tenant's obligation to share in Common Area Costs shall be adjusted
to reflect the Lease Commencement and Expiration dates and is subject to
recalculation in the event of expansion of the Building or Project.
F. WAIVER OF LIABILITY: Failure by Landlord to perform any defined
services, if any, or any cessation thereof, when such failure is caused by
accident, breakage, repairs, strikes, lockout or other labor disturbances or
labor disputes of any character or by any other cause, similar or dissimilar,
shall not render Landlord liable to Tenant in any respect, including damages
to either person or property, nor be construed as an eviction of Tenant, nor
cause an
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abatement of rent, nor relieve Tenant from fulfillment of any covenant or
agreement hereof. Should any equipment or machinery utilized in supplying
the services listed herein break down or for any cause cease to function
properly, upon receipt of written notice from Tenant of any deficiency or
failure of any services, Landlord shall use reasonable diligence to repair
the same promptly, but Tenant shall have no right to terminate this Lease and
shall have no claim for rebate of rent or damages on account of any
interruptions in service occasioned thereby or resulting therefrom. Tenant
waives the provisions of California Civil Code Sections 1941 and 1942
concerning the Landlord's obligation of tenantability and Tenant's right to
make repairs and deduct the cost of such repairs from the rent. Landlord
shall not be liable for a loss of or injury to person or property, however
occurring, through or in connection with or incidental to furnishing, or its
failure to furnish, any of the foregoing.
Notwithstanding the foregoing, in the event Landlord fails to perform in its
obligation under Section 8.A above to maintain plumbing and sewage
facilities, HVAC equipment, exterior windows, door entrances, plate glass and
glazing systems, skylights, fire extinguisher equipment, the parking lot,
underground utilities, elevator equipment, the roof membrane or landscaping
related to the Premises, Tenant may, after providing Landlord thirty (30)
days' written notice, undertake such maintenance at its own cost if Landlord
has not commenced such maintenance and Landlord shall reimburse Tenant for
its expenditure. The provisions of this paragraph do not apply to items
about which Landlord and Tenant may disagree as to the scope or necessity of
work.
G. REVIEW: Landlord shall maintain at all times during the term of
this Lease, at the office of Landlord, accurate records with respect to
Common Area Costs for the previous two-year period of the Lease, and shall
retain such records and such other documents as are reasonably necessary to
audit the Common Area Costs. Upon two weeks prior notice from Tenant,
Landlord shall make available for Tenant's inspection (or inspection
performed by Tenant's accountant and/or consultants) at Landlord's office,
during normal business hours, Landlord's records relating to the Common Area
Costs for the most recent two years of the Lease. If an audit, review or
inspection by a Tenant or Tenant's accountant or consultant alleges an
overbilling, Tenant may submit a claim for the overbilled amount to Landlord,
detailing the nature of the overbilling, and Landlord shall have thirty (30)
days to pay such amount or contest the claim by giving notice thereof to
Tenant, detailing the nature of Landlord's contest of Tenant's claims. If
Landlord's statement is determined to be in error by 3% or more, Landlord
shall reimburse Tenant within thirty (30) days
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following such determination for any overpayment of Common Area Costs, as
well as the cost of Tenant's review of Landlord's books and records not to
exceed $2,500.00 (including the cost of Tenant's accountant or consultant,
neither of which cost may be included as Common Area Costs), together with
interest on such amount, calculated at the Interest Rate, from the dates such
amounts were initially paid by Tenant.
H. RECOVERY: Landlord shall not expend more than the reasonable and
fair market value for any goods, services, labor or materials purchased or
provided by Landlord in connection with the management, operation,
maintenance and repair of the Building or the Common Area.
9. HAZARD INSURANCE:
A. TENANT'S USE: Tenant shall not use or permit the Premises, or
any part thereof, to be used for any purpose other than that for which the
Premises are hereby leased; and no use of the Premises shall be made or
permitted, nor acts done, which will cause an increase in premiums or a
cancellation of any insurance policy covering the Premises or any part
thereof, nor shall Tenant sell or permit to be sold, kept, or used in or
about the Premises, any article prohibited by the standard form of fire
insurance policies. Tenant shall, at its sole cost, comply with all
requirements of any insurance company or organization necessary for the
maintenance of reasonable fire and public liability insurance covering the
Premises and appurtenances.
B. LANDLORD'S INSURANCE: Landlord agrees to purchase and keep in
force fire, extended coverage insurance in an amount equal to the replacement
cost of the Building (not including any Tenant Improvements or Alterations
paid for by Tenant from sources other than the Work Allowance) as determined
by Landlord's insurance company's appraisers. Tenant agrees to pay Landlord
as additional rent, on demand, the full cost of said insurance as evidenced
by insurance billings to Landlord, and in the event of damage covered by said
insurance, the amount of any deductible under such policy. Payment shall be
due to Landlord within thirty (30) days after written invoice to Tenant. If
required by the holder of the first deed of trust on the property, such fire
and property damage insurance may be endorsed to cover loss caused by such
additional perils against which Landlord may elect to insure,
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including earthquake and/or flood, and shall contain reasonable deductibles
which, in the case of earthquake and flood insurance may be up to 15% of the
replacement value of the property. Additionally Landlord may maintain a
policy of (i) commercial general liability insurance insuring Landlord (and
such others designated by Landlord) against liability for personal injury,
bodily injury, death and damage to property occurring or resulting from an
occurrence in, on or about the Premises or Project in an amount as Landlord
determines is reasonably necessary for its protection, and (ii) rental lost
insurance covering a twelve (12) month period. It is understood and agreed
that Tenant's obligation under this Section will be prorated to reflect the
Lease Commencement and Expiration Dates.
Notwithstanding the above, Tenant shall have no obligation to pay premiums
payable with respect to earthquake insurance covering the Premises, unless
such coverage is (i) required by the lender in whose favor a first deed of
trust of the Premises has been granted, and (ii) is also generally required
by institutional lenders on similar properties in Alameda County. In such
event, the amount of the earthquake insurance premium required to be paid by
Tenant shall be limited to an amount equal to four (4) times the premium for
casualty insurance for the Building.
C. TENANT'S INSURANCE: Tenant agrees, at its sole cost, to insure
its personal property, Tenant Improvements (for which it has paid from
sources other than the Work Allowance), and Alterations for their full
replacement value (without depreciation) and to obtain worker's compensation
and public liability and property damage insurance for occurrences within the
Premises with a combined single limit of not less than Five Million Dollars
($5,000,000.00). Tenant's liability insurance shall be primary insurance
containing a cross-liability endorsement, and shall provide coverage on an
"occurrence" rather than on a "claims made" basis. Tenant shall name
Landlord and Landlord's lender as an additional insured and shall deliver a
copy of the policies and renewal certificates to Landlord. All such policies
shall provide for thirty (30) days' prior written notice to Landlord of any
cancellation, termination, or reduction in coverage.
D. WAIVER: Landlord and Tenant hereby waive all rights each may
have against the other on account of any loss or damage sustained by Landlord
or Tenant, as the case may be, or to the Premises or its contents, which may
arise from any risk covered by their respective insurance policies (or which
would have been covered had such insurance policies been maintained in
accordance with this Lease) as set forth above. The parties shall use their
reasonable efforts to obtain from their respective insurance companies a
waiver of any right of subrogation which said insurance company
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may have against Landlord or Tenant, as the case may be.
10. TAXES: Tenant shall be liable for and shall pay as additional
rental, prior to delinquency, the following: (i) all taxes and assessments
levied against Tenant's personal property and trade or business fixtures;
(ii) all real estate taxes and assessment installments or other impositions
or charges which may be levied on the Premises or upon the occupancy of the
Premises, including any substitute or additional charges which may be imposed
applicable to the Lease Term; and (iii) real estate tax increases due to a
sale, transfer or other change of ownership of the Premises as it appears on
the City and County tax bills during the Lease Term. Tenant's obligation
under this Section shall be prorated to reflect the Lease Commencement and
Expiration Dates. If, at any time during the Lease Term a tax, excise on
rents, business license tax or any other tax, however described, is levied or
assessed against Landlord as a substitute or addition, in whole or in part,
for taxes assessed or imposed on land or Building, Tenant shall pay and
discharge its pro rata share of such tax or excise on rents or other tax
before it becomes delinquent; except that this provision is not intended to
cover net income taxes, inheritance, gift or estate tax imposed upon
Landlord. In the event that a tax is placed, levied, or assessed against
Landlord and the taxing authority takes the position that Tenant cannot pay
and discharge its pro rata share of such tax on behalf of Landlord, then at
Landlord's sole election, Landlord may increase the Base Monthly Rent by the
exact amount of such tax and Tenant shall pay such increase. If by virtue of
any application or proceeding brought by or on behalf of Landlord, there
results a reduction in the assessed value of the Premises during the Lease
Term, Tenant agrees to reimburse Landlord for all costs incurred by Landlord
in connection with such application or proceeding. Tenant at its cost shall
have the right, at any time, to seek a reduction in the assessed valuation of
the Premises or to contest any real property taxes that are to be paid by
Tenant, provided Tenant does not withhold or delay its required payment to
Landlord during such contention. Landlord shall not be required to join in
any such proceeding or contest unless the provisions of any law require that
the proceeding or contest be brought by or in the name of the owner of the
Premises. In such event, Landlord shall join in the proceeding or contest or
permit it to
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be brought in Landlord's name, provided that Landlord is not required to bear
any cost in connection therewith.
11. UTILITIES: Tenant shall pay directly to the providing utility all
water, gas, electric, telephone, and other utilities supplied to the
Premises. Landlord shall not be liable for loss of or injury to person or
property, however occurring, through or in connection with or incidental to
furnishing or failure to furnish utilities to the Premises, and Tenant shall
not be entitled to abatement or reduction of any portion of Base Monthly Rent
or any other amount payable under this Lease.
12. TOXIC WASTE AND ENVIRONMENTAL DAMAGE:
A. TENANT'S RESPONSIBILITY: Without the prior written consent of
Landlord, Tenant shall not bring, use, or permit upon the Premises, or
generate, create, release, emit, or dispose (nor permit any of the same) from
the Premises any chemicals, toxic or hazardous gaseous, liquid or solid
materials or waste, including without limitation, material or substance
having characteristics of ignitability, corrosivity, reactivity, or toxicity
or substances or materials which are listed on any of the Environmental
Protection Agency's lists of hazardous wastes or which are identified in
Division 22 Title 26 of the California Code of Regulations as the same may be
amended from time to time ("Hazardous Materials"). In order to obtain
consent, Tenant shall deliver to Landlord its written proposal describing the
toxic material to be brought onto the Premises, measures to be taken for
storage and disposal thereof, safety measures to be employed to prevent
pollution of the air, ground, surface and ground water. Landlord's approval
may be withheld in its reasonable judgment. In the event Landlord consents
to Tenant's use of Hazardous Materials on the Premises, Tenant represents and
warrants that it will do the following: (i) adhere to all reporting and
inspection requirements imposed by Federal, State, County or Municipal laws,
ordinances or regulations and will provide Landlord a copy of any such
reports or agency inspections; (ii) obtain and provide Landlord copies of all
necessary permits required for the use and handling Hazardous Materials on
the Premises; (iii) enforce Hazardous Materials handling and disposal
practices consistent with industry standards; (iv) surrender the Premises
free from any Hazardous Materials arising from Tenant's bringing, using,
permitting, generating, creating, releasing, emitting or disposing of
Hazardous Materials; and (v) properly close the facility with regard to
Hazardous Materials including the removal or decontamination of any process
piping, mechanical ducting, storage tanks, containers, or trenches which have
come into contact with Hazardous Materials and
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obtain a closure certificate from the local administering agency prior to the
Expiration Date.
B. TENANT'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Tenant shall,
at its sole cost and expense, comply with all laws pertaining to, and shall
with counsel reasonably acceptable to Landlord, indemnify, defend and hold
harmless Landlord and Landlord's shareholders, directors, officers,
employees, partners, affiliates, and agents from, any claims, liabilities,
costs or expenses incurred or suffered by Landlord arising from the bringing,
using, permitting, generating, emitting or disposing of Hazardous Materials
by Tenant through the surface soils of the Premises during the Lease Term or
the violation of any environmental law, by Tenant or Tenant's Agents.
Tenant's indemnification and hold harmless obligations include, without
limitation, the following: (i) claims, liability, costs or expenses
resulting from or based upon administrative, judicial (civil or criminal) or
other action, legal or equitable, brought by any private or public person
under common law or under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation
and Recovery Act of 1980 ("RCRA") or any other Federal, State, County or
Municipal law, ordinance or regulation; (ii) claims, liabilities, costs or
expenses pertaining to the identification, monitoring, cleanup, containment,
or removal of Hazardous Materials from soils, riverbeds or aquifers including
the provision of an alternative public drinking water source; (iii) all costs
of defending such claims; (iv) Losses attributable to diminution in the value
of the Premises or the Building; (v) Loss or restriction of use of rentable
space in the Building; (vi) Adverse effect on the marketing of any space in
the Building; and (All other liabilities, obligations, penalties, fines,
claims, actions (including remedial or enforcement actions of any kind and
administrative or judicial proceedings, orders or judgments), damages
(including consequential and punitive damages), and costs (including
attorney, consultant, and expert fees and expenses) resulting from the
release or violation. This indemnification shall survive the expiration or
termination of this Lease.
C. ACTUAL RELEASE BY TENANT: Tenant agrees to notify Landlord of
any lawsuits or orders of which it becomes aware which relate to the
remedying of or actual release of Hazardous Materials on or into the
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soils or ground water at or under the Premises. Tenant shall also provide
Landlord all notices required by Section 25359.7(b) of the Health and Safety
Code and all other notices required by law to be given to Landlord in
connection with Hazardous Materials. Without limiting the foregoing, Tenant
shall also deliver to Landlord, within twenty (20) days after receipt
thereof, any written notices received from any governmental agency alleging a
material violation of, or material failure to comply with, any federal, state
or local laws, regulations, ordinances or orders, the violation of which of
failure to comply with poses a foreseeable and material risk of contamination
of the ground water or injury to humans (other than injury solely to Tenant,
Tenant's Agents and employees within the Building).
In the event of any release on or into the Premises or into the soil or
ground water under the Premises of any Hazardous Materials used, treated,
stored or disposed of by Tenant, Tenant agrees to comply, at its sole cost,
with all laws, regulations, ordinances and orders of any federal, state or
local agency relating to the monitoring or remediation of such Hazardous
Materials. In the event of any such release of Hazardous Materials, Tenant
agrees to meet and confer with Landlord and its Lender to attempt to
eliminate and mitigate any financial exposure to such Lender and resultant
exposure to Landlord under California Code of Civil Procedure Section 736(b)
as a result of such release, and promptly to take reasonable monitoring,
cleanup and remedial steps given, inter alia, the historical uses to which
the Property has and continues to be used, the risks to public health posed
by the release, the then available technology and the costs of remediation,
cleanup and monitoring, consistent with acceptable customary practices for
the type and severity of such contamination and all applicable laws. Nothing
in the preceding sentence shall eliminate, modify or reduce the obligation of
Tenant under 12.B of this Lease to indemnify and hold Landlord harmless from
any claims liabilities, costs or expenses incurred or suffered by Landlord.
Tenant shall provide Landlord prompt written notice of Tenant's monitoring,
cleanup and remedial steps.
In the absence of an order of any federal, state or local governmental
or quasi-governmental agency relating to the cleanup, remediation or other
response action required by applicable law, any dispute arising between
Landlord and Tenant concerning Tenant's obligation to Landlord under this
Section 12.C concerning the level, method, and manner of cleanup, remediation
or response action required in connection with such a release of Hazardous
Materials shall be resolved by mediation and/or arbitration pursuant to the
provisions of Section 19.E of this Lease.
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D. ENVIRONMENTAL MONITORING: Landlord and its agents shall have
the right to inspect, investigate, sample and monitor the Premises including
any air, soil, water, ground water or other sampling or any other testing,
digging, drilling or analysis to determine whether Tenant is complying with
the terms of this Section 12. If Landlord discovers that Tenant is not in
compliance with the terms of this Section 12, any such costs incurred by
Landlord, including attorneys' and consultants' fees, shall be due and
payable by Tenant to Landlord within thirty (30) days following Landlord's
written demand therefore.
13. TENANT'S DEFAULT: The occurrence of any of the following shall
constitute a material default and breach of this Lease by Tenant: (i)
Tenant's failure to pay any rent due under this Lease within ten (10) days
after written receipt of notice from Landlord that such rent is past due,
(ii) the abandonment of the Premises by Tenant, as defined in California
Civil Code Section 1951.3; (iii) Tenant's failure to observe and perform any
other required provision of this Lease, where such failure continues for
thirty (30) days after written notice from Landlord; (iv) Tenant's making of
any general assignment for the benefit of creditors; (v) the filing by or
against Tenant of a petition to have Tenant adjudged a bankrupt or of a
petition for reorganization or arrangement under any law relating to
bankruptcy (unless, in the case of a petition filed against Tenant, the same
is dismissed after the filing); (vi) 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; (vii) 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; or (viii) any default by Tenant on other
buildings leased by Tenant within the Project.
A. REMEDIES: In the event of any such default by Tenant, then in
addition to other remedies available to Landlord at law or in equity,
Landlord shall have the immediate option to terminate this Lease and all
rights of Tenant hereunder by giving written notice of such intention to
terminate. In the event Landlord elects to so terminate this Lease, Landlord
may recover from Tenant all the following: (i) the worth at time
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of award of any unpaid rent which had been earned at the time of such
termination; (ii) the worth at time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss for the same period that Tenant
proves could have been reasonably avoided; (iii) the worth at time of award
of the amount by which the unpaid rent for the balance of the Lease Term
after the time of award exceeds the amount of such rental loss that Tenant
proves could be reasonably avoided; (iv) any other amount necessary to
compensate Landlord for all detriment proximately caused by Tenant's failure
to perform its obligations under this Lease, or which in the ordinary course
of things would be likely to result therefrom; including the following: (x)
expenses for repairing, altering or remodeling the Premises for purposes of
reletting, (y) broker's fees, advertising costs or other expenses of
reletting the Premises, and (z) costs of carrying the Premises such as taxes,
insurance premiums, utilities and security precautions. and (v) at Landlord's
election, such other amounts in addition to or in lieu of the foregoing as
may be permitted by applicable California law. The term "rent", as used
herein, is defined as the minimum monthly installments of Base Monthly Rent
and all other sums required to be paid by Tenant pursuant to this Lease, all
such other sums being deemed as additional rent due hereunder. As used in
(i) and (ii) above, "worth at the time of award" shall be computed by
allowing interest at a rate equal to the discount rate of the Federal Reserve
Bank of San Francisco plus five (5%) percent per annum. As used in (iii)
above, "worth at the time of award" shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at
the time of award plus one (1%) percent.
B. RIGHT TO RE-ENTER: In the event of any such default by Tenant,
Landlord shall have the right, after terminating this Lease, to re-enter the
Premises and remove all persons and property. Such property may be removed
and stored in a public warehouse or elsewhere at the cost of and for the
account of Tenant, and disposed of by Landlord in any manner permitted by law.
C. ABANDONMENT: If Landlord does not elect to terminate this Lease
as provided in Section 13.A or 13.B above, then the provisions of California
Civil Code Section 1951.4, (Landlord may continue the lease in effect after
Tenant's breach and abandonment and recover rent as it becomes due if Tenant
has a right to sublet and assign, subject only to reasonable limitations) as
amended from time to time, shall apply and Landlord may from time to time,
without terminating this Lease, either recover all rental as it becomes due
or relet the Premises or any part thereof for such term or terms and at such
rental or rentals and upon such other terms and conditions as Landlord in its
sole
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discretion may deem advisable, with the right to make alterations and repairs
to the Premises. In the event that Landlord elects to so relet, rentals
received by Landlord from such reletting shall be applied in the following
order to: (i) the payment of any indebtedness other than Base Monthly Rent
due hereunder from Tenant to Landlord; (ii) the payment of any cost of such
reletting; (iii) the payment of the cost of any alterations and repairs to
the Premises; and (iv) the payment of Base Monthly Rent due and unpaid
hereunder. The residual rentals, if any, shall be held by Landlord and
applied in payment of future Base Monthly Rent as the same may become due and
payable hereunder. Landlord shall have no obligation to relet the Premises
following a default if Landlord has other available space within the Building
or Project. In the event the portion of rentals received from such reletting
which is applied to the payment of rent hereunder during any month be less
than the rent payable during that month by Tenant hereunder, then Tenant
shall pay such deficiency to Landlord immediately upon demand. Such
deficiency shall be calculated and paid monthly. Tenant shall also pay to
Landlord, as soon as ascertained, any costs and expenses incurred by Landlord
in such reletting or in making such alterations and repairs not covered by
the rentals received from such reletting.
D. NO TERMINATION: Landlord's re-entry or taking possession of the
Premises pursuant to 13.B or 13.C shall not be construed as an election to
terminate this Lease unless written notice of such intention is given to
Tenant or unless the termination is decreed by a court of competent
jurisdiction. Notwithstanding any reletting without termination by Landlord
because of any default by Tenant, Landlord may at any time after such
reletting elect to terminate this Lease for any such default.
E. NON-WAIVER: Landlord may accept Tenant's payments without waiving
any rights under this Lease, including rights under a previously served
notice of default. No payment by Tenant or receipt by Landlord of a lesser
amount than any installment of rent due shall be deemed as other than payment
on account of the amount due. If Landlord accepts partial payments after
serving a notice of default, Landlord may nevertheless commence and pursue an
action to enforce rights and remedies under the previously served notice of
default without giving Tenant any further notice or demand.
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Furthermore, the Landlord's acceptance of Rent from the Tenant when the
Tenant is holding over without express written consent does not convert
Tenants Tenancy from a tenancy at sufferance to a month to month tenancy. No
waiver of any provision of this Lease shall be implied by any failure of
Landlord to enforce any remedy for the violation of that provision, even if
that violation continues or is repeated. Any waiver by Landlord of any
provision of this Lease must be in writing. Such waiver shall affect only
the provision specified and only for the time and in the manner stated in the
writing. No delay or omission in the exercise of any right or remedy by
Landlord shall impair such right or remedy or be construed as a waiver
thereof by Landlord. No act or conduct of Landlord, including, without
limitation, the acceptance of keys to the Premises, shall constitute
acceptance of the surrender of the Premises by Tenant before the Expiration
Date. Only written notice from Landlord to Tenant of acceptance shall
constitute such acceptance of surrender of the Premises. Landlord's consent
to or approval of any act by Tenant which requires Landlord's consent or
approvals shall not be deemed to waive or render unnecessary Landlord's
consent to or approval of any subsequent act by Tenant.
F. PERFORMANCE BY LANDLORD: If Tenant fails to perform any
obligation required under this Lease or by law or governmental regulation,
Landlord in its sole discretion may, without notice, without waiving any
rights or remedies and without releasing Tenant from its obligations
hereunder, perform such obligation, in which event Tenant shall pay Landlord
as additional rent all sums paid by Landlord in connection with such
substitute performance, including interest at the Agreed Interest Rate within
ten (10) days of Landlord's written notice for such payment.
14. LANDLORD'S LIABILITY:
A. LIMITATION ON LANDLORD'S LIABILITY: In the event of Landlord's
failure to perform any of its covenants or agreements under this Lease,
Tenant shall give Landlord written notice of such failure and shall give
Landlord thirty (30) days to cure or commence to cure such failure prior to
any claim for breach or resultant damages, provided, however, that if the
nature of the default is such that it cannot reasonably be cured within the
30-day period, Landlord shall not be deemed in default if it commences within
such period to cure, and thereafter diligently prosecutes the same to
completion. In addition, upon any such failure by Landlord, Tenant shall
give notice by registered or certified mail to any person or entity with a
security interest in the Premises ("Mortgagee") that has provided Tenant with
notice of its interest in the Premises, and shall provide Mortgagee a
reasonable opportunity to cure such failure, including such time to obtain
possession of the Premises by power of sale
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or judicial foreclosure, if such should prove necessary to effectuate a cure.
Tenant agrees that each of the Mortgagees to whom this Lease has been
assigned is an expressed third-party beneficiary hereof. Tenant waives any
right under California Civil Code Section 1950.7 or any other present or
future law to the collection of any payment or deposit from Mortgagee or any
purchaser at a foreclosure sale of Mortgagee's interest unless Mortgagee or
such purchaser shall have actually received and not refunded the applicable
payment or deposit. Tenant Further waives any right to terminate this Lease
and to vacate the Premises on Landlord's default under this Lease. Tenant's
sole remedy on Landlord's default is an action for damages or injunctive or
declaratory relief, with the sole exception that if Landlord fails to perform
in its obligation under Section 8.A to maintain plumbing and sewage
facilities, HVAC equipment, exterior windows, door entrances, plate glass and
glazing systems, skylights, fire extinguisher equipment, the parking lot,
underground utilities, elevator equipment, the roof membrane or landscaping
related to the Premises, Tenant may, after providing Landlord thirty (30)
days' written notice, undertake such maintainence at its own cost if Landlord
has not commenced such maintenance. This exception does not apply to items
about which Landlord and Tenant may disagree as to the scope or necessity of
work.
B. LIMITATION ON TENANT'S RECOURSE: If Landlord is a corporation
trust, partnership, joint venture, unincorporated association or other form
of business entity: (i) the obligations of Landlord shall not constitute
personal obligations of the officers, directors, trustees, partners, joint
venturers, members, owners, stockholders, or other principals or
representatives except to the extent of their interest in the Premises.
Tenant shall have recourse only to the interest of Landlord in the Premises
or for the satisfaction of the obligations of Landlord and shall not have
recourse to any other assets of Landlord for the satisfaction of such
obligations.
C. INDEMNIFICATION OF LANDLORD: As a material part of the
consideration rendered to Landlord, Tenant hereby waives all claims against
Landlord for damages to goods, wares and merchandise, and all other personal
property in, upon or about said Premises and for injuries to persons in or
about said Premises, from any cause arising at any time to the fullest extent
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permitted by law, and Tenant shall indemnify and hold Landlord exempt and
harmless from any damage or injury to any person, or to the goods, wares and
merchandise and all other personal property of any person, arising from the
use of the Premises, Building, and/or Project by Tenant and Tenant's Agents
or from the failure of Tenant to keep the Premises in good condition and
repair as herein provided, except to the extent due to the active negligence
or willful misconduct of Landlord. Further, in the event Landlord is made
party to any litigation due to the acts or omission of Tenant and Tenant's
Agents. Tenant will indemnify, defend (with counsel reasonably acceptable to
Landlord) and hold Landlord harmless from any such claim or liability
including Landlord's costs and expenses and reasonable attorney's fees
incurred in defending such claims.
15. DESTRUCTION OF PREMISES:
A. DESTRUCTION BY AN INSURED CASUALTY: In the event of a destruction
of the Premises during the Lease Term by a casualty for which Landlord has
received insurance proceeds sufficient to repair the damage or destruction,
Landlord shall repair the same to the extent of such proceeds. Such
destruction shall not annul or void this Lease; however, Tenant shall be
entitled to a proportionate reduction of Base Monthly Rent while repairs are
being made, such proportionate reduction to be based upon the extent to which
the repairs interfere with Tenant's business in the Premises, as reasonably
determined by Landlord. If the repairs cannot be made in 180 days from the
date of receipt of all governmental approvals necessary under the laws and
regulations of State, Federal, County or Municipal authorities, as reasonably
determined by Landlord, then Landlord or Tenant may terminate this Lease
within fifteen (15) days of Landlord's determination of the foregoing.
Notwithstanding the foregoing, either Landlord or Tenant shall have the
option to terminate the Lease in the event of a total destruction of the
Premises or in the event of a partial destruction occurs in the last year of
the Lease Term and will take more than sixty (60) days to repair. In no
event shall Landlord be required to replace or restore Alterations, Tenant
Improvements paid for by Tenant from sources other than the Work Allowance,
Tenant's fixtures or personal property. With respect to a destruction which
Landlord is obligated to repair or may elect to repair under the terms of
this Section, Tenant waives the provisions of Section 1932, and Section 1933,
Subdivision 4, of the Civil Code of the State of California, and any other
similarly enacted statute, and the provisions of this Section 15 shall govern
in the case of such destruction.
B. DESTRUCTION BY AN UNINSURED CASUALTY: In the event of a total or
partial destruction of the Premises during the Lease Term by a casualty for
which
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Landlord has not received insurance proceeds sufficient to repair the damage
or destruction, Landlord may elect to either (i) terminate this Lease by
giving written notice to Tenant within fifteen (15) days after determining
the replacement cost and furnishing reasonable evidence thereof to Tenant; or
(ii) rebuild the Premises, provided the damage can be repaired within one
hundred eighty (180) days from the date of receipt of all governmental
approvals necessary under the laws and regulations of State, Federal, County
or Municipal authorities, as reasonably determined by Landlord.
Notwithstanding the foregoing, if the cost to repair the damage from an
uninsured casualty is less than 5% of the then replacement cost of the
Building (excluding Tenant Improvements), then Landlord shall repair the
damage. If Landlord contributes to payment for an uninsured loss, the
contributed amount shall be amortized over the useful life of the
improvements and such amortized amount shall be reimbursed by Tenant to
Landlord as additional rent, together with interest at the prime rate of
Union Bank plus two percent (2%). If Landlord so elects to terminate this
Lease, Tenant, within fifteen (15) days after receiving Landlord's notice to
terminate, can elect to pay to Landlord at the time Tenant notifies Landlord
of its election, the actual cost of restoration, in which case Landlord shall
restore the Premises and this Lease shall not terminate.
C. TENANT'S RIGHT TO CANCEL ADJACENT LEASES: In the event the Lease
is terminated pursuant to Section 15.A or 15.B above, Tenant shall have the
right to simultaneously terminate its leases for the other buildings within
the first phase of the Project leased by Tenant.
16. CONDEMNATION: If any part of the Premises shall be taken for any
public or quasi-public use, under any statute or by right of eminent domain
or private purchase in lieu thereof, and only a part thereof remains which is
susceptible of occupation hereunder, this Lease shall, as to the part so
taken, terminate as of the day before title vests in the condemnor or
purchaser ("Vesting Date") and Base Monthly Rent payable hereunder shall be
adjusted so that Tenant is required to pay for the remainder of the Lease
Term only such portion of Base Monthly Rent as the value of the part
remaining after such taking bears to the value of the entire Premises prior
to such taking; but in such event, Landlord shall have the
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option to terminate this Lease as of the Vesting Date. If all of the
Premises or such part thereof be taken so that there does not remain a
portion susceptible for occupation hereunder, this Lease shall terminate on
the Vesting Date. If part or all of the Premises be taken, all compensation
awarded upon such taking shall go to Landlord, and Tenant shall have no claim
thereto; but Landlord shall cooperate with Tenant, without cost to Landlord,
to recover compensation for damage to or taking of any Alterations, Tenant
Improvements paid for by Tenant from sources other than the Work Allowance,
or for Tenant's moving costs. Tenant hereby waives the provisions of
California Code of Civil Procedures Section 1265.130 and any other similarly
enacted statue, and the provisions of this Section 16 shall govern in the
case of such taking.
17. ASSIGNMENT OR SUBLEASE:
A. CONSENT BY LANDLORD: Except as specifically provided in this
Section 17, Tenant may not assign, sublet, hypothecate, or allow a third
party to use the Premises without the express written consent of Landlord,
which consent shall not be unreasonably withheld as defined below. In the
event Tenant desires to assign this Lease or any interest herein including,
without limitation, a pledge, mortgage or other hypothecation, or sublet the
Premises or any part thereof, Tenant shall deliver to Landlord (i) executed
counterparts of any agreement and of all ancillary agreements with the
proposed assignee/subtenant, (ii) current financial statements of the
transferee covering the preceding three years, (iii) the nature of the
proposed transferee's business to be carried on in the Premises, (v) all
consideration to be given on account of the Transfer, and (vi) a current
financial statement of Tenant. Landlord may condition its approval of any
Transfer to a certification from both Tenant and the proposed transferee of
all consideration to be paid to Tenant in connection with such Transfer. At
Landlord's request, Tenant shall also provide additional information
reasonably required by Landlord to determine whether it will consent to the
proposed assignment or sublease. Landlord shall have a ten (10) day period
following receipt of all the foregoing within which to notify Tenant in
writing that Landlord elects to: (i) permit Tenant to assign or sublet such
space to the named assignee/subtenant on the terms and conditions set forth
in the notice; or (ii) refuse consent. If Landlord should fail to notify
Tenant in writing of such election within the 10-day period, Landlord shall
be deemed to have elected option (ii) above. Landlord's written consent to
the proposed assignment or sublease shall not be unreasonably withheld,
provided and upon the condition that: (i) the proposed assignee or subtenant
is engaged in a business that is limited to the use expressly permitted under
this Lease; (ii) the proposed assignee is a company with sufficient financial
worth and management ability
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to undertake the financial obligation of this Lease and Landlord has been
furnished with reasonable proof thereof; (iii) the proposed assignment or
sublease is in form reasonably satisfactory to Landlord; and (iv) Tenant
reimburses Landlord on demand for any costs that may be incurred by Landlord
in connection with said assignment or sublease, including the costs of making
investigations as to the acceptability of the proposed assignee or subtenant
and legal costs incurred in connection with the granting of any requested
consent, not to exceed $2,500.00; and (vi) Tenant shall not have advertised
or publicized the availability of the Premises without prior notice to
Landlord. In the event all or any one of the foregoing conditions are not
satisfied, Landlord shall be considered to have acted reasonably if it
withholds its consent.
B. ASSIGNMENT OR SUBLETTING CONSIDERATION: Any rent or other
economic consideration realized by Tenant under any sublease and assignment,
in excess of the rent payable hereunder and reasonable subletting and
assignment costs, shall be divided and paid fifty percent (50%) to Landlord
and fifty percent (50%) to Tenant, after first deducting all direct costs
incurred by Tenant in connection with such transaction. Tenant's obligation
to pay over Landlord's portion of the consideration constitutes an obligation
for additional rent hereunder. The above provisions relating to Landlord's
right to terminate the Lease and relating to the allocation of bonus rent are
independently negotiated terms of the Lease which constitute a material
inducement for the Landlord to enter into the Lease, and are agreed by the
parties to be commercially reasonable. No assignment or subletting by Tenant
shall relieve it of any obligation under this Lease. Any assignment or
subletting which conflicts with the provisions hereof shall be void.
C. NO RELEASE: Any assignment or sublease, including assignments or
deemed assignments pursuant to Section 17.D below, shall be made only if and
shall not be effective until the assignee or subtenant shall execute,
acknowledge, and deliver to Landlord an agreement, in form and substance
satisfactory to Landlord, whereby the assignee or subtenant shall assume all
the obligations of this Lease on the part of Tenant to be performed or
observed and shall be subject to all the covenants, agreements, terms,
provisions and conditions in this Lease. Notwithstanding any such sublease
or assignment and the acceptance of rent by
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Landlord from any subtenant or assignee, Tenant and any guarantor shall
remain fully liable for the payment of Base Monthly Rent and additional rent
due, and to become due hereunder, for the performance of all the covenants,
agreements, terms, provisions and conditions contained in this Lease on the
part of Tenant to be performed and for all acts and omissions of any
licensee, subtenant, assignee or any other person claiming under or through
any subtenant or assignee that shall be in violation of any of the terms and
conditions of this Lease, and any such violation shall be deemed a violation
by Tenant. Tenant shall indemnify, defend and hold Landlord harmless from
and against all losses, liabilities, damages, costs and expenses (including
reasonable attorney fees) resulting from any claims that may be made against
Landlord by the proposed assignee or subtenant or by any real estate brokers
or other persons claiming compensation in connection with the proposed
assignment or sublease.
D. REORGANIZATION OF TENANT: If Tenant is a corporation, the
following shall be deemed a voluntary assignment of Tenant's interest in this
Lease: (i) any dissolution, merger, consolidation, or other reorganization of
or affecting Tenant, whether or not Tenant is the surviving corporation, and
(ii) if the capital stock of Tenant is not publicly traded, the sale or
transfer to one person or entity (or to any group of related persons or
entities) stock possessing more than 50% of the total combined voting power
of all classes of Tenant's capital stock issued, outstanding and entitled to
vote for the election of directors.
E. PERMITTED TRANSFERS: Notwithstanding anything contained in this
Section 17, so long as Tenant otherwise complies with the provisions of this
Article, Tenant may enter into any of the following transfers (a "Permitted
Transfer") without Landlord's prior consent, and Landlord shall not be
entitled to receive any part of any subrent resulting therefrom that would
otherwise be due. Tenant may sublease all or part of the Premises or assign
its interest in this Lease to (i) any corporation which controls, is
controlled by, or is under common control with the original Tenant to this
Lease by means of an ownership interest of more than 50%; (ii) a corporation
which results from a merger, consolidation or other reorganization in which
Tenant is not the surviving corporation, so long as such transaction is not
entered into as a subterfuge by Tenant to be relieved of or otherwise
diminish its obligations under this Lease; and (iii) a corporation which
purchases or otherwise acquires all or substantially all of the assets of
Tenant so long as such acquisition is not entered into as a subterfuge by
Tenant to be relieved of or otherwise diminish its obligations under this
Lease.
F. EFFECT OF DEFAULT: In the event of Tenant's default, Tenant
hereby assigns all rents due from any
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assignment or subletting to Landlord as security for performance of its
obligations under this Lease, and Landlord may collect such rents as Tenant's
Attorney-in-Fact, except that Tenant may collect such rents unless a default
occurs as described in Section 13 above. A Lease termination due to Tenant's
default shall not automatically terminate an assignment or sublease then in
existence; rather at Landlord's election, such assignment or sublease shall
survive the Lease termination, the assignee or subtenant shall attorn to
Landlord, and Landlord shall undertake the obligations of Tenant under the
sublease or assignment; except that Landlord shall not be liable for prepaid
rent, security deposits or other defaults of Tenant to the subtenant or
assignee, or for any acts or omissions of Tenant and Tenant's Agents.
G. CONVEYANCE BY LANDLORD: As used in this Lease, the term
"Landlord" is defined only as the owner for the time being of the Premises,
so that in the event of any sale or other conveyance of the Premises or in
the event of a master lease of the Premises, Landlord shall be entirely freed
and relieved of all its covenants and obligations hereunder, and it shall be
deemed and construed, without further agreement between the parties and the
purchaser at any such sale or the master tenant of the Premises, that the
purchaser or master tenant of the Premises has assumed and agreed to carry
out any and all covenants and obligations of Landlord hereunder. Such
transferor shall transfer and deliver Tenant's security deposit to the
purchaser at any such sale or the master tenant of the Premises, and
thereupon the transferor shall be discharged from any further liability in
reference thereto.
F. SUCCESSORS AND ASSIGNS: Subject to the provisions this Section
17, the covenants and conditions of this Lease shall apply to and bind the
heirs, successors, executors, administrators and assigns of all parties
hereto; and all parties hereto shall be jointly and severally liable
hereunder.
18. OPTION TO EXTEND THE LEASE TERM:
A. GRANT AND EXERCISE OF OPTION: Provided Tenant concurrently
exercises its options to extend the lease terms on all other buildings leased
by Tenant within the first phase portion of the Project, Landlord grants to
Tenant, subject to the terms and conditions
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set forth in this Section 18.A, two (2) options (the "Options") to extend the
Lease Term for an additional term (the "Option Term"). Each Option Term
shall be for a period of sixty (60) months and shall be exercised, if at all,
by written notice to Landlord no earlier than eighteen (18) months prior to
the Expiration Date but no later than twelve (12) months prior to the
Expiration Date. If Tenant exercises the Option, all of the terms, covenants
and conditions of this Lease except this Section shall apply during the
Option Term as though the expiration date of the Option Term was the date
originally set forth herein as the Expiration Date, provided that Base
Monthly Rent for the Premises payable by Tenant during the Option Term shall
be the greater of either the average of Base Monthly Rent paid during the
previous term, or the then Fair Market Rental as hereinafter defined.
Notwithstanding anything herein to the contrary, if Tenant is in monetary or
material non-monetary default under any of the terms, covenants or conditions
of this Lease either at the time Tenant exercises the Option or at any time
thereafter prior to the commencement date of the Option Term, Landlord shall
have, in addition to all of Landlord's other rights and remedies provided in
this Lease, the right to terminate the Option upon notice to Tenant, in which
event the expiration date of this Lease shall be and remain the Expiration
Date. As used herein, the term "Fair Market Rental" is defined as the rental
and all other monetary payments, including any escalations and adjustments
thereto (including without limitation Consumer Price Indexing) that Landlord
could obtain during the Option Term from a third party desiring to lease the
Premises, based upon the current use and other potential uses of the
Premises, as determined by the rents then being obtained for new leases of
space comparable in age and quality to the Premises in the locality of the
Building.
B. DETERMINATION OF FAIR MARKET RENTAL: If Tenant exercises the
Option, Landlord shall send Tenant a notice setting forth the Fair Market
Rental for the Option Term within thirty (30) days following the Exercise
Date. If Tenant disputes Landlord's determination of Fair Market Rental for
the Option Term, Tenant shall, within thirty (30) days after the date of
Landlord's notice setting forth Fair Market Rental for the Option Term, send
to Landlord a notice stating that Tenant either elects to terminate its
exercise of the Option, in which event the Option shall lapse and this Lease
shall terminate on the Expiration Date, or that Tenant disagrees with
Landlord's determination of Fair Market Rental for the Option Term and elects
to resolve the disagreement as provided in Section 18.C below. If Tenant does
not send Landlord a notice as provided in the previous sentence, Landlord's
determination of Fair Market Rental shall be the basis for determining the
Base Monthly Rent payable by Tenant during the Option Term. If Tenant elects
to resolve
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the disagreement as provided in Section 18.C and such procedures are not
concluded prior to the commencement date of the Option Term, Tenant shall pay
to Landlord as Base Monthly Rent the Fair Market Rental as determined by
Landlord in the manner provided above. If the Fair Market Rental as finally
determined pursuant to Section 18.C is greater than Landlord's determination,
Tenant shall pay Landlord the difference between the amount paid by Tenant
and the Fair Market Rental as so determined in Section 18.C within thirty
(30) days after such determination. If the Fair Market Rental as finally
determined in Section 18.C is less than Landlord's determination, the
difference between the amount paid by Tenant and the Fair Market Rental as so
determined in Section 18.C shall be credited against the next installments of
rent due from Tenant to Landlord hereunder.
C. RESOLUTION OF A DISAGREEMENT OVER THE FAIR MARKET RENTAL: Any
disagreement regarding Fair Market Rental shall be resolved as follows:
1. Within thirty (30) days after Tenant's response to Landlord's
notice setting forth the Fair Market Rental, Landlord and Tenant shall meet
at least two (2) times at a mutually agreeable time and place, in an attempt
to resolve the disagreement.
2. If within the 30-day period referred to above, Landlord and
Tenant cannot reach agreement as to Fair Market Rental, each party shall
select one appraiser to determine Fair Market Rental. Each such appraiser
shall arrive at a determination of Fair Market Rental and submit their
conclusions to Landlord and Tenant within thirty (30) days after the
expiration of the 30-day consultation period described above.
3. If only one appraisal is submitted within the requisite time
period, it shall be deemed as Fair Market Rental. If both appraisals are
submitted within such time period and the two appraisals so submitted differ
by less than ten percent (10%), the average of the two shall be deemed as
Fair Market Rental. If the two appraisals differ by more than 10%, the
appraisers shall immediately select a third appraiser who shall, within
thirty (30) days after his selection, make and submit to Landlord and Tenant
a determination of Fair Market Rental. This third appraisal will then be
averaged with the closer of the two previous appraisals and the result shall
be Fair Market Rental.
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4. All appraisers specified pursuant to this Section shall be
members of the American Institute of Real Estate Appraisers with not less
than ten (10) years experience appraising office and industrial properties in
the Santa Clara Valley. Each party shall pay the cost of the appraiser
selected by such party and one-half of the cost of the third appraiser.
D. PERSONAL TO TENANT: All Options provided to Tenant in this Lease
are personal and granted to Network Equipment Technologies and any entity
resulting from a permitted transfer as set forth in Section 17.E above and
are not exercisable by any third party should Tenant assign or sublet all or
a portion of its rights under this Lease, unless Landlord consents to permit
exercise of any option by any assignee or subtenant, in Landlord's sole and
absolute discretion. In the event Tenant has multiple options to extend this
Lease, a later option to extend the Lease cannot be exercised unless the
prior option has been so exercised.
19. OPTION TO LEASE : Landlord has granted Tenant an option to lease
addition buildings on the terms set forth in EXHIBIT "E".
20. GENERAL PROVISIONS:
A. ATTORNEY'S FEES: In the event a suit or alternative form of
dispute resolution is brought for the possession of the Premises, for the
recovery of any sum due hereunder, to interpret the Lease, or because of the
breach of any other covenant herein; then the losing party shall pay to the
prevailing party reasonable attorney's fees including the expense of expert
witnesses, depositions and court testimony as part of its costs which shall
be deemed to have accrued on the commencement of such action. The prevailing
party shall also be entitled to recover all costs and expenses including
reasonable attorney's fees incurred in enforcing any judgment or award
against the other party. The foregoing provision relating to post-judgment
costs is severable from all other provisions of this Lease.
B. AUTHORITY OF PARTIES: Each party represents and warrants to the
other party that it is duly formed and in good standing, and is duly
authorized to execute and deliver this Lease on behalf of it, and that this
Lease is binding upon the signing party in accordance with its terms. At
either party's request, the other party shall provide the requesting party
with proof in a form acceptable to the requesting party, authorizing the
execution of the Lease.
C. BROKERS: Tenant represents it has not utilized or contacted a
real estate broker or finder with respect to this Lease other than Julien J.
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Studley, Inc. and Tenant agrees to indemnify, defend and hold Landlord
harmless against any claim, cost, liability or cause of action asserted by
any other broker or finder claiming through Tenant.
D. CHOICE OF LAW: This Lease shall be governed by and construed in
accordance with California law. Venue shall be Alameda County.
E. DISPUTE RESOLUTION: Landlord and Tenant and any other party
that may become a party to this Lease or be deemed a party to this Lease
including any subtenants agree to and shall mediate any controversy, dispute,
or claim of whatever nature arising out of, in connection with, or in
relation to the interpretation, performance or breach of this Lease,
including any claim based on contract, tort, or statute,, except for any
claim by Landlord for unlawful detainer, or any action within the
jurisdiction of the small claims court. The mediation shall be held prior to
any court action or arbitration. The mediation shall be confidential and in
accordance with California Evidence Code Section1152.5. In the event the
parties are not able to agree on a mediator within thirty days JAMS or
another judicial and mediation service mutually acceptable to the parties
shall appoint a mediator. In the event the mediator determines that a second
mediation session is necessary, it shall be conducted in accordance with this
paragraph. Should the prevailing party attempt an arbitration or a court
action before attempting to mediate, THE PREVAILING PARTY SHALL NOT BE
ENTITLED TO ATTORNEYS FEES THAT MIGHT OTHERWISE BE AVAILABLE TO THEM IN A
COURT ACTION OR ARBITRATION, AND IN ADDITION THERETO, THE PARTY WHO IS
DETERMINED BY THE ARBITRATOR TO HAVE RESISTED MEDIATION SHALL BE SANCTIONED
BY THE ARBITRATOR OR JUDGE. Except for any claim by Landlord for unlawful
detainer or any claim within the Jurisdiction of the small claims court
(which for such claims the parties agree shall be the sole court of competent
jurisdiction), any controversy, dispute, or claim of whatever nature arising
out of, in connection with, or in relation to the interpretation, performance
or breach of this Lease, including any claim based on contract, tort, or
statute, shall be resolved at the request of any party to this agreement
through a two-step dispute resolution process administered by JAMS or another
judicial and mediation service mutually acceptable to the parties involving
first mediation, followed, if necessary, by final and binding arbitration
administered by and in accordance with the
Page 43
<PAGE>
then-existing rules and practice of the judicial and mediation service
selected, and judgment upon any award rendered by the arbitrator(s) may be
entered by any State or Federal Court having jurisdiction thereof. The
parties to the arbitration shall have those rights of discovery that the
arbitrator(s) deem necessary (after application to the arbitrator(s)) to a
full and fair hearing of the matter. However, in no event shall the parties
be entitled to propound interrogatories or requests for admissions during the
arbitration process. The arbitrator shall be a retired judge or a licensed
California Attorney. The venue for any such arbitration's or mediations
shall be in Santa Clara County.
F. ENTIRE AGREEMENT: This Lease contains all of the agreements and
conditions made between the parties hereto and may not be modified orally or
in any other manner other than by written agreement signed by all parties
hereto or their respective successors in interest. This Lease supersedes and
revokes all previous negotiations, letters of intent, lease proposals,
brochures, agreements, representations, promises, warranties, and
understandings, whether oral or in writing, between the parties or their
respective representatives or any other person purporting to represent
Landlord or Tenant.
G. ENTRY BY LANDLORD: Upon prior notice to Tenant and subject to
Tenant's reasonable security regulations, Tenant shall permit Landlord and
his agents to enter into and upon the Premises at all reasonable times, and
without any rent abatement or reduction or any liability to Tenant for any
loss of occupation or quiet enjoyment of the Premises thereby occasioned, for
the following purposes: (i) inspecting and maintaining the Premises; (ii)
making repairs, alterations or additions to the Premises; (iii) erecting
additional building(s) and improvements on the land where the Premises are
situated or on adjacent land owned by Landlord; and (iv) performing any
obligations of Landlord under the Lease including remediation of hazardous
materials if determined to be the responsibility of Landlord. Tenant shall
permit Landlord and his agents, at any time within one hundred eighty (180)
days prior to the Expiration Date (or at any time during the Lease if Tenant
is in default hereunder), to place upon the Premises "For Lease" signs and
exhibit the Premises to real estate brokers and prospective tenants at
reasonable hours.
H. ESTOPPEL CERTIFICATES: At any time during the Lease Term,
Landlord or Tenant shall, within ten (10) days following written notice from
the other party, execute and deliver to the requesting party a written
statement certifying, if true, the following: (i) that this Lease is
unmodified and in full force and effect (or, if modified, stating the nature
of such modification); (ii) the date to which rent and other
Page 44
<PAGE>
charges are paid in advance, if any; (iii) acknowledging that there are not,
to such party's knowledge, any uncured defaults on either party's part
hereunder (or specifying such defaults if they are claimed); and (iv) such
other information as either party may reasonably request. Any such statement
may be conclusively relied upon by any prospective purchaser or encumbrancer
of Landlord's interest in the Premises. Landlord or Tenant's failure to
deliver such statement within such time shall be conclusive upon such party
that this Lease is in full force and effect without modification, except as
may be represented by such party, and that there are no uncured defaults in
such party's performance. Tenant agrees to provide, within fifteen (15) days
of Landlord's request, Tenant's most recent three (3) years of audited
financial statements for Landlord's use in financing the Premises or
Landlord's interest therein.
I. EXHIBITS: All exhibits referred to are attached to this Lease
and incorporated by reference.
J. INTEREST: All rent due hereunder, if not paid when due, shall
bear interest at the rate of the Reference Rate published by Bank of America,
San Francisco Branch, plus two percent (2%) per annum from that date until
paid in full ("Agreed Interest Rate"). This provision shall survive the
expiration or sooner termination of the Lease. Despite any other provision
of this Lease, the total liability for interest payments shall not exceed the
limits, if any, imposed by the usury laws of the State of California. Any
interest paid in excess of those limits shall be refunded to Tenant by
application of the amount of excess interest paid against any sums
outstanding in any order that Landlord requires. If the amount of excess
interest paid exceeds the sums outstanding, the portion exceeding those sums
shall be refunded in cash to Tenant by Landlord. To ascertain whether any
interest payable exceeds the limits imposed, any non-principal
payment(including late charges) shall be considered to the extent permitted
by law to be an expense or a fee, premium, or penalty rather than interest.
K. MODIFICATIONS REQUIRED BY LENDER: If any Lender of Landlord
requires a modification of this Lease that will not increase Tenant's cost or
expense or materially or adversely change Tenant's rights and obligations,
this Lease shall be so modified and Tenant
Page 45
<PAGE>
shall execute whatever reasonable documents are required and deliver them to
Landlord within ten (10) days after the request.
L. NO PRESUMPTION AGAINST DRAFTER: Landlord and Tenant understand,
agree and acknowledge that this Lease has been freely negotiated by both
parties; and that in any controversy, dispute, or contest over the meaning,
interpretation, validity, or enforceability of this Lease or any of its terms
or conditions, there shall be no inference, presumption, or conclusion drawn
whatsoever against either party by virtue of that party having drafted this
Lease or any portion thereof.
M. NOTICES: All notices, demands, requests, or consents required to
be given under this Lease shall be sent in writing by U.S. certified mail,
return receipt requested, or by personal delivery addressed to the party to
be notified at the address for such party specified in Section 1 of this
Lease, or to such other place as the party to be notified may from time to
time designate by at least fifteen (15) days prior notice to the notifying
party. When this Lease requires service of a notice, that notice shall
replace rather than supplement any equivalent or similar statutory notice,
including any notices required by Code of Civil Procedure Section 1161 or any
similar or successor statute. when a statute requires service of a notice in
a particular manner, service of that notice (or a similar notice required by
this lease) shall replace and satisfy the statutory service-of-notice
procedures, including those required by Code of Civil Procedure Section 1162
or any similar or successor statute.
N. RENT: All monetary sums due from Tenant to Landlord under this
Lease, including, without limitation those referred to as "additional rent",
shall be deemed as rent.
O. REPRESENTATIONS: Tenant acknowledges that neither Landlord nor
any of its employees or agents have made any agreements, representations,
warranties or promises with respect to the Premises or with respect to
present or future rents, expenses, operations, tenancies or any other matter.
Except as herein expressly set forth herein, Tenant relied on no statement
of Landlord or its employees or agents for that purpose.
P. RIGHTS AND REMEDIES: All rights and remedies hereunder are
cumulative and not alternative to the extent permitted by law, and are in
addition to all other rights and remedies in law and in equity.
Q. SEVERABILITY: If any term or provision of this Lease is held
unenforceable or invalid by a court of competent jurisdiction, the remainder
of the Lease shall not be
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<PAGE>
invalidated thereby but shall be enforceable in accordance with its terms,
omitting the invalid or unenforceable term.
R. SUBORDINATION: This Lease is subject and subordinate to ground
and underlying leases, mortgages and deeds of trust (collectively
"Encumbrances") which may now affect the Premises, to any covenants,
conditions or restrictions of record, and to all renewals, modifications,
consolidations, replacements and extensions thereof; provided, however, if
the holder or holders of any such Encumbrance ("Holder") require that this
Lease be prior and superior thereto, within seven (7) days after written
request of Landlord to Tenant, Tenant shall execute, have acknowledged and
deliver all documents or instruments, in the form presented to Tenant, which
Landlord or Holder deems necessary or desirable for such purposes. Landlord
shall have the right to cause this Lease to be and become and remain subject
and subordinate to any and all Encumbrances which are now or may hereafter be
executed covering the Premises or any renewals, modifications,
consolidations, replacements or extensions thereof, for the full amount of
all advances made or to be made thereunder and without regard to the time or
character of such advances, together with interest thereon and subject to all
the terms and provisions thereof; provided only, that in the event of
termination of any such lease or upon the foreclosure of any such mortgage or
deed of trust, Holder agrees to recognize Tenant's rights under this Lease as
long as Tenant is not then in default and continues to pay Base Monthly Rent
and additional rent and observes and performs all required provisions of this
Lease. Within ten (10) days after Landlord's written request, Tenant shall
execute any documents required by Landlord or the Holder to make this Lease
subordinate to any lien of the Encumbrance. If Tenant fails to do so, then
in addition to such failure constituting a default by Tenant, it shall be
deemed that this Lease is so subordinated to such Encumbrance.
Notwithstanding anything to the contrary in this Section, Tenant hereby
attorns and agrees to attorn to any entity purchasing or otherwise acquiring
the Premises at any sale or other proceeding or pursuant to the exercise of
any other rights, powers or remedies under such encumbrance.
Notwithstanding the foregoing, the subordination of this Lease shall be
subject to Tenant's receipt of a
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<PAGE>
Nondisturbance and Attornment Agreement in a commercially reasonable form.
S. SUBMISSION OF LEASE: Submission of this document for examination
or signature by the parties does not constitute an option or offer to lease
the Premises on the terms in this document or a reservation of the Premises
in favor of Tenant. This document is not effective as a lease or otherwise
until executed and delivered by both Landlord and Tenant.
T. SURVIVAL OF INDEMNITIES: All indemnification, defense, and hold
harmless obligations of Landlord and Tenant under this Lease shall survive
the expiration or sooner termination of the Lease.
U. TIME: Time is of the essence hereunder.
V. TRANSPORTATION DEMAND MANAGEMENT PROGRAMS: Should a government
agency or municipality require Landlord to institute TDM (Transportation
Demand Management) facilities and/or program, Tenant agrees that the cost of
TDM imposed facilities required on the Premises, including but not limited to
employee showers, lockers, cafeteria, or lunchroom facilities, shall be paid
by Tenant. Further, any ongoing costs or expenses associated with a TDM
program which are required for the Premises and not provided by Tenant, such
as an on-site TDM coordinator, shall be provided by Landlord with such costs
being included as additional rent and reimbursed to Landlord by Tenant within
thirty (30) days after demand.
W. WAIVER OF RIGHT TO JURY TRIAL: Landlord and Tenant waive their
respective rights to trial by jury of any contract or tort claim,
counterclaim, cross-complaint, or cause of action in any action, proceeding,
or hearing brought by either party against the other on any matter arising
out of or in any way connected with this Lease, the relationship of Landlord
and Tenant, or Tenant's use or occupancy of the Premises, including any claim
of injury or damage or the enforcement of any remedy under any current or
future law, statute, regulation, code, or ordinance.
X. USE OF ROOF: Tenant shall have the exclusive right to use the
roof of the Building at no charge to place and maintain telecommunications
antennas, microwave or satellite dishes and other communications equipment.
Such use of the roof shall be subject to receipt of all required government
approvals, at Tenant's sole cost. The placements of any such antennas or
satellite dishes or other communications equipment on the roofs, the
modifications of the roof to accommodate such equipment, and the installation
of any such equipment shall be subject to Landlord's reasonable prior
approval of the plans and methods therefore. Such use
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<PAGE>
of the roof shall not restrict, impair or negate any warranty relating to the
roofs and Tenant shall be responsible for any and all damage, leakage or
extraordinary wear and tear to the roof occurring as a result of such use of
the roofs. Installation of such equipment shall be supervised by Landlord
and performed in a first class workmanlike manner. Prior to the Expiration
Date, Tenant shall, at its sole cost and expense, remove all such roof
equipment as Landlord desires and restore the roof to its condition as of the
Commencement Date. Such repair and restoration shall include causing the
roof to be brought into compliance with all applicable building codes and
laws in effect at the time of the removal to the extent such compliance is
necessitated by removal of the roof equipment and restoration work on the
roof.
Y. RECORDATION: Within forty-five (45) days after the execution and
delivery of this Lease by Landlord and Tenant, Landlord shall execute and
notarize a short form Memorandum of Lease, in recordable form, and shall
deliver the same to Tenant for Tenant's recording. Within (45) days
following the finalizing by Landlord of a new parcel map for the Project,
Landlord and Tenant shall execute all necessary documents to eliminate the
Short Form Memorandum of Lease and shall concurrently execute a new short
form Memorandum of Lease for recordation on the parcel affected by this
Lease. At such time, Landlord and Tenant shall also execute a Memorandum of
Lease for recordation on parcels affected by Tenant's Option to Lease
pursuant to Exhibit "E" of this Lease. Prior to the expiration or earlier
termination of the Lease and/or Option to Lease, Tenant agrees to promptly
execute all necessary documents to eliminate the Short Form Memorandum of
Lease as an exception to title.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day
and year first above written.
LANDLORD: Sobrato Interests III TENANT: Network Equip-
a California Limited Partnership ment Technologies
a Delaware Corporation
By: /s/ By: /s/
- ----------------------------- ---------------------------
Its: General Partner Its: Sr. Vice President & CFO
Page 49
<PAGE>
EXHIBIT - OPTION TO LEASE
RECITALS:
A. As part of the consideration for Tenant entering into the Lease,
Landlord is willing to grant to Tenant an option to lease a maximum of two
(2) buildings to be constructed on two adjacent parcels of land,
approximately 5.3 and 4.5 acres respectively, owned by Landlord and shown on
SCHEDULE 1 ("Option Properties). Such buildings currently do not exist, but
Landlord is willing, subject to the conditions set forth herein, to construct
such buildings if Tenant exercises such option to lease, all pursuant to the
terms and conditions set forth below. Such buildings and property is herein
referred to as the "Option Buildings".
B. The parties now wish to document the terms of such option to lease
the Option Buildings.
NOW, THEREFORE, in consideration of the execution of the Lease by both
parties, and in consideration of the mutual covenants set forth below, the
parties agree as follows:
1. GRANT OF OPTION. Landlord hereby grants to Tenant an option to
lease the Option Buildings (the "Option") subject to the terms and conditions
set forth in this Agreement.
2. TERM OF OPTION. Tenant shall be entitled, subject to paragraph 3
below, to exercise the Option at any time during the period commencing on the
execution date of the Lease and ending on June 1, 1999. Such period shall
herein be referred to as the "Option Period".
3. EXERCISE OF OPTION. Tenant shall exercise the Option only by
delivery of written notice to Landlord within the Option Period of such
exercise ("Exercise Date"). Tenant shall be entitled to exercise the Option
only if at the time of such exercise Tenant is not in default under the terms
of the Lease. In the event the Lease has been terminated for any reason,
this Option shall automatically terminate. At the time Tenant exercises the
Option, Tenant must notify Landlord of the amount of building square footage
it desires to lease pursuant to the Option.
<PAGE>
4. CONDITIONS PRECEDENT. Landlord's obligation to construct the
Option Buildings are expressly conditioned upon Landlord's ability to within
one hundred twenty (120) days of the Exercise Date to (i) secure a
commitment by an institutional lender to make a fixed rate non-recourse
non-participating loan to Landlord in a minimum amount equal to eighty-five
percent (85%) of Total Project Costs (as defined below), and (ii) obtain all
permits and governmental approvals necessary for the construction of the
Option Buildings.
5. LEASE OF THE OPTION BUILDING. Within thirty (30) days after
Tenant's exercise of the Option, Landlord and Tenant shall enter into a
written lease of the Option Buildings (the "Option Building Lease"). The
Option Building Lease shall be on the same terms as the Lease, except as
follows:
(a) The Premises shall be Option Buildings. References in the Lease
format shall be changed in the Option Building Lease to refer to Option
Building.
(b) Landlord shall provide 3.5 parking spaces per 1,000 square feet
of leasable space within the Option Buildings.
(c) The term shall commence upon the date of Substantial Completion
(as the term is defined in the Lease) of the Building Shell and Tenant
Improvements for the Option Building ("Commencement Date"), and end on the
twelfth (12th) anniversary thereof, with options to extend pursuant to the
Lease.
(d) Rent shall be payable beginning on the Commencement Date. Base
Monthly Rent shall be equal to one hundred thirty percent (130%) of (i) the
product of the (i) Total Project Costs as defined below and (ii) the best
non-participating twelve (12) year fixed rate permanent loan constant
available prior to the start of construction of the Option Building. In no
event shall the amortization period of the loan exceed twenty (20) years. In
the event that actual project costs have not been determined by the
Commencement Date, the rent shall be based on Landlord's reasonable estimate
of Project Costs until such time as actual Project Costs are available.
Total Project Costs shall be equal to the sum of (i) the Fair Market
Value of the Property, at the time Tenant exercises the Option determined by
appraisal as provided in the Lease, (ii) payments by Landlord for labor and
materials to contractors performing construction work in connection with the
Option Buildings, (iii) fees for building permits, licenses, inspection,
utility connections or extensions, and any other fees imposed by governmental
entities, (iv) fees of engineers, architects, consultants and others
providing professional services in connection with the
<PAGE>
construction of the Option Buildings, (v) construction loan interest paid by
Landlord including interest on Landlord's equity with respect to the
construction of the Option Buildings, calculated at the reference rate
charged by Union Bank plus one percent (1%), (vi) loan fees payable for the
construction and/or permanent loan for the Option Buildings (vii) real
property taxes and assessments levied against the Property during the period
the Option Buildings is constructed, (viii) liability and builders risk
insurance premiums and completion bond premiums paid by Landlord with respect
to the construction of the Option Buildings, (ix) real estate leasing
commissions or fees payable by Landlord with respect to the Option Buildings
in the event Tenant retains a broker; and (x) a sum equal to seven percent
(7%) of the Total Project Cost, for Landlord's construction and development
services including onsite and offsite supervision and management services
provided by Landlord.
The Base Monthly Rent shall then be increased on the same basis as
provided in Section 4.B of the Lease.
(e) The security deposit (in the form of a letter of credit) shall
be equal to the Base Monthly Rent amount for the Option Buildings for the
first month of the term.
(f) The Work Allowance shall be modified to (i) reflect a Work
Allowance of Twenty Five Dollars ($25.00) times the number of leasable square
feet of space in the Option Buildings, and (ii) require Tenant's submission
to Landlord of its Tenant Improvement Plans as set forth below in this
Agreement.
(g) The Lease shall be amended (i) to extend the original Lease Term
so as to be co-terminus with the original term of Option Building Lease; and
(ii) to provide that a default under Lease shall be deemed a default under
the Option Building Lease; and that a default under the Option Building Lease
shall be deemed a default under the Lease. The rent for the Premises under
the Lease during the extended term shall be at Fair Market Value (as the term
is therein defined) but not less than the rent paid in the preceding period
6. CONSTRUCTION OF SHELL AND TENANT IMPROVEMENTS.
(a) Within sixty (60) days after Tenant's exercise of the Option,
Landlord shall deliver to Tenant plans
<PAGE>
and specifications for construction of the shell of Option Buildings
(together called the "Shell Plans"). The Shell Plans shall contemplate
construction of two buildings of 100,000 leasable square feet each.
"Leasable Square Feet" shall include all square footage within the Option
Buildings when measured from outside exterior wall/glass to outside exterior
wall/glass of each floor, including docks, entries, patios and balconies
covered by a structural roof, but excluding roof overhangs. The Shell Plans
shall contemplate construction of a Building Shell of a design and size
similar to the Building Shell of the Premises.
(b) Within ninety (90) days after Tenant's receipt of the Shell
Plans, Tenant shall submit to Landlord, for Landlord's approval, Tenant
Improvement Plans respecting Tenant Improvements that Tenant desires Landlord
to construct in the Option Buildings. General Contractor shall commence
construction of Option Buildings as soon as reasonably possible after removal
of the conditions precedent outlined in Section 4 of this Exhibit, and
continue diligently to construct the same until completion thereof in
accordance with the Shell Plans. All costs of construction of the Building
Shell of Option Buildings shall be borne solely by Landlord. The costs
included within the Building Shell construction shall be as set forth in
EXHIBIT "C" of the Lease. All costs of Tenant Improvements in excess of the
Work Allowance shall be borne solely by Tenant.
7. SUCCESSORS. The Option provided Tenant in this Exhibit is personal
and granted to Network Equipment Technologies and is not exercisable by any
third party should Tenant assign or sublet all or a portion of its rights
under this Lease, unless Landlord consents to permit exercise of any option
by any assignee or subtenant, in Landlord's sole discretion. Except as
previously provided, the terms and provisions hereof shall be binding upon
and inure to the benefit of the successors and assigns of the parties hereto.
In no event, however, shall any lender be obligated to perform the terms this
Option in the event of a foreclosure of Landlord's interest in the Premises
or the Property.
<PAGE>
OFFICER EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and the undersigned
("Officer"), in partial consideration for their continuing officer and
employment relationship and to encourage continued employment in the event of
a potential Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. one year of Officer's base salary ("salary continuance"),
b. one year of Officer's variable compensation (computed using the
mid-point of the applicable range and the company "meets plan"),
c. Officer level medical, dental, life and disability insurance
during the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock awards
during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he or she is terminated without cause, job location is changed more
than 50 miles, his or her compensation is materially reduced or
responsibilities are substantially altered or reduced (without express
consent of the employee) by the Company, or by any successor to the Company
in conjunction with or within one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change
of Control, then vesting of outstanding stock options and restricted stock
held by Officer shall accelerate at the time of such Termination. All vested
options shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the
Company's release and non-competition agreement at the time of any such
Termination of Employment.
Agreed this 3rd day of June, 1996.
NETWORK EQUIPMENT Samuel H. Ezekiel
----------------------------
TECHNOLOGIES, INC. (Print Name of Officer)
BY: /S/ /S/
-------------------------------- ----------------------------
June 3, 1996
<PAGE>
(Signature)
TITLE: President & CEO
----------------------------
June 3, 1996
<PAGE>
EXHIBIT 11.1
NETWORK EQUIPMENT TECHNOLOGIES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRIMARY 1995 1996 1997
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Earnings:
Income before extraordinary gain............................................... $ 27,070 $ 31,350 $ 23,302
Extraordinary gain on repurchase of debentures................................. -- -- 690
--------- --------- ---------
Net income................................................................... $ 27,070 $ 31,350 $ 23,992
--------- --------- ---------
--------- --------- ---------
Shares:
Weighted average number of common shares outstanding........................... 17,735 19,825 20,888
Weighted average options using the treasury stock method....................... 1,033 1,008 617
--------- --------- ---------
18,768 20,833 21,505
--------- --------- ---------
--------- --------- ---------
Primary earnings per share:
Income before extraordinary gain............................................... $ 1.44 $ 1.50 $ 1.08
--------- --------- ---------
--------- --------- ---------
Net income..................................................................... $ 1.44 $ 1.50 $ 1.12
--------- --------- ---------
--------- --------- ---------
FULLY DILUTED
- --------------------------------------------------------------------------------------------
Earnings:
Income before extraordinary gain............................................... $ 27,070 $ 31,350 $ 23,302
Extraordinary gain on repurchase of debentures................................. -- -- 690
--------- --------- ---------
Net income................................................................... $ 27,070 $ 31,350 $ 23,992
--------- --------- ---------
--------- --------- ---------
Shares:
Weighted average number of common shares outstanding........................... 17,735 19,825 20,888
Weighted average options using the treasury stock method....................... 2,059 1,083 749
Number of common equivalent shares assuming conversion of convertible
securities (1)............................................................... -- -- --
--------- --------- ---------
19,794 20,908 21,637
--------- --------- ---------
--------- --------- ---------
Fully diluted earnings per share:
Income before extraordinary gain............................................... $ 1.37 $ 1.50 $ 1.08
--------- --------- ---------
Net income..................................................................... $ 1.37 $ 1.50 $ 1.11
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) The assumed exercise of these common stock equivalents was excluded as it
was anti-dilutive or had no material impact on the earnings per share
calculation.
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL QUARTER 1997
Revenue $76,469 $78,398 $83,302 $86,269
Gross margin 39,373 37,825 41,728 43,369
Net income 4,478 5,589 6,620 7,305
Primary and fully diluted earnings per share .21 .26 .31 .34
FISCAL QUARTER 1996
Revenue $79,609 $82,958 $84,561 $91,771
Gross margin 38,722 41,566 43,671 47,202
Net income 6,422 7,448 8,215 9,265
Primary and fully diluted earnings per share .32 .36 .39 .43
</TABLE>
FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $324,438 $338,899 $284,036 $237,672 $218,846
Net income (loss) 23,992 31,350 27,070 (6,324) (11,097)
Primary earnings (loss) per share 1.12 1.50 1.44 (.38) (.71)
7-1/4% convertible
subordinated debentures 25,821 33,526 68,625 68,625 68,625
Total assets 301,653 281,957 232,046 187,015 186,596
</TABLE>
Results for fiscal 1995 include a $9.9 million tax benefit. Excluding this
tax benefit, primary earnings per share would have been $.91.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the accompanying notes. The Company's future
operating results may be affected by a number of factors, trends, and risks
- -- many beyond the Company's control. These factors are discussed in more
detail below and include, among others: advances and trends in new
technologies; competitive pressures in the form of new products or price
reductions on current products; changes in product mix; changes in domestic
and international economic and/or political conditions or regulations;
ability to develop and deliver new products; customer acceptance of existing
and new products and services; and other factors identified below.
RESULTS OF OPERATIONS
The following table depicts data derived from the Consolidated Statements of
Income expressed as a percentage of revenue for each of the three years in
the period ended March 31, 1997.
(PERCENT OF REVENUE) 1997 1996 1995
- ----------------------------------------------------------------------
Product revenue 66.2% 66.7% 67.9%
Service and other revenue 33.8 33.3 32.1
--------------------------------
Total revenue 100.0 100.0 100.0
--------------------------------
Product gross margin 58.2 59.9 58.9
Service and other revenue gross margin 33.9 31.6 30.7
--------------------------------
Total gross margin 50.0 50.5 49.9
--------------------------------
--------------------------------
Sales and marketing 23.8 22.2 24.8
Research and development 12.7 10.8 12.0
General and administrative 3.5 3.5 4.0
--------------------------------
Total operating expenses 40.0 36.5 40.8
--------------------------------
--------------------------------
Income from operations 10.0 14.0 9.1
Interest income 1.9 1.8 0.9
Interest expense (0.7) (1.4) (1.8)
Other (0.2) (0.2) 0.0
--------------------------------
Income before income taxes 11.0 14.2 8.2
Income tax provision (benefit) 3.8 4.9 (1.3)
Extraordinary gain 0.2 0.0 0.0
--------------------------------
Net income 7.4% 9.3% 9.5%
--------------------------------
--------------------------------
COMPARISON OF 1997 AND 1996
REVENUE Total revenue in fiscal 1997 decreased $14.5 million, or 4.3%, from
fiscal 1996. Product revenue and service and other revenue decreased $11.2
million and $3.3 million, respectively, for the year. The 5.0% decrease in
product revenue was principally due to a decline in domestic product sales.
Total product sales in the U.S. federal channel, which includes U.S.
government sales and sales to U.S. government contractors, decreased 25.3% in
fiscal 1997. This decrease in U.S. government product revenue was primarily
due to the substantial completion in fiscal 1996 of the deployment of a
Department of Defense worldwide network. Increased international product
sales substantially offset the domestic decline, growing 25.3% over the prior
year to 45.0% of product revenue. This increase in international product
sales was primarily attributable to the Company's expansion of its
international sales and marketing infrastructure coupled with the economic
growth experienced in these regions. Both factors significantly impacted the
Company s Asia-Pacific/Latin American channel, which grew product sales 54.5%
year-over-year.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Service and other revenue decreased 2.9% from the prior year. This decrease
was attributable to a 17.6% decrease in systems integration services in
support of product sales to the U.S. government, partially offset by growth
in revenues generated from both traditional and expanded service offerings.
Overall, revenue in the U.S. federal channel decreased 17.9% over last year
and decreased as a percentage of total revenue from 36.4% in fiscal 1996 to
31.2% in fiscal 1997. Total international revenue increased 23.6% over last
year, and in fiscal 1997, it represented 35.0% of the Company's total revenue
as compared to 27.1% in fiscal 1996.
Management expects revenue to increase in fiscal 1998 based largely upon the
introduction of new products and entry into new, larger markets.
GROSS MARGIN Total gross margin as a percentage of total revenue decreased to
50.0% in fiscal 1997 from 50.5% in fiscal 1996. Product gross margin
decreased to 58.2% in fiscal 1997 from 59.9% in fiscal 1996. This decrease
primarily resulted from a less favorable sales channel mix, most notably in
the shift from domestic to international product sales, which typically have
lower margins due to a significantly higher percentage of product sold
through distributors. Product margins also decreased in part due to a shift
in product mix toward lower gross margin products.
The gross margin for service and other revenue increased to 33.9% in fiscal
1997 from 31.6% in fiscal 1996 as a result of a decreased percentage of
systems integration services provided under a U.S. government contract. In
addition, the gross margin on these systems integration services increased to
19.8% in fiscal 1997 from 14.8% in fiscal 1996 due to changes in the mix of
OEM products and services provided.
Management expects total gross margin in fiscal 1998 to remain fairly
constant.
OPERATING EXPENSES Operating expenses increased $6.2 million in fiscal 1997
and increased as a percentage of total revenue to 40.0% in fiscal 1997 from
36.5% in fiscal 1996. Management expects operating expenses in fiscal 1998 to
continue to increase to support planned growth, while remaining fairly
constant as a percentage of total revenue.
Sales and marketing expense increased $2.0 million in fiscal 1997 due to the
addition of personnel to support continued expansion of the sales and
marketing infrastructure, increased travel expenses and increased advertising
and promotional expenses, offset partially by decreased sales commissions. As
a percentage of total revenue, sales and marketing expense increased to 23.8%
in fiscal 1997 from 22.2% in fiscal 1996, primarily due to the lower sales
volume. Management expects sales and marketing expense to increase in fiscal
1998 to support continued expansion of the sales and marketing
infrastructure, which includes increased expenses for planned international
growth and new product introductions.
Research and development expense increased $4.6 million in fiscal 1997 due to
an increase in direct project funding, primarily salary-related expenses and
purchases of direct materials and hardware and software tools to support
product development. As a result of this increased spending, research and
development expense also increased as a percentage of total revenue to 12.7%
in fiscal 1997 from 10.8% in fiscal 1996. In fiscal 1997, $2.8 million of
software costs were capitalized as compared to $1.9 million in fiscal 1996 as
more
17
<PAGE>
projects reached technological feasibility in line with planned new product
introductions in fiscal 1997 and 1998. Management plans to continue funding
research and development efforts at levels necessary to advance product
programs and expects research and development spending to increase in fiscal
1998, while remaining fairly constant as a percentage of planned revenue.
General and administrative expense decreased $.4 million year-over-year and
remained flat as a percentage of total revenue at 3.5%. Management expects
general and administrative expense to remain fairly constant in fiscal 1998
as a percentage of planned revenue.
NON-OPERATING ITEMS Interest income in fiscal 1997 increased slightly from
fiscal 1996 due to higher cash balances, offset partially by lower rates
resulting from investment in tax-free securities. Interest expense, primarily
related to the 7-1/4% convertible subordinated debentures, decreased by over
50% to $2.3 million for fiscal 1997 as a result of the prior year partial
call and current year repurchases of the Company's convertible debentures.
Other expense remained flat from the prior year at $.5 million.
For the fiscal year ended March 31, 1997, the Company recorded income tax
expense of $12.5 million as compared to $16.9 million for fiscal 1996, at an
effective rate of 35% for both years. See Note 10 to the Consolidated
Financial Statements.
The results for fiscal 1997 included an extraordinary gain of $.7 million, or
three cents per share on a fully diluted basis, arising from the repurchase
of $7.7 million of convertible subordinated debentures. See Note 8 to the
Consolidated Financial Statements.
COMPARISON OF 1996 AND 1995
REVENUE Total revenue in fiscal 1996 increased $54.9 million, or 19.3%, from
fiscal 1995. Product revenue and service and other revenue increased $33.2
million and $21.7 million, respectively, over the same period. The 17.2%
increase in product revenue was principally due to increased IDNX product
sales across all sales channels. Over one-half of this increase was
attributable to the U.S. federal channel. Total product sales in the U.S.
federal channel increased 38.3% to 27.4% of product revenue. International
product sales increased 11.4% to 34.1% of product revenue, primarily due to
growth in Europe. Growth in other product lines included a 13.6%
year-over-year increase in STM-TM- product sales and incremental revenues
earned in fiscal 1996 on sales of OEM equipment sold under marketing
alliances. Service and other revenue increased 23.8% from fiscal 1995. This
increase was attributable to increased systems integration services in
support of product sales to the U.S. government and, to a lesser extent, to
growth in the installed base of the Company's products. Overall, revenue in
the U.S. federal channel grew 37.4% over fiscal 1995 and increased as a
percentage of total revenue from 31.6% in fiscal 1995 to 36.4% in fiscal
1996. Total international revenue increased 15.2% over the period and in
fiscal 1996 represented 27.1% of the Company's total revenue as compared to
28.1% in fiscal 1995.
GROSS MARGIN Total gross margin as a percentage of total revenue increased
to 50.5% in fiscal 1996 from 49.9% in fiscal 1995. Product gross margin
increased to 59.9% in fiscal 1996 from 58.9% in fiscal 1995. The increase in
fiscal 1996 was primarily due to favorable manufacturing variances from
higher production volumes. Favorable sales channel and IDNX product mix in
fiscal 1996 was partially offset by lower margins
18
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS
on sales of OEM equipment. The gross margin for service and other revenue
increased to 31.6% in fiscal 1996 from 30.7% in fiscal 1995 as a result of
improved margins on both service and systems integration services provided
under a U.S. government contract. The gross margin on these systems
integration services increased to 14.8% in fiscal 1996 from 11.5% in fiscal
1995 due to changes in the mix of OEM products and services provided.
OPERATING EXPENSES Operating expenses increased $8.1 million in fiscal 1996.
Operating expenses as a percentage of total revenue decreased to 36.5% in
fiscal 1996 from 40.8% in fiscal 1995.
Sales and marketing expense increased $5.1 million in fiscal 1996 due to the
addition of personnel to support expansion of the sales infrastructure, and
commissions and travel expenses commensurate with the increase in sales
volume and the geographic dispersion thereof. Despite the increase in
spending, sales and marketing expense decreased as a percentage of total
revenue to 22.2% in fiscal 1996 from 24.8% in fiscal 1995.
Research and development expense increased $2.5 million in fiscal 1996 due to
an increase in direct project funding, primarily salary-related expenses and
purchases of hardware and software tools to support product development. The
expense as a percentage of total revenue decreased to 10.8% in fiscal 1996
from 12.0% in fiscal 1995. In fiscal 1996, $1.9 million of software costs
were capitalized as compared to $2.0 million in fiscal 1995.
General and administrative expense increased $.5 million in fiscal 1996, but
decreased to 3.5% of total revenue as compared to 4.0% in fiscal 1995.
NON-OPERATING ITEMS Interest income in fiscal 1996 increased $3.4 million
from fiscal 1995 due to higher cash balances and higher interest rates.
Interest expense, primarily related to the 7-1/4% convertible subordinated
debentures, decreased $.5 million to $4.7 million for fiscal 1996 compared to
$5.2 million for fiscal 1995 as a result of the partial call of the Company's
convertible debentures. The decrease consisted of $1.0 million in interest
savings offset by $.5 million of one-time costs associated with the
redemption. Other expense increased $.4 million in fiscal 1996 from $.1
million in fiscal 1995.
For the fiscal year ended March 31, 1996, the Company recorded income tax
expense of $16.9 million at an effective rate of 35% as compared to a tax
benefit of $3.8 million for fiscal 1995. As a result of the significant
increase in profitability during fiscal 1995 and in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109), the Company recorded a tax benefit in the fourth quarter of
fiscal 1995 of $9.9 million. See Note 10 to the Consolidated Financial
Statements.
BUSINESS ENVIRONMENT AND RISK FACTORS
All statements in this Annual Report that are not historical are
forward-looking statements that involve risks and uncertainties including,
but not limited to, the risks and uncertainties detailed in the Company's
filings with the Securities and Exchange Commission. Actual results may
differ materially from those projected.
In recent years, the Company has experienced decreases in first quarter
revenues versus the preceding fourth quarter, and this trend is expected to
continue in fiscal 1998. Historically, the majority of the Company's revenue
in each quarter results from orders received and shipped in that quarter.
Because of these ordering patterns and potential delivery schedule changes,
the Company does not believe that backlog is indicative
19
<PAGE>
of future revenue levels. In addition, because a large portion of the
Company's orders historically have been received and filled in the last month
of the quarter, forecasting sales during a quarter is difficult, and there is
a significant risk of excessive or inadequate inventory if orders do not
match forecast. Furthermore, if large orders do not close when forecasted or
if near-term demand weakens for the products the Company has available to
ship, the Company's operating results for that or subsequent quarters would
be adversely affected.
Expense levels are relatively fixed and are set based on expectations
regarding future revenue and margin levels. These expectations derive from
making judgments on issues such as planned revenue, future technology trends,
competitive products and services, pricing and customer requirements, a
process that involves evaluation of information that is often unclear and in
conflict. All markets for the Company s products are very competitive and
dynamic and many are susceptible to changing regulations and political
conditions. The Company has limited visibility into factors that could
influence its revenue, mix of product orders and other revenue sources and
margins, particularly in international markets that are served primarily by
non-exclusive resellers.
The Company's products incorporate intellectual property and technology owned
by the Company or licensed from third parties. The Company s ability to
maintain and enhance the value of its intellectual property and technology
and third party licenses will affect future product and service offerings.
Moreover, the Company believes that operating results will depend on
successful development and introduction of new products and enhancements to
existing products and service offerings. There can be no assurance that the
Company will succeed in such efforts or that customers will accept new,
enhanced and existing products and services in quantities and at prices and
margins that are consistent with the Company's expectations. The Company's
success also depends on its ability to attract and retain employees necessary
to support planned development and growth.
The Company's products include components, assemblies and subassemblies that
are currently available from single sources and, in some cases, are in short
supply. Testing and manufacturing of products designed by N.E.T. are
performed at the Company s Redwood City, California, facility. Pursuant to
several types of agreements, the Company also resells products designed or
manufactured by third parties, and the Company relies to a significant degree
on such third parties for order fulfillment, quality control and support of
their products. Such products are generally available to end users from
sources other than the Company, and are generally sold or licensed by the
Company at gross margins that are lower than products designed and
manufactured by the Company. There can be no assurance that these third-party
manufacturers will be able to meet the Company's future requirements for
these products, that the quality control and support provided by these
manufacturers will be adequate, or that the Company's gross margins on these
products will not be lowered further. Product availability limitations, price
increases or business interruptions could adversely impact revenue, margins
and earnings.
The Company has distribution, product and technology relationships with a
number of significant customers and entities that are considered by the
Company to be strategic. Most of the Company's competitors have similar
relationships with their respective customers and other parties. Changes in
the Company's relationships or changes in similar relationships among
competitors could have a material impact on competitive and other factors
described above, including the Company's operating results. Also, litigation
or other claims based on securities, intellectual property, patent, product,
regulatory or other issues or factors could materially adversely affect the
Company s business, operating results and finances.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
A significant portion of the Company's revenue comes from contracts with the
U.S. government, most of which do not include purchase commitments. There can
be no assurance that orders from the U.S. government, or from other
customers, will continue at historical levels, or that the Company will be
able to obtain orders from new customers.
Because of the factors described above, as well as others that may affect the
Company's operating results, past financial results may not be an accurate
indicator of future performance.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had cash, cash equivalents and temporary
cash investments of $138.7 million, as compared to $112.2 million at the end
of fiscal 1996. Cash provided from operations was $48.1 million in fiscal
1997, a $7.9 million increase over the prior year. This increase was
principally due to a smaller increase in accounts receivable and a
significant decrease in inventories, partially offset by a decrease in
accrued liabilities and lower net income.
Net cash used for investing activities in fiscal 1997 consisted primarily of
net purchases of temporary cash investments of $39.7 million as increased
cash generated in the year was invested. Additionally, purchases of property
and equipment totalled $13.9 million and additions to software production
costs were $2.8 million.
Net cash used for financing activities in fiscal 1997 was composed of $6.4
million used to repurchase a portion of the Company's convertible
subordinated debentures and $2.7 million used to repurchase the Company's
Common Stock, partially offset by the issuance of $4.6 million of Common
Stock related to the employee stock benefit plans.
During the second quarter of fiscal 1997, the Board of Directors authorized
the Company to repurchase up to 10% of the outstanding shares of its Common
Stock and to repurchase its outstanding 7-1/4% convertible subordinated
debentures. These purchases can be made on the open market from time to time
at the discretion of the Company's management and at price levels the Company
deems appropriate. The Company can discontinue its purchases at any time it
determines additional purchases are not warranted. As of March 31, 1997, the
Company had repurchased 204,600 shares of its Common Stock at a weighted
average price of $13.27 and repurchased debentures with a face value of
$7,705,000 at a weighted average cost of 83.3% of the face value.
As of March 31, 1997, the Company had available an unsecured $10.0 million
line of credit. Borrowings under this committed borrowing facility are
available through May 1998 and bear interest at the bank's base rate (which
approximates prime). At March 31, 1997, there were no outstanding borrowings
under this facility.
In April 1997, the Company announced a 12-year operating lease agreement
pursuant to which a new corporate headquarters facility will be built in
Fremont, California. In conjunction with the project management and design
construction of the new facility, the Company expects to incur expenditures
in fiscal 1998, which it plans to capitalize. The Company plans to move to
its new headquarters when the buildings are completed, which is expected to
be in mid-calendar 1998. The Company's current headquarters' lease expires in
October 1998.
The Company believes that current cash and cash equivalents, temporary cash
investments and cash flows from operations will be sufficient to fund
operations, purchases of capital equipment and research and development
programs currently planned at least through fiscal 1998.
22
<PAGE>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, 1997 1996
- -----------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $39,141 $52,319
Temporary cash investments 99,581 59,892
Accounts receivable, net of allowances of
$3,910 in 1997 and $4,533 in 1996 82,986 76,966
Inventories 22,662 31,705
Deferred income taxes 7,418 11,830
Prepaid expenses and other assets 6,679 5,714
--------------------------
Total current assets 258,467 238,426
--------------------------
Property and equipment:
Machinery and equipment 96,011 92,653
Furniture and fixtures 6,508 5,874
Leasehold improvements 11,885 10,290
Construction in progress 318 438
--------------------------
114,722 109,255
Less accumulated depreciation and amortization (84,713) (78,215)
--------------------------
Property and equipment, net 30,009 31,040
Software production costs, net 4,616 4,146
Other assets 8,561 8,345
--------------------------
$301,653 $281,957
--------------------------
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $23,758 $21,559
Accrued liabilities 39,174 42,442
--------------------------
Total current liabilities 62,932 64,001
--------------------------
7-1/4% convertible subordinated debentures 25,821 33,526
Stockholders' equity:
Preferred Stock, $.01 par value
Authorized: 5,000,000 shares
Outstanding: none -- --
Common Stock, $.01 par value
Authorized: 50,000,000 shares
Outstanding: 21,049,000 shares in 1997
and 20,839,000 shares in 1996 210 208
Additional paid-in capital 172,038 166,013
Treasury stock (2,545) (599)
Net unrealized loss on
available-for-sale securities (56) (12)
Accumulated translation adjustment (490) (931)
Retained earnings 43,743 19,751
--------------------------
Total stockholders' equity 212,900 184,430
--------------------------
$301,653 $281,957
--------------------------
--------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
23
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31, 1997 1996 1995
- ---------------------------------------------------------------------
Revenue:
Product revenue $214,862 $226,070 $192,901
Service and other revenue 109,576 112,829 91,135
----------------------------------
Total revenue 324,438 338,899 284,036
----------------------------------
Cost of sales:
Cost of product revenue 89,746 90,588 79,227
Cost of service and other revenue 72,397 77,150 63,193
----------------------------------
Total cost of sales 162,143 167,738 142,420
----------------------------------
Gross margin 162,295 171,161 141,616
Operating expenses:
Sales and marketing 77,382 75,432 70,348
Research and development 41,054 36,437 33,923
General and administrative 11,494 11,884 11,375
----------------------------------
Total operating expenses 129,930 123,753 115,646
----------------------------------
Income from operations 32,365 47,408 25,970
Interest income 6,284 6,044 2,626
Interest expense (2,310) (4,713) (5,213)
Other (522) (508) (73)
----------------------------------
Income before income taxes 35,817 48,231 23,310
Income tax provision (benefit) 12,515 16,881 (3,760)
----------------------------------
Income before extraordinary gain 23,302 31,350 27,070
Extraordinary gain on repurchase
of debentures 690 -- --
----------------------------------
Net income $ 23,992 $ 31,350 $ 27,070
----------------------------------
----------------------------------
Primary earnings per share:
Income before extraordinary gain $ 1.08 $ 1.50 $ 1.44
----------------------------------
----------------------------------
Net income $ 1.12 $ 1.50 $ 1.44
----------------------------------
----------------------------------
Fully diluted earnings per share:
Income before extraordinary gain $ 1.08 $ 1.50 $ 1.37
----------------------------------
----------------------------------
Net income $ 1.11 $ 1.50 $ 1.37
----------------------------------
----------------------------------
Shares used in per share computation:
Primary 21,505 20,833 18,768
----------------------------------
----------------------------------
Fully diluted 21,637 20,908 19,794
----------------------------------
----------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
24
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED MARCH 31, 1997 1996 1995
- -----------------------------------------------------------------------------
Cash and cash equivalents at beginning of year $ 52,319 $ 33,886 $ 23,854
-------- -------- --------
Net cash flows from operating activities:
Net income 23,992 31,350 27,070
Adjustments required to reconcile net income
to cash provided by operations:
Extraordinary credit-gain on repurchase
of debentures (690) -- --
Depreciation and amortization 17,429 15,481 17,591
Restricted stock compensation 379 368 10
Deferred income taxes 4,412 (1,930) (9,900)
Changes in assets and liabilities:
Accounts receivable (5,816) (20,839) 2,077
Inventories 9,156 506 2,280
Prepaid expenses and other assets (927) (1,185) (621)
Accounts payable 2,158 3,356 (2,092)
Accrued liabilities (2,005) 13,099 6,941
-------- -------- --------
Net cash provided by operations 48,088 40,206 43,356
-------- -------- --------
Cash flows from investing activities:
Purchases of temporary cash investments (159,095) (85,960) (60,816)
Proceeds from maturities of temporary
cash investments 119,362 78,800 25,786
Purchases of property and equipment (13,910) (17,165) (8,258)
Additions to software production costs (2,792) (1,875) (1,968)
Other (316) 955 903
-------- -------- --------
Net cash used for investing activities (56,751) (25,245) (44,353)
-------- -------- --------
Cash flows from financing activities:
Sale of Common Stock 4,617 12,684 12,583
Repurchase of convertible subordinated
debentures (6,419) (10,117) --
Purchase of Common Stock (2,722) -- --
Repayments of borrowings -- -- (26)
-------- -------- --------
Net cash provided by (used for)
financing activities (4,524) 2,567 12,557
-------- -------- --------
Effect of exchange rate changes on cash 9 905 (1,528)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (13,178) 18,433 10,032
-------- -------- --------
Cash and cash equivalents at end of year $ 39,141 $ 52,319 $ 33,886
-------- -------- --------
-------- -------- --------
Other cash flow information:
Cash paid during the year for:
Interest $ 2,477 $ 4,136 $ 5,213
Income taxes $ 4,050 $ 5,496 $ 2,061
Non-cash investing and financing activities:
Conversion of convertible subordinated
debentures into Common Stock (including
accrued interest and debenture
offering costs) $ - $ 25,532 $ -
Income tax benefit arising from employee
stock option plans $ 1,807 $ 12,972 $ 2,718
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
25
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
COMMON GAIN (LOSS) ON
STOCK ADDITIONAL AVAILABLE- ACCUMULATED RETAINED
TO BE COMMON PAID-IN TREASURY FOR-SALE TRANSLATION EARNINGS
(DOLLARS IN THOUSANDS) ISSUED STOCK CAPITAL STOCK SECURITIES ADJUSTMENT (DEFICIT)
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S> <S> <S> <S> <S>
BALANCES, MARCH 31, 1994 $268 $171 $ 98,914 $ (599) $ - $(1,157) $(38,669)
------------------------------------------------------------------------------------
Sale of 1,586,000 shares
of Common Stock under
employee stock benefit plans - 16 12,577 - - - -
Stock issued in connection
with merger (236) - 236 - - - -
Income tax benefit arising from
employee stock option plans - - 2,718 - - - -
Net unrealized gain on securities
upon adoption of SFAS 115 - - - - 64 - -
Net unrealized loss on securities - - - - (74) - -
Accumulated translation
adjustment - - - - - 363 -
Net income - - - - - - 27,070
------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1995 32 187 114,445 (599) (10) (794) (11,599)
------------------------------------------------------------------------------------
Sale of 1,314,000 shares
of Common Stock under
employee stock benefit plans - 13 13,040 - - - -
Conversion of convertible
subordinated debentures
into 802,078 shares of
Common Stock, including
accrued interest and
offering costs - 8 25,524 - - - -
Stock issued in connection
with merger (32) - 32 - - - -
Income tax benefit arising from
employee stock option plans - - 12,972 - - - -
Net unrealized loss on securities - - - - (2) - -
Accumulated translation
adjustment - - - - - (137) -
Net income - - - - - - 31,350
------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1996 - 208 166,013 (599) (12) (931) 19,751
------------------------------------------------------------------------------------
Sale of 303,000 shares
of Common Stock under
employee stock benefit plans - 3 3,591 - - - -
Purchase of 205,000 shares
of Common Stock (2) - (2,720) - - - -
Reissuance of 113,000 shares of
treasury stock under stock plans - 1 627 774 - - -
Income tax benefit arising from
employee stock option plans - - 1,807 - - - -
Net unrealized loss on securities - - - - (44) - -
Accumulated translation
adjustment - - - - - 441 -
Net income - - - - - - 23,992
------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1997 $ - $210 $172,038 $(2,545) $(56) $ (490) $43,743
------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----
1
NATURE OF BUSINESS Network Equipment Technologies, Inc. ("N.E.T."
or "the Company"), headquartered in Redwood City, California, is a
leading designer, developer, manufacturer and supplier of
multiservice backbone networks and associated services used by
enterprises and carriers worldwide.
PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements
include the accounts of the Company and its wholly owned
subsidiaries. Intercompany accounts and transactions have been
eliminated.
REVENUE RECOGNITION The Company recognizes product revenue and
accrues related warranty expense upon shipment. At the time of
sale, no material vendor or post contract support obligations
remain outstanding. Revenue from service contracts is recognized
ratably over the contract period. Revenue from other services, such
as systems integration, installation and training, is recognized
when the service is performed.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly
liquid investments with original maturities of three months or less
at the time of acquisition.
TEMPORARY CASH INVESTMENTS Temporary cash investments are
primarily composed of highly liquid investments with original
maturities of greater than three months at the time of acquisition.
INVENTORIES Inventories are stated at lower of cost (first-in,
first-out) or market and include material, labor and manufacturing
overhead costs. Inventories at March 31 consisted of the following:
(DOLLARS IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------
Purchased components $ 6,710 $14,381
Work-in-process 13,675 15,533
Finished goods 2,277 1,791
-------------------------
$22,662 $31,705
-------------------------
-------------------------
PROPERTY AND EQUIPMENT Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over
estimated useful lives of generally three to five years. Leasehold
improvements are amortized over the shorter of the respective lease
terms or estimated useful lives.
SOFTWARE PRODUCTION COSTS Capitalization of software production
costs begins upon the establishment of technological feasibility
for the products, and amortization begins when the products are
available for release to customers. The Company assesses the
recoverability of capitalized software production costs in light of
many factors, including anticipated future revenues, estimated
economic useful lives and changes in software and hardware
technologies. Capitalization of software production costs amounted
to $2.8 million, $1.9 million and $2.0 million in fiscal 1997, 1996
and 1995, respectively. Software production costs are amortized
over the lives of the products, generally three years. Amortization
amounted to $2.3 million, $2.4 million and $2.8 million in fiscal
1997, 1996 and 1995, respectively. Accumulated amortization was
$6.0 million and $3.8 million at March 31, 1997 and 1996,
respectively.
FOREIGN CURRENCY TRANSLATION The functional currency for the
Company's foreign subsidiaries is the local currency. Assets and
liabilities of foreign subsidiaries are translated into dollars at
the rates of exchange in effect at the end of the period. Revenues
and expenses are translated at the average exchange rate during the
period. Gains and losses from foreign currency translation are
included in a separate account in stockholders' equity in the
Consolidated Balance Sheets. Foreign currency transaction gains or
losses are included in the Consolidated Statements of Income. The
Company enters into foreign exchange contracts to hedge certain
intercompany balances and balance sheet exposures against future
movements in foreign exchange rates. Gains and losses on the
foreign exchange contracts are included in other income and
expense, which offset foreign exchange gains or losses from
revaluation of foreign currency-denominated intercompany
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
balances and balance sheet exposure items. At March 31, 1997, the
Company had outstanding foreign exchange contracts of $2.9 million
(see Note 12). The contracts require the Company to exchange
foreign currencies for U.S. dollars and generally mature in one
month.
STOCK-BASED COMPENSATION The Company accounts for employee
stock-based compensation using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and,
accordingly, does not generally recognize compensation cost in
connection with its stock option and purchase plans. A summary of
the pro forma effects to reported net income and earnings per share
as if the Company had elected to recognize compensation cost based
on the fair value of the options granted as prescribed by Statement
of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) has been disclosed in Note 9
to the Consolidated Financial Statements.
EARNINGS PER SHARE Net income per share has been computed based
upon the weighted average number of common and common equivalent
shares outstanding. For primary earnings per share, common
equivalent shares consist of the incremental shares issuable upon
the assumed exercise of dilutive stock options. For fully diluted
earnings per share, common equivalent shares also include, if
dilutive, the effect of incremental shares issuable upon the
conversion of the 7-1/4% convertible subordinated debentures, and
net income is adjusted for the interest expense (net of income
taxes) related to the debentures.
SIGNIFICANT RISKS AND UNCERTAINTIES 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. Such management estimates
include the allowance for doubtful accounts receivable, the
valuation of inventory, the valuation allowance on deferred tax
assets and certain reserves and accruals. Actual results could
differ materially from those estimates.
The Company sells its products primarily to large organizations in
diversified industries worldwide. Credit risk is further mitigated
by the Company's credit evaluation process and the reasonably short
collection terms. The Company typically does not require collateral
or other security to support accounts receivable. While the Company
does maintain allowances for potential credit losses, actual bad
debt losses have not been material or outside of management's
expectations.
The Company participates in a very dynamic high technology
telecommunications industry and believes that changes in any of the
following areas could have a material adverse affect on the
Company's future financial position or results of operations:
advances and trends in new technologies; competitive pressures in
the form of new products or price reductions on current products;
changes in product mix; successful introduction of new products and
services; changes in the overall demand for products and services
offered by the Company; changes in certain strategic partnerships
or customer relationships; litigation or claims against the Company
based on securities, intellectual property, patent, product,
regulatory or other issues or factors; risks associated with
changes in domestic and international economic and/or political
conditions or regulations; availability of necessary components;
and the Company's ability to attract and retain employees necessary
to support its growth.
RECENTLY ISSUED ACCOUNTING STANDARD In February 1997, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128). This
standard replaces current earnings per share (EPS) reporting
requirements and requires a dual presentation of basic and diluted
EPS. As basic EPS excludes dilution by dividing net income by only
the weighted average of common shares outstanding for the period,
it will result in a higher value than the historically reported
28
<PAGE>
primary EPS. Diluted EPS under SFAS 128 is not expected to be
significantly different than fully diluted EPS reported
historically. This standard will be effective for the Company
beginning in the third quarter of fiscal 1998 and will require
restatement of prior periods.
RECLASSIFICATION Certain fiscal 1996 and 1995 amounts have been
reclassified to conform with fiscal 1997 presentation.
note TEMPORARY CASH INVESTMENTS
- ----
2
The Company classifies its temporary cash investments as
available-for-sale securities. The carrying value of such
securities is adjusted to fair market value, with unrealized gains
and losses, net of deferred taxes, being excluded from earnings and
reported as a separate component of stockholders' equity. Temporary
cash investments at March 31 consisted of the following:
<TABLE>
<CAPTION>
1997
--------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and municipalities $50,671 $80 $ (86) $50,665
Corporate notes and bonds 21,876 - (35) 21,841
Other debt securities 13,996 5 (35) 13,966
Foreign debt issues 5,832 - (14) 5,818
Commercial paper and banker's acceptances 5,291 - - 5,291
Certificates of deposit 2,000 - - 2,000
--------------------------------------------
$99,666 $85 $(170) $99,581
--------------------------------------------
--------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and municipalities $ 3,000 $ 3 $ - $ 3,003
Corporate notes and bonds 36,495 17 (35) 36,477
Foreign debt issues 11,430 6 (8) 11,428
Commercial paper and banker's acceptances 2,986 - (1) 2,985
Certificates of deposit 6,000 - (1) 5,999
--------------------------------------------
$59,911 $26 $ (45) $59,892
--------------------------------------------
--------------------------------------------
</TABLE>
At March 31, 1997, the estimated market value of available-for-sale
securities with maturities between one and two years was $44.5
million, with the remainder maturing within one year. Any gains or
losses on sales of securities are computed on a specific
identification basis. There were no material realized gains or
losses from the sale of securities in fiscal years 1997, 1996 and
1995.
note SIGNIFICANT CUSTOMERS
- ----
3
Sales to the U.S. government and its agencies amounted to 29%, 34%
and 28% of revenue for fiscal years 1997, 1996 and 1995,
respectively. These amounts include sales, which amounted to 27%,
30% and 19% of revenue for fiscal years 1997, 1996 and 1995,
respectively, under contracts with the Department of Defense under
which various government agencies can order products, installation
and service from the Company. The Company had no other customers
that accounted for more than 10% of revenue during these same
periods.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
note SEGMENT INFORMATION
- ----
4
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1997
Sales to unaffiliated customers $265,109 $59,329 $ - $324,438
Sales to foreign affiliates 28,294 4,764 (33,058) -
------------------------------------------------
Total revenue $293,403 $64,093 $(33,058) $324,438
------------------------------------------------
------------------------------------------------
Operating income $ 27,616 $ 4,921 $ (172) $ 32,365
------------------------------------------------
------------------------------------------------
Identifiable assets at year end $299,686 $26,180 $(24,213) $301,653
------------------------------------------------
------------------------------------------------
YEAR ENDED MARCH 31, 1996
Sales to unaffiliated customers $286,842 $52,057 $ - $338,899
Sales to foreign affiliates 21,409 4,316 (25,725) -
------------------------------------------------
Total revenue $308,251 $56,373 $(25,725) $338,899
------------------------------------------------
------------------------------------------------
Operating income $ 43,607 $ 2,560 $ 1,241 $ 47,408
------------------------------------------------
------------------------------------------------
Identifiable assets at year end $283,453 $27,801 $(29,297) $281,957
------------------------------------------------
------------------------------------------------
YEAR ENDED MARCH 31, 1995
Sales to unaffiliated customers $236,535 $47,501 $ - $284,036
Sales to foreign affiliates 24,409 3,624 (28,033) -
------------------------------------------------
Total revenue $260,944 $51,125 $(28,033) $284,036
------------------------------------------------
------------------------------------------------
Operating income $ 23,601 $ 2,938 $ (569) $ 25,970
------------------------------------------------
------------------------------------------------
Identifiable assets at year end $235,910 $32,146 $(36,010) $232,046
------------------------------------------------
------------------------------------------------
</TABLE>
Sales to foreign affiliates represent products that are transferred
on a basis intended to approximate arms-length prices as negotiated
by unrelated entities. Domestic sales to unaffiliated customers,
primarily to customers in the Asia-Pacific/Latin American region,
include $54.3 million, $39.9 million and $32.3 million of export
sales in fiscal years 1997, 1996 and 1995, respectively.
note ACCRUED LIABILITIES
- ----
5
Accrued liabilities at March 31 were as follows:
(DOLLARS IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------
Accrued compensation $16,211 $18,585
Unearned income 6,464 6,082
Other 16,499 17,775
-------------------------
$39,174 $42,442
-------------------------
-------------------------
note FINANCING ARRANGEMENTS
- ----
6
The Company maintains an unsecured $10.0 million line of credit.
Borrowings under this committed facility are available through May
1998 and bear interest at the bank's base rate (which approximates
prime). The terms of the agreement require that the Company
maintain certain financial covenants including a minimum of $25.0
million in cash and short-term highly liquid investments, net of
any bank borrowings, no quarterly
30
<PAGE>
operating or net losses greater than 10% of tangible net worth and
no operating or net losses in any two consecutive quarters of the
fiscal year. The Company was in compliance with these covenants at
March 31, 1997. There were no outstanding borrowings under the line
of credit agreement at March 31, 1997.
note LEASE COMMITMENTS
- ----
7
The Company leases its facilities under operating leases. The
minimum future lease commitments under these leases as of March 31,
1997 were as follows:
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------
1998 $ 7,287
1999 8,917
2000 7,021
2001 7,099
2002 6,207
After 2002 43,614
-------
$80,145
-------
-------
Rental expense under operating leases was $7.7 million, $7.2
million and $6.4 million for fiscal years 1997, 1996 and 1995,
respectively. In April 1997, the Company entered into a 12-year
operating lease agreement for a new headquarters facility. The
existing headquarters' lease expires in the fall of 1998, and the
Company plans to move to the new facility in Fremont, California,
when the buildings are completed in mid-calendar 1998. Lease
commitments under both agreements have been included in the above
amounts.
note CONVERTIBLE SUBORDINATED DEBENTURES
- ----
8
In May 1989, the Company issued $75.0 million of 7-1/4% convertible
subordinated debentures due May 15, 2014, in an underwritten public
offering, with net proceeds of $72.8 million. Each debenture is
convertible at the option of the holder into Common Stock at $31.50
per share and is redeemable at the option of the Company at prices
that decline from 101.45% of face value on May 15, 1997, to 100% of
face value on May 15, 1999.
In September 1990, the Company repurchased debentures in the face
amount of $6.4 million. In the third quarter of fiscal 1996, the
Company completed a partial call of its outstanding debentures,
reducing debenture principal by an additional $35.1 million, of
which $9.8 million was redeemed and an additional $25.3 million was
converted into shares of Common Stock at a conversion price of
$31.50 per share.
In fiscal 1997, the Company repurchased debentures in the face
amount of $7.7 million at a cost of $6.4 million, plus accrued
interest. Accordingly, the Company recorded a $.7 million gain, net
of taxes ($.03 per share on a fully diluted basis), as an
extraordinary credit in the Consolidated Statement of Income.
note CAPITAL STOCK
- ----
9
STOCKHOLDERS' RIGHTS PLAN The Company's Board of Directors has
approved a plan to protect stockholders' rights in the event of a
proposed takeover of the Company. Under the plan, as amended in
June 1990, a preferred share purchase right ("Right") is attached
to each share of Common Stock. The Rights are exercisable only
after a person or group acquires beneficial ownership of 15% or
more of the Company's Common Stock
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
or commences a tender or exchange offer that would result in 20% or
more of Common Stock ownership. Each Right initially entitles
stockholders to buy one one-hundredth of a share of a new series of
participating Preferred Stock at an exercise price of $120. If the
Company is acquired in a merger or other transaction with a person
or group, or sells 50% or more of its assets or earning power to
such a person or group, each Right not owned by such acquiring
person will entitle its holder to obtain on exercise of the Right a
number of the acquiring company's common shares having a market
value at the time of twice the Right's then-current exercise price.
If a person or group acquires 15% or more of the Company's
outstanding Common Stock, each Right will entitle its holder to
obtain on exercise of the Right a number of shares of Common Stock
(or equivalent) having a market value of twice the Right's
then-current exercise price. After a person or group has acquired
15% of the outstanding shares of Common Stock but before their
acquisition of 50% or more of the Common Stock, the Board of
Directors may exchange one share of Common Stock or equivalent
fractions of Preferred Stock for each Right. The Company can redeem
the Rights at $.01 per Right at any time until the tenth day
following the acquisition by a person or group of 15% of the
Company's Common Stock. The Rights are also redeemable thereafter
in certain circumstances. The Rights expire on August 24, 1999,
unless earlier redeemed or exchanged.
PREFERRED STOCK The Company has authorized 5,000,000 shares of
$.01 par value Preferred Stock. This stock, if issued, will carry
liquidation preferences and other rights, as determined by the
Board of Directors. As of March 31, 1997, no preferred shares were
outstanding.
RESERVED STOCK As of March 31, 1997, the Company had reserved
shares of its Common Stock for the following purposes:
RESERVED
- -------------------------------------------------------------------------------
Stock option plans:
Outstanding (at $5.25 to $36.63 per share) 3,577,247
Available for grant 778,296
Convertible subordinated debentures 819,714
Employee Stock Purchase Plan 216,815
EMPLOYEE STOCK PURCHASE PLAN Under the Employee Stock Purchase
Plan, the Company's employees, subject to certain restrictions, may
purchase shares of Common Stock at a price equal to at least 85% of
the lower of the fair market value of the Common Stock at the
beginning of the offering period or the end of each quarter. During
fiscal 1997, 1996 and 1995, 224,000, 142,000 and 229,000 shares
were issued under this Plan, at weighted average prices of $13.43,
$21.67 and $9.41 per share, respectively.
RESTRICTED STOCK AWARD PLAN Under the Restricted Stock Award Plan,
the Company may issue up to 750,000 shares of Common Stock to key
employees at $.01 per share. Shares awarded under the Plan carry
certain restrictions on transferability, which lapse over the
vesting period (generally two to four years). As of March 31, 1997,
239,500 shares at $.01 per share have been awarded and issued under
the Plan. As of March 31, 1997, the Company had the right to
repurchase 48,750 shares from certain employees at the original
purchase price. Such right expires ratably over the respective
vesting periods. Related compensation expense totalled $379
thousand, $368 thousand and $10 thousand for the years ended March
31, 1997, 1996 and 1995, respectively.
STOCK OPTION PLANS Under the Company's stock option plans, options
generally become exercisable ratably over a four-year period and
expire after seven to ten years. Options may be granted to
officers, key employees, directors and independent contractors to
purchase Common Stock at a price not less than 100% of fair market
value at the date of grant.
32
<PAGE>
Activity in the Company's option plans, excluding restricted stock,
is summarized below:
WEIGHTED
AVERAGE NUMBER
SHARES EXERCISE PRICE EXERCISABLE
- ------------------------------------------------------------------------------
Options outstanding at March 31, 1994 4,174,735 $ 8.33 2,091,202
---------------------------------------
Granted 654,862 11.91
Exercised (1,352,107) 7.75
Cancelled (465,028) 8.91
---------------------------------------
Options outstanding at March 31, 1995 3,012,462 9.25 1,628,899
---------------------------------------
Granted 996,066 26.19
Exercised (1,114,819) 8.63
Cancelled (259,021) 14.57
---------------------------------------
Options outstanding at March 31, 1996 2,634,688 15.39 1,080,002
---------------------------------------
Granted 3,514,470 18.15
Exercised (183,189) 8.88
Cancelled (2,388,722) 25.30
---------------------------------------
Options outstanding at March 31, 1997 3,577,247 $12.00 1,149,338
---------------------------------------
---------------------------------------
The following table summarizes information concerning options
outstanding and exercisable as of March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.25 - $ 7.88 719,156 6.06 $ 7.36 595,111 $ 7.28
$ 8.13 - $12.25 550,273 5.90 $ 9.87 454,401 $ 9.62
$12.38 - $12.38 1,627,095 9.17 $12.38 350 $12.38
$12.75 - $36.63 680,723 9.13 $17.60 99,476 $21.90
-------------------------------------------------------------------------------
$ 5.25 - $36.63 3,577,247 8.03 $12.00 1,149,338 $ 9.46
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
During the second quarter of fiscal 1997, the Company approved the
cancellation and regrant of outstanding options under the Company's
stock option plans. Under the program, holders of outstanding
options with exercise prices in excess of $12.38 per share were
given the choice of retaining these options or of obtaining in
substitution new options for the same number of shares. The new
options are exercisable at a price of $12.38 per share, the fair
market value of the Common Stock on the regrant date. The new
options have a vesting schedule identical to the cancelled options,
but beginning anew on the date of regrant.
STOCK-BASED COMPENSATION As discussed in Note 1, the Company
continues to account for its stock-based compensation using the
intrinsic value method in accordance with APB 25 and, accordingly,
does not recognize compensation expense for employee stock plans as
they are granted at fair market value. However, generally accepted
accounting principles require disclosure of pro forma net income
and earnings per share had the Company adopted the fair value
method as prescribed by SFAS 123. Under SFAS 123, the fair value of
stock-based awards is calculated through the use of option pricing
models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's
stock-based awards. These models also require subjective
assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. As
the Company's employee stock-based compensation plans have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, the Company believes
that the existing option valuation models do not necessarily
provide a reliable single measure of the fair value of awards from
those plans.
If the computed fair values of the fiscal 1997 and 1996 awards had
been amortized to expense, pro forma net income and earnings per
share would have been $16.9 million ($.78 per share fully diluted)
in fiscal 1997 and $26.7 million ($1.28 per share) in fiscal 1996.
The impact of outstanding non-vested stock options granted prior to
fiscal 1996 has been excluded from the pro forma calculations; as
such, the fiscal 1997
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and 1996 pro forma adjustments are not representative of such
future adjustments, which will include expense for more than two
years of awards.
The fair value of the options was estimated at the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions for fiscal 1997 and 1996,
respectively: risk-free rates of 6.3% and 6.1%; a stock price
volatility factor of 52%; an expected option life of six months
following vesting; and no dividends during the expected term. The
Company's calculations are based on a multiple option valuation
approach and recognition of forfeitures as they occur. The weighted
average fair value of options granted during fiscal 1997 and 1996
was approximately $6.49 and $11.11, respectively. The fair value of
the employee purchase rights under the Employee Stock Purchase Plan
was estimated using the same model, but with the following weighted
average assumptions for both fiscal 1997 and 1996: risk-free rate
of 5.5%; stock price volatility factor of 48%; and expected option
life of six months. The weighted average fair value of purchase
rights granted in fiscal 1997 and 1996 was approximately $6.16 and
$8.73, respectively.
note INCOME TAXES
- ----
10
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, which prescribes an
asset and liability method of income tax accounting.
Income before income taxes and the provision (benefit) for
income taxes consist of the following:
(DOLLARS IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------
Income before income taxes:
Domestic $31,360 $46,674 $20,563
Foreign 4,457 1,557 2,747
-------------------------
$35,817 $48,231 $23,310
-------------------------
-------------------------
Provision (benefit) for income taxes:
Current:
Federal $ 5,218 $16,595 $ 6,140
State 1,238 2,216 -
Foreign 1,647 - -
-------------------------
8,103 18,811 6,140
-------------------------
Deferred:
Federal 4,070 (1,643) (8,227)
State 342 (287) (1,673)
Foreign - - -
-------------------------
4,412 (1,930) (9,900)
-------------------------
$12,515 $16,881 $ (3,760)
-------------------------
-------------------------
The provision (benefit) for income taxes reconciles to the amount
computed by applying the statutory U.S. federal rate of 35% to
income before income taxes as follows:
(DOLLARS IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------
Statutory federal tax provision $12,536 $16,881 $ 8,159
State taxes net of federal income tax benefit 1,397 1,929 1,399
Change in valuation allowance (115) (3,504) (14,341)
Foreign sales corporation benefit (1,440) - -
Other 137 1,575 1,023
--------------------------
Provision (benefit) for income taxes $12,515 $16,881 $ (3,760)
--------------------------
--------------------------
34
<PAGE>
Deferred tax assets (liabilities) are composed of the following at
March 31:
(DOLLARS IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------
Reserves not currently deductible for tax purposes $ 7,770 $ 7,866
Depreciation (280) 942
Loss carryforwards 1,044 1,159
Credit carryforwards 3,500 6,431
-----------------------
Gross deferred tax assets 12,034 16,398
Gross deferred tax liabilities --
Capitalized software production costs (3,572) (3,409)
Valuation allowance (1,044) (1,159)
-----------------------
Net deferred tax assets $ 7,418 $11,830
-----------------------
-----------------------
The valuation allowance decreased $.1 million in fiscal 1997 due to
the realization of the benefit of certain tax loss carryforwards. A
valuation allowance of $1.0 million remains at March 31, 1997, and
is attributable to foreign loss carryforwards.
As of March 31, 1997, the Company has available alternative minimum
tax credit carryforwards of $2.0 million available indefinitely and
state tax credit carryforwards of $1.5 million. Foreign tax loss
carryforwards of $2.8 million are available for use in reducing
future taxable income in certain foreign jurisdictions.
note EMPLOYEE BENEFIT PLAN
- ----
11
The Company has established a 401(k) tax-deferred savings plan,
whereby eligible employees can contribute a percentage of their
eligible compensation (presently from 1% to 17% to a maximum of
$9,500 per year). Company contributions are discretionary and were
$860 thousand, $1.0 million and $846 thousand for fiscal 1997, 1996
and 1995, respectively.
note FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE
- ----
12
The estimated fair values of the Company's financial instruments at
March 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $39,141 $39,141 $52,319 $52,319
Temporary cash investments $99,581 $99,581 $59,892 $59,892
Liabilities:
Foreign exchange contracts $ 2,882 $ 2,898 $ 4,969 $ 4,924
Convertible subordinated debentures $25,821 $22,464 $33,526 $36,669
</TABLE>
The following methods and assumptions were used in estimating the
fair values of financial instruments:
Cash and cash equivalents-the carrying amounts reported in the
balance sheets for cash and cash equivalents approximate their
estimated fair values.
Temporary cash investments, foreign exchange contracts and
convertible subordinated debentures-fair values are based on quoted
market prices.
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF NETWORK EQUIPMENT TECHNOLOGIES,
INC.
We have audited the accompanying consolidated balance sheets of Network
Equipment Technologies, Inc. and subsidiaries as of March 31, 1997 and 1996,
and the related consolidated statements of income, stockholders equity, and
cash flows for each of the three years in the period ended March 31, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Network Equipment Technologies,
Inc. and subsidiaries at March 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1997 in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
San Jose, California
April 16, 1997
36
<PAGE>
COMMON STOCK DIVIDENDS AND PRICE RANGE
DIVIDENDS
The Company has not paid cash dividends on its Common Stock, and it presently
intends to continue this policy for the foreseeable future in order to retain
earnings for the development of the Company's business.
MARKET PRICE
The Common Stock is traded on the New York Stock Exchange under the symbol
NWK. The following table sets forth, for the periods indicated, the range of
high and low sale prices.
FISCAL 1997 HIGH LOW
- -------------------------------------------------------------------------------
First quarter $31.63 $19.38
Second quarter 21.75 11.13
Third quarter 16.38 13.00
Fourth quarter 20.88 13.13
FISCAL 1996 HIGH LOW
- -------------------------------------------------------------------------------
First quarter $25.25 $19.75
Second quarter 39.75 22.38
Third quarter 42.00 27.75
Fourth quarter 36.00 21.00
In addition, the Company's 7-1/4% convertible subordinated debentures trade
in the over-the-counter market.
37
<PAGE>
CORPORATE DIRECTORY & INFORMATION
<TABLE>
<CAPTION>
<S> <C>
CORPORATE DIRECTORY CORPORATE INFORMATION
CORPORATE OFFICERS ANNUAL MEETING
The annual meeting of shareholders will be held
Joseph J. Francesconi at 10:00 a.m. on August 12, 1997, at the
PRESIDENT AND CHIEF EXECUTIVE OFFICER Company's headquarters in Redwood City,
California.
Roger A. Barney
VICE PRESIDENT, INVESTOR RELATIONS
HUMAN RESOURCES AND CORPORATE SERVICES N.E.T. welcomes inquiries from its shareholders
and other interested investors. To receive the
James B. De Golia Company's Annual Report, Form 10-K, quarterly
VICE PRESIDENT, GENERAL COUNSEL financial results, and other corporate
AND ASSISTANT SECRETARY information, please dial our hotline at
1-888-828-8080, or write to Investor Relations
Samuel H. Ezekiel at N.E.T., 800 Saginaw Drive, Redwood City, CA
SENIOR VICE PRESIDENT, MARKETING 94063, or visit our World Wide Web site.
Craig M. Gentner N.E.T. ON THE INTERNET
SENIOR VICE PRESIDENT, CHIEF FINANCIAL N.E.T.'s home page on the World Wide Web
OFFICER AND CORPORATE SECRETARY contains background on the Company and its
products, financials, and other useful
David P. Owen information. Our Web site is located at
VICE PRESIDENT, http://www.net.com
STRATEGY AND TECHNOLOGY
TRANSFER AGENT
Raymond E. Peverell First National Bank of Boston
SENIOR VICE PRESIDENT, SALES AND SUPPORT Boston, Massachusetts
G. Michael Schumacher INDEPENDENT AUDITORS
SENIOR VICE PRESIDENT, Deloitte & Touche LLP
PRODUCT OPERATIONS San Jose, California
Charles S. Shiverick
VICE PRESIDENT,
INFORMATION SERVICES AND REENGINEERING
DIRECTORS
Dixon R. Doll
MANAGING GENERAL PARTNER,
DOLL CAPITAL MANAGEMENT
James K. Dutton
DIRECTOR, CAERE CORPORATION AND ECCS,INC.
IDNX and the N.E.T. logo are registered
Joseph J. Francesconi trademarks, and CellXpress, FrameXpress,
PRESIDENT AND CHIEF EXECUTIVE OFFICER, N.E.T. N.E.T., PanaVue, PrimeVoice, Promina, and STM
are trademarks of Network Equipment
Walter J. Gill Technologies, Inc.
VICE PRESIDENT AND CHIEF TECHNOLOGY
OFFICER (RETIRED), N.E.T. -C-1997 Network Equipment Technologies, Inc.
All rights reserved. Printed on recycled paper.
Hans A. Wolf Printed in U.S.A.
CHAIRMAN OF THE BOARD, N.E.T.
VICE CHAIRMAN OF THE BOARD (RETIRED), LIT122-1997-20K
SYNTEX CORPORATION
</TABLE>
38
<PAGE>
EXHIBIT 21.1
NETWORK EQUIPMENT TECHNOLOGIES, INC.
SUBSIDIARIES OF REGISTRANT
AS OF JUNE 1, 1997
<TABLE>
<CAPTION>
<S> <C>
N.E.T. APLA, Inc................................................ (State of Incorporation: Delaware)
N.E.T. China, Inc............................................... (State of Incorporation: Delaware)
N.E.T. Credit Corporation....................................... (State of Incorporation: California)
N.E.T. Europe Ltd............................................... (Incorporated Under the Laws of England)
N.E.T. Europe S.A............................................... (Incorporated Under the Laws of France)
N.E.T. Federal, Inc............................................. (State of Incorporation: Delaware)
N.E.T. International, Inc....................................... (Incorporated Under the Laws of Barbados)
Network Equipment Technologies Europe GmbH...................... (Incorporated Under the Laws of Germany)
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No.33-33013, No. 33-33063, No. 33-65157, and No. 33-68860 on Forms S-8 and
Registration Statement No. 33-45815 on Form S-3 of Network Equipment
Technologies, Inc. of our reports dated April 16, 1997, appearing and
incorporated by reference in this Annual Report on Form 10-K of Network
Equipment Technologies, Inc. for the year ended March 31, 1997.
DELOITTE & TOUCHE LLP
San Jose, California
June 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 39,141
<SECURITIES> 99,581
<RECEIVABLES> 82,986
<ALLOWANCES> 3,910
<INVENTORY> 22,662
<CURRENT-ASSETS> 258,467
<PP&E> 30,009
<DEPRECIATION> 84,713
<TOTAL-ASSETS> 301,653
<CURRENT-LIABILITIES> 62,932
<BONDS> 25,821
0
0
<COMMON> 210
<OTHER-SE> 212,690
<TOTAL-LIABILITY-AND-EQUITY> 301,653
<SALES> 214,862
<TOTAL-REVENUES> 324,438
<CGS> 89,746
<TOTAL-COSTS> 162,143
<OTHER-EXPENSES> 129,930
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,310
<INCOME-PRETAX> 35,817
<INCOME-TAX> 12,515
<INCOME-CONTINUING> 23,302
<DISCONTINUED> 0
<EXTRAORDINARY> 690
<CHANGES> 0
<NET-INCOME> 23,992
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.11
</TABLE>
