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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9434
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PICTURETEL CORPORATION
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C>
DELAWARE Q-2835972
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
222 ROSEWOOD DRIVE DANVERS, MA 01923
(Address of Principal Executive Offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER: (508)762-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(Title and 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 last 90 days. Yes /X/ No / /.
Indicate by check mark if disclosure of delinquent filings pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. / /
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of March 15, 1996 was $1,146,762,711. On
such date, the average of the high and low price of the Common Stock was $34.76
per share. The Registrant has 32,990,872 shares of Common Stock outstanding as
of March 15, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive 1996 Proxy Statement in connection with the Annual
Meeting of Stockholders to be held June 17, 1996 are incorporated by reference
into Part III.
A list of all Exhibits to this Annual Report on Form 10-K is located at pages
40 through 42.
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ITEM 1. BUSINESS
PictureTel develops, manufactures, markets and services visual
communications systems and collaboration software utilizing advanced video and
audio compression technology which permit users to hold face-to-face meetings at
a distance with the cost and convenience of the telephone. Videoconferences may
be held between two locations, or, using a multipoint bridge, among multiple
locations. PictureTel's compression technology permits the transmission of
"full-motion" color video with integrated full-duplex audio at data rates as low
as 56 Kbps. By operating over such low speed switched digital lines,
Picturetel's systems have substantially reduced the cost and increased the
flexibility of videoconferencing. With high-speed (e.g. at 2 to 6 Mbps)
videoconferencing solutions, which operate over dedicated (nondialed) lines, the
per-minute usage cost can be from 10 to 100 times higher. Flexibility is
achieved because the low speed digital switched lines have become available from
the long distance carriers in more and more geographic areas, thus leading to
greater potential use of videoconferencing in general and the PictureTel System.
The Company offers a range of products for group and personal videoconferencing
applications. PictureTel sells its products through a number of
telecommunication and personal computer distributors in the United States and
internationally as well as through a direct sales force. In 1995 43% of its
revenues were generated from sales to customers outside the United States.
PictureTel is a Delaware corporation organized in 1984, with executive
offices at 222 Rosewood Drive, Danvers, Massachusetts 01923 (telephone:
508-762-5000).
INDUSTRY BACKGROUND
The driving force behind the growth of the visual communications systems
market is the desire to achieve the effectiveness of face-to-face meetings with
the cost and convenience of the telephone. On a daily basis, information is
routinely exchanged between workers located in the same facility through
one-on-one or group meetings. Almost as frequently, information is communicated
between workers in geographically separate sites by telephone or by sending or
faxing written materials. Less frequently, individuals travel to a common site
to meet and exchange information that cannot be transferred effectively by
telephone or in writing. Face-to-face meetings maximize the exchange of
information, including written, verbal and non-verbal communication.
Visual communications systems, such as videoconferencing systems, can
improve worker productivity and reduce costs by eliminating or reducing travel,
improving the timely exchange of information between dispersed work groups and
leveraging the use of scarce personnel resources located at a distance from the
coworker needing their expertise.
Initial generations of videoconferencing products were relatively expensive
and typically required dedicated, high speed transmission facilities, trained
operators and special rooms, with customized lighting and acoustics. The price
and performance characteristics of these systems limited market demand to those
end-users with very large visual communications requirements between
geographically separate locations. Despite broad interest in videoconferencing,
cost benefit analyses led most potential users to conclude that an investment in
the technology could not be justified. In recent years, however, numerous
factors have led to greater use of videoconferencing. These factors include the
rapid growth of world-wide switched digital telephone services, the decreasing
cost of these services, technological improvements in both audio and video
quality and the availability of lower cost, easy to use turnkey visual
communications systems.
Connectivity, the ability to call any location without special equipment or
arrangements, is the basis of the telephone's popularity. The proliferation of
switched digital networks, which transmit digital signals (as compared to normal
telephone networks, which transmit analog signals), in the United States and
internationally has provided this key element of connectivity to the visual
communications market. Before switched digital service was available,
videoconferencing calls could only be completed over dedicated transmission
lines established between two fixed locations. At the end of 1995, switched 56
Kbps digital service was available in most cities in the United States and from
the United States to many foreign countries. The majority of videoconferencing
systems used on switched digital networks in the United States operate at 112
Kbps (two multiplexed 56 or 64 Kbps lines). Internationally, 64 Kbps is the
switched digital standard.
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The majority of videoconferencing systems used on foreign switched digital
networked operate at 128 Kbps (two multiplexed 64 Kbps lines). PictureTel's
videoconferencing systems are fully compatible with one another whether used
within the United States or internationally. The Company's products interoperate
with H.320 compliant systems from other vendors.
Coincident with the expansion of switched digital networks has been the
dramatic decrease in the cost to use these transmission services. A one hour
coast-to-coast call at 128 Kbps placed over the ISDN dial-up network costs less
than a local cellular phone call.
In order to transmit a video image over telephone circuits, video data
signals must be reduced or "compressed" to fit the capacity of digital telephone
lines, which are available in various capacities from 56 Kbps to 1.5 Mbps. As
the video image signal is compressed, information is dropped and the quality of
the video image decreases. The quality of the transmitted video image is a
function of the data rate at which the signal is transmitted, the sophistication
of the compression algorithm (which determines which information is eliminated
as redundant) and the relative amount of audio accompanying the video signal.
Video and audio quality have improved dramatically over the years with the
introduction of more sophisticated compression algorithms by PictureTel and
others. These algorithms compress 90 Mbps of information contained in a
television video signal down to 112 Kbps (an 800 to 1 compression ) for
transmission over switched digital networks and decompress that signal for
display at the receiving end while achieving acceptable picture quality and full
duplex audio transmission. In addition, proprietary advances in compression
technologies have improved audio fidelity from less than telephone quality in
the mid-1980's to today's systems which sound like the people are sitting in the
same room as the listener.
VLSI (Very Large Scale Integration) technology permits the placement of
large numbers of transistors and other components onto small chips of silicon,
thereby reducing significantly the size requirements for those components. With
the increasing use of VLSI chip technology, the cost of videoconferencing
systems has steadily decreased as components have become smaller and systems
more integrated, while offering greater functionality to the user.
Since the introduction of turnkey systems, videoconferencing equipment has
become more convenient to purchase and use. Previously, telecommunications
specialists acquired equipment from numerous vendors and integrated the various
components into a custom system. Over the past eight years, videoconferencing
vendors such as PictureTel have begun offering turnkey systems, which eliminate
the need for procurement specialists. In addition, these systems incorporate
"user friendly" features that eliminate, in most cases, the need for trained
specialists in order to use the equipment.
TECHNOLOGY
PROPRIETARY
The Company's primary technological contributions have been in the areas of
video compression, audio compression, echo cancellation, automatic volume
control, noise suppression, and system architecture. For definitions of
technical terms see the brief glossary at the end of the "Technology" section.
A standard broadcast video signal is comprised of 90 million bits of
information per second. Transmission of this amount of data is costly and, in
most cases, it is unnecessary to send 100% of the information in order to
recreate the original picture, or an acceptable representation of it. The
purpose of a video compression algorithm is to reduce the amount of information
required to describe an image, including movement for objects within the image,
without significant loss of accuracy. The effectiveness of an algorithm is
measured by the amount of bandwidth needed to provide "acceptable" picture
quality. There are further subjective measures, usually described in terms of
the smoothness of the moving images and the lack of coding artifacts.
Since its inception, the Company has developed increasingly sophisticated
algorithms capable of compressing a video signal 800-1600 times to enable the
transmission of video images over low bandwidth dial-up networks. In 1986,
PictureTel introduced its first codec utilizing its proprietary algorithm, MCT,
which was the first commercially available product using motion compensated
discrete cosine transform video
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compression technology. In 1988, PictureTel introduced HVQ, hierarchical vector
quantization, a more advanced compression technique which, among other
improvements, replaced the discrete cosine transform in MCT with a resolution
pyramid and a vector quantizer.
PictureTel's third generation algorithm, SG3, which the Company first
shipped in the first quarter of 1991, further advances low bandwidth video
compression technology. SG3 replaced the vector quantizer in HVQ with a more
efficient vector quantizer. SG3 is also the first commercial product to
incorporate background estimation, which dramatically improves picture quality
in scenes where objects frequently include complex backgrounds. SG3's background
estimator permits it to dedicate more bandwidth to coding moving objects by
storing views of non-moving objects at the receiving end so they need not be
retransmitted. The Company believes that with SG3, acceptable video and audio
quality is now possible at approximately 80 Kbps, representing a 90% reduction
in required bandwidth from 1985. SG3 uses the additional bandwidth beyond 80Kbps
available on a 112 Kbps network to provide enhanced video and audio quality.
PictureTel's latest video compression algorithm, SG4, introduced in 1995 in
the Concorde 4500 platform, has several improvements over SG3. The most
important are improved encoding of the motion vectors, resulting in smoother
motion rendition, and the PicturePlus video enhancement system, which
compensates for variations in the video quality caused by poor light conditions
and camera noise. Furthermore, the SG4 compressed data is transmitted through
the standard H.221 protocol, which allows multipoint conferencing with SG4 video
quality through standard H.320 MCUs.
The Company has devoted significant effort to audio compression and echo
cancellation in order to produce a more "natural" sound in its videoconferencing
systems. The Company believes that to produce audio quality which approximates
that of a face-to-face meeting, systems must feature wideband audio and
full-duplex operation, which, unlike half-duplex speakerphones, allow people at
all ends of a video call to be heard at the same time.
When conducting a videoconference at 112 Kbps, up to 28 Kbps are available
for audio transmission. In 1986, audio compression technology could only produce
2.5 KHz of audio bandwidth. With advancements incorporated into HVQ, audio
quality improved to 3.5 KHz, comparable to regular telephone audio quality,
Proprietary advancements in SG3 improved audio quality available with the same
28 Kbps to 7.0 KHz., which is comparable to FM radio audio quality.
An effective face-to-face meeting requires full-duplex audio. However, in a
videoconference, the transmission of sound into microphones and out through
speakers introduces the possibility of echo feedback. Commercial echo cancelers
in conventional speakerphones reduce echo feedback, but are not effective for
videoconferencing because of the relatively lone processing delay in codecs
(approximately one second round trip) coupled with broader, audio bandwidth than
normally found in a telephone. Therefore, the Company developed IDEC, its
proprietary echo cancellation technology, which substantially eliminates all
echo feedback and is standard in all group and personal videoconferencing system
products.
As the number of videoconferencing systems has expanded in the marketplace,
there has been an increasing demand to link multiple locations into a single
call, in much the same way that audio conference calls occur today. This demand
has led to the development of video bridges, or multipoint control units
("MCU"). In a multipoint videoconference, each location is transmitting a signal
to the bridge which contains both compressed audio and video information. The
MCU contains audio bridging technology which permits it to parse, or "strip out"
the audio signal, decode it, determine which signals represent speech, combine
the multiple signals back into one signal, recode the signal and transmit it to
all locations on the call. In this manner, the MCU is acting much as an audio
bridge operates. Beyond this capability, however, is the need to synchronize the
transmission of the audio with the video image which accompanies it and the
ability to switch between various video images. Research and development in MCU
technology is centered around improving the audio detection algorithms to better
distinguish speech from other noise in the audio signal, improving the audio
quality by increasing the audio bandwidth, developing the technology to permit
multiple sites to be viewed simultaneously in separate windows in the same
screen and transcoding technology which permits callers operating at different
bandwidths and using different compression algorithms to participate in the same
call.
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STANDARDS
The rate of expansion of the visual communications systems market is
influenced by the establishment of standard communication protocols for visual
communications.
In December 1990 the ITU-T (International Telecommunications Union)
(formerly CCITT) formally adopted a standard for video telecommunications
(H.320) to ensure that equipment from different manufacturers will be capable of
interoperating. Compatibility of codecs is particularly important for
communication via switched digital networks (ISDN) because the advantage of
these services is dial-up communications without regard to the type of equipment
being used at the receiving end of the transmission.
Since the mid-1980's the ITU-T defined the initial proposals for a new
standard, T. 120, which was subsequently approved in 1995. The Company actively
participated in the ITU-T discussions developing T. 120. This standard defines
the exchange of data and graphical images among personal computers,
videoconferencing systems and other graphical communication devices such as
electronic white boards and overhead projectors. This standard is presently
being included in the Company's group products and will be included in the
personal system products.
As technological evolution enables other networks besides ISDN to carry
effective videoconferencing calls, new standards are emerging to define the
protocols for them. The Company maintains a strong level of participation in the
ITU-T, and has been driving such new standardization efforts, In particular,
PictureTel served as the editor of the H.324 standard for POTS multimedia
conferencing, initially approved by the ITU-T in November of 1995, and is a
major technical contributor of the H.323 standard for LAN videoconferencing, to
be approved by the ITU-T in mid 1996.
The H.320 standard incorporates technology which has been developed and
patented by certain codec manufacturers, including the Company and certain of
its competitors. These codec manufactures have agreed with the ITU-T to grant
licenses, on nonexclusive bases and nondiscriminatory, fair and reasonable terms
to all manufacturers who wish to comply with the H.320 standard. Although no
such licenses have yet been granted, the Company believes that it will obtain
all necessary licenses at a reasonable cost.
GLOSSARY
ACCUNET -- the first commercially available switched digital communication
network, which allowed dialed digital connection at rates of 56 and 112 Kbps,
using a combination of existing telephone lines and new network equipment.
CODEC -- combination of a coder and decoder. A coder uses a compression
algorithm to reduce the number of bytes needed to represent an audio or video
segment. A decoder recovers the original raw bytes from the compressed bytes
generated by the coder. In video and audio compression, the recovery does not
need to be exact; a good approximation of the original information is
appropriate for practical purposes.
COMPRESSION ALGORITHM -- a set of procedures (usually specified by
mathematical equations and implemented in software within a particular computing
architecture) that reduce the number of bytes necessary to represent some piece
of information, such as a video or audio segment.
COMPRESSION RATIO -- the average number of bytes at the input of codec that
will produce one byte at the output of the coder. The higher the ratio the lower
the necessary channel speed to transmit the information, and therefore the lower
the transmission cost.
DISCRETE COSINE TRANSFORM, DCT -- a mathematical transformation used in
standards and some proprietary video compression algorithms. The DCT maps a set
of original image sample values into frequency components that can more
efficiently be compressed.
ECHO CANCELLATION -- the process of removing the acoustic echo that would
result from a full-duplex audio communication system. When the person at point A
talks and his voice is reproduced by the loudspeaker at point B, the microphone
at B would pick it up and send it back (with a delay due to the communication
system) to the loudspeaker at point A. An acoustic echo canceller eliminates
such a return signal.
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FULL-DUPLEX -- characteristic of a communication system in which signals
can be simultaneously transmitted in both directions. For example, in audio or
audio/video calls, it means that people at both ends of a call can speak and be
heard simultaneously.
HALF DUPLEX -- characteristic of a communication system in which signals
can be transmitted in both directions, but not simultaneously. For example, in
an audio call, it means that only one person can speak at any given time (a
typical mode of operation for inexpensive speakerphones).
ISDN -- integrated services digital network, an international switched
digital communication network (also leveraging existing telephone wires, similar
to ACCUNET) that provides multiples of Kbps per channel, up to a maximum of 2
mbps. ISDN is available in many countries.
KBPS -- kilobits per second, 1 Kbps = 1,000 bits per second.
MBPS -- megabits per second, 1 Mbps = 1,000,000 bits per second.
MCU -- multipoint control unit, also referred to as a bridge. A piece of
equipment that is connected to multiple communication channels, making possible
multipoint audio or audio/video calls (i.e. calls in which several sites can
communicate).
MOTION COMPENSATION, MC -- a component of most video compression
algorithms. MC leads to higher compression ratios because it allows a video
frame to be partially reconstructed from modifications on the previously
received frame using motion estimates.
QUANTIZATION -- the process for approximating a continuous variable by its
nearest value from a table.
VECTOR QUANTIZATION, VQ -- the process of approximating a collection of
continuous values (a vector), by its nearest vector from a table.
PRODUCTS
The Company develops and manufactures the products listed below for the
video conferencing industry. They range from high end group systems for many
people, to personal systems for one-on-one videoconferencing. The Company also
offers products that compliment these systems, such as multipoint bridges and
various software options and peripherals.
GROUP SYSTEMS
The Company develops, manufactures, supports and markets two families of
group videoconferencing systems: the Performance Family and the Value Family.
All group videoconferencing products are comprised of five basic modules or
components: an electronics module, a video module, an audio module, a user
interface and a WAN interface. The electronics module or CODEC
(compression/decompression) includes all the necessary functionality required
for video compression, audio compression and video switching. The video module
is comprised of a pan, tilt, and zoom camera (or cameras), an NTSC or PAL color
display and associated video electronics. The audio module consists of a
microphone, speaker(s), and associated audio electronics which facilitate echo
cancellation, noise suppression, and gain control. The user interface is
comprised of a keypad and menus that assist in placing a call and managing the
videoconference with features such as camera control keys, camera preset keys,
video source selection keys, mute and Picture-in-Picture. The WAN interface
includes standard interfaces such as V.35, RS-449 or X.21, permitting
communication over switched or dedicated digital networks that operate from 56
Kbps up to T1 (1.544 Mbps) and E1 (2.048 Mbps) speeds.
All the Company's group systems are interoperable and collectively, the
Performance and Value products, span a price/performance range from $13,000 to
$53,000 providing a viable solution for both the price sensitive and performance
oriented users.
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PERFORMANCE GROUP SYSTEMS
The Performance Family is PictureTel's premier line of products. The
Performance Family supports both PictureTel's most recent proprietary
compression algorithm, SG4, optimized for low bandwidth applications, and an
enhanced version of the industry standard ITU-T H.320 algorithm. The Performance
Family includes the S-4000EX and the Concorde 4500 products. The S-4000EX list
prices range from $30,000 to $50,000+ fully configured. The Concorde 4500,
introduced in April 1995, is the Company's flagship product. The standard system
includes an infrared based keypad, camera and Look-At-Me-Button (LAMB), a unique
device to facilitate distributed control within a videoconference call. The
Concorde 4500 also comes standard with a WorldCart supporting color NTSC or PAL
displays up to 32" in size and an integrated speaker system, optimized for
voice, developed exclusively for PictureTel by BOSE Corporation. Both the
S-4000EX and the Concorde 4500 offer 30 FPS (frames per second) performance.
This feature provides "30 frames per second quality" video at bandwidths
starting as low as 256 Kbps (kilobits per second) and as high as 768 Kbps.
VALUE GROUP SYSTEMS
The Value Family is PictureTel's answer for price sensitive users. The
Value Group Systems provide inter -operability via the industry standard ITU-T
H.320 algorithm and are optimized for low bandwidth applications. The Value
Family includes the S-1000 and the Venue 2000 products. The S-1000, introduced
in July 1993 as the first Value Family offering, addresses the needs of the
price oriented buyer with list prices beginning at $13,995. The Venue 2000,
PictureTel's second generation Value System, was introduced in April 1995. Its
standard configuration includes an infrared keypad and camera. Other features
like the LAMB are available on the Venue product as options. The Venue 2000 also
offers improved video quality as bandwidth increases (up to T1 or even E1
rates). The Venue 2000 list prices range from $19,000 to over $30,000 fully
configured.
PERSONAL SYSTEMS
In July 1993, the Company introduced the PictureTel Live PCS 100, a
personal videoconferencing system designed for use with a personal computer
(desktop product). The PCS 100 consists of a video board, audio board, camera,
speakerphone and software. Utilizing the H. 320 standard (described under
"Technology-Standards"), the PCS 100 is interoperable with all the Company's
conferencing and bridging products. It also provides information sharing
capabilities which allow users to simultaneously share files and applications
while conducting a videoconference. The system is designed to operate in an
ISAbus, 386 or above personal computer running Microsoft Windows 3.1(R). It
lists for $4,995.
In January 1995, the Company announced the PictureTel Live PCS 50 which
complements the PCS 100. The product consists of a single audio/video board, a
fixed focus camera, a speakerphone or headset and associated software. As with
the PCS 100, the ITU-T H.320 compression standard is used, which provides
interoperablity with all of PictureTel's other conferencing and bridging
products and any H.320 compatible system from other vendors. It also provides
the same information sharing capability as the PCS 100 which allows users to
simultaneously share files while conducting a videoconference. The system is
designed to operate on an ISA-bus, 386 or above personal computer running
Microsoft Windows 3.1(R). The product's list price ranges from $2,995 to $3,495.
While the PCS 100 remains the high end member of the PictureTel Live product
family, offering greater flexibility in terms of network support and expansion
options, the PCS 50 product line offers a more affordable solution for ISDN
networks.
In July 1994, the Company shipped its LiveShare collaboration software with
application sharing that allows users to share files and interact on an
application during a videoconference. In September 1994, the Company entered
into the Local Area Network market with its LiveLAN family of products. List
prices for these products start at $249.
In October 1995, the Company introduced the Live 200i videoconferencing
product. This product consists of an audio/video board, camera, headset, and
software. It features the same interoperablity and information sharing tools as
the PCS 50 and PCS 100. The system is designed to operate in a ISA-bus, 486 or
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above personal computer and requires a VMC display controller. Unlike the PCS 50
and PCS 100, the Live 200i runs using Microsoft Windows 95[Registered
Trademark] operating system. The product lists for $1,995.
NETWORK SYSTEMS DIVISION
PictureTel's Network Systems Divisions could be described as the "glue"
that joins its videoconferencing systems products into a company-wide solution,
commonly known as an "enterprise solution". Multipoint bridges and reservation
and management systems software are the major revenue sources for the division.
These products deliver functionality that is "shared" among distributed
videoconferencing systems throughout a network. Multipoint bridges enable
videoconferences with more than two sites. Reservation and management systems
allow conference rooms, bridging resources and network facilities to be
scheduled and managed in advance of upcoming meetings by anyone, right from
their PC.
The "Montage" Conferencing Server product line is the Company's third
generation multipoint bridge. Launched in April 1995, the product line takes
advantage of "off-the-shelf" bridging hardware and differentiating software
features that make the products unique to the Company. Software features include
the Company's proprietary compression algorithms SG4 and PT724. A range of
models address conferencing networks of all sizes and applications. The smallest
Montage supports four sites in a multipoint conference for about $35,000 list
price. The largest Montage systems support up to 48 sites in a single conference
or any combination of conferences up to a total of 48 sites. Over 2,000 sites
can be in a single conference using a capability which joins multiple Montages
together. A fully loaded Montage Model 570 lists for over $300,000. Each Montage
system is fully upgradable so customers can take advantage of new
standards-based and the Company's proprietary features as they are released.
PictureTel's Teleconferencing Software System (TCSS) scheduling and
reservation system is among the industry's most advanced scheduling products.
TCSS utilizes a client server architecture. The database, automatic control
mechanisms for other network devices, reporting systems and management
capabilities are all performed by a central server. Users access the functions
and capabilities through clients or a small Windows based application that is
resident on their PC. The server can communicate with hundreds of clients
simultaneously and process all requests for meetings and schedules of rooms,
equipment, network bandwidth, and multipoint bridges. Clients connect to the
server over LANs or dial up modems. TCSS can also automatically set a video
conference by provisioning the proper network and dialing up phone numbers of
each site to be connected.
SOFTWARE
The Company's Personal and Group videoconferencing systems are software
based and can be upgraded by the user using standard floppy diskettes or a
removable memory cartridge. The Company also sells a Developer's Toolkit, a set
of software components, designed to give programmers access to major functions
for set up and control of video, audio, windowing, data transfer, configuration
and network communication.
OPTIONS AND PERIPHERALS
The group and personal system videoconferencing products are available with
a number of software and hardware options. Options available on some or all
products include NTSC or PAL video input standards, various network interfaces
such as RS449, V. 35, RS232 or X. 21, high resolution graphics capability and
data encryption for secure communications. Peripheral equipment used to
supplement the systems may include document cameras for transmission of still
images, additional video cameras to be placed in the conference rooms and video
cassette recorders.
RESEARCH AND DEVELOPMENT
The Company believes that decreased size, cost and increased functionality
will characterize future product generations. The Company also believes that as
videoconferencing expands beyond group meetings into the personal communications
segment of the market, success will be dependent on the further development of
powerful VSP (video signal processing) chips and further miniaturization of
systems
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components such as cameras and monitors. At such time, the Company expects
videoconferencing usage to expand to the desktop as part of a "multimedia"
workstation, or as a personal videophone. This technology will initially augment
and may eventually replace the telephone, leading to the development of the
residential market with a consumer videophone.
The Company is working to develop products similar to the PictureTel Live
PCS 100 and 50. The Company believes that, in order to meet the power, size and
cost constraints of desktop products, more powerful custom VSP (video signal
processing) chips are required. The Company believes that video signal
processing chips already available or under development by the Company and
others will provide the basis for future generations of group and desktop
videoconferencing systems.
The Company spent $33,357,000, $41,243,000 and $50,431,000 on research and
development, including capitalized software costs, in 1993, 1994 and 1995,
respectively. The Company had 323 full-time employees in research and
development at December 31, 1995.
The Company has entered into joint development agreements with Compaq,
Microsoft, NTT and others for product and software development that will further
expand the desktop market. These companies retain non-exclusive rights under
license from PictureTel to distribute the products that result from the
development work.
SALES, MARKETING AND CUSTOMER SUPPORT
The Company and its wholly owned subsidiaries currently distribute
PictureTel products worldwide by direct sales and indirect channels of
distribution.
As the market for videoconferencing systems expends, the Company expects to
increase its reliance on joint selling and distribution through a combination of
transmission carriers, telecommunication equipment distributors, personal
computer distributors and resellers, and value-added resellers and has currently
developed relationships with companies in each of these indirect channels. In
1995, the Company derived approximately 33% of its worldwide product revenues
from direct selling activities, including co-marketing arrangements with MCI,
Nynex and U.S. Sprint, and 67% from indirect channels. At December 31, 1995 and
1994, the Company had a product backlog approximately $20,400,000 and
$14,100,000, respectively. Backlog consists of purchase orders for which a
delivery schedule within six months has been specified by the customer.
UNITED STATES
Indirect Channels. To address the market below the Fortune/Service 500
(the largest businesses in the United States as published annually by Fortune
magazine) and expand the Company's presence in the Fortune/Service 500 market,
the Company has increased the number of telecommunication equipment
distributors, regional Bell Operating Companies ("RBOCs") and value-added
resellers ("VARs") who distribute the Company's products. Telecom distributors,
or interconnects, act as dealers for the Company and typically distribute other
communications equipment such as PBX systems, voice processing equipment and
multiplexors, as well as network services to large, medium and small size
companies. The RBOCs typically sell third party manufactured systems which
leverage the use of their switched and dedicated network services. To expand its
coverage of the Fortune /Service 500 companies, the Company has entered into
distribution agreements with AT&T (soon to be known as Lucent Technologies,
Inc.), Sprint, IBM, CompuCom, MCI and GTE.
The Company believes that, as system prices decrease, additional
applications for sales to vertical markets, such as distance learning,
telemedicine and remote interviewing, will develop. VARs typically have
expertise in a particular market and the Company plans to utilize this expertise
to stimulate Applications Developers Program. Under this program PictureTel
sells to developers, VARs, original equipment manufacturers and systems
integrators its VM-4000 Video Modem and the PictureTel Developer's Tool Kit.
Together these products provide the building blocks to allow developers to write
applications and incorporate PictureTel's visual communications technology into
unique vertical market products. With the introduction of
9
<PAGE> 10
the PictureTel Live, PCS 100, PCS 50 and PCS 200I products, the Company
continues to develop relationships with established personal computer
distributors and resellers.
Direct Sales Organization. The Company directly markets its
videoconferencing systems principally to the Fortune/Service 500. These large
companies typically have multiple locations in the United States as well as
internationally and typically specify a single vendor to supply equipment on a
world-wide basis. The Company believes that it is important to maintain a close
working relationship with these customers in order to meet their demands for
sales and support on a multinational basis.
The Company maintains five regional sales and support offices and eighteen
additional branch sales and support offices, located in or near Boston and
Waltham, Massachusetts; New York, New York; East Rutherford, New Jersey;
Stamford, Connecticut; Washington, D.C.; Chicago, Illinois; Detroit, Michigan;
Minneapolis, Minnesota; Atlanta, Georgia; Dallas and Houston, Texas; Los Angeles
and San Francisco, California; St. Louis, Missouri; Philadelphia, Pittsburgh,
and King of Prussia, Pennsylvania; Denver, Colorado; Pompano Beach, Florida;
Seattle, Washington; Phoenix, Arizona; Kansas City, Kansas; Cincinnati, Ohio.
Regional offices typically include demonstration equipment as well as a number
of customer and technical sales representatives and field support personnel.
The Company's direct selling activities have been assisted by its
co-marketing arrangements with major long distance carriers. These companies
typically market the Company's products in conjunction with their sale of
switched digital or dedicated network services. Under these arrangements, these
companies refer potential customers to PictureTel and receive a fee in the event
that PictureTel completes a sale with the end-user.
INTERNATIONAL DISTRIBUTION
Outside of the United States the Company relies on a network of foreign
market distributors and its own foreign subsidiaries. Agreements with the
Company's foreign market distributors generally provide for pricing, volume
discounts, order lead times, a specific geographic territory and other terms and
conditions and are typically for terms of one to three years with options to
extend such terms by mutual agreement.
In the third quarter of 1991 the Company established its first
international subsidiary, and currently the Company has operating subsidiaries
in the United Kingdom, Germany, Switzerland, Sweden, Australia and Japan, and
branch offices in Canada, France, Hong Kong, People's Republic of China, and
Singapore. International distributors include companies such as British Telecom
(BT), Deutsche Telekom, Nippon Telephone & Telegraph (NTT), Alcatel, EGT (France
Telecom), Telecom Italia, Siemens, and Mercury Communication (Cable & Wireless).
These foreign units provide sales and support services locally. Sales to
international distributors are usually made in U.S. dollars in order to minimize
the risks associated with fluctuating foreign currency rates. Sales by the
Company's operating subsidiaries to customers are generally made in the
subsidiary's local currency.
The Company's revenues from sales to foreign markets represent
approximately 39%, 42%, and 43%, respectively, of the Company's total revenues
in 1993, 1994, and 1995. Additional information with respect to the Company's
international business is included in Note 11 to the Consolidated Financial
Statements.
CUSTOMER SUPPORT
The Company believes that the quality and reliability of its systems is
important to customer satisfaction and therefore has continually emphasized the
reduction of the number of components and improvements in reliability in its
product development activities. The Company provides a warranty for parts and
labor on its products and utilized a direct field service staff in the United
States and internationally to perform equipment installations, preventive
maintenance and service. Warranty periods are generally one year from
installation date on sales to end-users and one year from delivery date on sales
to distributors. In addition, warranty periods for certain software products,
repairs, and upgraded parts are 90 days upon receipt. Estimated costs related to
warranty are accrued at the time of revenue recognition. Typically, repairs are
performed at the customer site and involve replacement of a printed circuit
board or other module.
10
<PAGE> 11
The Company offers an array of customer service and support programs,
including preset inspection, installation, system maintenance and service,
spares kits, customer training and a toll-free telephone line for remote
customer consultation and diagnostics. In addition, it offers next day business
response to service requests to all of its domestic customers who are covered by
a service contract. Support outside of the United States is provided by the
Company's subsidiaries and local distributors.'
Revenues generated from service and support were less than 10% of total
revenues during 1993, 1994 and 1995.
COMPETITION
The Company is engaged in an industry that, as a result of extensive
research and development efforts, has new, more technologically advanced
products introduced on a regular basis. If the Company is not in a position to
exploit and obtain technological advancements, it products may become obsolete
or priced above competitive levels. Moreover, unforeseen technical or other
difficulties may interfere with the development or production of its products,
or prevent or create delays in marketing such products.
A number of companies, including British Telecom ("BT") Compression
Laboratories, Inc. ("CLI"), NEC and GEC Plessey Telecommunications, LTD.
("GPT"), continue to dominate the high bandwidth transmission (from 384 Kbps to
2.048 Mbps) videoconferencing market. Currently, switched 56 Kbps service is the
most widely available switched digital service in the United States. However,
transmission carriers have begun to offer switched services at 384 Kbps and 1.5
Mbps (T-1). The Company does not believe that competition from the high
bandwidth market will significantly affect its market potential because of the
greater cost and limited availability of the high bandwidth services.
The Company also faces competition from a number of companies with
currently available or announced visual communications products designed for low
bandwidth videoconferecing. Currently, three United States companies, CLI, VTEL
Corporation ("VTEL"), and Intel Corporation are among the companies marketing
low bandwidth full-motion video modems and complete videoconferencing systems.
In addition, outside the United States, low bandwidth videoconferecing systems
and video modems are available from a number of suppliers in Europe and the Far
East including GPT, Philips Kommunikations Industries AG, Vista Communications
Instruments, Inc., Tandberg Telecom AS, Mitsubishi Ltd., NEC, Hitachi, Ltd.,
Sony Corporation, Fujitsu Ltd. of Japan and Panasonic.
The Company competes primarily on the basis of video and audio quality as
well as on favorable features and the price of its systems. The Company believes
that its products are competitive in each of these areas.
Some of the companies which now offer or may be expected to offer products
that compete with the Company's products, such as Intel Corporation and Sony
Corporation, are substantially larger and have significantly greater financial
and other resources than the Company and now market or may be expected to market
a more diversified line of products than the Company's. Now that the H.320
standard has been widely established, larger companies with greater resources
may manufacture less costly products which compete with the Company's products.
In the personal (one-on-one) visual communications segment, the Company
expects that competition will continue to intensify. The competitive landscape
has shifted substantially in 1995. At the beginning of the year Intel, AT&T, and
BT were the primary competitors. In late 1995, AT&T decided to exit the desktop
market, leaving PictureTel and Intel as the market leaders. BT is now
distributing the Company's products. Other companies who did not start 1995 as
significant competitors but are now moving into position are Creative Labs, Inc.
and Netscape. These lower priced desktop products generally offer fewer features
and functionality than found in current video conferencing systems sold by the
Company and others. In addition, competitive price reductions may adversely
affect the Company's revenues and profitability. However, the Company believes
that its products are competitive in this area.
Previously, purchasers of videoconferencing systems must have purchased the
videoconferencing systems from the same vendor to ensure the interoperability.
However as a result of the adoption of the H. 320
11
<PAGE> 12
standard products from the Company and other manufacturers are interoperable.
Since 1994 all systems shipped by the Company included the H. 320 standard
capability.
MANUFACTURING
The Company has developed a supply chain that encompasses the Company's
subassemblies supplied by vendors to the delivery of finished goods to the
customer. This effort has resulted in a cost effective and timely delivery of
products to our customers. This strategy allows the Company to reduce costly
investment in manufacturing capital, and to leverage the expertise of our
vendors.
The Company's manufacturing operation consists of final assembly and
testing of complete videoconferecing systems. Subassemblies of large systems
that support networks and room conferencing, including tested printed circuit
boards, are assembled into complete systems. These final systems are tested to
ensure they meet all functional requirements.
Desktop hardware products are purchased in final form from various vendors.
The products have been subjected to PictureTel's quality testing at the vendor
site. These products are placed into inventory, and are shipped according to
demand.
Certain components and parts used in the Company's products are procured
from a single source. The Company obtains parts only from one vendor, even where
multiple sources are available, to maintain quality control and enhance the
working relationship with suppliers. These purchases are made under existing
contracts or purchase orders. The failure of a supplier, including a
subcontractor, to deliver on schedule could delay or interrupt the Company's
delivery of products and thereby adversely affect the Company's revenues and
profits.
PATENTS AND COPYRIGHTS
The Company's principal technology consists primarily of certain advances
in video and audio compression algorithms, echo cancellation and audio signal
processing, implemented in software and hardware configurations for use in
PictureTel products. The Company has been issued a number of United States
patents relating to the above described, which expire at various dates from 2007
to 2012. The Company has a number or additional patent applications pending in
various countries including the United States, Canada, Europe and Japan and may
in the future file additional applications. However, there can be no assurance
that its current patents (or any additional patents that may be issued in the
future) provide broad protection from the development of similar product
technology by competitors of the Company. In the absence of broad patent
protection, and despite the Company's reliance upon its proprietary confidential
information, competitors of the Company may be able to use algorithms similar to
those used by the Company to design and manufacture products that are directly
competitive with the Company's products.
The Company also protects its copyrightable software and related technology
under U.S. and other countries' copyright laws by placing appropriate copyright
notices that comply with the provisions of the U.S. Copyright Act and
international copyright treaties and by entering into written agreements with
its licensees.
EMPLOYEES
At December 31, 1995, the Company had 1,182 full-time employees, of whom
562 were employed in sales, marketing and customer support, 323 in product
development and engineering, 134 in manufacturing and 163 in administration and
finance.
The Company's continued success will depend in part on its ability to
attract and retain highly skilled and motivated personnel who are in great
demand throughout the industry.
None of the Company's employees are represented by a labor union. The
Company believes its relations with its employees to be good.
12
<PAGE> 13
ITEM 2. PROPERTIES
The Company's corporate offices and research, development and manufacturing
facilities are located in two facilities in Danvers and Andover, Massachusetts,
aggregating approximately 210,400 square feet and two facilities in Peabody,
Massachusetts, aggregating approximately 81,500 square feet. The Danvers' lease
expires in March 1997. The Andover lease agreement expires June of 1999. The
Company leases 37,500 square feet of manufacturing space in Peabody under an
agreement expiring in July 1996. Also in Peabody, the Company leases
approximately 44,000 square feet under an agreement expiring December 1996. In
October 1995 the Company entered into an agreement to lease approximately
300,000 square feet of space in Andover, Massachusetts beginning in July 1996.
The Company plans to consolidate both facilities in Peabody, Massachusetts as
well as the Danvers, Massachusetts facility into this new facility. This lease
expires in July 2014.
The Company also leases office space for its regional and branch sales and
support offices in or near Boston and Waltham, Massachusetts; New York, New
York; East Rutherford, New Jersey; Stamford, Connecticut; Washington, D.C.;
Chicago, Illinois; Detroit, Michigan; Minneapolis, Minnesota; Atlanta, Georgia;
Dallas and Houston, Texas; Los Angeles and San Francisco, California; St. Louis,
Missouri; Philadelphia, Pittsburgh and King of Prussia, Pennsylvania; Denver,
Colorado; Pompano Beach, Florida; Seattle, Washington; Phoenix, Arizona; Kansas
City, Kansas; Cincinnati, Ohio.
ITEM 3. LEGAL PROCEEDINGS
In December 1993, the Company was sued by Datapoint Corporation in the
United States District Court for the Northern District of Texas. Datapoint is
alleging that certain of the Company's products infringe patent rights allegedly
owned by Datapoint. The complaint seeks approximately $51 million in damages for
alleged past infringement and an injunction against alleged future infringement.
The Company believes that it has meritorious defenses to the allegations of the
complaint, and continues to vigorously defend against the lawsuit. In the event
the Company is found to be infringing a valid patent or patents in such
proceedings, the Company could be required to pay damages for past infringement
and cease the sale of products incorporating the infringing feature (or be
required to take a license and pay royalties with respect to such patents).
During the third quarter of 1995 the Company's motion for summary judgment was
renewed and referred to a special master for decision. While there can be no
assurance that the Company will prevail, the Company believes that it is
unlikely that the outcome of the lawsuit would have a material adverse effect on
the business or the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 14
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
<TABLE>
PRICE RANGE OF COMMON STOCK
The following table sets forth the high and low sale prices for the
Company's Common Stock for the periods indicated as reported by NASDAQ under the
symbol PCTL. (All share prices were adjusted for 2:1 stock split in November
1995)
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1994
First Quarter.......................................................... $ 9.500 $ 6.625
Second Quarter......................................................... $ 7.813 $ 5.000
Third Quarter.......................................................... $ 9.000 $ 5.875
Fourth Quarter......................................................... $12.250 $ 7.750
1995
First Quarter.......................................................... $19.125 $11.125
Second Quarter......................................................... $25.063 $17.000
Third Quarter.......................................................... $31.000 $21.188
Fourth Quarter......................................................... $43.875 $20.750
1996
First Quarter (through March 15, 1996)................................. $44.734 $30.250
</TABLE>
As of March 15, 1996 there were approximately 2,081 holders of record of
the Company's Common Stock.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock since its
inception and presently intends to reinvest earnings for use in its business and
to finance future growth. Accordingly, the Board of Directors does not
anticipate declaring any cash dividends in the foreseeable future.
14
<PAGE> 15
ITEM 6: SELECTED FINANCIAL DATA
<TABLE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues.......................... $ 78,024 $141,409 $176,252 $255,193 $346,758
Income before extraordinary credit
and cumulative effect of change
in accounting principle......... 4,021 8,387 7,384 4,579 19,626
Extraordinary credit, tax benefit
of net operating loss and tax
credit carryforwards............ 1,930 2,272 -- -- --
Cumulative effect of change in
accounting principle............ -- -- 1,042 -- --
Net income........................ 5,951 10,659 8,426 4,579 19,626
Net income per common and common
equivalent share(1)(2):
Income before extraordinary credit
and cumulative effect of change
in accounting principle......... $ 0.14 $ 0.26 $ 0.24 $ 0.15 $ 0.56
Extraordinary credit.............. 0.07 0.07 -- -- --
Cumulative effect of change in
accounting principle............ -- -- 0.03 -- --
-------- -------- -------- -------- --------
Net income........................ $ 0.21 $ 0.33 $ 0.27 $ 0.15 $ 0.56
======== ======== ======== ======== ========
Weighted average shares
outstanding(1)(2)............... 27,746 31,868 31,486 31,354 35,014
Balance Sheet Data:
Working capital................... $109,460 $ 55,334 $ 48,399 $118,922 $139,396
Total assets...................... 144,857 165,713 187,425 216,699 288,141
Total short-term debt............. 2,038 7,643 6,651 10,452 2,840
Total long-term debt.............. 3,915 4,685 4,367 3,015 12,804
Stockholders' equity.............. 119,623 132,128 146,939 153,236 200,822
</TABLE>
- ---------------
(1) Net income per common and common equivalent share is based on the weighted
average number of shares of Common Stock and dilutive Common Stock
equivalents outstanding during the period. All common and common equivalent
share and per share amounts have been retroactively restated to reflect the
two-for-one common stock split effected by a 100% common stock dividend
paid during the fourth quarter of 1995.
(2) The Company has not paid dividends on its Common Stock since its inception.
The Company intends to reinvest earnings for use in its business and to
finance future growth. Accordingly, the Board of Directors does not
anticipate declaring any cash dividends in the foreseeable future.
15
<PAGE> 16
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth, for the periods indicated, the percentage
of Revenues for certain items in the Company's Statement of Income for each
period:
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Revenues.......................................................... 100.0% 100.0% 100.0%
Cost of sales..................................................... 44.3 50.6 50.5
Gross margin...................................................... 55.7 49.4 49.5
Selling, general and administrative............................... 34.2 32.4 29.2
Research and development.......................................... 16.6 15.0 13.3
Total operating expenses.......................................... 50.8 47.4 42.5
Operating income.................................................. 4.9 2.0 7.0
Interest income, net.............................................. 1.3 0.7 0.9
Other income, net................................................. 0.2 -- --
Income before provision for income taxes.......................... 6.4 2.7 7.9
Provision for income taxes........................................ 2.2 0.9 2.2
Net income(1)..................................................... 4.8 1.8 5.7
<FN>
- ---------------
(1) Includes the cumulative effect of change in accounting principle of
$1,042,000, or 0.6% of revenues, for the year ended December 31, 1993.
</TABLE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Revenues. The Company's revenues increased $91,565,000, or 36%, in 1995
from 1994. The increase in revenue was primarily a result of increased
videoconferencing system unit shipments. This growth was partially offset by a
reduction in the average selling price of videoconferencing systems resulting
from a shift towards lower priced models, especially in the personal desktop
products, as well as a shift in distribution channel mix with approximately 67%
of revenue now coming from the indirect channels. Videoconferencing system sales
accounted for approximately 85% of the Company's revenues in 1995 and 1994.
Sales of group and desktop videoconferencing products accounted for 70% and 15%,
respectively, of revenues for 1995, compared with 76% and 9%, respectively, for
1994. In addition, sales of bridge products accounted for approximately 7% of
the Company's revenues for 1995 compared to approximately 6% for 1994. The
balance of the revenues in 1995 and 1994 were primarily from maintenance
services, licensing/development agreements and the sales of stand-alone codecs
and video modems.
The Company's revenues from sales to foreign markets were approximately
$147,981,000 in 1995 compared to approximately $108,118,000 in 1994 representing
43% and 42%, respectively of total revenues. The Company expects that
international revenues will continue to account for a significant portion of
total revenues.
Gross Margin. The Company's gross margin increased $45,561,000 or 36%, in
1995 compared to 1994. Gross margin as a percentage of revenues was 49% in 1995
and 1994. Gross margin as a percentage of revenues remained consistent primarily
as a result of continued product material cost reductions and decreasing
overhead costs offset by an increased percentage of volume through the indirect
channels and a higher percentage of revenues coming from the Company's
lower-margin videoconferencing system products. The latter two trends are
expected to continue and may impact future gross margins.
Selling, General and Administrative. Selling, general and administrative
expenses increased $18,611,000 or 23% from 1994 and decreased as a percentage of
revenues to 29% from 32%. The dollar
16
<PAGE> 17
increase in spending resulted primarily from the worldwide marketing focus
associated with expanding indirect channels and new product launches, as well as
increased commission expense. In addition, the Company has provided additional
sales, general and administrative personnel in order to support the Company's
overall growth.
Research and Development. Research and development expenses increased
$7,857,000, or 21% in 1995 from 1994 and were 13% and 15%, respectively, of
revenues for 1995 and 1994. Research and development expenditures, prior to the
capitalization of software costs, were $50,431,000 in 1995 and $41,243,000 in
1994 or 15% and 16% of revenues, respectively. The dollar increase in
expenditures primarily reflects the Company's continuing investment in new
product and software development for existing and future videoconferencing
products. The Company capitalized software costs of $4,247,000 in 1995 and
$2,916,000 in 1994 representing 8% and 7% of research and development
expenditures, respectively.
Operating Income. Although gross margin as a percentage of sales has not
increased over 1994, operating income as a percentage of sales increased due to
a decline in operating expenses as a percentage of sales.
Net Interest Income (Expense). Net interest income increased to $3,152,000
in 1995 from $1,841,000 in 1994. The increase was primarily the result of higher
interest earning portfolio balances.
Other Income (Expense). Other income of $87,000 in 1995 consists primarily
of net gains on foreign currency transactions. Other expense of $101,000 in 1994
consists primarily of net losses on foreign currency transactions.
Income Taxes. The Company's effective tax rate for 1995 and 1994 was 29%
and 34% respectively, and 1995 was lower than the federal statutory rate
primarily due to the change in deferred asset valuation allowance.
Forward-Looking Statements. This section, as well as other portions of
this document, includes certain forward-looking statements about the Company's
business and new products, sales and expenses, effective tax rate and operating
and capital requirements. In addition, forward-looking statements may be
included in various other Company documents to be issued in the future and in
various oral statements by Company representatives to security analysts and
investors from time to time. Any such statements are subject to risks that could
cause the actual results or needs to vary materially. These risks are discussed
below in "Factors Affecting Future Results" in this document.
Factors Affecting Future Results. The Company continues to seek
improvement in operating results through the introduction of new products, cost
reductions in existing products, and finding new channels of distribution.
However, there can be no assurance that the Company will be successful in its
efforts.
Announcements by competitors indicate that the Company may face increased
competition in group and desktop videoconferencing systems. The potential
increase in competition may lead to decrease in average selling prices and
declining margins in both group and desktop videoconferencing systems, which may
impact the Company's growth. In addition, the Company may experience competition
in the continued development of indirect channels.
The Company's operating results may also be affected by delays from key
suppliers and other factors such as seasonal patterns of spending by customers
and changes in general economic conditions.
Historically, a significant portion of the Company's shipments have been
made in the last month of each quarter. As a result, a shortfall in revenue
compared to expectation may not evidence itself until late in the quarter.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993
Revenues. The Company's revenues increased $78,941,000, or 45% in 1994
from 1993. The increase in revenue was primarily a result of an increase in
videoconferencing system unit shipments in 1994 from 1993. The growth was
partially offset by a reduction in the average selling price of
videoconferencing systems
17
<PAGE> 18
resulting from a shift towards lower priced models, as well as a shift in
distribution channel mix to a greater volume through indirect channels.
Videoconferencing systems sales accounted for approximately 85% of the Company's
revenues for 1994 compared to approximately 83% in 1993. In addition, the sale
of bridge products accounted for approximately 6% of the Company's revenues in
1994 compared to 7% in 1993. The balance of revenues in 1994 and 1993 were
primarily from maintenance services and the sales of video modems and
stand-alone codecs.
The Company's revenues from sales to foreign markets were approximately
$108,118,000 in 1994 compared to approximately $68,636,000 in 1993, representing
42% and 39%, respectively, of total revenues.
Gross Margin. The Company's gross margin increased $27,913,000, or 28%, in
1994 compared to 1993. Gross margin as a percentage of revenues declined to 49%
in 1994 from 56% in 1993. The decline in gross margin as a percentage of
revenues was primarily the result of a higher percentage of revenues coming from
the Company's lower-margin videoconferencing system products and an increased
percentage of volume through indirect channels.
Selling, General and Administrative. Selling, general and administrative
expenses increased $22,244,000, or 37% in 1994 from 1993 and decreased as a
percentage of revenues to 32% in 1994 from 34% in 1993. The dollar increase in
spending resulted primarily from the expansion of the Company's international
and domestic sales force. The Company has also added marketing and
administrative personnel in order to support the Company's overall growth.
Research and Development. Research and development expenses increased
$9,135,000, or 31%, in 1994 from 1993, and were 15% and 17%, respectively, of
revenues for 1994 and 1993. Research and development expenditures, prior to
capitalization of software development costs, were $41,243,000 in 1994 and
$33,357,000 in 1993 or 16% and 19% of revenues, respectively. The dollar
increase in expenditures primarily reflects the Company's continuing investment
in new product and software development for existing and future
videoconferencing products. The Company capitalized software costs of $2,916,000
in 1994 and $4,165,000 in 1993 representing 7% and 12% of research and
development expenditures, respectively.
Net Interest Income (Expense). Net interest income decreased to $1,841,000
in 1994 from $2,371,000 in 1993. The decrease was primarily a result of lower
interest earning portfolio balances.
Other Income (Expense). Other expense of $101,000 in 1994 consists
primarily of net losses on foreign currency transactions. Other income of
$314,000 in 1993 consists primarily of realized gains from the sale of assets
and net losses on foreign currency transactions.
Income Taxes. The Company's effective tax rate for 1994 and 1993 was 34%
and 35%, respectively, and in 1994 was lower than the federal statutory rate
primarily due to the combined effects of research and developments credits,
foreign tax rates and losses for which no tax benefits were available and the
change in deferred asset valuation allowance.
18
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995 the Company had $39,476,000 in cash and cash
equivalents, $20,463,000 in short-term marketable securities and $34,084,000 in
long-term marketable securities. During the year ended December 31, 1995 the
Company generated $18,825,000 in net cash from operating activities. The primary
use of cash during 1995 was to fund the growth in working capital items such as
accounts receivable and inventories of $32,707,000 and $12,130,000,
respectively, as well as additions to property and equipment of $16,251,000.
Accounts receivable increased more than sales as a percentage in 1995 compared
with 1994 due to increased foreign sales and sales to distributors and dealers
which typically have longer collection cycles. Capital expenditures in 1996 are
projected to be approximately $30,000,000 including leasehold improvements
related to the newly leased property for the Company's corporate office and
manufacturing facilities.
The Company has available for borrowing up to $17,000,000 under its
revolving credit agreement and approximately $3,400,000 available under local
foreign guaranteed lines of credit to certain of its foreign subsidiaries. At
December 31, 1995 there was $12,226,000 outstanding under the revolving credit
agreement and $557,000 outstanding under the foreign lines of credit. At
December 31, 1995, the Company had $2,861,000 outstanding and $7,000,000
available to be borrowed under various leasing lines.
The Company believes that funds from operations, equipment lease financing,
borrowings under its various credit agreements and existing cash, cash
equivalents and marketable securities will be sufficient to meet the Company's
foreseeable operating and capital requirements.
19
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
<TABLE>
<CAPTION>
PICTURETEL CORPORATION
Index to Financial Statements and Supplementary Data
<S> <C>
Financial Statements:
Report of Independent Accountants....................................... page 21
Consolidated Statements of Income....................................... page 22
Consolidated Balance Sheets............................................. page 23
Consolidated Statements of Stockholders' Equity......................... page 24
Consolidated Statements of Cash Flows................................... page 25
Notes to Consolidated Financial Statements.............................. page 26
Supplementary Data:
Report of Independent Accountants....................................... page 37
Schedule II Valuation and Qualifying Accounts........................... page 38
</TABLE>
20
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
PICTURETEL CORPORATION:
We have audited the accompanying consolidated balance sheets of PictureTel
Corporation as of December 31, 1994 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PictureTel
Corporation as of December 31, 1994 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for income taxes in 1993.
/S/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
BOSTON, MASSACHUSETTS
FEBRUARY 20, 1996
21
<PAGE> 22
<TABLE>
PICTURETEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues................................................. $176,252 $255,193 $346,758
Cost of sales............................................ 78,011 129,039 175,043
-------- -------- --------
Gross margin............................................. 98,241 126,154 171,715
Operating expenses:
Selling, general and administrative...................... 60,374 82,618 101,229
Research and development................................. 29,192 38,327 46,184
-------- -------- --------
Total operating expenses................................. 89,566 120,945 147,413
-------- -------- --------
Income from operations................................... 8,675 5,209 24,302
Other income (expense):
Interest income.......................................... 3,375 2,826 4,123
Interest expense......................................... 1,004 985 971
Other income (expense), net.............................. 314 (101) 87
-------- -------- --------
Income before provision for income taxes and cumulative
effect of change in accounting principle............... 11,360 6,949 27,541
Provision for income taxes............................... 3,976 2,370 7,915
-------- -------- --------
Income before cumulative effect of change in accounting
principle.............................................. 7,384 4,579 19,626
Cumulative effect of change in accounting principle...... 1,042 -- --
-------- -------- --------
Net income............................................... $ 8,426 $ 4,579 $ 19,626
======== ======== ========
Net income per common and common equivalent share:
Income before cumulative effect of change in accounting
principle.............................................. $ 0.24 $ 0.15 $ 0.56
Cumulative effect of change in accounting principle...... 0.03 -- --
-------- -------- --------
Net income............................................... $ 0.27 $ 0.15 $ 0.56
======== ======== ========
Weighted average common and common equivalent shares
outstanding............................................ 31,486 31,354 35,014
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE> 23
PICTURETEL CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 24,347 $ 39,476
Marketable securities.............................................. 50,354 20,463
Accounts receivable less allowance for doubtful accounts of $1,785
and $1,791...................................................... 65,155 97,735
Inventories........................................................ 31,679 43,791
Deferred taxes, net................................................ 5,131 6,665
Other current assets............................................... 2,704 5,781
-------- --------
Total current assets............................................ 179,370 213,911
Marketable securities................................................ 3,226 34,084
Deferred taxes, net.................................................. 3,272 6,000
Property and equipment, net.......................................... 19,417 22,515
Capitalized software costs, net...................................... 4,163 5,073
Other assets......................................................... 7,251 6,558
-------- --------
Total assets....................................................... $216,699 $288,141
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.............................................. $ 6,969 $ 557
Accounts payable................................................... 18,335 25,639
Accrued compensation and benefits.................................. 6,357 9,881
Accrued expenses................................................... 10,677 16,646
Income taxes....................................................... 922 --
Current portion of capital lease obligations....................... 3,483 2,283
Deferred revenue................................................... 13,705 19,509
-------- --------
Total current liabilities....................................... 60,448 74,515
Long-term borrowings................................................. -- 12,226
Capital lease obligations............................................ 2,860 578
Other long-term liabilities.......................................... 155 --
Commitments (Notes 6 and 7)
Stockholders' equity:
Preference stock, $.01 par value; 15,000,000 shares authorized; none
issued............................................................. -- --
Common stock, $.01 par value; 80,000,000 shares authorized;
30,717,800 and 32,723,444 shares issued and outstanding at December
31, 1994 and 1995.................................................. 307 328
Additional paid-in capital........................................... 145,999 173,379
Retained earnings.................................................... 7,796 27,422
Cumulative translation adjustment.................................... (452) (531)
Unrealized (loss) gain on marketable securities, net................. (414) 224
-------- --------
Total stockholders' equity......................................... 153,236 200,822
-------- --------
Total liabilities and stockholders' equity......................... $216,699 $288,141
-------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE> 24
PICTURETEL CORPORATION CONSOLIDATED
<TABLE>
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, 1995
(DOLLARS IN THOUSANDS)
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
---------------------- PAID-IN RETAINED UNEARNED TRANSLATION
SHARES PAR VALUE CAPITAL EARNINGS COMPENSATION ADJUSTMENT
--------- --------- ---------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992...................... 30,048,482 $ 300 $137,536 $(5,209) $ (142) $(357)
Exercise of employee stock options and related
tax benefit................................... 249,208 3 1,585 -- -- --
Cumulative change in accounting principle....... -- -- 4,857 -- -- --
Amortization of unearned compensation........... -- -- -- -- 102 --
Foreign currency translation adjustment......... -- -- -- -- -- (162)
Net income...................................... -- -- -- 8,426 -- --
---------- ----- -------- ------- ------ -----
Balance, December 31, 1993...................... 30,297,690 303 143,978 3,217 (40) (519)
Exercise of employee stock options and related
tax benefit................................... 420,110 4 2,021 -- -- --
Amortization of unearned compensation........... -- -- -- -- 40 --
Foreign currency translation adjustment......... -- -- -- -- -- 67
Unrealized loss on marketable securities, net... -- -- -- -- -- --
Net income...................................... -- -- -- 4,579 -- --
---------- ----- -------- ------- ------ -----
Balance, December 31, 1994...................... 30,717,800 307 145,999 7,796 -- (452)
Exercise of employee stock options and related
tax benefit................................... 1,873,650 19 26,229 -- -- --
Employee stock purchase plan shares............. 131,994 2 1,151 -- -- --
Foreign currency translation adjustment......... -- -- -- -- -- (79)
Unrealized gain on marketable securities, net... -- -- -- -- -- --
Net income...................................... -- -- -- 19,626 -- --
---------- ----- -------- ------- ------ -----
Balance, December 31, 1995...................... 32,723,444 $ 328 $173,379 $27,422 $ -- $(531)
========== ===== ======== ======= ====== =====
<CAPTION>
UNREALIZED
(LOSS) GAIN ON TOTAL
MARKETABLE STOCKHOLDERS'
SECURITIES, NET EQUITY
--------------- -------------
<S> <C> <C>
Balance, December 31, 1992...................... $ -- $ 132,128
Exercise of employee stock options and related
tax benefit................................... -- 1,588
Cumulative change in accounting principle....... -- 4,857
Amortization of unearned compensation........... -- 102
Foreign currency translation adjustment......... -- (162)
Net income...................................... -- 8,426
----- ---------
Balance, December 31, 1993...................... -- 146,939
Exercise of employee stock options and related
tax benefit................................... -- 2,025
Amortization of unearned compensation........... -- 40
Foreign currency translation adjustment......... -- 67
Unrealized loss on marketable securities, net... (414) (414)
Net income...................................... -- 4,579
----- ---------
Balance, December 31, 1994...................... (414) 153,236
Exercise of employee stock options and related
tax benefit................................... -- 26,248
Employee stock purchase plan shares............. -- 1,153
Foreign currency translation adjustment......... -- (79)
Unrealized gain on marketable securities, net... 638 638
Net income...................................... -- 19,626
----- ---------
Balance, December 31, 1995...................... $ 224 $ 200,822
===== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE> 25
<TABLE>
PICTURETEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 8,426 $ 4,579 $ 19,626
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 12,179 18,345 17,906
Deferred taxes, net....................................... (7,018) (1,162) (2,127)
Cumulative effect of change in accounting principle....... (1,042) -- --
Other non-cash items...................................... (167) 53 (79)
Changes in operating assets and liabilities:
Accounts receivable....................................... (19,611) (16,682) (32,707)
Inventories............................................... (8,306) (7,384) (12,130)
Other assets.............................................. (3,830) (3,364) (2,401)
Accounts payable.......................................... 4,584 7,481 7,423
Accrued compensation and benefits and accrued expenses.... 2,726 5,693 9,472
Income taxes, net......................................... 4,546 660 8,056
Deferred revenue.......................................... 2,971 5,384 5,786
-------- -------- --------
Net cash provided by (used in) operating activities......... (4,542) 13,603 18,825
Cash flows from investing activities:
Purchase of marketable securities......................... (75,858) (19,014) (71,772)
Proceeds from marketable securities....................... 80,616 38,182 70,902
Additions to property and equipment....................... (11,129) (14,335) (16,251)
Proceeds from disposals of property and equipment......... 54 -- --
Capitalized software costs................................ (4,165) (2,916) (4,247)
Purchase of intangible asset.............................. (2,006) -- --
-------- -------- --------
Net cash provided by (used in) investing activities......... (12,488) 1,917 (21,368)
Cash flows from financing activities:
Change in short-term borrowings........................... (2,392) 4,944 (6,412)
Proceeds from long-term borrowings........................ -- -- 12,226
Proceeds from sale/leaseback of equipment................. 5,048 2,483 --
Principal payments under capital lease obligations........ (3,954) (5,533) (3,482)
Proceeds from exercise of stock options................... 1,018 2,025 13,786
Proceeds from stock purchase plan......................... -- -- 1,153
-------- -------- --------
Net cash provided by (used in) financing activities......... (280) 3,919 17,271
Effect of exchange rate changes on cash..................... (206) (2,013) 401
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (17,516) 17,426 15,129
Cash and cash equivalents at beginning of year.............. 24,437 6,921 24,347
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 6,921 $ 24,347 $ 39,476
-------- -------- --------
Interest paid............................................... $ 975 $ 938 $ 958
-------- -------- --------
Income taxes paid........................................... $ 6,471 $ 2,782 $ 2,893
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE> 26
PICTURETEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS:
PictureTel Corporation (the "Company"), operates in one business segment,
the development, manufacture, marketing and servicing of videoconferencing
equipment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
Certain financial statement items have been reclassified to conform to the
current year's format.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All material inter-company accounts and
transactions have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's non-U.S. subsidiaries, where the
local currency is the functional currency, are translated using exchange rates
in effect at the end of the year for assets and liabilities and average exchange
rates during the year for results of operations. Related translation adjustments
are reported as a separate component of stockholders' equity.
FOREIGN EXCHANGE CONTRACTS
The Company has entered into foreign currency forward contracts as a hedge
against specific inter-company and foreign currency receivable transactions.
Forward contracts involve agreements to purchase or sell foreign currencies at
specific rates at future dates. The Company's hedging activities do not subject
the Company to exchange rate risk because the gains and losses on these
contracts offset the losses and gains on the assets, liabilities, and
transactions being hedged. The contract premiums or discounts are amortized over
the life of the foreign exchange contracts and are recognized in other income.
At December 31, 1994 and 1995 the Company had contracts maturing through August
1996 to purchase $17,315,000 and $21,779,000, respectively, in foreign currency
(British pounds, French francs, German marks, Japanese yen, Swiss francs,
Swedish krona and Australian dollars). Cash flows resulting from hedging
contracts are classified in the same category as the cash flows from the items
being hedged. The carrying amount of the foreign currency forward contracts is
the fair value which is estimated by obtaining market prices.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company classifies all marketable securities as available for sale.
They are carried at their fair value, based on quoted market prices, with the
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. The Company considers all highly liquid investments with a
maturity of three months or less at the date of purchase to be cash equivalents.
Those instruments with maturities between three months and twelve months are
considered to be short-term marketable securities and investments with
maturities of greater than one year are classified as long-term marketable
securities. At December 31, 1994
26
<PAGE> 27
and 1995 cash equivalents and marketable securities primarily consist of U.S.
government securities, corporate and municipal issues and commercial paper.
The amortized cost of marketable securities is adjusted for the
amortization of premiums and accretion of discounts over the life of the
security. Such amortization and interest are included in interest income.
Realized gains and losses are included in other income.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out basis.
PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line method over the following estimated useful
lives:
<S> <C>
Equipment................................. 2-5 years
Equipment and furniture under capital
leases.................................. 3-5 years
Furniture and fixtures.................... 3-5 years
Estimated useful life or term of the lease, if
Leasehold improvements.................... shorter
</TABLE>
Maintenance and repairs are charged to expense as incurred. Significant
improvements are capitalized and depreciated. Upon retirement or sale, the cost
of the assets disposed of, and the related accumulated depreciation, are removed
from the accounts and any resulting gain or loss is included in the
determination of net income.
RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE COSTS
Costs incurred prior to the establishment of technological feasibility are
charged to research and development expense. Software production costs incurred
subsequent to the establishment of technological feasibility are capitalized
until the product is available for general release to customers. Amortization is
based on the greater of (i) the ratio that current gross revenues for a product
bear to the total of current and anticipated future gross revenues for that
product or (ii) the straight-line method over the remaining estimated life of
the product.
During the years ended December 31, 1993, 1994, and 1995, the Company
capitalized approximately $4,165,000, $2,916,000, and $4,247,000, respectively,
of software costs. During the years ended December 31, 1993, 1994, and 1995, the
Company amortized approximately $2,081,000, $3,973,000, and $3,337,000,
respectively, of software costs.
OTHER ASSETS
Included in other assets are intangible assets which consist primarily of
intellectual property rights and non-compete agreements which are amortized over
their estimated useful life, which range from eighteen to thirty-six months.
Also included in other assets are prepaid royalties which are charged to cost of
sales upon recognition of the related revenue.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment or in accordance
with contractual acceptance terms. Revenue from maintenance contracts is
recognized ratably over the term of the contract. Allowances for estimated
future product returns and price protection under the Company's agreements with
its distributors and resellers are provided in the same period as the related
revenues.
27
<PAGE> 28
WARRANTY
The Company provides a warranty for parts and labor on its products.
Warranty periods are generally one year from installation date on sales to
end-users and one year from delivery date on sales to distributors. In addition,
warranty periods for certain software products, repairs, and upgraded parts are
90 days upon receipt. Estimated costs related to warranty are accrued at the
time of revenue recognition.
INCOME TAXES
The Company provides for the recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Pursuant to the adoption of the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", the net cumulative effect of
change in accounting principle was $5,899,000 of which $1,042,000 was recorded
as a credit to income due to net operating loss and tax credit carryforwards and
$4,857,000 was recorded as a credit to additional paid-in capital due to the tax
effect of stock options.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is based on the weighted
average number of shares of common and common equivalent shares (stock options)
outstanding during the period.
Fully diluted earnings per common and common equivalent share did not
differ materially from primary earnings per common and common equivalent share.
CONCENTRATIONS
Credit Risk
The Company performs ongoing credit evaluations of its customers and
maintains reserves for potential credit losses and such losses have been within
management's expectations.
The Company invests its excess cash primarily in deposits with a commercial
bank, U.S. government securities, corporate and municipal issues, and commercial
paper, and any such losses recognized have been immaterial.
Suppliers
Certain components and parts used in the Company's products are procured
from a single source. The Company obtains parts only from one vendor, even where
multiple sources are available, to maintain quality control and enhance the
working relationship with suppliers. These purchases are made under existing
contracts or purchase orders. The failure of a supplier, including a
subcontractor, to deliver on schedule could delay or interrupt the Company's
delivery of products and thereby adversely affect the Company's revenues and
profits.
NEWLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). SFAS 121
requires that an impairment loss be recognized for long-lived assets and certain
identifiable intangibles when the carrying amounts of these assets may not be
recoverable. The Company will adopt SFAS 121 in 1996 and does not expect the
adoption to have a material impact on the Company's results of operations or
financial position.
28
<PAGE> 29
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). This statement establishes accounting and reporting
standards for stock-based employee compensation plans. While the Company is
reviewing the adoption and impact of SFAS 123, it expects to adopt the
disclosure-only alternative and accordingly this standard will not have a
material impact on the Company's results of operations or financial position.
<TABLE>
3. INVENTORIES:
Inventories consist of the following (in thousands):
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Purchased parts........................................................ $ 7,208 $11,492
Work in process........................................................ 2,464 3,252
Finished goods......................................................... 22,007 29,047
------- -------
$31,679 $43,791
======= =======
</TABLE>
<TABLE>
4. MARKETABLE SECURITIES:
At December 31, 1994 and 1995, marketable securities can be summarized as
follows (in thousands):
<CAPTION>
1994 1995
---------------------- ----------------------
AMORTIZED CARRYING AMORTIZED CARRYING
COST VALUE COST VALUE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
U. S. Government and its agencies................ $35,993 $35,458 $45,983 $46,252
Municipal Issues................................. 18,224 18,122 8,217 8,295
------- ------- ------- -------
Marketable Securities............................ $54,217 $53,580 $54,200 $54,547
======= ======= ======= =======
</TABLE>
Unrealized holding losses of $637,000 for 1994 and unrealized holding gains
of $347,000 for 1995 are included as a separate component of stockholders'
equity, net of tax. Realized gains of approximately $316,000, $84,000 and
$107,000 from the sales of marketable securities are included in other income
for the years ended December 31, 1993, 1994 and 1995, respectively.
At December 31, 1995 $20,463,000, or 36% of the Company's marketable
securities have stated maturity dates within one year of the balance sheet date,
the remaining securities have stated maturity dates within two years of the
balance sheet date.
5. PROPERTY AND EQUIPMENT:
<TABLE>
Property and equipment consist of the following (in thousands):
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Equipment.............................................................. $32,884 $49,526
Equipment and furniture under capital leases........................... 11,890 7,867
Furniture and fixtures................................................. 4,507 6,166
Leasehold improvements................................................. 2,514 2,735
------- -------
51,795 66,294
Less: Accumulated depreciation and amortization........................ 32,378 43,779
------- -------
$19,417 $22,515
======= =======
</TABLE>
29
<PAGE> 30
At December 31, 1994 and 1995 accumulated depreciation amounted to
$7,218,000 and $5,907,000 on equipment and furniture under capital leases.
Depreciation expense for the years ended December 31, 1993, 1994, and 1995
was $8,938,000, $12,426,000 and $13,112,000, respectively.
6. DEBT:
On September 30, 1995, the Company amended its agreement to increase the
amount of its unsecured revolving credit from $12,000,000 to $17,000,000 with an
expiration date of October 1, 1997. This agreement requires interest payable at
either the bank's rate, the adjusted eurocurrency rate plus one and one-eighth
percent per annum or the bank's money market rate, and a commitment fee of
one-quarter percent per annum, payable on any unused portion. The amended
agreement provides that the principal portion of the borrowings be paid by the
expiration date and, unlike the original agreement, contains no demand feature.
Accordingly, the borrowings under the amended agreement are classified as long
term borrowings at December 31, 1995.
The unsecured revolving credit agreement contains certain financial
covenants including the maintenance of a certain ratio of total liabilities to
tangible net worth. At December 31, 1994 and 1995 the Company was in compliance
with all covenants under this credit agreement.
Local lines of credit are available for short-term advances of up to
$3,400,000 to certain of the Company's foreign subsidiaries. These lines are
guaranteed by the Company. The agreements require interest payable ranging from
the bank's base rate plus one to one and one half of a percent per annum, and
facility fees of up to one eighth of one percent of the facility amount per
annum. A total of $557,000 was borrowed against these local lines of credit at
December 31, 1995. At December 31, 1994 and 1995 the weighted average interest
rate on outstanding short-term borrowings was 6.8% and 5.9%, respectively. The
carrying amount of the short-term borrowings is a reasonable estimate of the
fair value because of the short maturity of those instruments.
7. COMMITMENTS:
The Company has commitments under operating leases for office and
manufacturing space. The facilities leases are for terms ranging from one to
eighteen years. The leases usually contain provisions which allow for expansion,
extension and termination. Total rent expense for operating leases was
$4,027,000, $5,724,000 and $6,757,000 for the years ended December 31, 1993,
1994, and 1995, respectively. In October 1995 the Company entered into an
eighteen year lease agreement for approximately 300,000 square feet of space in
Andover, Massachusetts beginning in July 1996 at an annual rate of $3,000,000.
The Company plans to consolidate both facilities in Peabody, Massachusetts as
well as the Danvers, Massachusetts facility into this new facility.
The Company is lessee under several capital lease and sale-leaseback
agreements with third parties for certain equipment and furniture. The Company
renegotiated its lease agreements in 1995 under which it can finance up to
$7,000,000 in capital equipment. The Company has yet to utilize the available
balance but does have $2,861,000 outstanding under previous lease agreements.
30
<PAGE> 31
<TABLE>
Future minimum lease payments under capital and operating leases with
initial or remaining terms of one year of more are (in thousands):
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996................................................................... $ 2,375 $ 8,304
1997................................................................... 643 6,750
1998................................................................... -- 5,402
1999................................................................... -- 4,382
2000................................................................... -- 3,239
Thereafter............................................................. -- 40,500
------- -------
Total future minimum lease payments.................................... 3,018 $68,577
-------
Less estimated executory costs included in capital lease............... 20
------- -------
Net future minimum lease payments under capital lease.................. 2,998
Less amount representing interest...................................... 137
------- -------
Present value of net future minimum lease payments..................... 2,861
Less current portion................................................... 2,283
------- -------
Long-term obligation under capital leases.............................. $ 578
=======
</TABLE>
8. CAPITAL STOCK:
PREFERENCE STOCK
The Company's Board of Directors is empowered to fix the terms and rights
of the Preference Stock. Issuance of the Preference Stock limits the rights of
the Common Stockholders.
COMMON STOCK
On September 28, 1995, the Board of Directors authorized a two-for-one
split of the Company's outstanding Common Stock (the "Stock Split") by means of
a 100% stock dividend. All Common Stock and Common Stock equivalents and per
share amounts have been retroactively restated to reflect the two-for-one split.
STOCKHOLDERS' RIGHTS AGREEMENT
On March 25, 1992, the Board of Directors of the Company declared a
dividend of one purchase right (a "Right") for every outstanding share of the
Company's Common Stock. After giving effect to the split, each Right entitles
the holder to purchase from the Company one two-hundredths of a share of Junior
Preference Stock at a price of $90 per one two-hundredths of a share, subject to
adjustment. The Rights will become exercisable on the fifteenth business day
following the date of a public announcement that an acquiring person (as defined
in the Rights Agreement, the definition of which provides for certain limited
exclusions) has acquired, or obtained the right to acquire, beneficial ownership
of 15% or more of the Company's outstanding Common Stock or on the fifteenth
business day following the commencement of a tender offer or exchange offer that
would result in an acquiring person owning 15% or more of the Company's
outstanding Common Stock.
If the Company were acquired in a merger or other business combination, or
more than 25% of its assets or earning power were sold, each holder of a Right
would be entitled to exercise such Right and thereby receive common stock of the
acquiring company with a market value of two times the exercise price of the
Right. If an acquiring person has acquired or obtained the right to acquire 15%
of the Company's Common Stock, each holder of a Right, other than the acquiring
person, will be entitled to receive shares of the Company's Common Stock having
a market value of two times the exercise price of the Right. At any time
31
<PAGE> 32
the Company may redeem the Rights at a redemption price of $0.005 per Right. The
Rights expire March 25, 2002.
EMPLOYEE STOCK PURCHASE PLAN
On April 15, 1994 the Company adopted an Employee Stock Purchase Plan under
which eligible employees are able to purchase shares of the Company's Common
Stock at 85% of the market value at the date of the start of each six month
option period or the end of such period, whichever is lower. Under the
provisions of the Plan up to 1,000,000 shares are deliverable after the Stock
Split. The first offering period commenced on September 1, 1994 and ended on
February 28, 1995 with 72,956 shares issued at a purchase price of $6.375 per
share; a second offering period commenced on March 1, 1995 and ended on August
30, 1995 with 59,038 shares issued at a purchase price of $11.635 per share.
Therefore, there were a total of 131,994 shares issued under this Plan for the
year ended December 31, 1995. A third offering period commenced on September 1,
1995 and ended on February 29, 1996.
STOCK OPTION PLANS
Under the Company's 1984 Amended and Restated Stock Option Plan, employees
and other persons who are in a position to make significant contributions to the
success of the Company may be granted either non-statutory or incentive stock
options to purchase up to 2,094,174 shares of Common Stock after the Stock
Split. The options are exercisable as stipulated by the Board of Directors (or a
Committee thereof) and will expire no more than ten years from the date of the
grant. The incentive option price per share will not be less than the fair
market value at the date of the grant. No new options will be issued as the Plan
has been terminated.
On November 14, 1989, the Company's shareholders approved the PictureTel
Equity Incentive Plan. As of December 31, 1995 shareholders have authorized the
issuance of up to 9,000,000 shares of post Stock Split Common Stock under the
Plan. The Equity Incentive Plan permits the granting of non-statutory and
incentive stock options, a variety of stock and stock-based awards and related
benefits, and cash performance awards, which are in addition to option grants
under the 1984 Amended and Restated Stock Option Plan, to employees and other
persons who are in a position to make significant contributions to the success
of the Company.
Effective October 23, 1992, the Board of Directors adopted the 1992
Non-Employee Directors' Stock Option Plan. As of December 31, 1995 shareholders
have authorized the issuance of up to 280,000 shares of post Stock Split Common
Stock under the Plan to eligible non-employee directors. Under this Plan each
nonemployee director at October 23, 1992 and each non-employee director
subsequently elected receives, at October 23, 1992 or the director's first
election date, a non-statutory option to purchase 40,000 shares of post Stock
Split Common Stock at an exercise price equal to the fair market value of the
stock on the effective date of grant. All options expire ten years after the
effective date of grant, and such options become exercisable over a four year
period.
Certain stock options and warrants were granted, in previous years, at post
Stock Split prices ranging from $2.25 to $4.25 per share, which was less than
fair market value at the date of grant. Generally, vesting was required over a
period of four years through 1994. Unearned compensation related to these
options and warrants has been recognized ratably over the vesting period.
Compensation expense charged to operations related to these grants was $102,000,
$40,000, and $0 in 1993, 1994, and 1995 respectively.
32
<PAGE> 33
<TABLE>
The following table summarizes stock option activity for 1993, 1994 and
1995:
<CAPTION>
OPTION OPTION PRICE
SHARES RANGE
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1992............................ 4,683,168 $1.125 -- $19.875
Granted................................................... 995,700 8.00 -- 12.875
Canceled.................................................. (468,624) 1.125 -- 19.875
Exercised................................................. (249,208) 1.125 -- 11.875
--------- -----------------
Outstanding at December 31, 1993............................ 4,961,036 1.125 -- 18.44
Granted................................................... 2,102,300 6.00 -- 9.75
Canceled.................................................. (779,676) 3.745 -- 12.875
Exercised................................................. (420,110) 1.125 -- 11.75
--------- -----------------
Outstanding at December 31, 1994............................ 5,863,550 1.125 -- 18.44
Granted................................................... 1,089,524 11.28 -- 35.13
Canceled.................................................. (170,613) 1.125 -- 31.815
Exercised................................................. (1,873,650) 1.125 -- 14.00
--------- -----------------
Outstanding at December 31, 1995............................ 4,908,811 $1.125 -- $ 35.13
========= =================
</TABLE>
At December 31, 1995 there were 1,811,854 fully exercisable stock options
outstanding. In addition, there were 2,190,924 shares available for future
grant.
9. INCOME TAXES:
<TABLE>
Significant items making up total net deferred tax assets are as follows
(in thousands):
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Net operating loss and tax credit carryforwards........................ $ 8,497 $ 9,434
Inventory reserves..................................................... 3,506 2,889
Deferred revenue....................................................... 3,459 1,110
Other temporary timing differences..................................... 3,464 5,916
Valuation allowance.................................................... (10,523) (6,684)
------- -------
Total net deferred tax assets.......................................... $ 8,403 $12,665
======= =======
</TABLE>
The valuation allowance primarily offsets the deferred benefit of certain
foreign net operating loss and federal and state tax credit carryforwards whose
benefit is uncertain. The Company has recorded a deferred tax asset of
approximately $4,500,000 reflecting the benefit of deductions from the exercise
of stock options. This deferred tax asset has been fully reserved until it is
more likely than not that the benefit from the exercise of stock options will be
realized. The benefit from this $4,500,000 deferred tax asset will be recorded
as a credit to additional paid-in capital when realized.
33
<PAGE> 34
<TABLE>
The provision for income taxes consisted of the following (in thousands):
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Federal income taxes:
Currently payable......................................... $ 3,878 $ 1,613 $ 7,311
Deferred.................................................. (1,302) (595) (1,840)
State income taxes:
Currently payable......................................... 645 671 1,301
Deferred.................................................. 38 (567) (119)
Foreign taxes:
Currently payable......................................... 572 1,248 1,430
Deferred.................................................. 145 -- (168)
------- ------- -------
Total....................................................... $ 3,976 $ 2,370 $ 7,915
======= ======= =======
</TABLE>
<TABLE>
The differences between the statutory federal income tax rate and the
Company's effective income tax rate were as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1994 1995
----- ----- ----
<S> <C> <C> <C>
Statutory federal income tax rate.................................. 35.0% 35.0% 35.0%
State income tax, net of federal tax benefit....................... 3.6 0.8 5.1
Federal and state tax credits from research and development........ (14.3) (30.1) (1.9)
Foreign tax rates and losses not tax benefited..................... (5.6) (5.1) (1.0)
Change in deferred asset valuation reserve......................... 15.8 31.5 (8.8)
Other.............................................................. 0.5 2.0 0.3
----- ----- ----
Effective tax rate................................................. 35.0% 34.1% 28.7%
===== ===== ====
</TABLE>
At December 31, 1995, the Company had remaining net operating loss ("NOL")
carryforwards available of approximately $5,299,000 to offset future federal
taxable income. The Company also has unused federal research and development tax
credits of approximately $2,813,000. The NOL and tax credit carryforwards expire
at various dates through the year 2009. As a result of prior equity issuances,
the Company's use of NOL carryforwards incurred prior to July 1988 is subject to
certain annual limitations. At December 31, 1995 the available NOL carryforwards
have an annual limitation amount of approximately $662,000 that may be used to
reduce the Company's taxable income in the future.
10. EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution profit sharing plan, including
features under Section 401(k) of the Internal Revenue Code, which will provide
retirement benefits to its employees. The Plan covers substantially all
employees of the Company and eligible participants may contribute up to 15% of
their pay on a pretax basis subject to annual dollar limits established by the
Internal Revenue Code and plan limitations. In 1993 and 1994 the Company voted
to contribute approximately $175,000 and $353,000 to the Plan, respectively. In
1995 the Company agreed to provide a 50% matching contribution up to the first
3% of each participant's eligible compensation. The Company's matching
contribution to the Plan was $661,000 in 1995.
34
<PAGE> 35
<TABLE>
11. GEOGRAPHIC DATA & MAJOR CUSTOMERS:
The Company's operations involve a single industry segment-the development,
manufacture, marketing and servicing of videoconferencing equipment. The Company
has subsidiaries in various foreign countries which sell the Company's products
in their respective geographic areas. Revenues are reflected in the geographic
areas from which the sales are made. Financial information, summarized by
geographic area, is as follows (in thousands):
<CAPTION>
UNITED ASIA/
STATES EUROPE PACIFIC ELIMINATIONS CONSOLIDATED
-------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Total revenues
Unaffiliated customers............. $231,740 $ 79,010 $ 36,008 -- $346,758
Inter-company transfers............ 80,300 701 -- $(81,001) --
-------- -------- -------- -------- --------
Total........................... $312,040 $ 79,711 $ 36,008 $(81,001) $346,758
-------- -------- -------- -------- --------
Income (loss) from operations........ $ 23,131 $ (1,515) $ 1,037 $ 1,649 $ 24,302
-------- -------- -------- -------- --------
Identifiable assets.................. $193,496 $ 42,196 $ 17,434 $(26,254) $226,872
-------- -------- -------- --------
Corporate assets..................... 61,269
--------
Total assets.................... $288,141
========
YEAR ENDED DECEMBER 31, 1994
Total revenues
Unaffiliated customers............. $164,176 $ 62,876 $ 28,141 -- $255,193
Inter-company transfers............ 59,268 -- -- $(59,268) --
-------- -------- -------- -------- --------
Total........................... $223,444 $ 62,876 $ 28,141 $(59,268) $255,193
Income from operations............... $ 4,026 $ 604 $ 926 $ (347) $ 5,209
-------- -------- -------- -------- --------
Identifiable assets.................. $134,515 $ 29,919 $ 14,642 $(20,429) $158,647
-------- -------- -------- --------
Corporate assets..................... 58,052
--------
Total assets.................... $216,699
========
YEAR ENDED DECEMBER 31, 1993
Total revenues
Unaffiliated customers............. $133,669 $ 28,404 $ 14,179 -- $176,252
Inter-company transfers............ 25,524 -- -- $(25,524) --
-------- -------- -------- -------- --------
Total........................... $159,193 $ 28,404 $ 14,179 $(25,524) $176,252
======== ======== ======== ======== ========
Income (loss) from operations........ $ 8,724 $ (1,548) $ 1,622 $ (123) $ 8,675
======== ======== ======== ======== ========
Identifiable assets.................. $104,779 $ 21,979 $ 9,965 $(22,700) $114,023
-------- -------- -------- --------
Corporate assets..................... 73,402
--------
Total assets.................... $187,425
========
</TABLE>
The United States inter-company transfers primarily represent shipments of
systems to international subsidiaries. The inter-company transfers of systems
are made at transfer prices which approximate cost to distributors plus an
appropriate mark up, and are eliminated from consolidated revenues. Corporate
assets consist primarily of marketable securities.
35
<PAGE> 36
<TABLE>
Export sales to unaffiliated customers from the Company's United States
operations were as follows (in thousands):
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Europe...................................................... $10,077 $ 2,552 $ 2,693
Canada...................................................... 7,965 5,989 8,341
Asia/Pacific................................................ 5,486 4,703 13,220
Other....................................................... 2,525 3,857 8,709
------- ------- -------
$26,053 $17,101 $32,963
======= ======= =======
</TABLE>
In 1993 one customer accounted for 13% of total revenues. In 1994 and 1995 no
customer accounted for 10% or more of total revenues.
12. UNAUDITED INTERIM FINANCIAL INFORMATION
<TABLE>
Quarterly financial information is as follows (in thousands, except per share
data):
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------
<S> <C> <C> <C> <C>
1995
Revenues......................................... $74,156 $80,489 $90,098 $102,015
Gross margin..................................... 37,798 41,039 44,335 48,543
Net income....................................... 3,088 4,155 5,223 7,160
Net income per common and common equivalent
share.......................................... $ 0.09 $ 0.12 $ 0.15 $ 0.20
1994
Revenues......................................... $53,748 $64,011 $63,314 $ 74,120
Gross margin..................................... 26,478 31,435 31,680 36,561
Net income....................................... 614 598 935 2,432
Net income per common and common equivalent
share.......................................... $ 0.02 $ 0.02 $ 0.03 $ 0.08
</TABLE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
<PAGE> 37
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of PictureTel
Corporation is included in Item 8 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in Item 14(a)2 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 20, 1996
37
<PAGE> 38
<TABLE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
CHARGED TO
BALANCE AT COSTS AND BALANCE AT
BEGINNING OF YEAR EXPENSES DEDUCTIONS END OF YEAR
----------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993:
Accounts receivable reserves......... $1,011,000 $ 667,000 $ 301,000 $1,377,000
Inventory reserves................... $1,683,000 $2,162,000 $1,311,000 $2,534,000
Warranty reserves.................... $ 666,000 $1,644,000 $1,495,000 $ 815,000
YEAR ENDED DECEMBER 31, 1994:
Accounts receivable reserves......... $1,377,000 $ 560,000 $ 152,000 $1,785,000
Inventory reserves................... $2,534,000 $2,376,000 $1,739,000 $3,171,000
Warranty reserves.................... $ 815,000 $1,541,000 $ 699,000 $1,657,000
YEAR ENDED DECEMBER 31, 1995:
Accounts receivable reserves......... $1,785,000 $ 430,000 $ 424,000 $1,791,000
Inventory reserves................... $3,171,000 $3,036,000 $3,339,000 $2,868,000
Warranty reserves.................... $1,657,000 $2,181,000 $1,343,000 $2,495,000
</TABLE>
38
<PAGE> 39
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is incorporated by reference herein
to information contained in "Election of Directors" in the definitive 1996 Proxy
Statement.
ITEM 11: EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by reference herein
to information contained in "Election of Directors" in the definitive 1996 Proxy
Statement. (information in the 1996 Proxy Statement under "Report of the
Compensation Committee" and "Performance Graph" is not incorporated by
reference.)
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this time is incorporated by reference herein
to information contained in "Security Ownership" in the definitive 1996 Proxy
Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated by reference herein
to information contained in "Certain Relationships and Related Transactions"
appearing in the definitive 1996 Proxy Statement.
39
<PAGE> 40
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
-- Report of Independent Accountants
-- Consolidated Statements of Income for the Years ended December 31,
1993, 1994 and 1995
-- Consolidated Balance Sheets as of December 31, 1994 and 1995
-- Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995
-- Consolidated Statements of Cash Flows for the years ended December
31, 1993, 1994 and 1995
-- Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
-- Report of Independent Accountants
-- Schedule II -- Valuation and Qualifying Accounts
-- Schedules other than those listed above have been omitted since they
are either not required, not applicable, or the information is
otherwise included.
(B) REPORTS ON FORM 8-K
None
<TABLE>
(C) EXHIBITS
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Third Restated Certificate of Incorporation of Registrant, effective June 10,
1992(2)
3.2 By-Laws as Amended September 13, 1994(6)
4.1 Form of Common Stock Certificate (13)
4.2 Shareholders' Rights Agreement between the Company and The First National Bank
of Boston as Rights Agent, dated March 25, 1992(8)
4.2.1 Form of Certificate of Designation with respect to Junior Preference Stock (9)
4.2.2 Form of Rights Certificate (10)
4.2.3 Summary of Purchase Rights (11)
4.2.4 Amendment dated January 13, 1995 to item 4.2 (14)
The Company hereby agrees to furnish to the Commission upon request copies of
any long-term debt instruments not filed herewith because the securities
authorized under any such instrument do not exceed ten percent of total assets
of the Company and its consolidated subsidiaries.
10.10 1984 Amended and Restated Stock Option Plan as amended through December 13,
1988 (3)
10.10.1 Amendment dated October 26, 1994 to item 10.10 (14)
10.11 PictureTel Corporation Equity Incentive Plan as amended October 26, 1994 (14)
10.11.1 Amendment dated June 29, 1995 to item 10.11 (20)
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.12 Employment Agreement between PictureTel Corporation and Norman E. Gaut dated
July 29, 1988 (3)
10.12.1 Amendment dated January 15, 1995 to the employment agreement between
PictureTel Corporation and Norman Gaut dated July 29, 1988 (15)
10.13 PictureTel Corporation 1994 Employee Stock Purchase Plan (12)
10.14 Agreement between PictureTel Corporation and Les Strauss as amended through
January 15, 1995 (16)
10.15 Agreement between PictureTel Corporation and Khoa Nguyen as amended through
March 6, 1995 (17)
10.16 Agreement between PictureTel Corporation and Domenic J. LaCava as amended
through January 17, 1995 (18)
10.17 Agreement between PictureTel Corporation and Lawrence Bornstein as amended
through January 16, 1995 (18)
10.34 Form of Indemnification Agreement for directors and officers (1)
10.44 Lease Agreement between PictureTel Corporation and Centennial Park dated April
21, 1988. (3)
10.45 401(k) Profit Sharing Retirement Plan as amended through July 1, 1994 (14)
10.47 Lease Agreement between PictureTel Corporation and 100 Minuteman Limited
partnership dated October 7, 1995 (filed herewith)
10.50 Lease Agreement between PictureTel Corporation and the JMS Realty Trust dated
October 22, 1990 (7)
10.51 Lease Agreement between PictureTel Corporation and Andover Mills Realty
Limited Partnership dated February 10, 1994 (14)
10.54 Amended and Restated Employment Agreement between PictureTel Corporation and
Brian L. Hinman dated June 1, 1990 ("Hinman Employment Agreement") (4)
10.54.1 Separation and Termination Agreement between PictureTel Corporation and Brian
L. Hinman dated December 31, 1990 (5)
10.57 Non-exclusive License Agreement between PictureTel Corporation and Polycom
Corporation dated January 4, 1991 (5)
10.61 Lease Agreement between PictureTel Corporation and Comdisco, Inc., dated
September 16, 1991. (7)
10.62 Lease Agreement between PictureTel Corporation and BancBoston Leasing Inc.,
dated September 27, 1991 (7)
10.63 Lease Agreement between PictureTel Corporation and Northwoods Business Park
Tower Phase IV Realty Trust, dated November 25, 1991. (7)
10.64 Distribution Agreement between PictureTel Corporation and American Telephone
and Telegraph Company dated January 20, 1992 (confidential treatment
requested) (7)
21.1 Subsidiaries of the Company (filed herewith)
23.1 Consent of Coopers & Lybrand L.L.P. (filed herewith)
27.1 Financial Data Schedule as required by Item 601(c) of Regulation S-K (filed
herewith).
(1) Incorporated by reference to the similarly numbered exhibit to Registrant's
Registration Statement on Form S-1, Registration No. 33-6368, effective August
12, 1986.
(2) Incorporated by reference to Exhibit 3.1.4 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 27, 1992.
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
(3) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Annual Report on Form 10-K for the Year ended December 31, 1988.
(4) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1990.
(5) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Registration Statement on Form S-1, No. 33-38983 effective April
9, 1991.
(6) Incorporated by reference to Exhibit 1 to the Registrant's Current Report on
Form 8-K filed September 14, 1994.
(7) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Annual Report on Form 10-K for the Year ended December 31, 1991.
(8) Incorporated by reference to Exhibit 1 to the Registrant's Registration of
Certain Classes of Securities on Form 8-A dated March 26, 1992.
(9) Incorporated by reference to Exhibit 2 to the Registrant's Registration of
Certain Classes of Securities on Form 8-A dated March 26, 1992.
(10) Incorporated by reference to Exhibit 3 to the Registrant's Registration of
Certain Classes of Securities on Form 8-A dated March 26, 1992.
(11) Incorporated by reference to Exhibit 4 to the Registrant's Registration of
Certain Classes of Securities on Form 8-A dated March 26, 1992.
(12) Incorporated by reference to Exhibit 4 to the Registrant's Registration
Statement on Form S-8, No. 33-81848, effective July 22, 1994.
(13) Incorporated by reference to Exhibit 4(b) of Registrant's Registration
Statement on Form S-8, Registration Number 33-36315 effective August 10, 1990.
(14) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 1994.
(15) Incorporated by reference to exhibit 10.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 1, 1995.
(16) Incorporated by reference to exhibit 10.2 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 1, 1995.
(17) Incorporated by reference to exhibit 10.3 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 1, 1995.
(18) Incorporated by reference to exhibit 10.4 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 1, 1995.
(19) Incorporated by reference to exhibit 10.5 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 1, 1995.
(20) Incorporated by reference to exhibit 10.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 1, 1995.
</TABLE>
(d) FINANCIAL STATEMENT SCHEDULE
The Company hereby files as part of this Annual Report on Form 10-K the
financial statement schedule listed on Item 14(a)2 as set forth above.
42
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 30, 1996
PICTURETEL CORPORATION
/S/ NORMAN E. GAUT
By:--------------------------------
Norman E. Gaut
President and Chief Executive
Officer
<TABLE>
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.
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/S/ NORMAN E. GAUT Chairman of the Board, President, March 29, 1996
- ------------------------------------- Chief Executive Officer and Director
Norman E. Gaut (Principal Executive Officer)
/S/ DAVID B. LEVI Director March 29, 1996
- -------------------------------------
David B. Levi
/S/ JAMES R. SWARTZ Director March 29, 1996
- -------------------------------------
James R. Swartz
/S/ VINOD KHOSLA Director March 29, 1996
- -------------------------------------
Vinod Khosla
/S/ ROBERT T. KNIGHT Director March 29, 1996
- -------------------------------------
Robert T. Knight
/S/ LES B. STRAUSS Vice President, Chief Financial March 29, 1996
- ------------------------------------- Officer (Principal Financial Officer &
Les B. Strauss Principal Accounting Officer)
</TABLE>
43
<PAGE> 1
Exhibit 10.47
ANDOVER, MASSACHUSETTS
LEASE
LANDLORD: 100 MINUTEMAN LIMITED PARTNERSHIP, a Massachusetts Limited
Partnership
TENANT: PICTURETEL CORPORATION, a Delaware corporation
DATE: October 7, 1995
<PAGE> 2
INDEX TO CERTAIN DEFINED TERMS
<TABLE>
<S> <C> <C>
Term Section Page
- ---- -------- ----
Affiliates 24.18(a) 63
Alterations 13 22
Bankruptcy Code Exhibit "F"
base rent 1.1(e) 2
Building 1.1(d) 1
Cancellation Fee 4(b) 6
Cancellation Option 4(b) 6
Commencement Date 1(aa) 1
Condemnation 17 34
Control Affiliates 25.18(aa) 63
Cure Payments 19.5 44
Excess Refinancing Proceeds Add. #5 4
Existing Loans 2(a) Add. #4
Extension Options 1 Add. #2
Guarantor 1.1(k) 3
Hazardous Substances 25 64
Landlord's Insurance Proceeds 16.1 28
Landlord's Mortgagees 19.1 41
Landlord's Work 2 4
Laws 24.18(b) 63
LC Advances 24.17(f) 62
LC Note 24.17(f) 62
Lease Year 4 6
Letter of Credit 24.17 59
Liabilities 24.18(c) 63
Liens 13.4 23
New Termination Date 4(b) 6
No-sale Election Add. #5 2
Occupancy Date 1.1(a) 1
Operating Costs 7.1 10
Permitted Assignee 18.5(c) 40
Permitted Sublessee 18.5(c) 40
Phase 1.1(dd) 2
Premises 1.1(c) 1
Purchase Options Add. #4
Reconstruction Costs 16.5 32
Related Entities 24.18(cc) 63
Released Assignor 18.4 35
Rent 5 7
Right of Self Help 14.4 26
1776 Premises 1.1(cc) 1
1776 Easements 1.3 4
Systems and Equipment 24.18(d) 63
Superior Leases and Mortgages 24.4 50
Taxes 6.1 8
Tenant's Broker 1.1(l) 4
Tenant's Percentage 1.1(f) 2
Tenant's Property 3 5
Tenant's Work 1.1 Exh. C
Transfer 18.1 33
Unamortized Costs Exhibit "H"
Unpermitted Financing 19.4 43
</TABLE>
<PAGE> 3
LEASE
THIS INDENTURE OF LEASE, dated as of October ______, 1995 is between 100
MINUTEMAN LIMITED PARTNERSHIP, a Massachusetts limited partnership
("Landlord"), and PICTURETEL CORPORATION, a Delaware corporation ("Tenant").
Landlord leases the Premises to Tenant and Tenant leases the Premises from
Landlord on the following terms and conditions:
BASIC LEASE PROVISIONS.
1.1 Summary.
(a) Occupancy Date: With respect to each Phase, when Landlord's Work for
that particular Phase is deemed to be substantially completed (as described in
Article 2) or Tenant occupies that Phase, whichever is earlier.
(aa) "Commencement Date": The later of: July 1, 1996; or the last
Occupancy Date.
(b) Term: The term of this Lease will begin on the first Occupancy Date
and will end eighteen (18) Lease Years after the Commencement Date, unless
extended or terminated earlier per this Lease.
(c) Premises: The land located in Andover, Massachusetts, legally
described in Exhibit "B," the Building, and all other improvements on the land.
<PAGE> 4
(cc) 1776 Premises: The property adjacent to the Premises owned by 1776
Limited Partnership or its successors.
(d) Building: The existing structure on the land designated as the
"Building" in Exhibit "A," as it may be changed, enlarged or improved in the
future pursuant to Landlord's Work or otherwise.
(dd) Phase: The parties initially contemplate that Landlord's Work for
the Building generally will be subdivided into four (4) different areas, each
of which may have a different Occupancy Date due to the differing nature of
Landlord's Work necessary to meet the requirements of the users who ultimately
will occupy those different areas (e.g., the majority of administrative,
financing and marketing functions in one area, the majority of engineering and
research and development functions in another area, and the majority of light
manufacturing functions in a third area). Each of these separate areas is
called a "Phase." The parties acknowledge that these areas may change during
Landlord's Work, and that performing Landlord's Work in Phases and/or getting
separate Certificates of Occupancy for each Phase may be impractical or
unlawful.
(e) Base Rent: (see Exhibit "D").
(f) Tenant's Percentage: Tenant's Percentage for each Phase will be a
fraction, expressed as a percentage, determined by dividing the rentable area
of that Phase by the rentable area of the entire Building as if Landlord's Work
was completed. If the rentable area of the entire Building is not known when a
particular Phase is completed, then the rentable area of the Building shall be
based on Landlord's reasonable determination at the time, with a retroactive
adjustment when the rentable area of the Building is determined.
Notwithstanding anything to contrary, the rentable area shall be determined in
each case by Landlord's architect or representative in a consistent fashion,
and upon the occurrence of the Occupancy Date for all of the Phases, Tenant's
Percentage shall be 100%.
<PAGE> 5
(g) Letter of Credit: (See Section 24.17).
(h) Use of Premises: For general office purposes, engineering, research
and development, light manufacturing, demonstration of video teleconferencing
systems, training rooms, customer demonstrations, repairs, distribution and
warehousing, and uses incidental thereto.
(i) Notice to Tenant Prior to First Occupancy Date:
PictureTel Corporation
The Tower at Northwoods
222 Rosewood Drive
Danvers, Massachusetts 01923
Attn: Chief Financial Officer
With a Copy to:
PictureTel Corporation
The Tower at Northwoods
222 Rosewood Drive
Danvers, Massachusetts 01923
Attn: Vice President, Human Resources
<PAGE> 6
(j) Notice to Landlord:
c/o Brickstone Properties, Inc.
300 Brickstone Square
Andover, Massachusetts 01810
Attn: Martin Spagat
With a Copy to:
c/o U.S. Managers Realty, Inc.
433 North Camden Drive, Suite 960
Beverly Hills, CA 90210
Attn: John G. Baker, Esq.
(k) Guarantor: N/A.
(l) Tenant's Broker: Avalon Partners, Inc..
(m) Certain Other Defined Terms: [See Section 24.18]
If there is a conflict between this summary and the rest of this Lease, the
rest of this Lease will control.
1.2 Site Plan. Exhibit "A" is the general site plan of the land, the
Building and the other principal improvements that are now part of the
Premises. The parties acknowledge and agree that the site plan may change as a
result of Landlord's Work, and so the parties agree that Landlord will have the
right to substitute for Exhibit "A" another general site plan, if necessary, to
depict the Premises more accurately upon such substantial completion.
<PAGE> 7
1.3 Premises. Subject to and in accordance with the terms and limitations
in this Lease (including any regarding prior notice, entry and the
non-disturbance of Tenant's business), Landlord reserves the right to install,
maintain, repair and replace Systems and Equipment within or serving the
Building or the rest of the Premises or otherwise modify the Premises in
emergencies or in order to comply with its obligations or exercise its rights
under this Lease or to comply with Laws or insurance requirements or to protect
health, safety or property or to provide access and parking and associated
improvements for the 1776 Premises in accordance with easements to be granted
to 1776 Limited Partnership (the "1776 Easements"), and in so doing Landlord
will endeavor to not interrupt Tenant's uses of the Premises or the services
Landlord is required to provide under this Lease more than reasonably
necessary. Landlord will not otherwise have the right to materially modify the
Premises unless it obtains Tenant's approval, which will not be unreasonably
withheld or delayed.
<PAGE> 8
CONSTRUCTION OF PREMISES.
Landlord will perform "Landlord's Work" and Tenant will perform "Tenant's
Work" (if any) as described in the Workletter attached as Exhibit "C." The
good faith written certification by Landlord's architect of the substantial
completion of Landlord's Work and the issuance of a temporary or final
certificate of occupancy by the Town of Andover will be binding on the parties
as to the date of substantial completion for each Phase. Except for Tenant
delays and force majeure, Landlord will diligently attempt to substantially
complete Landlord's Work on or before July 1, 1996. Landlord's Work for each
Phase will be deemed substantially completed even if Landlord has not completed
"punch list" or other minor items, as long as Landlord agrees to complete these
items diligently. Tenant's final punch list for each Phase will be submitted
to Landlord within fifteen (15) days after Landlord notifies Tenant that
Landlord's Work is substantially completed. Subject to scheduling requirements
for the completion of Landlord's Work, Tenant's contractors may have access to
the Premises prior to the completion of Landlord's Work as described in Exhibit
"C," and to the extent that conflicts with the scheduling for Landlord's Work
can reasonably be avoided, Landlord and its contractors will attempt to
cooperate reasonably with Tenant's contractors so that Tenant's Work can be
completed in a timely manner.
POSSESSION AND SURRENDER OF PREMISES.
When this Lease terminates, Tenant will remove from the Premises all of
its signs, movable trade fixtures and equipment, inventory and other personal
property, whether owned by Tenant or its Affiliates ("Tenant's Property").
<PAGE> 9
Tenant's Property remaining more than five (5) business days after delivery of
written notice from Landlord after such termination will be deemed abandoned
and Landlord may keep, sell, destroy or dispose of it without any Liabilities
to Tenant or its Affiliates. Tenant will repair all damage and surrender the
Premises broom clean and in good order, condition and repair, reasonable wear
and tear, damage by fire and casualty and taking by eminent domain excepted.
TERM; CANCELLATION OPTION
(a) This Lease is effective as of the date first set forth above, and the
term begins on the first Occupancy Date for a Phase and ends eighteen (18)
Lease Years after the Commencement Date, unless terminated earlier or extended
in accordance with this Lease. A "Lease Year" is a period of twelve (12)
consecutive calendar months during the Lease term, starting with the
Commencement Date. However, the first Lease Year is the first twelve (12) full
calendar months plus the partial month (if any) after the Commencement Date if
the Commencement Date is not the first day of the month, and the last Lease
Year may be less than twelve (12) months. In addition to the rent payable for
the first Lease Year, Tenant will pay rent for the partial calendar month (if
any) after the Commencement Date. Within ten (10) days after Landlord's
request in each instance, Tenant will execute an agreement confirming the
Occupancy Date for each Phase and/or the Commencement Date. Tenant's failure
to execute such an agreement will not affect the actual Occupancy Date for a
Phase or the actual Commencement Date.
<PAGE> 10
(b) Subject to the terms hereof, and provided that Tenant is not then in
default, Tenant will have the right (the "Cancellation Option") to cancel and
terminate this Lease as of the end of the tenth (10th) Lease Year (the "New
Termination Date") if and only if Tenant delivers to Landlord at least twelve
(12) months prior to the New Termination Date: an unconditional written notice
of termination; and, together with such notice, Ten Million and No/100 Dollars
($10,000,000.00) in good and clear funds as a cancellation fee (the
"Cancellation Fee"). Time is of the essence, and notwithstanding anything to
the contrary, if for any reason this notice and payment are not made as and
when required, or if before the valid exercise of the Cancellation Option a
Purchase Option or an Extension Option or the Purchase Election under Addendum
#5 has been exercised or the Lease Term is extended pursuant to the specific
terms in this Lease or Tenant or any of its Related Entities has entered into
any agreements or exercised any rights to lease additional space in a new
building or buildings, or an enlargement of the Building after completion of
Landlord's Work, totalling more than 50,000 square feet to be constructed on
the Premises or the 1776 Premises or to purchase or otherwise acquire all or
any portion of the Premises or the 1776 Premises or any interest in Landlord,
or if Tenant or any of its Related Entities leases any portion of the 1776
Premises or exercises any rights it may have to cause 1776 Limited Partnership
to construct any buildings on the 1776 Premises, at Landlord's election the
Cancellation Option will terminate and be null and void. Subject to the
foregoing, if the Cancellation Option is validly exercised, this Lease will
terminate and expire as of the New Termination Date, and Tenant will continue
to pay all rent and perform all of its obligations through and until the New
Termination Date. The termination of this Lease will not relieve Tenant from
Liabilities for any of its defaults, nor will the termination extinguish
Liabilities for any indemnities or for any other obligations that survive
pursuant to the terms of this Lease.
<PAGE> 11
(c) If Tenant or any of its Related Entities ever leases any portion of
the 1776 Premises from 1776 Limited Partnership, then, if necessary, the
initial term of this Lease automatically shall be deemed extended (but not
shortened) so that the initial term of this Lease and the initial term of
Tenant's lease with 1776 Limited Partnership will be co-terminous.
RENT.
(a) For each Phase, Tenant will pay the base rent as shown in Exhibit "D"
in equal monthly installments in advance beginning on the later of July 1, 1996
or the Occupancy Date for that Phase, and thereafter on the first day of each
month during the term (except as otherwise shown in Exhibit "D"), prorated for
any portion of a month. The term "rent" includes base rent, additional rent
and all other amounts to be paid by Tenant under this Lease, whether or not
specifically described as rent. All rent will be paid without demand,
deduction, counterclaim or offset of any type (except as may be specifically
provided otherwise elsewhere in this Lease) in lawful U.S. legal tender at 433
North Camden Drive, Suite 960, Beverly Hills, California 90210, Attn:
Accounting Dept., or to such other person or place as Landlord may from time to
time designate. Notwithstanding the foregoing, if and for so long as there is
a mortgage loan encumbering the Premises or a loan that is secured by the
Letter of Credit, at the written request of Tenant Landlord and Tenant will
establish a
<PAGE> 12
collection account for the receipt and disbursement of base rent. In such
event, Tenant will pay the base rent as and when required each month into this
collection account, and the collection agent promptly will disburse from such
amount an amount sufficient to pay debt service and any other amounts owed to
the mortgage lender and the lender of the loan secured by the Letter of Credit,
with the balance being disbursed first to Tenant (but only if and to the extent
necessary to pay current debt service to Tenant under the LC Note per Section
24.17(f) if any amounts are then owed under the LC Note) and then to Landlord.
The collection agent and the terms of this collection account will be subject
to the mutual written approval of Landlord and Tenant, which approval will be
based on customary terms for such agreements and will not be unreasonably
withheld or delayed.
(b) If Tenant provides and continues to provide the Letter of Credit in
accordance with Section 24.17 and otherwise does not default under this Lease,
within thirty (30) days after payment by Tenant and delivery to Landlord of an
invoice therefor and reasonable evidence of Tenant's payment (but not earlier
than the date that Tenant pays its first full month of base rent under this
Lease), Landlord either will reimburse to Tenant, or credit against rent owed
by Tenant, the actual amounts paid by Tenant to the issuer of the Letter of
Credit for such issuance, up to an annual amount equal to one percent (1%) of
the face amount of the Letter of Credit from time to time.
<PAGE> 13
TAXES.
6.1 Definition of Taxes. "Taxes" means all taxes, assessments, levies,
charges and fees imposed against, for or in connection with all or any portion
of: the Premises; the use, ownership, leasing, occupancy, operation,
management, repair, maintenance, demolition or improvement of the Premises; the
amount of, or Landlord's right to receive or the receipt of, rent, profit or
income from the Premises (but specifically excluding Landlord's net income
taxes); improvements, utilities and services, whether because of special
assessment districts or otherwise; the value of Landlord's interest in the
Premises; and fixtures, equipment and other real or personal property used in
connection with the Premises. Taxes also include, without limitation, license
fees, sales, use, capital and value-added taxes, penalties (but only if Tenant
does not pay its share of Taxes as and when required), interest and costs
incurred in contesting taxes, and any charges or taxes in addition to, in
substitution or in lieu of, partially or totally, any taxes or charges
previously included within this definition, including taxes or charges
completely unforeseen by the parties and collected from whatever source. Taxes
do not include: Landlord's federal or state net income, franchise, excise,
inheritance, gift or estate taxes, and any deed stamps or documentary or
transfer taxes payable upon the Transfer of the Premises to any of Landlord's
Control Affiliates.
6.2 Payment of Taxes. Subject to and in accordance with Article 9,
starting as of the first Occupancy Date for a Phase and continuing thereafter
during the term, Tenant will pay Tenant's Percentage of Taxes directly to
Landlord as additional rent within fifteen (15) days after receipt of
Landlord's bill. Taxes that are assessed during the term of this Lease and
also cover any periods prior to or after the term of this Lease will be
appropriately prorated.
<PAGE> 14
6.3 Tenant's Taxes. Tenant will pay all taxes assessments, license fees
and charges levied, assessed or imposed on Tenant, Tenant's business operations
and Tenant's Property, and Tenant will indemnify and hold Landlord and its
Affiliates harmless from any Liabilities in connection therewith or in
connection with any non-payment thereof.
6.4 Contest. Tenant will have the right to contest the amount or validity
of any Taxes with the appropriate governmental authorities, provided that:
Tenant pays all Taxes when due and complies with all applicable rules,
regulations and other Laws in connection with such contest; Tenant pays all
costs and expenses in connection with such contest and neither Landlord nor the
Premises will, as a result of such contest or any nonpayment of Taxes, become
subject to any cost, loss, claim, liability, lien or encumbrance of any type.
Tenant will indemnify and hold Landlord and its Affiliates harmless from any
Liabilities in connection with any such contest or any nonpayment of Taxes.
Landlord also will have the right to contest Taxes. A prorata share of any
refund of Taxes obtained, net of all bona fide costs and expenses incurred in
connection with the contest resulting in such refund, shall be refunded to
Tenant in proportion to the amount of the Taxes paid by Tenant to which such
refund relates.
<PAGE> 15
OPERATING COSTS.
7.1 Definition of Operating Costs.
(a) "Operating Costs" are all costs and expenses incurred in connection
with the Premises and for its ownership, operation, management, maintenance,
repair, restoration and replacement, including, without limitation, costs for:
services, costs and utilities not otherwise directly paid or reimbursed by
Tenant; materials, supplies and equipment; premiums for Landlord's insurance
policies and deductibles thereunder; wages and payroll, including bonuses,
fringe benefits, workers compensation and payroll taxes (but excluding the
foregoing payable to Landlord's partner or chief executive charged with the
operation and management of the Premises, currently Martin Spagat);
professional and consulting fees; management fees at the rate of 3.5% of all
scheduled base rent, Taxes and Operating Costs payable by Tenant (without
giving effect to any abatements or reductions) and utilities and services
payable by Tenant (other than those payable by Tenant directly to third-party
providers), or at prevailing rates, whichever is greater, or if no managing
agent is retained, an amount in lieu thereof not in excess of the greater of
the foregoing amounts; complying with any Laws and insurance requirements;
environmental matters, including, without limitation, costs of investigations,
disclosures, preventive measures, remediation, disposal, audits, monitoring,
maintenance and responsive actions; roadway maintenance; costs payable in
connection with any easements that benefit or burden the Premises; capital
expenditures (excluding those incurred for repairs or rebuilding resulting from
a casualty, but including an amount thereof equal to any deductibles under
Landlord's casualty insurance policies); an annual audit of Landlord's books
and records relating to the Premises and the preparation of Landlord's annual
financial statements (but not its tax returns); and snowplowing and
landscaping. Operating Costs do not include: Taxes; depreciation of the
Premises structures and improvements; Landlord's loan or ground lease payments
(including principal payments); costs of negotiating and enforcing leases;
brokerage commissions; costs of any items otherwise includable in Operating
Costs to the extent that they are reimbursed under warranties or by insurance
proceeds or condemnation awards; costs for Landlord's California corporate
office; costs of Landlord's Work; and costs directly paid or specifically
reimbursed by Tenant (other than by an allocation of Operating Costs).
<PAGE> 16
(b) Subject to the other terms and conditions of this Lease, until the end
of the ninth (9th) Lease Year, Operating Costs also will not include, and
Landlord will be responsible at its cost for, the replacement of the Building's
roof and major structural members (as opposed to the cost of the repair and
maintenance thereof, which will be included as part of Operating Costs), unless
such replacement is required due to the acts or omissions of Tenant or its
Affiliates, in which case Tenant will be solely responsible for all costs in
connection therewith.
(c) If Tenant validly exercises its Cancellation Option, then the terms
set forth in Section 7.1(b) above will continue until the New Termination Date.
If Tenant does not validly exercise its Cancellation Option, then the costs
for such replacement will be included as part of Operating Costs starting as of
the beginning of the tenth (10th) Lease Year and ending as of the beginning of
the seventeenth (17th) Lease Year.
<PAGE> 17
(d) If the first Extension Option is exercised, or Tenant otherwise agrees
to extend the Lease term or the Lease term is otherwise deemed to have been
extended pursuant to the specific terms of this Lease, or if Tenant or any of
its Related Entities has entered into any agreements or exercised any rights to
lease additional space in a new building or buildings, or an enlargement of the
Building after completion of Landlord's Work, totalling more than 50,000 feet
to be constructed on the Premises or to purchase or otherwise acquire all or
any portion of the Premises or any interest in Landlord, then the cost for such
replacement will be included as part of Operating Costs for the seventeenth
(17th) and eighteenth (18th) Lease Years and thereafter if this Lease is
extended. If none of the events described in the preceding sentence occur,
then the terms of Section 7.1(b) again will apply during the seventeenth (17th)
and eighteenth (18th) Lease Years.
7.2 Payment of Operating Costs. Subject to and in accordance with Article
9, starting as of the first Occupancy Date for a Phase and continuing
thereafter during the term, Tenant will pay Tenant's Percentage of Operating
Costs to Landlord as additional rent within thirty (30) days after receipt of
Landlord's bills.
INSURANCE.
8.1 Tenant's Insurance.
(a) Tenant will maintain during the term:
(i) Commercial general liability insurance (Broad Form CGL, or if this
insurance is not then commercially available, the closest equivalent), with
contractual liability (including indemnities made by Tenant in this Lease),
cross-liability endorsements (or the equivalent) and fire legal liability
endorsements, and automobile liability insurance. The amount of this insurance
will be at least $10 Million combined single limit for each occurrence, with a
deductible not to exceed $10,000.00. If this policy includes a "general
aggregate" limit, the limit will be at least two (2) times the combined single
limit per occurrence.
<PAGE> 18
(ii) "All risk" casualty insurance (or if this insurance is not then
commercially available, the closest equivalent), covering all of Tenant's
Property and all Alterations made by or for the benefit of Tenant (excluding
Landlord's Work). This insurance will be for full replacement cost (which may
be subject to standard exclusions in such policies).
(iii) Employer's liability insurance of not less than $1,000,000.00, and
worker's compensation insurance in statutory limits.
(b) Tenant's commercial general liability policy must: name Landlord and
the following parties as additional insureds: Landlord and its general
partners, Landlord's Mortgagees, and the property managers; be written on an
"occurrence" basis; be from insurers licensed to do business in Massachusetts
and who also maintain a Best's rating of at least A+; and state with respect to
both liability and casualty policies that the insurers will not cancel, fail to
renew or modify the coverage without first giving Landlord at least thirty (30)
days prior written notice (provided, however, that notice of modification will
not be required with respect to modifications which neither reduce the policy
limits or materially restrict or reduce the coverage provided by a policy). No
more than once every five (5) years during the term, upon Landlord's written
request the limits of Tenant's insurance policies shall be increased to amounts
as reasonably determined by Landlord based upon customary practices of other
prudent landlords.
<PAGE> 19
(c) Tenant will supply copies of each paid-up policy or a certificate from
the insurer certifying that the policy has been issued and complies with all of
the terms of this Article. This insurance must be in effect and the policies
or certificates delivered to Landlord on or before the first Occupancy Date for
a Phase, or on or before the date that Tenant or its contractors or
representatives first enter the Premises, whichever is earlier, and renewals
provided not less than thirty (30) days before the expiration of the coverage.
Landlord always may inspect and copy any of the policies.
<PAGE> 20
8.2 Landlord's Insurance.
(a) Landlord will maintain during the Lease term the following insurance
policies (or if any of them are not commercially available, the closest
equivalents): an "all risk" casualty insurance policy for the full replacement
cost (or the highest amount not in excess thereof that is reasonably
commercially available) of the Building (which may be subject to standard
exclusions in such policies and to exclusion for foundations and footings),
rental loss insurance providing coverage for two (2) years (or the longest
period not in excess thereof that is reasonably commercially available) of base
rent and estimated Taxes and Operating Costs, commercial general liability
insurance (Broad Form CGL) of at least $10 Million combined single limit for
each occurrence, with a deductible not to exceed $10,000.00, and other
insurance policies with commercially reasonable carriers in such amounts, with
such deductibles and providing protection against such perils as Landlord
determines to be necessary in its reasonable discretion. All losses on all
policies maintained pursuant to this Article will be settled in Landlord's name
(or as otherwise designated by Landlord) and proceeds will belong and be paid
to Landlord except if and to the extent specifically set forth in Addendum #3
and Addendum #4 or by reference in Addendum #5. Landlord makes no
representations or warranties as to the adequacy of any insurance to protect
Landlord's or Tenant's interests. Upon Tenant's written request, Landlord will
provide Tenant with certificates of Landlord's insurance.
<PAGE> 21
(b) Tenant and its Affiliates will not undertake, fail to undertake or
permit any acts or omissions which will increase the cost of, violate, void or
make voidable all or any portion of any insurance policies maintained by
Landlord, unless Landlord gives its specific written consent and Tenant pays
all increased costs to Landlord on demand.
<PAGE> 22
8.3 Waiver of Subrogation.
Landlord shall cause each casualty insurance policy required to be carried
under this Lease (or actually carried by Landlord) to be written in such a
manner as to provide that the insurer waives all right of recovery by way of
subrogation against Tenant in connection with any loss or damage covered by
that policy, even if such loss or damage may have been caused by the act,
omission, negligence or strict liability of Tenant, its subtenants or assignees
or any of their officers, directors, agents, employees, contractors, licensees,
invitees or suppliers. Tenant shall cause each casualty insurance policy
required to be carried by Tenant under this Lease (or actually carried by
Tenant) to be written in such a manner as to provide that the insurer waives
all right of recovery by way of subrogation against Landlord and any other
additional insureds in connection with any loss or damage covered by that
policy, even if such loss or damage may have been caused by the act, omission,
negligence or strict liability of Landlord or the additional insureds or their
respective general or limited partners, officers, directors, agents, employees,
contractors, licensees, invitees, suppliers, successors or assigns and neither
party shall be liable to the other for any loss or damage to the property of
the other party caused by fire or any of the casualties covered by the casualty
insurance policies required to be maintained under this Lease (or actually
maintained) by the other party even if such loss or damage is caused by the
party or any of the other persons or entities described above in this clause
and even if the cost of the loss or damage is below the deductible amount on
the applicable policy or policies maintained.
<PAGE> 23
MONTHLY PAYMENT OF TAXES AND OPERATING COSTS; AUDITS.
9.1 Monthly Payments. At any time and from time to time, and subject to
later change, Landlord may elect to have Tenant pay its share of Taxes and
Operating Costs (or either of them) in monthly installments, in advance on the
first of each month, based on amounts reasonably estimated by Landlord (as
revised from time to time). If these estimated monthly payments are required,
after the end of each tax fiscal year, Lease Year or other relevant periods
selected by Landlord, Landlord will deliver to Tenant a statement of the actual
amounts due for the period. Any additional amounts due from Tenant will be
payable as additional rent within thirty (30) days (fifteen [15] days for
Taxes) after receipt of Landlord's statement, and any overpayment by Tenant
will be refunded by Landlord or deducted from the next monthly installments due
for that particular payment category. At any time or from time to time,
Landlord may deliver a bill to Tenant for Tenant's share of Taxes and Operating
Costs (or either of them), and Tenant will pay the amount due to Landlord as
additional rent within thirty (30) days (fifteen [15] days for Taxes) after
receipt of Landlord's bill. Tenant will receive a credit for any estimated
monthly payments already paid by Tenant for the period covered by that bill.
9.2 Tenant's Audit of Taxes and Operating Costs. Upon Tenant's written
request in each instance, Landlord will furnish Tenant reasonable backup
information for its itemized statements. During the Lease term (and after the
Lease term, but within ninety (90) days after Landlord's last invoice to
Tenant),
<PAGE> 24
and upon at least fourteen (14) days' prior written notice to Landlord, not
more than once in each calendar year Tenant may audit Landlord's records of
Taxes and Operating Costs for the prior calendar year in order to verify the
accuracy of the Taxes and Operating Costs charged to Tenant. Such audit will
be conducted only during regular business hours where Landlord maintains its
records (which Landlord agrees will be in Massachusetts or California) and
Tenant will deliver a copy of the results of the audit to Landlord within
fifteen (15) days after receipt by Tenant. All audits will be conducted at
Tenant's cost and expense and no subtenant will have the right to conduct an
audit, and no assignee will have the right to conduct an audit for any period
when the assignee was not in possession of the Premises.
9.3 Landlord's Audit. In addition to providing the information described
in Addendum #3, Landlord shall arrange for an annual audit to be made of its
books and records relating to this Lease (including with respect to Net
Proceeds under Addendum #3). Landlord shall deliver a copy of this annual
audit to Tenant within ten (10) days after it is received in final form by
Landlord. Tenant shall have the right, at its sole cost and expense, at any
time during the term of this Lease and for six (6) months thereafter, to
consult with Landlord's auditors regarding such audit. If the results of an
annual audit made by Landlord's auditors show an underpayment or overpayment
with respect to Net Proceeds, the shortfall or the excess, as applicable, will
be paid or refunded within thirty (30) days after the final results of such
audit have been delivered to Landlord and Tenant.
<PAGE> 25
UTILITIES AND LANDLORD'S SERVICES.
(a) Landlord will initially be responsible for bringing utility services
(including electricity and hot and cold running water) to the Building to the
extent provided as part of Landlord's Work in Exhibit "C." Beginning as of the
Occupancy Date for each Phase, Tenant will pay when due to the furnishing
parties all fees and costs associated with utilities and communication services
provided to or for the benefit of Tenant or the Premises for that Phase,
including, without limitation, electricity, water, sewer, gas, heat, telephone,
trash and waste removal and disposal, and all other utilities and services
provided, whether or not separately metered. If and to the extent that an
Occupancy Date has occurred for a Phase but Landlord's Work is continuing with
respect to other Phases, if necessary there shall be reasonable proration
between Landlord and Tenant of utilities and services consumed for Landlord's
Work, so that Landlord bears the cost for such utilities and services. If
utilities and services payable by Tenant are not charged to Tenant directly by
a public utility, Tenant will pay the charges therefor (as determined by meter
or submeter, or if there is no meter or submeter as reasonably determined by
Landlord) directly to Landlord as additional rent, either monthly when base
rent is due, or within fifteen (15) days after receipt of Landlord's bill, at
Landlord's option. Landlord will not be responsible for any Liabilities
incurred by Tenant or Tenant's Affiliates nor may Tenant abate rent, terminate
this Lease or pursue any other right or remedy against Landlord or Landlord's
Affiliates, as a result of any termination or malfunction of any utilities or
systems except as specifically provided otherwise in this Lease, although this
will not be deemed to limit in any way Landlord's repair and maintenance
obligations under Section 12.1 or its repair and/or restoration obligations
under Articles 16 and 17 if and to the extent applicable.
<PAGE> 26
(b) During the Lease term, Landlord shall provide the services
("Landlord's Services") set forth in Exhibit "G."
(c) Tenant shall have access to the Premises 365 days per year, 24 hours
per day, unless and to the extent that and for as long as such access is
prevented by reason of casualties, emergencies, force majeure or by reason of
necessary maintenance or repairs.
USE OF PREMISES.
Tenant will use the Premises for the purposes described in Section 1.1(h),
but for no other purpose. Tenant will:
(a) Not permit any objectionable or unreasonable noises, vibrations, odors
or fumes in or to emanate from the Premises, nor commit or permit any waste,
improper, immoral or offensive use of the Premises, any public or private
nuisance or anything that disturbs the quiet enjoyment of neighboring owners or
tenants. All deliveries and pickups must be conducted at reasonable times and
in a reasonable manner. All trash and waste products must be stored,
discharged, processed and removed in a reasonable manner and in compliance with
applicable Laws and so as not to be visible to neighboring owners or tenants or
create any health or fire hazard.
(b) [INTENTIONALLY OMITTED]
<PAGE> 27
(c) Not: permit any coin or token operated vending, pinball, gaming or
other mechanical devices on the Premises, except for telephones and vending
machines solely for use by Tenant's employees and its business invitees; permit
governmental or quasi-governmental agencies to occupy the Premises; use or
operate the Premises for retail sales to the general public or as a messenger,
answering or employment service, doctors' offices, for banking or mortgage
broker or mortgage banking purposes (but a credit union of not more than 1,800
square feet serving only Tenant's employees will not be deemed excluded by this
clause), a restaurant or food-service facility (other than for Tenant's
employees and its business invitees), a school or educational institution
(although training and demonstration rooms for Tenant's employees and customers
are permitted), or living or sleeping quarters; store, sell or distribute
obscene, lewd or pornographic materials or engage in related businesses in or
from the Premises; or conduct any auction, distress, fire, bankruptcy or
going-out-of-business sale (except that Tenant may conduct such a sale once
each calendar year in the Premises of its equipment and products, provided that
each such sale is in accordance with applicable Laws and lasts no more than
three (3) days).
(d) Comply with: Laws and insurance requirements affecting the Premises
or any use and occupancy thereof, including, without limitation, making
required alterations to the Premises; and Landlord's rules and regulations and
reasonable changes to those rules and regulations made by Landlord from time to
time (provided that such reasonable changes are not materially more adverse to
Tenant than the current rules and regulations). Tenant will, at its expense,
<PAGE> 28
obtain and maintain all licenses, approvals and variances necessary to conduct
its business and occupy the Premises (other than the initial temporary or final
Certificates of Occupancy to be obtained in connection with Landlord's Work,
but none of those licenses, permits or variances will be binding on or in any
way affect or restrict Landlord or the Premises itself.
(e) If it wishes, install exterior signage on the Building as well as a
limited number of monument signs, which shall be subject to compliance with
applicable Laws and Landlord's approval as to size, location, materials and
design, which approval shall not be unreasonably withheld. Subject to
compliance with applicable Laws, Tenant may install such interior signage as it
may deem necessary or advisable. Tenant will be responsible for the
maintenance and repair of its signage, and on or before the expiration of the
term, it will remove its signage and repair any damage to Landlord's reasonable
satisfaction.
(f) During the Lease term, unless Tenant's right to possession is
terminated pursuant to this Lease, Tenant and its employees will have access to
the Premises twenty-four (24) hours per day, three hundred sixty-five (365)
days per year, subject to emergencies, force majeure and necessary repairs,
maintenance or construction.
<PAGE> 29
MAINTENANCE AND REPAIRS.
12.1 Landlord's Obligations. Landlord will repair and maintain: the
roadways, sidewalks, parking lot and loading docks of the Premises, and provide
snow plowing and landscaping for the Premises; the roof, any elevators, the
structural elements of the Building (including structural elements of the
columns, stairwells, foundations, floors and exterior walls of the Building,
but not the interior surfaces of any walls, floors or ceilings); the plumbing
Systems and Equipment, but excluding any specialty plumbing Systems and
Equipment for Tenant's engineering, research and development or manufacturing
processes or any kitchen appliances or cafeteria equipment or installations;
the base building HVAC system (but excluding any special systems, such as
special computer-room cooling systems, etc.); the exterior windows and exterior
glass of the Premises (except as provided in Section 12.2 below); and the base
building life safety and sprinkler systems, and the base building electrical
system (but excluding for example Tenant's own security system and any special
or above-standard systems, such as special computer-room systems, etc.) All of
the foregoing will be performed in a manner generally similar to the repair and
maintenance activities customarily undertaken by prudent owners of property
similar to the Building. However, subject to the terms in Section 8.3 of this
Lease regarding casualties and waivers of claims for damage, Tenant will be
responsible for all repairs and maintenance resulting from Tenant's Alterations
or the negligent or intentional acts or omissions of Tenant or its Affiliates.
Landlord will make its repairs within a reasonable time following Tenant's
notification that the repairs are required and once begun will proceed
diligently with such repairs. Landlord's obligations are subject to the
provisions of Articles 16 and 17 and the rest of this Lease. If requested by
Tenant, Landlord will provide a full-time or part-time building engineer
on-site on the Premises to help supervise and perform Landlord's repair,
maintenance and service obligations, and all costs for such personnel shall be
deemed to part of Operating Costs.
<PAGE> 30
12.2 Tenant's Obligations. Except for Landlord's obligations in Section
12.1, Tenant will maintain and repair the Building and the Systems and
Equipment serving the Building in a first-class manner, provide its own
janitorial service and keep the Building in good order and condition,
including, without limitation, Tenant's Property, all doors, windows (but only
to the extent of breakage or damage caused by Tenant or its Affiliates), window
treatments, wall coverings, floor coverings, non-structural portions of the
ceiling, floor and walls, and Tenant's Alterations (unless otherwise requested
by Landlord), reasonable wear and tear and damage by fire and casualty
excepted. Landlord will reasonably cooperate with Tenant to enforce any
warranties that Landlord may receive in connection with any equipment that
Tenant is required to maintain.
<PAGE> 31
ALTERATIONS.
13.1 Landlord's Consent. "Alterations" means Tenant's alterations,
additions, improvements, remodeling, repainting, decorations or other changes
(not including the tenant improvements made as part of Landlord's Work).
Tenant may make nonstructural Alterations to the interior of the Building
without Landlord's consent provided that Tenant complies with this Article and
the rest of this Lease and the Alterations do not: affect the windows or the
exterior of the Building; increase any mezzanine areas of the Building;
adversely affect the strength, structural integrity or load-bearing capacity of
any portion of the Building; or adversely affect the Systems and Equipment in
the Building. All other Alterations require Landlord's prior written consent,
which may be withheld arbitrarily. Whether or not Landlord's consent is
required, Alterations are subject to the rest of this Article.
<PAGE> 32
13.2 Notice. Tenant will notify Landlord at least fifteen (15) days
before beginning any Alterations (other than the initial Tenant's Work for each
Phase). Together with Tenant's notice, or if notice is not required then prior
to beginning the Alterations, Tenant will give Landlord copies of the necessary
permits and approvals and, if Landlord deems it necessary in its arbitrary
discretion, plans and specifications for the Alterations (but not for minor,
non-structural Alterations such as wall coverings, wall hangings, built-in
cabinetry, movable partitions, carpeting and painting). Landlord's review or
approval of Tenant's plans and specifications is solely for Landlord's benefit
and will not be considered a representation or warranty to Tenant as to safety,
adequacy, efficiency, compliance with Laws or any other matter, or a waiver of
any of Tenant's obligations. Except for items of Tenant's Property, and unless
otherwise specifically agreed by Landlord in writing in response to Tenant's
specific written request in each instance with respect to each Alteration, at
the end of this Lease all Alterations will be removed and the Premises restored
to its condition prior to the Alterations, unless otherwise requested in
writing by Landlord prior to the end of this Lease, in which case they will be
surrendered with the Premises at the end of this Lease and will be deemed to be
Landlord's property (except for moveable partitions, which will remain Tenant's
Property).
13.3 Compliance with Laws. Alterations will comply in all respects with
this Lease and applicable Laws and insurance requirements. Alterations will be
done in a first-class manner, using first quality materials, and so as not to
interfere with Landlord or other tenants in the Premises, cause labor disputes,
<PAGE> 33
disharmony or delay, or impose any Liabilities on Landlord. Alterations will
be performed only by experienced, licensed and bonded contractors and
subcontractors approved in writing by Landlord (except that Tenant need not
obtain Landlord's approval for contractors who perform a non-structural
Alteration with an aggregate cost of less than $100,000.00). Tenant will cause
its contractors and subcontractors to carry workmen's compensation insurance in
statutory limits, and commercial general liability insurance (Broad Form CGL,
or if such insurance is not then commercially available, the closest
equivalent) in an amount not less than $1,000,000.00 or such higher amount as
then may be customarily demanded by prudent landlords, and such liability
insurance shall contain cross-liability endorsements or the equivalent (if
Landlord is to be named as an additional insured hereunder) and automobile
liability insurance in the same amount, and if such work is reasonably
estimated to cost more than $75,000.00 in any instance, Landlord and its
general partners, Landlord's Mortgagees and the property managers shall be
named as additional insureds on such policies.
<PAGE> 34
13.4 Liens. Tenant will pay when due all claims for labor, materials and
services claimed to be furnished for Tenant or Tenant's Affiliates or for their
benefit and keep the Building and the Premises free from all liens, security
interests and encumbrances based on or arising from such claims ("Liens").
Tenant will indemnify Landlord for, and hold Landlord harmless from, all Liens,
the removal of all Liens and any related actions or proceedings, and all
Liabilities incurred by Landlord in connection therewith. NOTICE IS HEREBY
GIVEN TO ALL PERSONS FURNISHING LABOR OR MATERIALS TO TENANT THAT NO
MECHANICS', MATERIALMENS' OR OTHER LIENS SOUGHT ON THE PREMISES WILL IN ANY
MANNER AFFECT LANDLORD'S RIGHT, TITLE OR INTEREST.
<PAGE> 35
INDEMNITY; SATISFACTION OF REMEDIES.
14.1 Indemnification. Notwithstanding Section 24.11 or any other
provision of this Lease, but subject to the next sentence, Tenant will not be
required to indemnify Landlord for or hold it harmless from Liabilities if and
to the extent that they arise directly from Landlord's negligence or willful
misconduct or the negligence or willful misconduct of Landlord's employees,
agents, contractors and subcontractors (if and to the extent that those
contractors and subcontractors are performing work under contracts or
agreements with Landlord). Notwithstanding anything to the contrary, for all
purposes in connection with this Lease and the Premises, Landlord and its
employees, agents, contractors and subcontractors and their respective
Affiliates never will be deemed to have been negligent or to have engaged in
willful misconduct because of any failure to properly supervise Tenant or
Tenant's Affiliates or to prevent, discover, disclose, correct or cure any acts
or omissions of Tenant or Tenant's Affiliates. Except as otherwise
specifically provided in Section 8.3, Tenant will indemnify Landlord for and
hold Landlord harmless from Liabilities arising from or in connection with:
acts or omissions of Tenant and its Affiliates on, about or in connection with
the Premises, and/or agreements or alleged agreements involving Tenant and any
third parties, and/or the conduct of Tenant's business; Tenant's breach of or
default under this Lease; and claims by Tenant's Affiliates or persons other
than Tenant if Landlord declines to consent to any act, event or document
requiring Landlord's consent under this Lease (but, subject to the terms of
this Lease, this will not prevent Tenant from bringing an action against
Landlord if Landlord declines to consent if Landlord is required to consent by
the terms of this Lease or if Landlord's decision not to consent is
unreasonable where Landlord is required to be reasonable).
<PAGE> 36
14.2 Damage to Persons or Property. Subject to the rest of this Section
and the rest of this Lease, Landlord will be liable for injuries to persons and
damages to property to the extent caused by its own negligence or willful
misconduct or the negligence or willful misconduct of Landlord's employees,
agents, contractors and subcontractors (if and to the extent that those
contractors and subcontractors are performing work under contracts or
agreements with Landlord), but Landlord will not be liable for any special,
indirect, consequential, punitive or similar damages (including, without
limitation, any loss of use or revenue by Tenant or any other person) under any
circumstances, or for any Liabilities arising from or in connection with: acts
or omissions of Tenant, any third parties, or their Affiliates, including,
without limitation, burglary, vandalism, theft, or criminal or illegal
activity; explosion, fire, steam, electricity, water, gas, rain, pollution,
contamination, hazardous substances, motor vehicles or any casualties;
breakage, cracking, leakage, malfunction, obstruction or other defects in
Systems and Equipment or the roof, walls, floors, surfaces or structure, or of
any services or utilities; any work, demolition, maintenance or repairs
permitted under this Lease; any exercise of Landlord's rights under any Laws or
under this Lease, including any entry by Landlord or its Affiliates on the
Premises and/or the Building as permitted by and in accordance with this Lease;
any loss of or damage to Tenant's Property; or the requirements of any Laws or
any of the matters described in Section 24.5. Tenant waives all claims against
Landlord in connection therewith, but the foregoing is not meant to imply that
Tenant will be liable therefor, or be required to indemnify Landlord against
any loss, damage or liability incurred by Landlord as a result thereof, unless
such liability or indemnity is otherwise provided for by the terms of this
Lease, nor to release Landlord from its repair and maintenance obligations
under Section 12.1 or Landlord's obligations to repair and/or restore in
Articles 16 and 17 if and to the extent applicable. Tenant also waives any
Laws or rights that would permit Tenant to terminate this Lease, perform
repairs or maintenance in lieu of Landlord (or on Landlord's behalf), or offset
or withhold any amounts due because of damage to or destruction of the
Premises, any repairs or maintenance, or for any other reason
<PAGE> 37
(unless specifically permitted in this Lease [for example, in Section 14.4
below]). This exculpation of Landlord and all of Tenant's waivers in this
Lease will apply to all of Tenant's Affiliates to the greatest extent possible.
14.3 Satisfaction of Remedies. Notwithstanding anything in this Lease or
elsewhere to the contrary: Tenant will look solely to Landlord's interest in
the Premises and, subject to the terms of this Lease, Landlord's interest in
liability insurance proceeds, casualty insurance proceeds and eminent domain
awards if and to the extent that such proceeds or awards are not paid to or
retained by Landlord's Mortgagees or applied in accordance with this Lease, to
satisfy any claims, rights or remedies, and Landlord and its partners and their
respective Affiliates, at every level of ownership and interest, have no
personal or individual liability of any type, whether for breach of this Lease
or otherwise, their assets will not be subject to lien or levy of any type, nor
will they be named individually in any suits, actions or proceedings of any
type.
<PAGE> 38
14.4 Tenant's Self Help.
(a) Tenant shall have the right, but not the obligation, to perform an
obligation that Landlord is otherwise required to perform under this Lease (the
"Right of Self Help") under the circumstances set forth below:
(i) If Landlord fails to perform such obligation as and when required
under this Lease, such failure materially interferes with Tenant's business
activities in the Premises, and such failure continues without cure for thirty
(30) days after a subsequent written notice from Tenant to Landlord (but if
more than thirty (30) days are reasonably required to cure, Landlord will be
deemed to have cured if it promptly begins to cure within the thirty (30)-day
period and then diligently completes the cure as soon as reasonably possible),
and Tenant provides an additional notice to Landlord and Landlord's Mortgagees
that it intends to perform such obligation and Landlord and Landlord Mortgagees
fail to perform such obligation within a reasonable time after receiving
Tenant's notice of its intention to so perform.
(ii) If the failure to perform such obligation would result in an
emergency condition if not remedied promptly (i.e., an imminent and substantial
risk of significant additional property damage, or personal injury or death)
and Landlord fails to perform such obligation within a reasonable period of
time after receiving Tenant's notice of such emergency condition and Tenant's
intention to exercise the Right of Self Help (and in such case Tenant shall
exercise its Right of Self Help only if and to the extent reasonably necessary
to remedy the emergency condition, and as soon as there no longer is an
emergency condition, Tenant shall not have the right to continue to exercise
the Right of Self Help pursuant to this Subsection (ii)).
<PAGE> 39
(See Section 3 of Addendum #3, which addresses Tenant's recovery of the
reasonable costs and expenses incurred by Tenant in exercising its Right of
Self Help.)
PARKING.
All parking areas on the Premises shall be available to Tenant and its
Affiliates (the current parking areas are shown in Exhibit "A"). Except for
Tenant's share of Taxes and Operating Costs associated with the parking areas,
Tenant will not be charged for parking. If necessary in Landlord's reasonable
judgement to protect property, permit adequate security, prevent unauthorized
use or entry, increase safety or promote the orderly or efficient flow of
traffic, Landlord may: change signs, lanes and the direction of traffic within
the parking areas; change, eliminate or add parking spaces or areas devoted to
parking (provided that Tenant's parking is not reduced); allow parking with a
validation, valet, sticker or other system; promulgate reasonable rules and
regulations that do not materially adversely affect any of Tenant's parking
rights; and take any other actions deemed necessary by Landlord, as long as
such actions conform with this Lease.
<PAGE> 40
DAMAGE OR DESTRUCTION.
16.1 Repairs. Subject to the rest of this Article and the rest of this
Lease, Landlord will repair damage to the Premises and the Building caused by
fire or other casualties to the extent insured against under standard "all
risk" casualty policies. However, Landlord is not obligated to repair damage
for which Landlord has no liability if and to the extent specifically so
provided under other provisions of this Section or the rest of this Lease or to
undertake repairs unless insurance proceeds are available, spend more than the
net insurance proceeds it actually receives and is permitted to retain for any
repair or replacement ("Landlord's Insurance Proceeds") (except if and to the
extent that Tenant agrees in writing to advance, and in fact advances as
needed, all costs in such repairs), or repair or replace any damage to Tenant's
Work, Tenant's Property or any Alterations (except to the extent that damage to
such Alterations is covered by Landlord's casualty insurance policy). Except
as may otherwise be required by then applicable Laws or as provided in this
Lease, Landlord will attempt to restore the damaged portions to their prior
condition. Landlord will proceed diligently to complete repairs within a
reasonable time after receiving notice of the damage, required approvals,
building permits and licenses and the insurance proceeds payable on account of
the damage, all of which Landlord will pursue diligently, but in no event will
this diligent pursuit be deemed to require any legal action by or on behalf of
Landlord, except if and to the extent that Tenant agrees in writing to advance,
and in fact advances as needed, all costs in connection with such legal action
and such legal action does not result in any Liabilities to Landlord.
<PAGE> 41
16.2 Election to Terminate. Landlord has the option either to (a) repair
the casualty damage, or (b) terminate this Lease by delivering written notice
within ninety (90) days after the damage occurs, if: (i) the damage occurs
during the last two (2) years of the term, as the term already may have been
extended pursuant to this Lease, and in Landlord's reasonable determination the
repairs would take more than one hundred fifty (150) days or one-third (1/3) of
the remaining term, whichever is less, to complete (unless Tenant validly
exercises a previously unexercised Extension Option in accordance with this
Lease within thirty (30) days after receipt of written notice from Landlord
that Landlord intends to terminate this Lease in accordance with this
Subsection (i) or unless Tenant within such 30-day period agrees in writing to
advance, and in fact advances as needed, all costs in excess of Landlord's
Insurance Proceeds in order to complete such repairs); or (ii) Tenant is in
default; or (iii) in Landlord's reasonable judgement the repairs would take
more than two (2) years from the date of the damage to complete or cost more
than the insurance proceeds that are reasonably likely to be made available as
a result of such casualty (unless within thirty (30) days after receipt of
written notice from Landlord that it intends to terminate this Lease in
accordance with this Subsection (iii) Tenant agrees in writing to advance, and
in fact advances as needed, all costs in excess of Landlord's Insurance
Proceeds in order to complete such repairs; or (iv) Tenant already has
exercised the Cancellation Option; or (v) if the damage occurs during the
eighth (8th) or ninth (9th) Lease Year and in Landlord's reasonable
determination the repairs would take more than one hundred fifty (150) days or
1/3 of the remaining period until the end of the ninth (9th) Lease Year,
whichever is less, to complete, and within thirty (30) days after Landlord's
written request, Tenant fails to deliver to Landlord an unconditional and
irrevocable written waiver of any rights to exercise the Cancellation Option,
or Tenant agrees to advance and in fact advances as needed, all costs in excess
of Landlord Insurance Proceeds in order to complete such repairs.
<PAGE> 42
Tenant also has the right to terminate this Lease for such damage if: (x)
the damage denies Tenant access to the Premises, or causes more than thirty
percent (30%) of Tenant's parking spaces to become unusable (and Landlord
cannot replace those lost spaces reasonably promptly and in reasonable
proximity to the Premises, whether by the use of valet parking, or otherwise),
or causes at least 85% of the useable area of the Building to become entirely
untenantable, Landlord elects or is required under this Lease to repair the
damage, and except for delays for which Tenant is responsible under this Lease,
Landlord fails to substantially complete the repairs it is required to make (or
restore access or restore or replace parking spaces, as applicable) within two
(2) years after the damage occurs, Tenant delivers its written termination
notice to Landlord within fifteen (15) days after the end of Landlord's two
(2)-year repair period and Landlord fails to substantially complete those
repairs (or restore access or restore or replace parking spaces, as applicable)
within sixty (60) days after receiving such notice. If Landlord's repairs are
deemed to be substantially completed (or Landlord has restored access or
restored or replaced parking spaces, as applicable) within this sixty (60)-day
period, Tenant's termination notice will be null and void and this Lease will
continue in existence; or (y) the damage denies Tenant access to the Premises,
or causes more than thirty percent (30%) of Tenant's parking spaces to become
unusable (and Landlord cannot replace those lost spaces reasonably promptly and
in reasonable proximity to the Premises, whether by the use of valet parking,
or otherwise) or causes at least 85% of the useable area of the Building to
become entirely untenantable, Landlord
<PAGE> 43
notifies Tenant specifically and in writing that the repairs that Landlord is
required to make probably will take longer than two (2) years to substantially
complete (or that Landlord cannot restore access or restore or replace parking
spaces, as applicable, within two (2) years) and Tenant delivers to Landlord a
written termination notice within fifteen (15) days after receiving Landlord's
notice; or (z) the damage occurs during the last two (2) years of the term (as
it may have been extended) and the damage denies Tenant access to the Premises,
or causes more than thirty percent (30%) of Tenant's parking spaces to become
unusable (and Landlord cannot restore or replace those lost spaces reasonably
promptly and in reasonable proximity to the Premises, whether by the use of
valet parking, or otherwise) or causes at least 85% of the useable area of the
Building to become entirely untenantable, Landlord notifies Tenant specifically
and in writing that the repairs that Landlord is required to make probably will
take longer than one hundred fifty (150) days or one-third (1/3) of the
remaining period until the expiration of the term, whichever is less, to
substantially complete (or that Landlord cannot restore access or restore or
replace parking spaces, as applicable, within such period) and Tenant delivers
to Landlord a written termination notice within fifteen (15) days after
receiving Landlord's notice.
<PAGE> 44
16.3 Abatement of Rent. If the Building or any portion thereof is
damaged by casualty so that it is untenantable for more than two (2)
consecutive business days, base rent and Taxes and Operating Costs will abate
in proportion to the degree to which Tenant's use of the Premises is impaired,
as reasonably determined by Landlord, from the date of the damage until
Landlord has substantially completed the repairs it is required to make and
gives Tenant access to the Premises, or Tenant reoccupies or can reoccupy the
damaged part of the Premises, whichever is earlier. The abatement of base
rent, Taxes and Operating Costs will not exceed the net amount of rental loss
insurance collected by Landlord for or by reason of such casualty. The
abatement of base rent, Taxes and Operating Costs described above is Tenant's
sole remedy and compensation in connection with any damage, destruction or
repairs, except for Tenant's right to terminate as permitted in this Article,
or unless Landlord willfully fails to attempt to complete with diligence the
repairs it is required or elects to make.
16.4 Consequences of Termination. If this Lease is terminated per this
Article 16 or Article 17 but Tenant holds over in the Premises, then despite
the second to last sentence of Section 24.1, the most recent annual base rent
will not be doubled, and any abatement of rent that applied prior to the
termination will continue to apply to the same extent and for the same period
that it would have absent the termination. However, the rest of Section 24.1
will continue to apply. Notwithstanding anything to the contrary, after a
termination of this Lease per this Article 16 or Article 17: Tenant shall
remove Tenant's Property from the Premises as quickly as reasonably
practicable, but in any event within
<PAGE> 45
sixty (60) days after such termination; Tenant assumes all risk of loss and/or
damage to Tenant's Property from any source, and waives against Landlord and
its Affiliates all Liabilities in connection therewith; Tenant shall cooperate
with Landlord at Tenant's expense to minimize any interference with Landlord's
activities on the Premises; and upon Landlord's request, Tenant shall
immediately remove (or relocate to an unaffected part of the Building, if any,
or the Premises) the items of Tenant's Property specified by Landlord if, in
Landlord's good faith belief, such removal or relocation is necessary to avoid
the risk of additional damage, injury or death or to comply with applicable
Laws, and if Tenant does not so remove or relocate those items of Tenant's
Property as so required, those items shall be deemed abandoned by Tenant and
Landlord shall have all of the rights set forth in the second sentence of
Article 3.
16.5 Reconstruction Costs. "Reconstruction Costs" means the costs
advanced by Tenant, if any, to perform Landlord's repairs up to the same level
of fit and finish that existed immediately prior to the casualty damage if and
to the extent that Tenant specifically has been granted the right in this
Article 16 to advance such costs. Reconstruction Costs shall not include any
costs to repair or replace Tenant's Work, Tenant's Property or any Alterations,
nor any advances that are subsequently repaid to Tenant (whether by insurance
or otherwise).
<PAGE> 46
CONDEMNATION.
(a) If all or substantially all of the Premises is condemned, taken or
appropriated by any public or quasi-public authority under the power of eminent
domain, police power or otherwise, or if there is a conveyance in lieu thereof
("Condemned" or a "Condemnation"), this Lease will terminate as of the day
before the Condemnation.
(b) If more than twenty-five percent (25%) of the usable area of the
Building is Condemned, either Landlord or Tenant may terminate this Lease as of
the day prior thereto by delivering written notice to the other within fifteen
(15) days after the Condemnation. Tenant also will have the right to terminate
this Lease subject to the terms of and in the manner described in Section (16.2
(x), (y) and (z) if the Condemnation denies Tenant access to the Building or
effectively renders the Building untenantable in the same manner, to the same
extent and for the same periods as a casualty as described in those Sections,
or at least thirty percent (30%) of Tenant's parking spaces are Condemned and
are not restored or replaced by Landlord and the ratio of the number of
Tenant's parking spaces Condemned compared to the rentable area of the Building
Condemned at the same time (if any) is materially greater than the ratio of
Tenant's total initial parking spaces compared to the initial rentable area of
the Building, in each case effective as of the date of Condemnation.
(c) If part of the Premises is Condemned and this Lease is not terminated,
Landlord will make the necessary repairs so that, to the extent reasonably
possible, the remaining part of the Premises will be a complete
<PAGE> 47
architectural unit. Otherwise, Landlord's restoration will be conducted as
described in Section 16.1, except that Landlord will not be required to begin
repairs until a reasonable time after it receives any necessary approvals,
building permits and licenses and substantially all of the proceeds of any
awards granted for the Condemnation, and then will proceed diligently with the
repairs. As of the date of Condemnation, base rent, Taxes and Operating Costs
will abate in proportion to the area of the Building Condemned.
Except for Tenant's rights to receive its share of Net Proceeds as set forth in
Addendum #3, all proceeds, income, rent, awards and interest in connection with
any Condemnation will belong to Landlord, whether awarded as compensation for
diminution of value to the leasehold improvements, or the unexpired portion of
this Lease, or otherwise. Except for Tenant's right to receive Net Proceeds as
set forth in Addendum #3, Tenant waives all claims against Landlord and the
condemning authority with respect thereto, and in connection with a
Condemnation, but nothing in this Section prevents Tenant from bringing a
separate action against the condemning authority for moving costs or for lost
goodwill (as long as this separate action does not diminish Landlord's
recovery).
<PAGE> 48
ASSIGNMENT AND SUBLETTING.
18.1 Landlord's Consent Required. Tenant will not, and does not have the
right or power to, voluntarily, involuntarily or by operation of any Laws,
sell, convey, mortgage, subject to a security interest, license, assign, sublet
or otherwise transfer or encumber all or any part of Tenant's interest in this
Lease or the Premises, or allow anyone other than Tenant's employees (or
employees of Tenant's current or future joint venturers or development partners
who are temporarily working on joint projects with Tenant and who will not, in
the aggregate, occupy more than 25,000 square feet of space in the Building) to
occupy the Building or the Premises (singularly or collectively, "Transfer"),
without in each instance first obtaining Landlord's prior written consent
(unless Landlord's consent specifically is not required per Section 18.5(c))
and complying with this Article and any attempt to do so without this consent
(which may be withheld arbitrarily unless otherwise specifically set forth in
this Article) and compliance will be null and void and a default, unless
otherwise specifically elected by Landlord in writing.
<PAGE> 49
18.2 Notice. Tenant will notify Landlord in writing at least thirty (30)
days before any proposed or pending Transfer (or as soon as reasonably possible
in the case of the Transfer pursuant to Section 18.5 (c) if thirty (30)-day
advance notice is not possible, but in any case before such a Transfer) and
will deliver to Landlord such information as Landlord may reasonably request in
connection with the proposed or pending Transfer and the proposed Transferee,
including, without limitation, a copy of the final executed Transfer documents,
current financial statements prepared or reviewed by an independent certified
public accountant, a current Dun & Bradstreet report (if available) and other
reasonably available financial information about and banking references for the
proposed Transferee, and information as to the type of business and business
history of the proposed Transferee. All of this information must be certified
as true and correct by a senior, responsible officer of the party providing the
information. The financial information received by Landlord from the
Transferee will be treated as confidential information, unless the information
is otherwise publicly available or is obtained by Landlord from other sources,
and in any event Landlord may disclose it to Landlord's lenders, attorneys,
accountants, prospective purchasers and their agents, to be treated by them as
confidential to the same extent as by Landlord.
<PAGE> 50
18.3 Reasonable Consent. Landlord will not unreasonably withhold or
delay its consent to an assignment or sublease by Tenant. Landlord may
withhold its consent to any hypothecation, assignment for security purposes or
other Transfer arbitrarily and in its sole discretion. Tenant agrees that
Landlord's withholding of consent to a proposed sublease or assignment will be
deemed reasonable if Tenant is in default or any of the other material terms
and conditions of this Article have not been complied with, or if any of the
following conditions are not satisfied: (a) the subtenant or assignee will use
the Building and the Premises only for the uses permitted in Section 1.1(h) and
otherwise in accordance with this Lease, and the business and reputation of the
subtenant or assignee are reasonably acceptable to Landlord and Landlord'
Mortgagees (and Landlord's Mortgagees will not unreasonably withhold or delay
their consent); (b) the subtenant or assignee is reputable and creditworthy and
has the independent financial ability to perform its obligations under its
assignment or sublease without undue financial burden in Landlord's reasonable
judgment (which reasonable judgment shall be deemed satisfied if the subtenant
or assignee has a net worth, credit rating and financial capability at least
equal to Tenant's when Tenant executed this Lease), and it is not then subject
to any bankruptcy or reorganization plan, proceeding or order, and no receiver
is managing its affairs or assets; and (c) there will be no more than an
aggregate of six (6) subleases of the Premises at any one time. These
conditions are not exclusive and Landlord may consider other factors deemed to
be relevant in determining if Landlord should grant or reasonably withhold its
consent.
<PAGE> 51
18.4 No Release of Tenant. Whether or not Landlord consents, no Transfer
will release or alter any of the Transferor's or Tenant's Liabilities
hereunder, including, without limitation, the joint and several obligations of
the Transferor and Tenant to pay rent and perform all of Tenant's other
obligations under this Lease, except that, provided that there is then no
default by Tenant under this Lease, but notwithstanding any other provisions of
this Lease to the contrary, an assignor will be released (a "Released
Assignor") from further obligations under this Lease as of the date that the
following conditions are satisfied:
(i) There is a valid assignment of this Lease by the assignor in
accordance with the terms of this Article to an assignee who has a net worth,
Moody's or Standard & Poor's credit rating and financial capability at least
equal to those possessed by PictureTel Corporation when PictureTel Corporation
executed this Lease or equal to those possessed by the assignor just prior to
the assignment (whichever are better), or the assignor validly assigns this
Lease to and merges into or consolidates with a Permitted Assignee and thereby
ceases to exist. PictureTel Corporation's, credit rating as of the date of its
execution of this Lease is deemed to be Baa2 (Moody's) and BBB (Standard &
Poor's).
(ii) The assignee (including a Permitted Assignee) unconditionally
assumes in writing for Landlord's benefit this Lease and all of the assignor's
and Tenant's Liabilities including, without limitation, those that arose prior
to the assignment, and notwithstanding any other provision of this Lease, upon
such assignment and assumption the assignor shall have no further obligations
under this Lease and may cease its existence without any violation of any
provision of this Lease.
<PAGE> 52
The acceptance of rent by Landlord from any person other than Tenant is not a
waiver by Landlord. Consent to one Transfer will not be deemed to be consent
to any subsequent Transfer. If Tenant or any Transferee defaults under this
Lease, Landlord may proceed directly against the Transferee and/or against
Tenant and/or against the Transferor without proceeding or exhausting its
remedies against the other. After any assignment, or after sublease(s)
aggregating more than fifty percent (50%) of the area of the Building with an
initial term (including options) of at least seventy-five percent (75%) of the
remaining term of this Lease at the time of such Transfer, Landlord may consent
in its arbitrary discretion to subsequent Transfers of or amendments to this
Lease without notifying Tenant or any other person, without obtaining consent
thereto, and without relieving Tenant or a Transferor of its Liabilities under
this Lease (as it may be amended), provided that unless Tenant or a Transferor
consents in writing, Tenant or such Transferor (as applicable), will not become
liable by reason of any such Transfer or amendment to the extent of any
increase in Tenant's or such Transferor's (as applicable) aggregate obligations
and liabilities under this Lease as set forth in such Transfer or amendments,
or for increases in the scope of any indemnities owed to Landlord (e.g., an
additional act or omission requiring indemnification, as opposed to an increase
in the potential liability under an existing indemnity), or for any increase in
the Lease term, except for: (a) Extension Options exercised pursuant to and in
accordance with Addendum #2 hereto or otherwise agreed to by Tenant or
Transferor (as applicable); or (b) other extensions agreed to by a Transferee,
in each case
<PAGE> 53
if such other extension is permitted in accordance with the terms of a written
agreement between Tenant or the transferor and such Transferee, provided that
within thirty (30) days after such extension has been entered into Tenant
receives notice, or in fact otherwise becomes aware, that such extension has
been entered into. Subject to the following, but notwithstanding anything else
to the contrary, Tenant and a Transferor will not be relieved of any
Liabilities under this Lease if and to the extent that Landlord grants or
consents to any waivers under this Lease to or for the benefit of any
Transferee (but if, prior to a breach by Tenant or any Transferee, Landlord
waives in writing the performance by the Transferee of any obligation that
Tenant otherwise would be required to perform under this Lease, that waiver
also shall apply with respect to Tenant [or such Transferor, as applicable]).
Landlord's waivers with respect to a Transferee will not affect the rights (if
any) of Tenant or the Transferor (as applicable) against the Transferee for any
breach of this Lease or any assignment, sublease or other agreement (as
applicable) by the Transferee. However, all of such rights against the
Transferee will be subject and subordinate to Landlord's rights under this
Lease against the Transferee in the event of a default under this Lease.
<PAGE> 54
18.5 Additional Terms.
(a) Tenant will pay Landlord's reasonable attorneys' fees and other costs
in connection with any request for Landlord's consent to a Transfer. This
Article is binding on and will apply to every Transferee, at every level. The
surrender of this Lease or its termination will not be a merger, but Landlord
will have the right in its arbitrary discretion to terminate all subleases and
the occupancy rights of all Transferees. Tenant will pay to Landlord as
additional rent: all consideration paid or payable for or by reason of any
assignment of this Lease (other than an assignment to a Permitted Assignee),
and in the case of a sublease, the amount by which the sublease rent and other
consideration paid or payable exceeds the base rent, Taxes and Operating Costs
payable by Tenant under this Lease for the sublease term (prorated if the area
subleased is less than the entire area of the Building), in each case after
Tenant first recovers its bona fide, reasonable out-of-pocket costs paid to
third parties unaffiliated with Tenant or the subtenant or assignee to obtain
the subtenant or assignee (including without limitation, attorneys fees,
brokerage commissions, new tenant improvements made solely for the subtenant or
assignee), and Tenant recovers any free rent granted. At Landlord's option,
Landlord may collect all or any part of this additional rent directly from the
payor. Tenant will promptly deliver to Landlord copies of all executed
transfer documents, all collateral agreements and all later amendment.
<PAGE> 55
(b) An assignee will be deemed to have assumed all of Tenant's
Liabilities under this lease and will be deemed to be bound by this Lease, and
Tenant and the assignee will indemnify Landlord and hold it harmless from all
Liabilities in connection with the assignment, although this indemnity will not
affect any liability that Landlord owes to Tenant or others if and to the
extent specifically set forth in the terms of this Lease, and it is also
understood that Tenant's and any assignee's Liabilities and indemnities
relating to the use and occupancy of the Premises will remain as set forth in
this Lease and any amendments thereto. To confirm the foregoing, a prospective
assignee will be required to execute and deliver to Landlord an unconditional
written assumption of Tenant's Liabilities under this Lease and the indemnity
described above. Tenant and the assignee will be deemed to be jointly and
severally liable for all Liabilities of the Tenant under this Lease. A
sublease will be deemed to be subject and subordinate to this Lease in all
respects; Tenant and the subtenant will indemnify Landlord and hold it harmless
from all Liabilities in connection with the sublease (although this indemnity
will not affect any liability that Landlord owes to Tenant or others if and to
the extent specifically set forth in the terms of this Lease, and it is
understood that Tenant's Liabilities and indemnities relating to the use and
occupancy of the Premises remain as set forth in this Lease and any amendments
thereto); the subtenant will acquire no rights or claims against Landlord or
its Affiliates; if this Lease is terminated or Landlord rightfully reenters or
repossesses the Premises, Landlord may terminate the sublease, or at its
option, become the sublessor under the sublease and the subtenant will attorn
to Landlord, but Landlord will not be liable for Tenant's acts or omissions,
subject to any existing defenses or offsets against Tenant or bound by any
amendment to the sublease made without Landlord's prior written consent.
Sublessees will not have the right or power to make further Transfers, and any
attempt to do so will be null and void and a default unless otherwise
<PAGE> 56
specifically elected by Landlord in writing. Tenant will make each prospective
Transferee aware of the terms of this Article and will deliver to each
prospective Transferee a true and correct copy of this Lease prior to any
Transfer. Each document of assignment, sublease or other Transfer, at every
level, must include or explicitly incorporate the terms of this Article.
Landlord may require confirming and/or additional assurances and agreements for
its protection from Tenant and the assignee or subtenant, each of whom agrees
to give such assurances and execute such agreements, in each case consistent
with the terms of this Lease. Notwithstanding anything to the contrary, except
for a valid assignment or sublease to a Permitted Assignee or a Permitted
Sublessee, respectively, Tenant will not, and will not have the right or power
to, assign or convey to, or sublease or otherwise Transfer more than 20,000
square feet in the Building to, any then-current tenant that leases more than
20,000 square feet in any project located in Massachusetts which lies within
the "Project Area" as depicted in Exhibit "K" hereto, and of which, at such
time, Landlord or any of its Control Affiliates is the owner, or a general
partner in the Owner, or a shareholder (in a closely held corporation) of at
least forty percent (40%) of the issued and outstanding voting shares of the
owner or a general partner in the owner, and Landlord may arbitrarily withhold
its consent to such a Transfer.
<PAGE> 57
(c) If Tenant is a corporation, the Transfer, directly or indirectly, by
one or more transactions of more than forty percent (40%) of Tenant's capital
stock (but if Tenant is a public corporation whose stock is regularly traded on
a national stock exchange or in the over-the-counter market and quoted on
NASDAQ, stock purchases in the ordinary course of business on the open market
will not be deemed to be Transfers of stock for purposes of this Subsection
(c)), or any dissolution, merger, consolidation or other reorganization of
Tenant, or if Tenant becomes a subsidiary or division of another entity, or the
Transfer of substantially all of Tenant's assets, will be deemed to be an
assignment of this Lease. Notwithstanding anything to the contrary herein
contained, an assignment or sublease by Tenant to an entity that is controlled
by, controls or is under common control with Tenant, or to an entity resulting
from a merger, consolidation or reorganization with Tenant, or to a purchaser
of substantially all of the assets or shares of Tenant, will be deemed to be a
permitted assignment or sublease, as applicable, that does not require
Landlord's or Landlord's Mortgagees' consent provided that the rest of this
Article is complied with, the Transferee (if an assignee) unconditionally
assumes this Lease and all of Tenant's Liabilities (including, without
limitation, those arising before the assignment) in writing, and the Transferee
has a net worth, Moody's or Standard & Poor's credit rating, and financial
capability at least equal to PictureTel Corporation's when PictureTel
Corporation executed this Lease as set forth in Section 18.4(i) (and such
Transferee will be a "Permitted Assignee" or a "Permitted Sublessee," as
applicable). As a material inducement to Landlord, Tenant agrees that it will
make each potential Transferee contemplated by this clause (including any
potential purchasers or candidates for
<PAGE> 58
merger, consolidation or reorganization) aware of this clause and the rest of
this Lease, deliver a copy of this clause and the rest of this Lease to such
party prior to entering into such an agreement with such party and make the
written assumption described herein and the compliance with this Article a
condition to the effectiveness of such an agreement.
(d) An assignee pursuant to a valid assignment and assumption of this
Lease in accordance with the terms of this Article shall be regarded as the
Tenant under this Lease with all of the rights and Liabilities of the Tenant,
except as otherwise specifically provided in this Lease, but this shall not
affect the assignor's continuing liability under this Lease as set forth in
Section 18.4.
<PAGE> 59
MORTGAGEE PROTECTION; UNPERMITTED FINANCING; LANDLORD'S LOAN DEFAULTS.
19.1 Subordination and Attornment. This Lease is subordinate to all
Superior Leases and Mortgages (defined in Section 24.4), and Tenant will attorn
to each person or entity that succeeds to Landlord's interest under this Lease,
provided that such person or entity agrees in writing not to disturb Tenant's
rights under this Lease as long as Tenant is not in default. This Section is
self-operative, but if requested to confirm a subordination and/or attornment
or non-disturbance, Tenant will execute subordination and/or attornment and/or
non-disturbance agreements furnished by Landlord or Landlord's lessor or
mortgagee under any of the Superior Leases and Mortgages (a "Landlord's
Mortgagee") within twenty (20) days after request and provided that such
Agreements materially substantively conform to typical institutional forms of
agreements then in use and do not result in a material adverse change in any of
the material terms of this Lease, or materially substantively conform to the
forms attached as Exhibit "J" hereto, and provided that any subordination
agreements shall provide that the lender shall agree to concurrently deliver to
Tenant any notices of Landlord's default delivered to Landlord and to accept
from Tenant a cure of such defaults (if and to the extent that such defaults
are curable by Tenant) within the cure periods for such defaults granted to
Landlord under such loans. However, if Landlord or Landlord's Mortgagee elects
in writing, this Lease will be superior to the Superior Leases and Mortgages
specified, regardless of the date of recording, and Tenant will execute an
agreement confirming this election on request.
<PAGE> 60
19.2 Mortgagee's Liability. The obligations and Liabilities of Landlord,
Landlord's Mortgagees or their successors under this Lease will exist only if
and for so long as each of these respective parties owns fee title to the
Premises or is the lessee under a ground lease of the Premises. Tenant will be
liable to Landlord's Mortgagees or their successors if any of those parties
become the owner of the Premises for any payment of base rent made more than
thirty (30) days in advance of the due date for such payment as set forth in
this Lease. Landlord's Mortgagees and their successors will not be liable
for: (a) acts or omissions of prior owners; (b) the return of any security
deposit not delivered to them; or (c) amendments to this Lease made without
their consent (if their consent is required under a Superior Lease or
Mortgage).
19.3 Mortgagee's Right to Cure. No act or omission (if any) which
otherwise entitles Tenant under the terms of this Lease or by any Laws to be
released from any Lease obligations or to terminate this Lease will result in
such a release or termination unless Tenant first gives written notice of the
act or omission to Landlord and Landlord's Mortgagees and those parties then
fail to correct or cure the act or omission within a reasonable time thereafter
(which will not be less than sixty [60] days and which, in any case, will be
long enough to allow the Landlord's Mortgagees sufficient time within which to
complete such a correction or cure in a commercially reasonable and diligent
manner). Nothing in this Section or the rest of this Lease obligates
Landlord's Mortgagees to correct or cure any act or omission or is meant to
imply that Tenant has the right to terminate this Lease or be released from its
obligations except as may otherwise be permitted in this Lease (although if
Landlord or Landlord's Mortgagees fail to cure as set forth above, then nothing
in this clause shall prevent Tenant from exercising any of its rights and
remedies as specifically set forth in this Lease). Landlord will (and upon
Tenant's written request shall), and/or Landlord's Mortgagees may, give notice
to Tenant in writing of the identity of any mortgagee of the Premises and
Tenant may rely on such notice(s) in complying with this Article.
<PAGE> 61
19.4 Unpermitted Financing. So long as Tenant is not in default and is
entitled to continue to receive a share of Net Proceeds in accordance with
Addendum #3 and/or to exercise a Purchase Option in accordance with Addendum
#4, Landlord agrees not to use the Premises or any portion thereof to secure
any indebtedness other than:
(a) The initial acquisition, construction/development, and/or permanent
financing in connection with the Premises and any additional advances
thereunder and any extensions, renewals, consolidations, replacements or
modifications thereof, so long as the proceeds thereof are used for the
purposes set forth in Subsection (b) below; or
(b) Financing, the proceeds of which are: used to repay all or part of
the financing described in Subsection (a) above; or used to benefit the
Premises or pay any Liabilities in connection therewith or as required under
this Lease; or are included in Cash Proceeds; or used to pay for any
development fees, management fees or fees in lieu thereof payable to Landlord
or its Affiliates pursuant to this Lease or in connection with Landlord's Work
or in connection with the construction of any additional buildings on the
Premises or the enlargement of or other modification of the Building or the
rest of the Premises.
<PAGE> 62
In any case, any such permitted financing that is placed on the Premises on or
before the end of the eighteenth (18th) Lease Year shall, by its terms, be
amortized and repaid entirely on or before the end of the Lease term (as it may
have been extended prior to the date that such financing encumbers the
Premises, and assuming no early terminations of the term), unless Tenant
consents thereto or Landlord agrees to reduce the cash portion of the purchase
price of the third (3rd) Purchase Option under Addendum #4 by the outstanding
principal balance of such financing as of the end of such Lease term (assuming
no early terminations thereof).
Secured financing that is prohibited pursuant to this Section 19.4 is called
the "Unpermitted Financing."
19.5 Landlord's Loan Defaults. If either:
(a) Landlord defaults under any loans the lender of which is the
beneficiary under the Letter of Credit, and as a result of Landlord's default
such lender/beneficiary draws under the Letter of Credit (not including any
draws of the type described in Sections 24.17(b) or (e)), and Landlord's
default did not arise as a result of Tenant's breach of its obligations under
this Lease (e.g., Tenant's failure to pay rent in full when due hereunder) and
at the time of Landlord's default Tenant is not in default under this Lease; or
(b) Landlord defaults under any mortgage loan secured by the Premises or
any portion thereof and the Letter of Credit is not drawn as a result thereof,
and Landlord's default did not arise as a result of Tenant's breach of its
obligations under this Lease and at the time of Landlord's default Tenant is
not in default under this Lease (e.g., Tenant's failure to pay rent in full
when due hereunder), and Tenant exercises its rights to cure Landlord's
default; or
<PAGE> 63
(c) The beneficiary of the Letter of Credit draws under the Letter of
Credit and such draws are deemed to be LC Advances under Section 24.17(f);
THEN, if and to the extent that Landlord does not reimburse Tenant for the
amounts drawn under the Letter of Credit as set forth in Subsection (a) above
and/or the amounts paid by Tenant to the mortgagee to cure Landlord's default
as set forth in Subsection (b) above and/or pay to Tenant as and when required
amounts due under the LC Note (including for purposes of this Section only
amounts, if any, that remain due under the LC Note after funds from a permanent
loan have been received by Landlord and used to prepay Tenant as provided under
the LC Note) as described in Section 24.17(f) (collectively, the "Cure
Payments"), notwithstanding anything to the contrary in this Lease: (i) as
described in Section 3 of Addendum #3, Net Proceeds first will be distributed
to Tenant to repay the unrepaid Cure Payments; and (ii) if there are any
unrepaid Cure Payments as of the date that the loan secured by the Letter of
Credit and the mortgage loan and any refinancing thereof are fully paid, Tenant
may offset against base rent an amount equal to the difference between the
monthly base rent due from Tenant, less the monthly debt service (multiplied by
1.2) due to any then-existing Landlord's Mortgagees, until the Cure Payments
have been repaid in full. For purposes of this Section, Landlord's default
under the applicable loan(s) shall be deemed to be a breach of Landlord's
obligations under the
<PAGE> 64
applicable loan(s) which is not cured within applicable notice and cure periods
under such loans. Such loans shall provide that: (A) the lender(s) shall
deliver notices of such defaults to Tenant concurrently with delivery to
Landlord; and (B) that the lender(s) will accept a cure of such defaults by
Tenant (if and to the extent that such defaults are curable by Tenant) within
the cure periods for such defaults granted to Landlord under such loans.
ESTOPPEL CERTIFICATES; FINANCIAL STATEMENTS.
(a) Tenant will from time to time, within twenty (20) days after written
request by Landlord (which request will be made in accordance with Section
24.16), execute and deliver an estoppel certificate in form satisfactory to
Landlord or its designees which will certify (except as may be truthfully and
accurately noted to the contrary by Tenant therein) such information that is
available to Tenant concerning this Lease or Tenant or its Affiliates as
Landlord or its designees may request. Tenant understands that Landlord's
timely receipt of these Estoppel certificates may be critical and Tenant agrees
that if it fails to execute and deliver estoppel certificates as required,
Landlord's good faith representations concerning the matters covered by the
estoppel certificate will conclusively be presumed to be correct and binding on
Tenant and its Affiliates.
<PAGE> 65
(b) Within ninety (90) days after the end of each fiscal year of Tenant
that falls within the term of this Lease, Tenant will prepare and/or obtain, at
no cost or expense to Landlord, annual audited financial statements for Tenant
and any assignee of this Lease and any sublessee of more than 60,000 square
feet in the Building (including, without limitation, a balance sheet, income
statement and statement of sources and uses of funds) prepared in accordance
with generally accepted accounting principles and signed by an independent
certified public accountant (the "Financial Statements"). Within ten (10) days
after Landlord's written request from time to time, Tenant shall deliver to
Landlord copies of the most recent annual and quarterly Financial Statements,
whether or not audited (provided, however, that for so long as Tenant and/or
the assignee and/or the sublessee is a public company, such public company
shall not be required to release its Financial Statements to Landlord until it
releases them or is permitted to release them to the public, whichever is
earlier).
<PAGE> 66
DEFAULT.
The occurrence of one or more of the following events will be a default by
Tenant under this Lease: (a) [INTENTIONALLY OMITTED]; (b) the failure to pay
rent or any other required amount within ten (10) days after written notice
that the payment is due, but even if Tenant has not paid in full within the
first ten (10)-day period, Tenant will not be in default unless it fails to pay
in full within ten (10) days after an additional written notice that payment is
due (except that no such additional notice will be required if Tenant has
failed to pay rent when due more than twice in any twelve (12)-month period);
(c) as provided in Articles 23 and 25; (d) a Transfer or attempted Transfer in
violation of Article 18; (e) the failure to maintain its required insurance
policies (unless such insurance policies are not generally offered by
responsible insurance companies, in which case Tenant must maintain the closest
form of policy then generally offered by responsible insurance companies, and
in which case Landlord's insurance obligations will be similarly modified); or
(f) the failure to observe or perform any other obligation, term or condition
within the time period specified in this Lease and if such failure continues
for an additional five (5) days after the expiration of such prior period and
the delivery of a subsequent written notice; if no time period is specified, it
will be a default if this failure continues for thirty (30) days after written
notice from Landlord to Tenant, but if more than thirty (30) days are
reasonably required to cure, Tenant will not be in default if Tenant promptly
begins to cure within the thirty (30)-day period and then diligently completes
the cure as soon as possible but within seventy-five (75) days after the notice
of default is given, or such longer period as may be otherwise permitted in
this Lease.
<PAGE> 67
REMEDIES FOR DEFAULT.
22.1 General. If Tenant defaults, Landlord may at any time thereafter,
with or without notice or demand, do any or all of the following in its
arbitrary discretion: (a) give Tenant written notice stating that the Lease is
terminated, effective on the giving of notice or on a date stated in the
notice, as Landlord may elect, in which event this Lease will terminate without
further action; (b) in any manner permitted by law or this lease, and with or
without notice, and with or without terminating this Lease, terminate Tenant's
right of possession and enter and repossess the Premises, and expel Tenant and
Tenant's Affiliates, and remove their property and effects, without being
guilty of trespass; and (c) pursue any other right or remedy now or hereafter
available to Landlord under this Lease or at law or in equity.
22.2 Tenant's Obligations. If Tenant defaults:
(a) All rent due at the time of the default will be paid immediately and
Tenant also will pay such costs as Landlord may incur for attorneys' fees and
reasonable costs, inspection fees, brokerage fees, putting the Premises in
good order, condition and repair (fire and casualty excepted), but not
including costs to improve the Premises for a new tenant, and, in addition,
Tenant specifically agrees to pay an amount equal to the amount (if any) set
forth in Exhibit "H" hereto applicable to the month in which the default occurs
(the "Unamortized Costs").
<PAGE> 68
(b) Landlord may, at its sole option and in its arbitrary discretion,
re-let all or any portion of the Premises on terms satisfactory to Landlord in
its arbitrary discretion, either in its own name or otherwise, for a term or
terms which may, at Landlord's option, be more or less than the balance of the
term of this Lease and pursuant to one or more leases, and Landlord may grant
concessions, tenant allowances and/or free rent, among other things.
(c) Unless and until Landlord elects to accelerate the rent due pursuant
to Section 22.2(e) and Tenant pays all the amounts due thereunder, whether or
not the Premises are re-let, Tenant will pay punctually to Landlord all of the
rent and other sums and perform all of Tenant's obligations for the entire
Lease term (assuming the original expiration date, as extended) in the same
manner and at the same time as if this Lease had not been terminated.
<PAGE> 69
(d) If Landlord re-lets the Premises, the date that the new tenant begins
to pay base rent to Landlord will be referred to as the "New Rent Payment
Date." Subject to the rest of this Subsection, Tenant will be entitled to a
credit (the "Credit") against the amounts owed by Tenant in an amount equal to:
(a) the total rent stream payable by the new tenant to Landlord only for the
period starting on the New Rent Payment Date and ending on the original
expiration date of this Lease, as it may have been extended by Tenant prior to
the default (and if the amounts owed by Tenant to Landlord have been
accelerated pursuant to Subsection (e) below, then the total rent stream owed
by the new tenant will be discounted to the date of such acceleration or the
New Rent Payment Date, whichever is later, at the prime rate then charged by
the Bank of Boston on such date); less (b) the costs and expenses incurred by
Landlord to relet the Premises to such new Tenant (including, without
limitation, marketing fees, brokerage fees, legal fees and the costs to repair
and improve the Premises for such new tenant). The Credit to be received by
Tenant will never exceed the amounts actually owed by Tenant to Landlord and
Landlord will not be required to pay any amounts to Tenant by reason of the
Credit. Neither the Credit nor any other credit will be given to Tenant for
any rent received or projected to be received from any reletting for any period
after the original expiration date of this Lease, as it may have been extended
by Tenant prior to the default.
<PAGE> 70
(e) At Landlord's option, Landlord may, by written notice to Tenant at any
time after Tenant's default, elect to recover, and Tenant will thereupon pay,
as liquidated damages, an amount equal to the total rent stream which would
have accrued to Landlord under this Lease for the remainder of the Lease term
as accelerated (assuming the original expiration date, as extended) if the
default had not occurred, discounted to the date of Landlord's election at the
then prime rate charged by the Bank of Boston, plus all of the unpaid expenses
described in Sections 22.2(a) (except for the Unamortized Costs) and 22.2(f).
(f) No action of Landlord in connection with any re-letting, or failure to
re-let or collect rent under such re-letting, will operate or be construed to
release or reduce Tenant's Liabilities hereunder. Without limiting any of the
foregoing provisions, and in addition to any other amounts that Tenant is
otherwise obligated to pay, Tenant agrees that Landlord may recover from Tenant
all costs and expenses, including reasonable attorneys' fees and costs,
incurred by Landlord in enforcing this Lease from and after Tenant's default.
(g) Any amount drawn under the Letter of Credit pursuant to Section
24.17(c) or any amount of the cash security deposit applied by Landlord
pursuant to Section 24.17(c) shall be credited against amounts owed by Tenant
to Landlord under this Section 22.2, whether for base rent, additional rent,
Unamortized Costs or liquidated damages, but among them as specified by
Landlord.
22.3 Redemption. Tenant waives any and all rights of redemption granted
by or under any Laws if Tenant is evicted or dispossessed for any default by
Tenant, or if Landlord obtains possession of the Premises by reason of any
default by Tenant.
22.4 Performance by Landlord. If Tenant fails to perform any of its
obligations under this Lease, Landlord, without waiving or curing the default
or failure, may, bud will not be obligated to, perform Tenant's obligations for
the
<PAGE> 71
account and at the expense of Tenant. Landlord will attempt to provide Tenant
with oral or written notice before performing Tenant's obligations, but if
Landlord believes that such actions are necessary due to an emergency or to
prevent damage or injury or protect health, safety or property, Landlord need
not give notice before performing Tenant's obligations. Tenant will pay on
demand all reasonable costs and expenses incurred by Landlord in connection
with Landlord's performance of Tenant's obligations.
22.5 Post-Judgment Interest. The amount of any judgment obtained by
Landlord against Tenant in any legal proceeding arising out of Tenant's default
under this Lease will bear interest until paid at the Bank of Boston's (or its
successor's) prime rate plus three percent (3%), or the maximum rate permitted
by law, whichever is less. Notwithstanding anything to the contrary contained
in any Laws, with respect to any damages that are certain or ascertainable by
calculation, interest will accrue from the day that the right to the damages
vests in Landlord, and in the case of any unliquidated claim, interest will
accrue from the day the claim arose.
[SEE EXHIBIT "F"]
<PAGE> 72
GENERAL PROVISIONS.
24.1 Holding Over. Tenant will not hold over in the Premises after the
end of the Lease term without the express prior written consent of Landlord,
which may be withheld arbitrarily. However, provided that Tenant is not in
default, Tenant may extend the Lease Term on the same terms and conditions
provided that Tenant delivers an unconditional extension notice to Landlord at
least six (6) months before the end of the term (or any extensions thereof) and
specifies in that notice the length of extension period, which cannot be more
than three (3) months. If Tenant validly exercises this extension right, the
term will be deemed extended for the period specified in Tenant's notice (but
not for more than three (3) months), and such extension will be part of the
Lease term and will not be considered a holding over by Tenant, but there will
be no further extension rights. This extension right is applicable only at the
end of the Lease term, as extended. Landlord will diligently attempt to
include in its lease with any succeeding or prospective tenant provisions
disclaiming liability for consequential damages (i.e., damages for lost
business or revenue, as opposed to actual damages or penalties) to any such
tenant, and/or provisions limiting such succeeding or prospective tenant's
remedies solely to the termination of the Lease, as a result of Landlord's
failure to substantially complete and deliver space to such tenant as required,
but Tenant will indemnify Landlord for, and hold Landlord harmless from, any
and all Liabilities arising out of or in connection with any holding over,
including, without limitation, any claims made by any succeeding or prospective
tenant and any loss of rent suffered by Landlord. If, despite this express
agreement, any tenancy is created by Tenant's
<PAGE> 73
holding over, except as specifically set forth in the next sentence the tenancy
will be a tenancy at will terminable immediately at Landlord's sole option on
written notice to Tenant, but otherwise subject to the terms of this Lease,
except that the most recent annual base rent will be doubled (except as
specifically set forth in Section 16.4). Nothing in this Article or elsewhere
in this Lease permits Tenant to hold over or in any way limits Landlord's other
rights and remedies if Tenant holds over (except as specifically set forth
in 16.4).
<PAGE> 74
24.2 Entry By Landlord. Landlord and its designated representatives at
all times shall have the right to enter the Premises, and Landlord will retain
(or be given by Tenant) keys to unlock all the doors to or within the Building,
excluding doors to Tenant's vaults and files. Landlord in good faith will
attempt to give Tenant reasonable advance (which will not require more than
twenty-four (24) hours prior) written notice to Tenant or to a responsible
officer of Tenant or Tenant's designated facilities manager, or oral notice to
a responsible officer of Tenant or Tenant's designated facilities manager,
prior to entering the Building and not to unreasonably disturb the conduct of
Tenant's business by such entry, but Landlord need not give prior notice and
will have the right to use any means necessary to enter the Building if
Landlord believes there is an emergency or that entry is necessary to prevent
damage or injury or protect health, safety or property. Entry to the Premises
or the Building and the exercise of Landlord's rights in accordance with this
Lease will not, under any circumstances, be deemed to be a default, a forcible
or unlawful entry into or a detainer of the Premises or the Building or an
eviction of Tenant from the Premises or the Building or any portion thereof,
nor will it subject Landlord to any Liabilities or entitle Tenant to any
compensation, abatement of rent or other rights and remedies.
<PAGE> 75
24.3 Brokers. Tenant represents and warrants that it has had no dealings
with any agent, broker, finder or other person who is or might be entitled to a
commission or other fee from Landlord in connection with this or any related
transaction, except for Tenant's Broker. Landlord will incur Liabilities for
brokerage commissions or other compensation to Tenant's Broker only pursuant to
a written agreement (if any) executed and delivered by Landlord and Tenant's
Broker.
24.4 Quiet Enjoyment. So long as Tenant pays all rent and pays and
performs its other Liabilities as and when required, Tenant may quietly enjoy
the Premises without hindrance or molestation by Landlord or any person
lawfully claiming through or under Landlord, subject to the terms of this Lease
and the terms of any Superior Leases and Mortgages and other agreements or
matters of record or to which this Lease is subordinate. As used in this
Lease, the term "Superior Leases and Mortgages" means all present and future
ground leases, underlying leases, mortgages, deeds of trust or other
encumbrances, and the documents and agreements in connection therewith, and all
renewals, modifications, consolidations, replacements or extensions thereof and
advances made thereunder, affecting all or any portion of the Premises, but not
including any of the same securing or relating to an Unpermitted Financing.
<PAGE> 76
24.5 Security. Tenant is solely responsible for providing security for
the Premises and Tenant's personnel within the Premises. Without limiting the
generality of this Section, Tenant agrees that: (a) Landlord may, but will
not be required to, supply security personnel and systems for the Building or
the Premises or Tenant's personnel, and remove or restrain unauthorized persons
and prevent unauthorized acts; (b) Landlord will incur no Liabilities for
failing to provide security personnel or systems or, if provided, for acts,
omissions or malfunctions of the security personnel or systems (although this
is not meant to imply that Tenant will have liability therefor or be required
to indemnify Landlord therefor, unless Tenant is otherwise liable therefor or
required to indemnify Landlord therefor pursuant to the other terms of this
Lease); and (c) Landlord and its Affiliates make no representations or
warranties of any kind in connection with the security or safety of the
Premises or the Building. Subject to the terms and conditions in this Lease,
Tenant will have the right to install a security system for the Building at
Tenant's sole cost and expense. Tenant will keep Landlord fully apprised and
give to Landlord's designated representatives the means necessary to bypass the
security system and enter the Building in the event of an emergency.
24.6 Obligations; Successors; Recordation. If Tenant consists of more
than one person or entity, the obligations and liabilities of those persons or
entities are joint and several. Time is of the essence of this Lease. Subject
to the restrictions in Article 18 or elsewhere in this Lease, this Lease inures
to the benefit of and binds Landlord, Tenant and their respective successors
and assigns and anyone who acquires an interest in this Lease, or in the case
of Landlord anyone who acquires title to the Premises. Tenant will not record
this Lease, but each party agrees on the written request of the other, to
execute a notice of lease in recordable form and in customary form reasonably
satisfactory to Landlord's attorney.
<PAGE> 77
24.7 Late Charges. If any rent or other amounts payable by Tenant are
not received within five (5) days after the due date more than twice in any
calendar year, Tenant will pay to Landlord on demand a late charge equal to
five percent (5%) of the overdue amount, and if not received within ten (10)
days after the due date, the amounts also will bear interest from the due date
until paid at the interest rate in Section 22.5. Notwithstanding the previous
sentence, for the first and second times in any calendar year that any rent or
other amounts payable by Tenant are not received within five (5) days after the
due date, if Landlord accordingly incurs late charges from one or more of its
lenders, then Tenant shall pay such late charges up to a maximum of five
percent (5%) of the amount overdue from Tenant. Collection of these late
charges and interest will not: be a waiver or cure of Tenant's default or
failure to perform; be deemed to be liquidated damages, an invalid penalty or
an election of remedies; or prevent Landlord from exercising any other rights
and remedies.
24.8 Accord and Satisfaction. Payment by Tenant or acceptance by Landlord
of less than the full amount of rent due is not a waiver (unless such
acceptance is accompanied by a written waiver signed by Landlord specifying
that such acceptance is a waiver and specifying the amount being waived), but
will be deemed to be on account of amounts next due, and no endorsements or
statements on any check or any letter accompanying any check or payment will
be deemed an accord and satisfaction or binding on Landlord. Landlord may
accept the check or payment without prejudice to any of Landlord's rights
and remedies, including, without limitation, the right to recover the full
amount due.
<PAGE> 78
24.9 Prior Agreements; Amendments; Waiver. This Lease is an integrated
document and contains all of the agreements of the parties with respect to any
matter covered or mentioned in this Lease, and supersedes all prior agreements
or understandings, except for an Agency Agreement between the parties, dated of
even date herewith.
This Lease may not be amended except by an agreement in writing signed by
Landlord and Tenant. All waivers must be in writing, specify the act or
omission waived and be signed by the party charged with the waiver. No other
alleged waivers will be effective, including, without limitation, Landlord's
acceptance of rent (except as specifically provided otherwise in Section 24.8),
collection of a late charge or application of a security deposit. Landlord's
waiver of any specific act, omission, term or condition will not be a waiver of
any other or subsequent act, omission, term or condition.
24.10 Representations; Inability to Perform. Except as may be
specifically set forth as representations and warranties in this Lease,
Landlord and its Affiliates have not made, and Tenant is not relying on, any
representations or warranties of any kind, express or implied, with respect to
the Premises or this transaction. Landlord will not be in default nor incur
any Liabilities if it does not fulfill any of its obligations, or is delayed in
doing so, because of accidents, breakage, strike, labor troubles, war,
sabotage, governmental regulations or controls, inability to obtain materials
or services, acts of God, or any other cause, whether similar or dissimilar,
beyond Landlord's reasonable control, but will not be deemed to limit in any
way Landlord's repair and maintenance obligations under Section 12.1 or its
repair and/or restoration obligations under Articles 16 and 17, except to the
extent that such repair, maintenance or restoration activities are affected by
such events or causes.
<PAGE> 79
24.11 Legal Proceedings. In any action or proceeding involving or relating
in any way to this Lease, the court or other person or entity having
jurisdiction in such action or proceeding will award to the party in whose
favor judgment is entered the actual attorneys' fees and costs incurred.
Subject to Article 14, Tenant also will indemnify Landlord for, and hold
Landlord harmless from and against, all Liabilities incurred by Landlord if
Landlord becomes or is made a party to any proceeding or action: (a) brought
against any person or entity (other than a permitted Assignee under Section
18.5(c) or any assignee pursuant to an assignment that caused the assignor to
become a Released Assignor) holding any interest under this Lease or using the
Premises by license of or agreement with Tenant (provided that Tenant's
indemnity obligations in this case will not exceed the indemnity obligations
that Tenant would have had under Article 14 if Tenant "stood in the shoes" of
such other person or entity and the action or proceeding was brought against
Tenant); or (b) brought by any person or entity (other than an assignee under a
valid assignment of this Lease if and to the same extent that Tenant would have
had the right to bring such action or proceeding against Landlord under the
same circumstances) holding any interest under this Lease or using the Premises
by license of or agreement with Tenant; or (c) necessary to protect Landlord's
interest under this Lease in a proceeding under the Bankruptcy Code or in
connection with the matters described or contemplated in Exhibit "F" hereto.
Unless prohibited by law, Tenant waives the right to trial by jury in all
actions involving or related to this Lease, the Premises or
<PAGE> 80
any collateral or subsequent agreements between the parties, and any right to
impose a counterclaim in any proceeding brought for possession of the Premises
as a result of Tenant's default (although this waiver of counterclaim will not
be deemed to prohibit Tenant from bringing any claims in a separate
non-consolidated action). Tenant also submits to and agrees not to contest the
sole and exclusive jurisdiction of the state and federal courts located in
Massachusetts to adjudicate all matters in connection with this Lease or
involving Landlord or Landlord's Affiliates in any way, and Tenant agrees that
it will bring all suits and actions only in such Massachusetts courts and not
to seek a change of venue. In any circumstance where a party is obligated to
indemnify or hold harmless the other party under this Lease, that obligation
also will include the obligation to protect the other party and defend it with
counsel acceptable to the other party or, at the other party's election, the
other party may employ its own counsel and the indemnifying party will pay when
due all attorneys' fees and costs. These obligations to indemnify, hold
harmless, protect and defend will survive the expiration or termination of this
Lease.
24.12 Ownership; Invalidity; Remedies; Choice of Law. As used in this
Lease, the term "Landlord" means only the current owner or owners of the fee
title to the Premises. Upon each conveyance (whether voluntary or involuntary)
of fee title, the conveying party will be relieved of all Liabilities and
obligations contained in or derived from this Lease or arising out of any act,
occurrence or omission occurring after the date of such conveyance. Landlord
may Transfer all or any portion of its interests in this Lease or the Premises
without affecting Tenant's obligations and Liabilities under this Lease.
Tenant has no right, title or interest in the name of the Building or of the
Premises, and may use these names only to identify its location. Any provision
of this Lease which is invalid, void or illegal will not affect, impair or
invalidate any of the other provisions and the other provisions will remain in
full force and effect. Landlord's rights and remedies are cumulative and not
exclusive. This Lease is governed by the laws of Massachusetts applicable to
transactions to be performed wholly therein.
<PAGE> 81
24.13 Triple Net Lease; Consent. The parties acknowledge and agree that
this is intended to be, to the fullest extent possible, a "triple net" lease,
and all costs and expenses in connection with the Premises in addition to the
base rent are intended to be paid or reimbursed by Tenant unless otherwise
stated in this Lease (but this shall not be deemed to affect Landlord's
obligations to pay portions of the Net Proceeds to Tenant to the extent set
forth in Addendum #3). Notwithstanding anything to the contrary, Landlord will
not be required under any circumstances to agree to any amendments,
modifications, waivers, increases or decreases in any of the terms of this
Lease or any of the rights and obligations of the parties hereunder, whether or
not such agreement would be reasonable under the circumstances. In any dispute
involving Landlord's withholding of consent or approval or its exercise of
judgement, the sole right and remedy of Tenant and its Affiliates is
declaratory relief (i.e., that such consent or approval should be granted), and
Tenant and its Affiliates waive all other rights and remedies, including,
without limitation, claims for damages.
<PAGE> 82
24.14 Presumptions; Exhibits; Submission. This Lease will be construed
without regard to any presumption or other rule requiring construction or
interpretation for or against the party drafting the document. The titles to
the Articles and Sections of this Lease are not a part of this Lease and will
have no effect on its construction or interpretation. Whenever required by the
context of this Lease, the singular includes the plural and the plural includes
the singular, and the masculine, feminine and neuter genders each include the
others, and the word "person" includes individuals, corporations, partnerships
or other entities. All exhibits, addenda and riders attached to this Lease are
incorporated in this Lease by this reference. The submission of this Lease to
Tenant or its broker, agent or attorney for review or signature is not an offer
to Tenant to lease the Premises or the grant of an option to lease to Premises.
This Lease will not be binding unless and until it is executed and delivered
by both Landlord and Tenant.
24.15 Cooperation. If Landlord finds it necessary to enter the Building
to perform its obligations or exercise its rights under this Lease, Tenant will
cooperate reasonably with Landlord, and this cooperation will include moving
machinery, equipment or Alterations within the Building and allowing Landlord
sufficient space within the Premises to enable Landlord to perform any work
that Landlord has the right or is required to perform under this Lease.
<PAGE> 83
24.16 Notices. Unless otherwise specifically stated in this Lease, all
notices, demands or communications required or permitted under this Lease (the
"Notices") will be in writing and personally delivered (by messenger or
recognized national overnight carrier), or sent by certified mail, return
receipt requested, postage prepaid. Notices to Tenant prior to the first
Occupancy Date will be delivered to the address for Tenant in Section 1.1 or to
such other address as may be specified by Tenant to Landlord in writing.
Thereafter, Notices to Tenant will be delivered to the address of the Premises
or to such other address as may be specified by Tenant to Landlord in writing.
Notices to Landlord will be delivered to the addresses for Landlord in Section
1.1 or to such other address as may be specified by Landlord to Tenant in
writing. Notices will be effective on the earlier of: delivery; or, if
mailed, four (4) days after they are mailed in accordance with this Section.
<PAGE> 84
24.17 Letter of Credit.
(a) Upon the execution and delivery of this Lease, Tenant will obtain and
deliver to Landlord an irrevocable, unconditional standby letter of credit in
accordance with the terms and conditions of this Section (the "Letter of
Credit"). The Letter of Credit will be in the amount of $10 Million, will be
issued initially by Bank of Boston or Chemical Bank and subsequently by any
issuer that meets the criteria in Section 24.17(e), will name Landlord (or, at
Landlord's request, a lender to Landlord) as the beneficiary thereof and will
have an initial term of at least one (1) year and, with renewals, an aggregate
term (as renewed) as set forth below. The terms of the Letter of Credit shall
be as set forth in this Section 24.17 and in form reasonably acceptable to the
beneficiary thereof. The beneficiary shall have the right to draw under the
Letter of Credit on one or more occasions from time to time during its term and
in accordance with the terms hereof simply upon presentation to the issuer of a
sight draft executed by the beneficiary or its authorized representative and
without further condition, and the issuer shall pay upon presentation of such
draft without deduction or offset of any type. The Letter of Credit shall be
assignable in whole but not in part. Provided that Tenant is not in default
and is entitled to continue to receive a share of Net Proceeds in accordance
with Addendum #3 and/or to exercise a Purchase Option in accordance with
Addendum #4, Landlord agrees not to request that any of its lenders be named as
a beneficiary under the Letter of Credit with respect to any Unpermitted
Financing supplied by such lenders.
<PAGE> 85
(b) Until and unless the Letter of Credit is drawn upon, starting as of
July 1, 1997, and on each July 1 thereafter (or, if a permanent first mortgage
loan on the Premises has not funded before July 1, 1996, then starting as of
October 15, 1997, and each October 15 thereafter), the face amount of the
Letter of Credit shall be reduced based on a direct reduction loan amortization
schedule, assuming an interest rate equal to the interest rate (but not any
"default" or "penalty" rate) under the then existing first mortgage loan on the
Premises, provided by the beneficiary whose loan is secured by the Letter of
Credit which will have the effect of reducing the Letter of Credit to zero over
the aggregate term of the Letter of Credit. However, subject to the foregoing
but notwithstanding anything else to the contrary, even if the Letter of Credit
has been drawn upon, if and to the extent that those amounts are repaid to
Tenant, Tenant shall thereupon cause the face amount, and the amount that may
again be drawn, under the Letter of Credit to be increased by an amount equal
to the amount so repaid. (For example, if $2 Million were to be drawn under
the Letter of Credit pursuant to Section 24.17(f), and if that $2 Million were
then repaid, the face amount and the amount that could be drawn under the
Letter of Credit again would be $10 Million.) Tenant shall cause the Letter of
Credit to be renewed continuously on the same terms as described above for
successive one (1)-year terms (or longer terms) so that the Letter of Credit is
continuously maintained for a term expiring at the end of the tenth (10th)
Lease Year. Each succeeding Letter of Credit shall be effective on or before
the date that the then-existing Letter of Credit expires. Tenant's failure to
deliver these renewals of the Letter of Credit to the beneficiary at least
twenty (20) days
<PAGE> 86
prior to each expiration date shall not in and of itself be a default under
this Lease, but at the beneficiary's option, and notwithstanding anything to
the contrary, the beneficiary shall have the immediate right thereon and
thereafter to draw under the Letter of Credit for all or any portion thereof,
and the cash proceeds thereof shall be held and, if necessary, applied, by the
beneficiary in the same manner as set forth in Subsection (d) below.
(c) The Letter of Credit is security for the timely payment and
performance of all of Tenant's Liabilities in connection with this Lease,
including, without limitation, Tenant's obligation to pay base rent, additional
rent and, if applicable, the Cancellation Fee, any amounts due under any
Addendum hereto, and the Unamortized Costs if Tenant defaults, and the
obligations under Landlord's loan(s) from its lender(s). If Tenant defaults
under this Lease or there is a default under such loan(s) or if otherwise
permitted under the loan documents, the beneficiary may, but shall not be
obligated to, draw under the Letter of Credit on one or more occasions, and the
beneficiary's draw(s) under or failure to draw down all or any portion of the
Letter of Credit in any particular instance will not be deemed to be a waiver
or election of any rights and remedies of any type, a limitation on Landlord's
or the beneficiary's right to damages, a payment of liquidated damages or an
accord or satisfaction.
<PAGE> 87
(d) Until and unless the Letter of Credit is drawn upon, Tenant may, at
any time, substitute for the Letter of Credit cash in an amount equal to the
then-current face amount of the Letter of Credit. If Tenant does so substitute
cash, then the amount thereof will be deemed to be a security deposit
hereunder, and will be deemed to be security for the same obligations and
Liabilities as are set forth in Section 24.17(c). Landlord (and/or the
beneficiary under the former Letter of Credit) will have the right to apply all
or any portion of that security deposit in the same manner and subject to the
same terms as are set forth in Section 24.17(c), and until and unless the
security deposit is applied in accordance with this Lease, the amount of that
security deposit shall reduce in the manner and at the times set forth in the
first sentence of Section 24.17(b). Until applied, the cash security deposit
shall be kept in a separate, interest-bearing account or in another form of
investment reasonably acceptable to Tenant and the secured party, and until and
unless it is applied, interest earned thereon shall be payable annually to
Tenant, and the security deposit shall be used for no other purpose other than
as security for the payment and performance of the obligations and Liabilities
as set forth in Section 24.17(c).
<PAGE> 88
(e) Tenant shall cause the Letter of Credit to be replaced by a Letter of
Credit issued by another recognized bank located and in good standing in the
United States that meets the financial criterion described below and is
otherwise reasonably acceptable to the beneficiary: (i) on demand by the
beneficiary if the issuer ever fails to meet the financial criterion described
below; or (ii) if Tenant wishes to replace the Letter of Credit with a Letter
of Credit issued by another bank. The financial criterion referred to above is
the requirement that the issuer will maintain ratings from Moody's and Standard
& Poor's at least equal to those enjoyed by the initial issuer of the Letter of
Credit on the date that the Letter of Credit is issued. The beneficiary shall
have the immediate right thereon and thereafter to draw under the Letter of
Credit for all or any portion thereof if the Letter of Credit is not replaced
as and when required by an issuer meeting the financial criterion referred to
above, and the cash proceeds thereof shall be held and, if necessary, applied,
by the beneficiary in the same manner as set forth in Subsection (d) above.
(f) In addition to the other circumstances set forth in this Lease
pursuant to which the beneficiary of the Letter of Credit may draw thereunder,
the beneficiary may draw under the Letter of Credit as set forth in Section
8.15 of that certain Construction Loan Agreement between Landlord and Mellon
Bank which provides financing for the Premises. A copy of that Section 8.15 is
attached hereto as Exhibit "M."
<PAGE> 89
Any amounts drawn by the beneficiary under the Letter of Credit (not
including draws of the type described in Sections 24.17(b) and (e), or draws
resulting from Tenant's default under this Lease or any other agreements
between Tenant and the beneficiary or Landlord's default under a loan arising
as a result of Tenant's breach of its obligations under this Lease) shall be
referred to as the "LC Advances," and shall be treated as a loan made by Tenant
to Landlord, which shall be repayable on the terms set forth in a promissory
note executed by Landlord in favor of Tenant in the form attached as Exhibit
"L" hereto (the "LC Note").
24.18 Other Defined Terms.
(a) "Affiliates" means: a party's internal partners, and the directors,
officers, agents, employees, parent, subsidiaries, invitees, customers,
licensees, concessionaires, contractors, subcontractors, successors, assigns,
subtenants, and representatives of the party or its internal partners.
(aa) "Control Affiliates" means a party's internal partners, and the
directors, officers, employees, parent, subsidiaries, successors or assigns of
the party or its internal partners, or an entity in which any of them owns at
least 20% of the outstanding interests or voting shares.
(b) "Laws" means: laws, codes, decisions, ordinances, rules, regulations,
any CC&R's or deed restrictions (or the equivalent) to which the Premises may
be subject, licenses, permits, and directives of governmental and
quasi-governmental officers, including, without limitation, those relating to
building and safety, fire prevention, health, energy conservation, Hazardous
Substances and environmental protection.
<PAGE> 90
(c) "Liabilities" means: obligations, costs, damages, claims, injuries,
liens, liabilities and judgments, including, without limitation, attorneys'
fees and costs (whether or not suit is commenced or judgment entered).
(cc) "Related Entities" means a party's successors, assigns, parent or
subsidiaries, or any person that controls, is controlled by or is under common
control with that party, and the successors or assigns of such person.
(d) "Systems and Equipment" means: all HVAC, plumbing, mechanical,
electrical, lighting, water, gas, sewer, safety, sanitary and any other utility
or service facilities, systems and equipment, and all pipes, ducts, poles,
stacks, chases, conduits and wires.
(e) "Default," when applied to Tenant, and whether or not used with an
initial capital, will have the meaning set forth in Section 21.
24.19 No Partnership. Notwithstanding anything to the contrary, neither
this Lease nor the performance of any of the terms and conditions thereof are
intended to create or imply, nor shall they create or imply, any partnership,
joint venture, trust, fiduciary relationship or agency relationship between
Landlord and Tenant (or any of their respective Affiliates).
HAZARDOUS SUBSTANCES.
Without limiting the generality of any portion of this Lease, Tenant and
its Affiliates will:
(a) Not store, handle, transport, use, process, generate, discharge or
dispose of any hazardous, toxic, corrosive, dangerous, explosive, flammable or
noxious substances, gasses or waste, whether now or hereafter defined under any
Laws or otherwise (collectively, "hazardous substances"), from, in or about the
Building or the rest of the Premises, or create any release of any hazardous
substances, nor permit any of the foregoing to occur, except for customary and
reasonable amounts of office supplies and other supplies reasonably used in the
conduct of Tenant's permitted research and development, light manufacturing and
warehousing activities which may contain or consist of reasonable amounts of
hazardous substances, and then only strictly in accordance with applicable
Laws. If any of the foregoing prohibited activities occur, or if Landlord in
good faith believes that any of the foregoing prohibited activities have
occurred or are likely to occur or that Tenant and its Affiliates are not
complying fully with the requirements of this Article, in addition to any other
rights and remedies of Landlord, Tenant and its Affiliates immediately will
cease the acts or omissions and in addition to any other rights and remedies
(all of which are cumulative), at Landlord's request Tenant will take such
actions as may be required by Laws and as Landlord may in good faith direct to
cure or prevent the problem. Tenant and its Affiliates will comply fully with
all Laws and insurance requirements in connection with or related to hazardous
substances, whether now or hereafter existing, including, without limitation,
CERCLA, SARA, RCRA, TSCA, CWA, Chapter 21E of Massachusetts General Laws and
any other Laws promulgated by the EPA, OSHA or Commonwealth of Massachusetts.
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<PAGE> 91
(b) Immediately pay, and indemnify Landlord and its Affiliates for and
hold them harmless from, all Liabilities in connection with or arising directly
or indirectly from any breach by Tenant or its Affiliates of their obligations
in this Article, including, without limitation, Liabilities to any lenders and
the costs of any of the following, whether required by Landlord, any lenders,
applicable Laws or insurance requirements or otherwise: any "response actions"
or "responses"; any surveys, "audits", inspections, tests, reports or
procedures deemed necessary or desirable by Landlord or governmental or
quasi-governmental authorities to determine the existence or scope of any
hazardous substances or Tenant's compliance with this Article, and any actions
recommended to be taken in connection therewith; compliance with any applicable
Laws and insurance requirements; any requirements, directives or plans for the
prevention, containment, processing, storage, clean-up or disposal of hazardous
substances; the release and discharge of any resulting liens; and any other
injury or damage. On the expiration or earlier termination of this Lease,
Tenant will leave the Building and the Premises free of hazardous substances
stored, handled, transported, used, processed, generated, discharged or
disposed of in, on, from or about the Building, or the Premises by Tenant or
its Affiliates.
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<PAGE> 92
(c) Immediately deliver to Landlord copies of any notices, information,
reports, and communications of any type received or given in connection with
hazardous substances, including, without limitation, notices of violation and
settlement actions from or with governmental or quasi-governmental authorities.
Tenant's failure to comply with the requirements of this Article will be a
material default under this Lease, but if the failure was not intentional, then
if Tenant immediately begins to cure the failure and diligently begins and
completes all required remediation, disposal and other responsive actions in
accordance with the Lease and applicable Laws and guidelines and all necessary
repairs to the Building or the Premises, Tenant will be deemed to have cured
the default (although Tenant's indemnity obligations and other Liabilities
still will remain). All of Tenant's obligations and Liabilities under this
Article will survive the expiration or earlier termination of this Lease.
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<PAGE> 93
IN WITNESS WHEREOF, intending to be legally bound, each party has executed
this Lease as a sealed instrument as of the date first set forth above.
"LANDLORD"
Executed: , 1995
------------
100 MINUTEMAN LIMITED PARTNERSHIP,
a Massachusetts limited partnership
By: NIUNA-MINUTEMAN, INC.,
a WITNESS: general partner
By:
- ---------------------------- ----------------------------
Name Printed: John Kusmiersky, President
"TENANT"
Executed: , 1995
-----------
PICTURETEL CORPORATION,
a Delaware corporation
WITNESS:
By:
- ---------------------------- ---------------------------------
Name Printed: (Signature)
-------------------------------------
Name Printed, Vice President
-------------------------------------
Authorized Signature
WITNESS:
By:
- ---------------------------- ---------------------------------
Name Printed: (Signature)
-------------------------------------
Name Printed, Secretary
-------------------------------------
Authorized Signature
<PAGE> 94
EXHIBIT "A"
INITIAL PREMISES SITE PLAN
[SITE PLAN OF PREMISES TO BE ATTACHED]
<PAGE> 95
EXHIBIT "B"
LEGAL DESCRIPTION
EXHIBIT "B"
<PAGE> 96
EXHIBIT "C"
WORKLETTER
1. General Conditions.
1.1 Landlord will construct Landlord's Work in accordance with applicable
Laws in effect at the time, except that Landlord makes no agreements,
representations or warranties concerning compliance with the Americans with
Disabilities Act or any rules, regulations, guidelines or additional
legislation issued in connection therewith. (The previous sentence is not meant
to change the obligations of the parties pursuant to Section 11(d).) Landlord
conclusively shall be deemed to have complied with all applicable Laws in
effect at the time with respect to Landlord's Work for each Phase when and if
Landlord obtains a Certificate of Occupancy for that Phase or for the entire
Building. Subject to Section 2(a), Tenant and its contractors may have access
to the Building for the
EXHIBIT "C"
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<PAGE> 97
purpose of preparing the Building for Tenant's occupancy before Landlord's Work
has been substantially completed, but only with Landlord's prior written
approval. After any entry by Tenant or its contractors, all of Tenant's Lease
obligations will be immediately effective except for the obligation to pay base
rent, Taxes and Operating Costs. All construction, materials, services,
licenses, approvals, costs, installations and equipment to or for the Premises
other than Landlord's Work are called "Tenant's Work," and will be performed by
Tenant at Tenant's sole cost and in a good and workmanlike manner and subject
to the rest of the terms of this Lease. Subject to Section 2(a), Tenant will
not interfere in any way with Landlord's Work, whether in connection with
Tenant's Work or otherwise. If Landlord's Work is delayed or made more
expensive due to: any act or omission of Tenant or its Affiliates (including,
without limitation, any delay of or failure to complete Tenant's Work [subject
to Section 2(a)], any requested or required changes to Exhibit "C" agreed to by
Landlord, or any failure or delay in submitting the information in Exhibit "CC"
or other plans, specifications, drawings, requirements, information or
approvals, or changes or inaccuracies in any of the foregoing that are or are
supposed to be submitted by or on behalf of or approved by Tenant); or the
inclusion in Exhibit "C" or other Tenant specifications of "long lead" items or
services that cannot reasonably be obtained in sufficient time to be
incorporated in Landlord's Work in the normal course of Landlord's construction
schedule (and Tenant's failure to delete or substitute for those items or
services), then Tenant will be responsible for the delays and additional cost,
Landlord's Work for each Phase will be deemed substantially completed when it
would have been completed but for the delays (and at minimum any delays will be
subtracted from the date of actual substantial completion in determining when
substantial completion will be deemed to have occurred), and Tenant will pay
any additional cost to Landlord as additional rent within fifteen (15) days
after receipt of Landlord's bill. Furthermore, if a delay for which Tenant is
responsible results in an increased interest rate on Landlord's loans, then
Tenant will pay as additional rent the increased amounts payable by Landlord as
and when Landlord is obligated to pay such amounts. Within ten (10) days after
Landlord's request, Tenant will execute and deliver to Landlord a certificate
confirming the date of substantial completion of Landlord's Work for each
Phase. Tenant's certificate is for purposes of confirmation only and will not
affect the actual date of substantial completion for that Phase.
EXHIBIT "C"
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1.2 Landlord intends that: Gilbane Building Company (or an affiliated
entity) will act as the construction manager, or in an equivalent capacity,
with respect to Landlord's Work; and that Gilbane Building Company (or an
affiliated entity) will guaranty the maximum price for Landlord's Work. With
respect to Landlord's Work, at least the "major trades" will be competitively
bid to subcontractors, and Landlord will award those subcontracts to the lowest
bidder, except that Landlord may award a subcontract to any of the bidding
subcontractors if: (a) the lowest bidder takes exception to the bid documents;
or (b) the initial bid or subsequent revised bid of the subcontractor chosen by
Landlord is within 5% of the lowest responsive and timely bid received.
1.3 Notwithstanding anything to the contrary, Landlord's Work will not
include, and Landlord will not be responsible for, any labor or services in
connection with Tenant's security or alarm systems, and Tenant's data,
telecommunications, audio, visual, computer, cafeteria or fitness-related
equipment or installations or any piping, wiring, cabling or conduits
associated with any of the foregoing or any hookups thereof.
EXHIBIT "C"
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<PAGE> 99
1.4 The rest of this Workletter is attached and is incorporated herein by
this reference.
EXHIBIT "C"
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<PAGE> 100
EXHIBIT "CC"
PICTURETEL INITIAL INFORMATION
1. PictureTel will deliver the following information (to the extent
applicable in each instance) to Landlord on or about the dates set forth in
Section 2 below: detailed floor plans/layouts for the Building, including the
size and location of all offices, conference rooms, demonstration rooms,
laboratories and other areas, prepared to 1/8" scale, with architectural
features included (e.g., high wall versus low wall); equipment loads, BTU
requirements, amperage requirements, and similar requirements for engineering
laboratories, demonstration rooms and any other special requirements;
PictureTel's choices and specifications for hardware, floor and wall finishes,
all special finishes, special lighting, raised flooring and other design
elements and other information and specifications sufficient to enable Landlord
to produce final plans, drawings and specifications for Landlord's Work.
2. The relevant information for each of the Phases (which for these
purposes are defined in Exhibit "C" (Workletter)) will be delivered by the
following dates: Phase I - August 31, 1995; Phase II - September 30, 1995; and
Phase III - October 31, 1995:
EXHIBIT "CC"
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<PAGE> 101
3. The goal of Landlord's design team is to produce GMP pricing documents
on or about October 1, 1995. Therefore, in addition to the information to be
delivered for each of the Phases as described above, Tenant will direct its
professionals to deliver to Landlord's design team design documents on a weekly
basis or otherwise as often as practicable, and to deliver sufficient
information for all of the Phases to Landlord's design team in sufficient time
so that Landlord's design team can reasonably attempt to meet the October 1,
1995 target date.
EXHIBIT "CC"
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<PAGE> 102
EXHIBIT "D"
BASE RENT
1. Subject to Paragraph 2 below, for each Phase, starting on the later of
July 1, 1996 or the Occupancy Date for that Phase, the annual base rent for
that Phase shall be Tenant's Percentage of Three Million and No/100 Dollars
($3,000,000.00), which will be payable in equal monthly installments in advance
as set forth in Section 5(a) of the Lease. If Tenant's Percentage is
retroactively adjusted as set forth in Section 1.1(f), then if any amounts are
owed by Tenant they shall be paid within fifteen (15) days after such
adjustment, and if any amounts are owed by Landlord they shall be paid within
fifteen (15) days after such adjustment, or, at Landlord's election, the
amounts owed to Tenant shall be credited against the next rental payments due
from Tenant.
2. AS OF THE COMMENCEMENT DATE, THE ANNUAL BASE RENT FOR THE PREMISES
WILL BE THREE MILLION AND NO/100 DOLLARS ($3,000,000.00) PER ANNUM, WHICH WILL
BE PAYABLE IN EQUAL MONTHLY INSTALLMENTS IN ADVANCE AS SET FORTH IN SECTION 5(a)
OF THE LEASE.
3. Base rent payable for any other space leased by Tenant from Landlord
shall be in addition to and at rates different from the base rent set forth
above, unless otherwise specifically agreed in writing by Landlord and Tenant.
EXHIBIT "D"
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<PAGE> 103
[SEE SECTION 5(b) OF THE LEASE FOR POSSIBLE RENT CREDITS IN CONNECTION WITH THE
LETTER OF CREDIT.]
EXHIBIT "D"
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<PAGE> 104
EXHIBIT "E"
RULES AND REGULATIONS
1. Any person whose presence on the Premises at any time shall, in the
reasonable judgment of the Landlord, be prejudicial to the safety, character,
reputation and interests of the Premises may be denied access to the Premises
or may be ejected therefrom. In case of invasion, riot, public excitement or
other commotion the Landlord may prevent all access to the Premises or the
Building during the continuance of the same, by closing the doors or otherwise,
for the safety of Tenant or protection of property. The Landlord shall in no
way be liable to Tenant or its Affiliates for damages or loss arising from the
admission, exclusion or ejection of any person to or from the Premises under
the provisions of this rule, as long as Landlord acts reasonably under the
circumstances as they appear to Landlord at the time.
2. No awnings or other projections over or around the windows shall be
installed by Tenant, and all window blinds used or installed by Tenant or its
Affiliates shall be of the same type in order to provide a uniform exterior
appearance.
3. Tenant shall not encumber or obstruct, or permit the encumbrance or
obstruction of, or store or place any materials, outside of the Building, or in
any entrances, corridors, elevators, fire exits or stairways of the of the
Building so as to create any unsafe or unlawful condition.
EXHIBIT "E"
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<PAGE> 105
4. Nothing shall be done or permitted by Tenant which would impair or
interfere with any of the Systems or Equipment or the proper and economic
servicing of the Building or the Premises, nor shall there be installed by
Tenant any Systems or Equipment or other equipment of any kind which, in
Landlord's reasonable judgment, could result in such impairment or interference.
No dangerous, inflammable, combustible or explosive object or material shall be
brought into the Building or onto the Premises by Tenant or with the permission
of Tenant, except strictly in accordance with this Lease.
5. Whenever Tenant shall submit to Landlord any plan, agreement or other
document for Landlord's consent or approval, Tenant agrees to pay Landlord as
additional rent, on demand, a processing fee in a sum equal to the reasonable
fees payable to any architects, contractors, engineers and attorneys engaged by
Landlord to review said plan, agreement or document, and costs, expenses or
fees required to be paid by Landlord to or at the direction of Landlord's
Mortgagees in order to secure approval of said plan, agreement or document, if
and to the extent that their approval is required.
6. No acids, vapors, hazardous or other materials shall be discharged or
permitted to be discharged into the waste lines, ducts, vents or flues which
may damage them or any other portions of the Building or the Premises. The
water and wash closets and other plumbing fixtures in or serving the Building
shall not be used for any purpose other than the purpose for which they were
designed or constructed, and no sweepings, rubbish, rags, acids or other
foreign substances shall be deposited therein. All damage resulting from any
misuse of the fixtures shall be borne by Tenant, if it shall have caused the
same, subject to Section 8.3 of the Lease.
EXHIBIT "E"
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<PAGE> 106
7. Landlord shall have the right to prohibit any advertising by Tenant
which impairs the reputation of the Building or the Premises, and upon written
notice from Landlord, Tenant shall refrain from or discontinue such
advertising.
8. All third party movers used by Tenant shall be appropriately licensed
and shall maintain reasonable insurance coverage (proof of such coverage shall
be delivered to Landlord prior to movers providing service in, on or to the
Premises.
9. The Premises shall not be used for lodging or sleeping or for any
immoral or illegal purposes.
EXHIBIT "E"
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<PAGE> 107
EXHIBIT "F"
BANKRUPTCY PROVISIONS
This Article is incorporated into the Lease as Article 23:
23. BANKRUPTCY OR INSOLVENCY.
23.1 Tenant's Interest Not Transferable. Neither Tenant's interest in
this Lease nor any estate hereby created in Tenant nor any interest herein or
therein will pass to any trustee or receiver or assignee for the benefit of
creditors or otherwise by operation of law except as may specifically be
provided pursuant to the Bankruptcy Code, 11 U.S.C. Section 101 et seq. (the
"Bankruptcy Code").
23.2 Default and Termination. If:
(a) Tenant or Tenant's Guarantor, if any, or its executors,
administrators, or assigns, will generally not pay its debts within a
reasonable and customary time after they become due or will admit in writing
its inability to pay its debts, or will make a general assignment for the
benefit of creditors; or
(b) Tenant or Tenant's Guarantor, if any, will commence any case,
proceeding or other action seeking reorganization, arrangement, adjustment,
liquidation, dissolution or composition of it or its debts under any law
relating to bankruptcy, insolvency, reorganization or relief of debtors, or
seeking appointment of a receiver, trustee, custodian or other similar official
for it or for all or any substantial part of its property; or
EXHIBIT "F"
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<PAGE> 108
(c) Tenant or Tenant's Guarantor, if any, will take any corporate,
partnership or other action to authorize or in furtherance of any of the
actions set forth above in subsection (a) or (b); or
(d) Any case, proceeding or other action against Tenant or Tenant's
Guarantor, if any, will be commenced seeking to have an order for relief
entered against it as debtor, or seeking reorganization, arrangement,
adjustment, liquidation, dissolution or composition of it or its debts under
any law relating to bankruptcy, insolvency, reorganization or relief of
debtors, or seeking appointment of a receiver, trustee, custodian or other
similar official for it or for all or any substantial part of its property, and
such case, proceeding or other action remains undismissed or unstayed for a
period of sixty (60) days, then it will be a default hereunder and this Lease
and all rights of Tenant hereunder will automatically cease and terminate as if
the date of such event were the original expiration date of this Lease and
Tenant will vacate and surrender the Premises but will remain liable as herein
provided.
EXHIBIT "F"
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<PAGE> 109
23.3 Rights and Obligations Under the Bankruptcy Code.
(a) Upon the filing of a petition by or against Tenant under the
Bankruptcy Code, Tenant, as debtor and as debtor in possession, and any trustee
who may be appointed agree as follows: (i) to perform all obligations of
Tenant under this Lease, including, but not limited to, the covenants regarding
the operations and uses of the Premises until such time as this Lease is either
rejected or assumed by order of the United States Bankruptcy Court; (ii) to pay
monthly in advance on the first day of each month as reasonable compensation
for use and occupancy of the Premises an amount equal to all base rent and
other rent otherwise due pursuant to this Lease; (iii) to reject or assume this
Lease within sixty (60) days of the filing of a petition under any Chapter of
the Bankruptcy Code or under any Law relating to bankruptcy, insolvency,
reorganization or relief of debtors (any such rejection being deemed an
automatic termination of this Lease); (iv) to give Landlord at least thirty
(30) days prior written notice of any proceeding relating to any assumption of
this Lease; (v) to give at least thirty (30) days prior written notice of any
abandonment of the Premises (any such abandonment being deemed a rejection and
automatic termination of this Lease), unless the Bankruptcy Court has otherwise
extended the period for acceptance or rejection; (vi) to do all other things of
benefit to Landlord otherwise required under the Bankruptcy Code or under any
Law relating to bankruptcy, insolvency, reorganization or relief of debtors;
(vii) to be deemed to have rejected this Lease in the event of the failure to
comply with any of the above; and (viii) to have consented to the entry of an
order by an appropriate United States Bankruptcy Court providing all of the
above, except that if and to the extent that any of the above provisions, if
enforced, would violate the Bankruptcy Code then in existence, then such
provisions shall be conformed to the Bankruptcy Code then in existence.
EXHIBIT "F"
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<PAGE> 110
(b) No default under this Lease by Tenant, either prior to or subsequent
to the filing of such petition, will be deemed to have been waived unless
expressly done so in writing by Landlord.
(c) Included within and in addition to any other conditions or obligations
imposed upon Tenant or its successor in the event of assumption and/or
assignment are the following: (i) the cure of any monetary defaults and the
reimbursement of pecuniary loss by the time of the entry of the order approving
such assumption and/or assignment (pecuniary loss will include, without
limitation, any attorneys' fees and costs and expert witness fees incurred by
Landlord in protecting its rights under this Lease, including representation of
Landlord in any proceeding commenced under the Bankruptcy Code or under any Law
relating to bankruptcy, insolvency, reorganization or relief of debtor); (ii)
the deposit of an additional sum equal to three (3) months' base rent; (iii) the
use of the Premises only as set forth in this Lease; (iv) the reorganized debtor
or assignee of such debtor in possession or of Tenant's trustee demonstrates in
writing that
EXHIBIT "F"
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<PAGE> 111
it has sufficient background including, but not limited to, substantial
experience in operating businesses in the manner contemplated in this Lease and
meet all other reasonable criteria of Landlord as did Tenant upon execution of
this Lease; (v) meet all other criteria of 11 U.S.C. Section 365(b)(3); and (v)
the prior written consent of any mortgagee to which this Lease has been
assigned as collateral security; and (vi) the Premises at all times remains a
single unit and no Alterations or physical changes of any kind may be made
unless in compliance with the applicable provisions of this Lease, except that
if and to the extent that any of the above provisions, if enforced, would
violate the Bankruptcy Code then in existence, then such provisions shall be
conformed to the Bankruptcy Code then in existence.
(d) Any person or entity to whom this Lease is assigned pursuant to the
provisions of the Bankruptcy Code will be deemed without further act or deed to
have assumed all of the obligations arising under this Lease on or after the
date of such assignment. Any such assignee will upon demand execute and
deliver to Landlord an instrument confirming such assumption.
23.4 Construction. The terms of this Article will be in addition to, but
not exclusive of, any rights or remedies of Landlord in Article 22 and
elsewhere in this Lease or otherwise available at law or in equity, and will
not be deemed to limit Landlord, except as may be required by law.
EXHIBIT "F"
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<PAGE> 112
EXHIBIT "G"
LANDLORD'S SERVICES
In addition to Landlord's obligations in Article 12 and the rest of this
Lease, Landlord shall furnish (as part of Operating Costs) the following
services during the term of the Lease and any renewals:
I. Outside Maintenance:
A. All parking areas and access ways will be plowed of snow and
ice and sanded as reasonably required and practicable. All paths
and walkways will be shoveled of snow and sanded as reasonably
required and practicable.
B. All landscaped areas and exterior grounds shall be kept in a
neat appearance.
C. Lighting of all parking areas and roadways.
II. Miscellaneous Services:
A. Render pest control services as reasonably required.
B. Wash exterior windows at least once per year.
III. Janitorial Services: None, Tenant responsible for all Janitorial Services.
IV. Trash: Tenant will have access to trash compactor(s) (or the equivalent)
for standard office-usage trash disposal. Landlord provides hauling from
compactor.
EXHIBIT "G"
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<PAGE> 113
Landlord will provide or hire the personnel necessary to provide the
services set forth herein, including, if necessary, on-site personnel (and
the costs related to all of such personnel shall be part of Operating
Costs).
EXHIBIT "G"
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<PAGE> 114
EXHIBIT "I"
[INTENTIONALLY OMITTED]
<PAGE> 115
ADDENDUM #1
ROOFTOP COMMUNICATIONS EQUIPMENT
Subject to the following and the rest of this Article and this Lease,
Tenant may install satellite dishes and other communications equipment and
antennas of reasonable size on the roof of the Building in a mutually agreeable
location, or in another mutually agreeably location. Notwithstanding anything
to the contrary, Tenant will be responsible for all Liabilities in connection
with these satellite dishes and antennas and associated Systems and Equipment,
including, without limitation, installation, removal, operation, maintenance,
insurance, taxes and other costs and fees, and any necessary alterations or
improvements to the Building or the rest of the Premises. Tenant also will be
solely responsible for securing all federal, state and local permits in
connection with the installation and operation of these satellite dishes and
antennas prior to installation and for complying with all applicable Laws. If
these satellite dishes and antennas are on a roof, Tenant will secure from the
membrane roofing manufacturer certification that the installation is compatible
with all design requirements and that this installation will not void the
existing roof warranty. This certification must be delivered to Landlord before
installation begins. Tenant also will use only a manufacturer-authorized
roofing contractor for any work that requires the penetration of the existing
membrane roofing system. Upon the expiration or earlier termination of this
Lease, Tenant, at its expense, will remove these satellite dishes or antennas
and all
ADDENDUM #1
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associated Systems and Equipment and repair all damage. Notwithstanding
anything to the contrary, Landlord will have no Liabilities in connection with
these satellite dishes or antennas and associated Systems and Equipment, and
Tenant will indemnify Landlord for and hold it free and harmless from all
Liabilities arising out of or in connection with these satellite dishes or
antennas and all associated Systems and Equipment.
ADDENDUM #1
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<PAGE> 117
ADDENDUM #2
EXTENSION OPTIONS
1. Grant of Extension Options. Landlord grants to Tenant seven (7)
options (the "Extension Options") to extend the Lease term for additional terms
of ten (10) years each on the same terms and conditions as this Lease, except
that there will be no further right to extend and except as set forth below.
Except as specifically set forth in Section 4 below, the Extension Options can
be exercised only by Tenant delivering unconditional written notice of exercise
to Landlord on or before the later of: two (2) years before the expiration of
the then-current term; or fifteen (15) days after Landlord's written notice to
Tenant of Tenant's failure to exercise, which notice may be given at any time
after two (2) years before the expiration of the then-current term. If for any
reason Landlord does not actually receive Tenant's unconditional written notice
of exercise when required, at Landlord's election the Extension Options will
lapse and become null and void and there will be no further right to extend the
Lease term. If Tenant does not validly exercise an Extension Option, that
Extension Option and all subsequent Extension Options shall, at Landlord's
election, lapse and become null and void. The Extension Options are personal to
the Tenant originally named in this Lease and may not be exercised by anyone
else (except for an assignee pursuant to a valid assignment of this Lease, and
then only if prior to the date for exercise set forth in this Lease the
assignor and the
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assignee deliver to Landlord a jointly executed and unconditional written
notice stating that the specific Extension Option may be exercised by the
assignee; provided that notwithstanding anything to the contrary, if there is a
valid assignment of this Lease then thereafter only the assignee will have the
right to exercise any Extension Options and such exercise shall be subject to
the terms above). The Extension Options are granted to and may be exercised by
Tenant on the express condition that, at the time of the exercise and at all
times before the beginning of each Extension Option period, Tenant is not in
default (and has not committed acts which would constitute a default with the
passage of time or the giving of notice). TIME IS ABSOLUTELY OF THE ESSENCE.
2. No Additional Work. Landlord will not be required to perform or pay
for any work or other improvement to the Premises, and subject to the other
terms of this Lease Tenant will accept the Premises in its then "as is"
condition in all respects. The annual base rent for each Lease Year of each
Extension Option period will be as set forth in Exhibit "D."
3. Cancellation. Tenant shall not have the right or power to exercise
any Extension Options if it first has exercised the Cancellation Option or if
this Lease has otherwise expired or been terminated pursuant to its terms, and
Tenant shall not have the right to exercise the Cancellation Option if it first
has exercised any of the Extension Options.
ADDENDUM #2
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4. Special Extension Option. If pursuant to Addendum #4 Tenant exercises
the third (3rd) Purchase Option at the end of the sixteenth (16th) Lease Year
and thereafter Landlord fails to close on the sale of the Premises to Tenant
due to Landlord's default under Addendum #4, or if Landlord commences any case,
proceeding or other action seeking reorganization, arrangement, adjustment,
liquidation, dissolution or composition of it or its debts under any law
relating to bankruptcy, insolvency, reorganization or relief of debtors, or
seeking appointment of a receiver, trustee, custodian or similar official for
it or for all or any substantial part of its property, or any such case,
proceeding or action is commenced against Landlord and is not stayed or
dismissed before the closing and Landlord fails to close as a result thereof
(the "Landlord Bankruptcy"), THEN, the Extension Options granted to Tenant in
accordance with this Addendum #2 shall be exercisable by Tenant in accordance
with this Addendum #2, except that Tenant may exercise the first (1st)
Extension Option by giving Landlord written notice thereof in accordance with
Section 1 above within thirty (30) days after the earlier of the scheduled
closing date or the date of the Landlord Bankruptcy, but in any case prior to
the expiration of the initial Lease term, and otherwise in accordance with this
Addendum. Exercise of the first (1st) Extension Option by Tenant as provided
in this Section 4 shall in no manner affect or extinguish the rights and
obligations of Landlord and Tenant under or in connection with Tenant's
exercise of the third (3rd) Purchase Option.
ADDENDUM #2
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ADDENDUM #3
NET PROCEEDS
1. Cash Proceeds. "Cash Proceeds" means: all cash proceeds actually
received by or on behalf of Landlord that Landlord is permitted to retain (for
example, if Landlord must refund an overpayment to Tenant or a third party, the
amount refunded will not be deemed to be "retained" by Landlord nor shall it be
a part of Cash Proceeds hereunder) from the sale, leasing (including base rent
and additional rent), assignment, subleasing, initial financing (including,
without limitation, the initial financing secured by the Premises and any
financing secured by the Letter of Credit, but subject, however, to Addendum
#7), refinancing, encumbrance, Condemnation or other disposition of all or any
portion of the Premises or any interest therein (including any additional
buildings constructed on the Premises), and any casualty and rental insurance
proceeds received by or on behalf of Landlord that Landlord is permitted to
retain in connection with all or any portion of the Premises, any loans,
advances or capital contributions made to Landlord, indemnities paid by Tenant
to Landlord and any interest or investment income received by Landlord on such
cash proceeds. Notwithstanding the foregoing, Cash Proceeds do not include any
amounts paid to or receivable by Landlord for, as a result of or in connection
with: an exercise of the Cancellation Option or any Purchase Options; Tenant's
defaults, or any judgments, settlements or awards paid by Tenant or its
Affiliates; amounts drawn
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under the Letter of Credit or the application(s) of any cash security deposit,
or any late charges or interest payable by Tenant; the Transfer of any interest
in Landlord or in any of its partners or other Control Affiliates; or
development fees, management fees or fees in lieu thereof payable to Landlord
or its Affiliates pursuant to this Lease or in connection with Landlord's Work
or in connection with the construction of any additional buildings on the
Premises or the enlargement or other modification of the Building or the rest
of the Premises; or any Excess Refinancing Proceeds as described in Section 3
of Addendum #5; or any Net Proceeds distributed or distributable to Landlord
pursuant to Section 3 below.
2. Costs. "Costs" means: all bona fide costs and expenses of any type
paid by Landlord or its Affiliates, or reasonably anticipated by Landlord to be
payable by Landlord or its Affiliates, for, as a result of or in connection
with all or any portion of the Premises or any interest therein or any
ownership, operation, management, maintenance, repair, restoration,
replacement, improvement, leasing (other than the payment of Net Proceeds
hereunder), financing, refinancing or Transfer by Landlord thereof (whether or
not included as part of Operating Costs, but not including any sale or
conveyance to any of Landlord's Control Affiliates), or the establishment and
maintenance of Landlord's existence in good standing as an entity, or any
rights or Liabilities in connection with any of the foregoing, including,
without limitation, costs and expenses for: the acquisition, sale or other
disposition of all or any portion
ADDENDUM #3
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of the Premises and any rights appurtenant thereto (including, without
limitation, all costs for due diligence, investigations, remedial work, closing
costs, escrow and title fees, legal fees, professional fees and commissions);
Landlord's Work and all other labor, services and materials supplied to or for
the benefit of the Premises (including any additional buildings constructed on
the Premises) and/or Tenant under or in connection with this Lease (including,
without limitation, costs for designers, architects, engineers, draftsmen,
supervision, permits and approvals, development fees (other than those payable
to Landlord or its Affiliates which are excluded from Cash Proceeds as set
forth in Section 1 above), fees, profit and savings payable to construction
managers, contractors and subcontractors, and all other reasonably related
"hard" and "soft" costs); financing, refinancing and encumbrance of the
Premises or any interest therein (including, without limitation, payment of all
principal, interest, fees, commissions, appraisals, escrow and title fees,
other closing costs, interest rate hedges, "caps" or "floors," and other costs
in connection therewith and other amounts owed under any of the loan
documents); the repayment of all bona fide capital contributions, loans or
advances made by Landlord or its partners or their respective Affiliates
(including, without limitation, the repayment of such amounts and commercially
reasonable interest on such loans and a commercially reasonable rate of return
on such contributions or advances, which in any case will be at least equal to
the Bank of Boston's (or its successor's) prime rate plus one percent (1%), or
the maximum rate permitted by law, whichever
ADDENDUM #3
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is less, and commercially reasonable closing costs, commissions and/or loan
fees or similar fees in order to obtain such loans, contributions or advances);
the payment and performance of all of Landlord's Liabilities and the exercise
of Landlord's rights under or in connection with this Lease or the Premises or
agreements in connection therewith (including, without limitation, costs for
Taxes, Operating Costs, amounts in connection with Hazardous Substances and
environmental protection, compliance will all Laws, indemnity and defense
costs, and other costs in connection therewith and other amounts owed under any
of the loan documents); attorneys' fees and other costs in connection with the
defense or prosection of any litigation, proceedings, claims or counterclaims
or as otherwise deemed necessary by Landlord; the payment and performance of
all of Landlord's liabilities under or in connection with Tenant's existing
leases at the Tower of Northwoods in Danvers, Massachusetts, judgments,
claims, awards or settlements, whether due to the fault of Landlord or its
partners or otherwise; an amount per calendar year equal to forty percent
(40%) of an amount (the "Tax Payments") equal to: Landlord's taxable income (if
any) in the prior calendar year (other than the taxable income resulting solely
from the sale or the conveyance of the Premises) less the amounts paid to
Landlord for that prior calendar year pursuant to this Subclause of this
Section 2, and if in any year the Tax Payments are not fully paid, then the
unpaid Tax Payments shall cumulate and be paid as Costs as soon as there are
sufficient Cash Proceeds; the preparation of Landlord's annual audited
financial statements and any other
ADDENDUM #3
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information to be provided by Landlord under this Lease (including audits of
Net Proceeds) and tax returns; corporate or partnership license fees, filing
fees, business and franchise taxes and fees, and similar charges; and reserves
deemed reasonably necessary by Landlord in connection with any of the
foregoing. Unless otherwise specifically agreed and set forth in this Lease
(e.g., with respect to the interest rate on loans or the return on capital, or
with respect to management fees or fees in lieu thereof, or budgeted
development fees), amounts payable as Costs by Landlord to any of its
Affiliates for services rendered shall not exceed the prevailing rates that
would be payable to unaffiliated third parties in an arms-length transaction.
Costs do not include any of the above amounts which are directly paid by Tenant
or which are funded by insurance.
3. Payment of Net Proceeds. "Net Proceeds" means, from time to time, an
amount equal to the positive amount, if any, obtained by taking an amount equal
to the current amount of Cash Proceeds and deducting therefrom an amount equal
to the current amount of Costs. Prior to any distribution of Net Proceeds to
Landlord or any of its Control Affiliates, Landlord first will pay to Tenant
Net Proceeds in amount equal to: the unrepaid Reconstruction Costs (if any)
until the Reconstruction Costs have been repaid in full; and the unrepaid Cure
Payments (if any) until the unrepaid Cure Payments have been repaid in full;
and the reasonable costs and expenses incurred by Tenant in good faith to third
parties in validly exercising its Right of Self Help as set forth in Section
14.4, but
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excluding therefrom any of such costs and expenses that otherwise would qualify
as Operating Costs under Article 7. Thereafter, Landlord will pay to Tenant
one-half (1/2) of all Net Proceeds available for distribution at the same times
as Net Proceeds are distributed by Landlord to its Control Affiliates. These
payments to Tenant will be deemed to be a reduction in Tenant's rent already
paid from time to time under this Lease (although they may not be credited,
offset or deducted against Tenant's current or future rent payments owed).
Payments of Net Proceeds to Tenant during any year shall be subject to an
annual reconciliation for that year (which shall occur after the end of that
year), and any amounts overpaid to Tenant or owed by Landlord shall be adjusted
in cash between the parties within thirty (30) days after such annual
reconciliation is delivered. Upon Tenant's written request in each instance,
Landlord will furnish to Tenant reasonable backup information for its annual
reconciliations, including copies of Landlord's most recent financial
statements. Within ninety (90) days after delivery of each of Landlord's
annual reconciliations, and upon at least fourteen (14) days' prior written
notice to Landlord, not more than once in each calendar year Tenant may audit
Landlord's books and records applicable to the period after the last annual
reconciliation in order to verify the accuracy of Landlord's calculation of Net
Proceeds. Such audit will be conducted only during regular business hours
where Landlord maintains its books and records (which Landlord agrees will be
in Massachusetts or California) and Tenant will deliver a copy of the audit to
Landlord within fifteen (15) days after receipt by Tenant. All audits will be
conducted at Tenant's cost and expense and shall be conducted only by Tenant or
its designated professional representatives.
ADDENDUM #3
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4. Termination of Rights. Notwithstanding anything to the contrary, as
of the date of the first occurrence of any or all of the following, at
Landlord's election all of Tenant's rights and Landlord's obligations under or
in connection with this Addendum will terminate and lapse completely, except
that the entity that is the Landlord immediately prior to the occurrence of any
or all of the following shall remain obligated to pay to Tenant (or at such
entity's election credit against amounts owed by Tenant to such entity) Tenant's
share of undistributed Net Proceeds (if any) existing as of the date of such
occurrence:
(a) The termination or expiration of this Lease in accordance with its
terms, by reason of the exercise of Tenant's Cancellation Option or otherwise.
(b) A default by Tenant under this Lease.
(c) The closing of any Purchase Option or, unless the No-sale Election
first has been validly elected, another bona fide sale or other conveyance by
Landlord of all or any portion of the Premises, or any interest therein (which
shall not be deemed to include an interest in Landlord), which sale or
conveyance is not prohibited under this Lease, but Tenant's rights and
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Landlord's obligations with respect to Net Proceeds shall continue with respect
to the portions of the Premises or interests therein, if any, still retained by
Landlord and with respect to any Net Proceeds received by Landlord in
connection with such sale or other conveyance (except with respect to a sale
pursuant to a Purchase Option).
5. Unaffected Parties. Notwithstanding anything to the contrary,
Tenant's rights and Landlord's obligations under this Addendum will not be
binding on and will not affect or otherwise apply in any way to:
(a) Any party that, in a bona fide transaction, purchases or otherwise
acquires all or any portion of the Premises or any interest therein, or its
successors, assigns and purchasers, or their respective Affiliates (unless the
No-sale Election first has been validly elected or unless any such sale or
conveyance is prohibited under this Lease); or
(b) Landlord's Mortgagees, whether or not they take title to or acquire
all or any portion of the Premises or any interest therein, and their
successors, assigns and purchasers, or their respective Affiliates.
ADDENDUM #3
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6. Personal Rights. Notwithstanding anything to the contrary, the rights
granted to Tenant under or in connection with this Addendum are granted to and
may be exercised only by the Tenant originally named in this Lease, and they
may not be exercised by anyone else (other than by an assignee to whom such
rights have been entirely assigned pursuant to a valid assignment of this
Lease, if at the time of such assignment the assignor and the assignee deliver
to Landlord a jointly executed written notice stating unconditionally that the
assignee has the right to exercise such rights), and Tenant shall not, and
shall not have the right or power to, otherwise assign or Transfer any of these
rights. If at the time of a valid assignment the assignor and the assignee
deliver to Landlord a jointly executed written notice directing Landlord to pay
a portion of the Net Proceeds otherwise payable to the assignee instead to the
assignor, then Landlord will continue to pay that portion of the Net Proceeds
to the assignor until and unless Landlord receives from the assignor and the
assignee a jointly executed written notice changing such direction to Landlord
and then Landlord shall pay in accordance with the new direction.
ADDENDUM #3
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ADDENDUM #4
PURCHASE OPTIONS
1. Grant and Exercise. Provided that this Lease is in full force and
effect, and subject to the terms hereof, Landlord grants to Tenant three (3)
options (the "Purchase Options") to purchase the Premises from Landlord, which
Purchase Options must be exercised during the following periods:
(a) The first (1st) Purchase Option can be exercised only during the first
month of the fifth (5th) Lease Year.
(b) The second (2nd) Purchase Option can be exercised only during the
first month of the tenth (10th) Lease Year.
(c) The third (3rd) Purchase Option can be exercised only during the last
month of the sixteenth (16th) Lease Year.
The Purchase Options can be exercised only by Tenant delivering unconditional
written notice of exercise to Landlord as and when required together with a
cashier's check or the wire transfer of funds to Landlord in an amount equal to
five percent (5%) of the total purchase price under the applicable Purchase
Option. These funds shall be placed by Landlord into a separate
interest-bearing account or other mutually agreeable investment instrument and
these funds and all interest earned thereon collectively are called the
"Deposit." When and if the
ADDENDUM #4
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closing under the applicable Purchase Option occurs, the Deposit shall be
credited against the cash portion of the purchase price payable by Tenant
thereunder. If the Deposit is in excess of the cash portion of the purchase
price payable by Tenant, the excess shall be returned to Tenant as of the
closing. If for any reason Landlord does not actually receive this
unconditional written notice of exercise and the Deposit as and when required,
at Landlord's option the applicable Purchase Option will lapse and become null
and void.
At Landlord's election, the Purchase Options and all of Tenant's rights
and Landlord's obligations under this Addendum and Addendum #5 shall lapse and
become null and void if: (i) Tenant defaults under the rest of this Lease at
any time prior to the exercise of a Purchase Option or any closing thereunder;
or (ii) Tenant defaults under this Addendum, or defaults in connection with
any closing under, or fails to close as required after the exercise of, a
Purchase Option (a "Purchase Option Default"). If Tenant commits a Purchase
Option Default Tenant also shall waive as against Landlord and its Affiliates
all Liabilities and defaults (if any) of or by any of them under this Lease
that directly arise from or in connection with the Purchase Option Default, and
Landlord shall retain the Deposit as its sole and liquidated damages for the
ADDENDUM #4
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Purchase Option Default, and if Tenant commits more than one Purchase Option
Default, at Landlord's election the Purchase Options and all of Tenant's rights
and Landlord's obligations under this Addendum and Addendum #5 shall lapse and
become null and void. (A Purchase Option Default is not the same as a default
described in Section 4(c) of this Addendum.)
ADDENDUM #4
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2. Purchase Price.
(a) The cash portion of the purchase price for the Premises shall be
payable by cashier's check or wire transfer of immediately available funds to
or at the direction of Landlord and will be payable in full on or before the
scheduled closing date. In addition to the cash portion of the purchase price,
as of the closing Tenant shall either repay in full all mortgage loan(s)
secured by the Premises, and any other loan secured by the Letter of Credit (if
separate from such mortgage loan(s)), other than those that are Unpermitted
Financing (the "Existing Loans") (including, without limitation, any prepayment
or "breakage" fees or similar charges) or assume the Existing Loans, and in
any case Tenant will cause the lender(s) to release Landlord and its Affiliates
as of the closing from all Liabilities in connection with the Existing Loans
and Tenant shall indemnify and hold Landlord and its Affiliates harmless from
all further Liabilities in connection with the Existing Loans. In addition to
the purchase price, Tenant shall pay all closing costs of any type (other than
Landlord's attorneys' fees and costs), including, without limitation,
commissions (if any) and the costs of deed stamps and documentary and transfer
taxes and fees, surveys, title insurance, escrows, recording and other similar
fees and costs. Base rent will be prorated between the parties as of the
closing date, but there will be no other prorations or adjustments.
ADDENDUM #4
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(b) The cash portion of the purchase price for the Premises shall be never
be less than zero, but otherwise shall be equal to the following amounts:
(i) For the first (1st) Purchase Option, an amount equal to: (x) ten (10)
times the "Current Base Rent Amount" (defined below); less (y) the "Existing
Mortgage Balance" (as defined below). The "Current Base Rent Amount" means the
scheduled annual base rent payable under this Lease as of the date of closing,
without any deductions, offsets or abatements of any type, and including,
without limitation, scheduled annual base rent payable in connection with any
other space leased or agreed to be leased from Landlord in a new building or
new buildings, or an enlargement of the Building, on the Premises. If an
agreement has been entered into to lease such other space or a right to lease
such other space has been exercised prior to closing but the full base rent
applicable thereto has not commenced or cannot be accurately determined as of
the closing, then the scheduled annual base rent applicable to that Expansion
Option shall be reasonably estimated by Landlord. (As a hypothetical example,
if the scheduled annual base rent at the closing is $3,000,000.00, this amount
would be $30,000,000.00.) The "Existing Mortgage Balance" means the
outstanding principal balance (not including any prepayment or "breakage" fees
or similar charges) as of the closing date under an exercised Purchase Option
of any Existing Loans.
ADDENDUM #4
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(ii) For the second (2nd) Purchase Option, an amount equal to: (x) eight
and one-half (8 1/2) times the Current Base Rent Amount; less (y) the Existing
Mortgage Balance; and less (z) the purchase price paid by Tenant to 1776
Limited Partnership if Tenant has previously purchased the 1776 Premises from
1776 Limited Partnership.
(iii) For the third (3rd) Purchase Option, an amount equal to: (x) five
(5) times the Current Base Rent Amount; less (y) if the No-sale Election first
has been validly elected, one-half (1/2) of any Excess Refinancing Proceeds
distributed to Landlord or its Control Affiliates; and less (z) the outstanding
principal balance of any Unpermitted Financing secured by the Premises (and
Tenant shall then either repay in full or assume such Unpermitted Financing,
and if and to the extent that the deduction of such outstanding principal
balance otherwise would reduce the Purchase Price below zero, Landlord shall
pay to Tenant at the Closing cash an amount equal to the amount by which the
Purchase Price otherwise would have been reduced below zero).
As a hypothetical example, if the second (2nd) Purchase Option is validly
exercised, the Current Base Rent Amount is $3,000,000.00, and as of the closing
the Existing Mortgage Balance is $17,000,000.00, then the cash portion of the
purchase price payable to Landlord would be only $8,500,000.00 and Tenant would
repay or assume the existing $17,000,000.00 mortgage loan secured by the
Premises, for a total purchase price of $25,500,000.00.
ADDENDUM #4
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3. Closing. The closing under an exercised Purchase Option will occur at
a location in Massachusetts and on a date specified by Landlord pursuant to
written notice to Tenant, which date will be: during the last four (4) months
of the fifth (5th) Lease Year (for the first (1st Purchase Option); during the
last four (4) months of the tenth (10th) Lease Year (for the second (2nd)
Purchase Option); and during the ninth (9th), tenth (10th) and eleventh (11th)
months of the last Lease Year of the initial Lease term (for the third (3rd)
Purchase Option). At the closing, Landlord will execute and deliver to Tenant
a Massachusetts Quitclaim Deed (which will be subject to all matters of record
and all title and survey exceptions), an affidavit of Landlord stating
Landlord's U.S. taxpayer identification number and that Landlord is not a
"foreign person" within the meaning of Section 1445(f)(3) of the Internal
Revenue Code of 1986, as amended or Landlord shall provide the necessary forms
if Landlord is a "foreign person"), and a blanket assignment to Tenant of all
third party guaranties, warranties, permits, certificates, consents and
approvals pertaining to the Premises that are assignable by Landlord, to the
extent assignable at no cost or Liabilities to Landlord (unless Tenant advances
such costs and discharges such Liabilities, in which case they shall be
assigned to the extent assignable by Landlord).
ADDENDUM #4
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4. Additional Terms.
(a) Tenant specifically acknowledges and agrees that Landlord will sell
and Tenant will purchase the Premises on an "as is with all faults" basis,
subject to all exceptions to and defects of title, whether or not of record
(but subject also to Tenant's rights and Landlord's obligations as set forth
below), and that Tenant will not rely on nor will Landlord or any of its
Affiliates be deemed to have made, any representations or warranties of any
kind, express or implied including, without limitation, those in connection
with the physical condition of the Premises (including, without limitation, any
matters involving Hazardous Substances or compliance with any Laws), or the
nature of title to the Premises, or the advisability of Tenant's purchase of
the Premises). However, until and unless Tenant otherwise agrees in writing or
defaults Landlord will not voluntarily execute any documents affecting title
that materially adversely affect Tenant's operations or that render title to
the Premises unmarketable (but easements, dedications or other documents for
utilities or curb cuts, or as otherwise may be needed to comply with applicable
Laws or to enable Landlord to meet its obligations under this Lease or in
connection with the construction of any new building(s) or the enlargement of
the Building per this Lease, will not be deemed to be violations of this
restriction). If this restriction is violated after the exercise of a Purchase
Option, Tenant shall have the right to terminate that Purchase Option without
liability and receive the Deposit back. Notwithstanding the foregoing, even if
ADDENDUM # 4
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Tenant has validly exercised a Purchase Option, Tenant shall have the right to
terminate that Purchase Option without liability (except for Landlord's
out-of-pocket costs) and shall not be required to close the purchase if, after
the exercise of the Purchase Option but prior to closing, there is a casualty
that causes damage of the type and to the extent described in Section
16.2(b)(x) such that Tenant otherwise would have the right to terminate this
Lease, and in the reasonable judgement of a qualified independent contractor
hired by Landlord it will take more than two (2) years from the date of the
damage to restore access or restore or replace the destroyed parking spaces or
substantially complete the repairs that Landlord would have been required to
make, and Tenant notifies Landlord of its intent to terminate within thirty
(30) days after receiving the notice from Landlord's contractor, which shall be
provided as soon as reasonably practicable after the damage occurs. If these
circumstances occur, the closing date shall be extended as necessary to
accommodate this thirty (30)-day period. If Tenant does not so terminate, or
if Tenant is not permitted to so terminate as a result of a casualty, as of the
closing Landlord will assign to Tenant all casualty insurance proceeds
otherwise payable to Landlord on account of the damage and all rights and
claims in connection therewith (other than those which Landlord was entitled to
receive for the period and/or for the work and services performed prior to the
closing). Notwithstanding anything to the contrary, if Landlord is in the
process of repairing or rebuilding casualty damage and Tenant subsequently
validly exercises a Purchase Option: Landlord will continue the
ADDENDUM # 4
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process of repairing or rebuilding as otherwise required in this Lease until
the closing date under the Purchase Option; Tenant will be deemed to have
waived its right to terminate this Lease under Article 16, and its right to
terminate the Purchase Option in connection with that casualty or any repairs
or rebuilding in connection therewith; Landlord will assign to Tenant as of the
closing all casualty insurance proceeds otherwise payable to Landlord on
account of the damage and all rights and claims in connection therewith (other
than those which Landlord was entitled to receive for the period and/or for the
work and services performed prior to the closing), and Landlord shall assign to
Tenant and Tenant shall assume all rights and Liabilities of Landlord under the
contracts entered into in connection with the repair or rebuilding to the
extent assignable and Tenant shall indemnify Landlord and its Affiliates for
and hold them harmless from all Liabilities in connection therewith; and
Landlord shall be obligated to continue to repair or rebuild after the closing
date only if and to the extent actually agreed to by Landlord and Tenant in
good faith and in writing at the time.
(b) As of the closing, Tenant and its Affiliates will be deemed to have
released and discharged Landlord and its Affiliates from, and to have waived,
all Liabilities of any type, known or unknown, including, without limitation,
Liabilities under or in connection with this Lease and/or the Premises (except
as set forth in the last sentence of Subsection (c) below). As a condition to
closing, Landlord may require that Landlord's Mortgagees release Landlord and
its Affiliates from Liabilities under or in connection with any Superior Leases
or Mortgages. From and after the closing, Tenant shall indemnify, defend and
hold Landlord free and harmless from all Liabilities under or in connection
with this Lease and/or the Premises and/or the purchase thereof (except as set
forth in the last sentence of Subsection (c) below).
ADDENDUM # 4
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(c) Time is of the essence in this Addendum. If Tenant defaults hereunder
after the closing under a Purchase Option or Tenant or Landlord defaults under
any of the documents delivered by it in connection therewith, in addition to
any rights and remedies available to each of the respective parties, each party
shall have all rights and remedies at law and in equity, all of which are
cumulative and not exclusive, including, without limitation, the right to
require specific performance. The exercise of a Purchase Option or any closing
as a result thereof shall not relieve Tenant or Landlord from any Liabilities
for any defaults under this Lease, nor will they extinguish Liabilities for any
indemnities or other obligations that survive pursuant to the terms of the rest
of this Lease or this Addendum.
(d) Notwithstanding anything to the contrary, as of the date of the first
occurrence of any of the following, at Landlord's election all of Tenant's
rights and Landlord's obligations under or in connection with this Addendum
will lapse and become null and void upon:
ADDENDUM # 4
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(i) The exercise of Tenant's Cancellation Option or the expiration of the
Lease term (as validly extended) or termination of this Lease in accordance
with its terms prior to the exercise of a Purchase Option or any closing
thereunder; or
(ii) The bona fide purchase or other acquisition of all or substantially
all of the Premises by any person or entity (including, without limitation,
Tenant or its Affiliates) other than by any of Landlord's Control Affiliates
prior to the exercise of a Purchase Option and other than any sale or
conveyance which is prohibited under this Lease.
(e) Notwithstanding anything to the contrary, Tenant's rights and
Landlord's obligations under or in connection with this Addendum will not be
binding on and will not affect or otherwise apply in any way to Landlord's
Mortgagees or their successors, assigns and purchasers, or their respective
Affiliates, whether or not they take title to or acquire all or substantially
all of the Premises.
ADDENDUM #4
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5. Personal Rights. Notwithstanding anything to contrary, the Purchase
Options are granted only to and may be exercised only by the Tenant originally
named in this Lease, and they may not be exercised by anyone else (other than
by an assignee to whom the right to exercise a Purchase Option has been
assigned pursuant to a valid assignment of this Lease, if at the time of such
assignment the assignor and the assignee deliver to Landlord a jointly executed
written notice stating unconditionally that the assignee has the right to
exercise such Purchase Option) and Tenant shall not, and shall not have the
right or power to, otherwise assign or otherwise Transfer any of the Purchase
Options or any rights in connection therewith. Tenant may assign this Lease
without granting to the assignee the right to exercise any or all of the
Purchase Options, and in such event Tenant will retain the rights to exercise
any Purchase Options whose exercise rights have not been validly assigned as
set forth in this Addendum, if and only if Tenant has not become a Released
Assignor in connection with its assignment of this Lease.
ADDENDUM # 4
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ADDENDUM #5
RIGHT OF FIRST OFFER TO PURCHASE
1. Grant of Rights.
(a) Subject to the terms of this Addendum, before Landlord sells or
conveys the Premises during the first eighteen (18) Lease Years (other than
pursuant to a sale or conveyance to any of Landlord's Control Affiliates)
Landlord shall notify Tenant in writing (the "Offer Notice") of the purchase
price and the terms of payment thereof (e.g., all cash, or cash and purchase
money financing or assumption of debt) that Landlord intends to accept for the
Premises (the "Offer Price").
(b) Within ninety (90) days after delivery of the Offer Notice, Tenant
shall notify Landlord in writing that it unconditionally elects one of the
three (3) following alternatives:
(i) To purchase the Premises for the applicable Offer Price and otherwise
on the terms of this Addendum. (Tenant's election of the alternative described
in this Subsection (i) is referred to as the "Purchase Election.")
(ii) To cause Landlord not to sell the Property during the first eighteen
(18) Lease Years . (Tenant's election of the alternative described in this
Subsection (ii) is referred to as the "No-sale Election.")
ADDENDUM # 5
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(iii) To permit Landlord to sell or convey the Premises in accordance
with Addendum and to continue to lease the Premises on the terms of this Lease.
(Tenant's election of the alternative described in this Subsection (iii) is
called the "Existing Lease Election.")
(b) TIME IS ABSOLUTELY OF THE ESSENCE. If for any reason Landlord does
not actually receive Tenant's unconditional written notice of election as and
when required, Tenant shall be deemed to have elected the No-sale Election. At
Landlord's election, all of Tenant's rights and Landlord's obligations under or
in connection with this Addendum and Addendum #4 shall lapse and become null
and void if Tenant defaults hereunder or under the rest of this Lease at any
time prior to the exercise of its rights hereunder or any closing hereunder, or
if Tenant defaults in connection with any closing hereunder or fails to close
as required after its election of the Purchase Election (an "Offer Default").
Any amounts payable under this Addendum in connection with the Purchase
Election are deemed to be amounts payable under the Lease, and any default
hereunder will be deemed to be a default under the Lease and in such case
Landlord shall be entitled to all rights and remedies hereunder and under the
rest of the Lease, including, without limitation, the right to require specific
performance from Tenant. If Tenant commits an Offer Default, Tenant also shall
indemnify and hold Landlord harmless from and against all Liabilities incurred
by Landlord that arise from or in connection with the Offer Default.
ADDENDUM # 5
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2. Purchase Election. If Tenant validly exercises the Purchase Election,
then Landlord shall sell and Tenant shall purchase the Premises and the
following terms and conditions of Addendum #4 are incorporated herein and shall
apply with respect to this Addendum and such sale and purchase as if it were
the sale and purchase under an exercised Purchase Option: Section 2(a) (except
that the applicable purchase price and the terms of the payment thereof shall
be as set forth in the Offer Price, or if there is an outstanding mortgage or
mortgages on the Premises at such time Tenant shall assume the mortgage(s) and
the cash portion of the Offer Price shall be deemed reduced by the outstanding
principal balance of the mortgage(s) assumed); Section 3 (except that the
closing date will be a date specified by Landlord that will be at least three
(3) months but no more than six (6) months after Tenant's notice of election;
and Sections 4(a), (b), (c) and (e).
3. No-sale Election. If Tenant validly elects the No-sale Election,
then:
(a) Until and unless Tenant otherwise agrees in writing, or Tenant
defaults under this Lease or Tenant's rights under this Addendum #5 terminate,
or the 18th Lease Year expires (whichever is earliest), Landlord will not sell
or convey the Premises except to one of Landlord's Control Affiliates or to
Tenant or one of its Related Entities or pursuant to the exercise of a Purchase
Option; and
ADDENDUM # 5
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<PAGE> 145
(b) Notwithstanding anything to the contrary, all "Excess Refinancing
Proceeds" (defined below) shall belong solely to Landlord and no portion
thereof shall be deemed to be part of Cash Proceeds pursuant to Addendum #3 or
otherwise payable or distributable to Tenant. However, if Tenant validly
exercises the third (3rd) Purchase Option in accordance with Addendum #4, then
Tenant shall receive the credit against the purchase price payable by Tenant as
described in Section 2(b) (iii) of Addendum #4. "Excess Refinancing Proceeds"
means all of the net proceeds actually distributed to Landlord that are
directly traceable to and result from excess proceeds from mortgage
refinancings first encumbering the Premises after the No-sale Election if and
to the extent that the disbursed principal balance of each such refinancing
exceeds: the outstanding principal balance and all accrued and unpaid interest
and other charges (including, without limitation, prepayment and "breakage"
fees and similar charges) under loan(s) that were repaid by such refinancing;
plus any other Liabilities and reserves therefor that were paid with the
proceeds of such refinancing. There shall not be deemed to be any Excess
Refinancing Proceeds arising from the funding of the financing described in
Section 19.4(a).
ADDENDUM # 5
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<PAGE> 146
4. Existing Lease Election.
(a) If Tenant validly elects (or is deemed to have elected) the Existing
Lease Election, then for the next twelve (12) months after Tenant's election,
Landlord may not sell or convey the Premises (other than pursuant to a sale or
conveyance to any of Landlord's Control Affiliates) for a purchase price which
is less than ninety-seven percent (97%) of the applicable Offer Price without
first delivering to Tenant a new Offer Notice with an Offer Price equal to such
new, lower purchase price. If Landlord delivers such a new Offer Notice, then
Tenant shall have the right to elect either the Purchase Election or the
No-sale Election or the Existing Lease Election in accordance with the
procedures established in Section 1 above, except that Tenant will have
forty-five (45) days, and not ninety (90) days, within which to respond to
Landlord's new Offer Notice. If within twelve (12) months after Tenant validly
elects the Existing Lease Election in accordance with this Section 3 Landlord
has not executed a binding agreement to sell or convey the Premises for a
purchase price which is equal to or greater than ninety-seven percent (97%) of
the new, lower Offer Price, or if Landlord has entered into such a binding
agreement within the twelve (12)-month period but fails to close thereunder,
then the terms and conditions in Section 1 above again will apply.
ADDENDUM # 5
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<PAGE> 147
(b) If Tenant validly elects the Existing Lease Election, then Tenant will
have the right, upon written request to Landlord, to participate reasonably and
in good faith with Landlord in the negotiations conducted by Landlord to sell
or convey the Premises, which negotiations will be subject to Landlord's
control and direction. Tenant acknowledges and agrees that the manner and
substance of these negotiations are critical to Landlord, and so Tenant will
support Landlord's negotiating positions (provided that, unless Tenant
otherwise agrees, such negotiating positions do not attempt to change Tenant's
rights and obligations under this Lease) and will not attempt to delay,
obstruct or hinder these negotiations. Landlord will have the right at any
time and in its sole discretion to suspend, terminate or continue such
negotiations and, subject to Subsection (a) above, Articles 6 and 7 of this
Addendum and the parenthetical in the preceding sentence, to accept or reject
terms offered by prospective buyers and to execute documents and agreements,
binding or otherwise, in connection with a sale or conveyance of the Premises.
Tenant shall have not have the right or power nor shall it attempt to bind
Landlord in connection with a sale or conveyance of the Premises or to deal
directly or negotiate alone with any prospective buyer or its agents without
Landlord's prior written consent.
5. Termination of Rights. Notwithstanding anything to contrary, at
Landlord's election all of Tenant's rights and Landlord's obligations under or
in connection with this Addendum will lapse and become null and void upon:
ADDENDUM # 5
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<PAGE> 148
(a) The exercise of the Cancellation Option, or the termination or
expiration of the Lease term in accordance with its terms, prior to the
exercise of Tenant's rights hereunder or any closing hereunder; or
(b) Unless the No-sale Election first has been validly elected, the bona
fide purchase or other acquisition of all or substantially all of the Premises
other than by any of Landlord's Control Affiliates prior to the valid exercise
of the Purchase Election hereunder and other than any sale or conveyance which
is prohibited under this Lease; or
(c) As set forth in Section 9 below; or
(d) At the end of the eighteenth (18th) Lease Year.
6. No Sale to Direct Competitors. Unless and until Tenant's rights under
this Addendum have lapsed or terminated, Landlord shall not sell or convey the
Premises to: AT&T, Intel or Compression Laboratories, Inc.
7. Restrictions on Landlord's Sale Rights. Until and unless Tenant
defaults hereunder or the rest of the Lease, Landlord agrees that it will not
sell or convey the Premises to anyone other than Tenant or any of its Control
Affiliates or any of Landlord's Control Affiliates: for the first five (5)
Lease
ADDENDUM # 5
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<PAGE> 149
Years; or other than for cash or cash equivalents (which will be deemed to
include, without limitation, purchase money financing and/or the purchaser
assuming or taking subject to debt); or if Tenant has validly elected the
No-Sale Election.
8. Unaffected Parties. Notwithstanding anything to the contrary,
Tenant's rights and Landlord's obligations under or in connection with this
Addendum will not be binding on and will not affect or otherwise apply in any
way to Landlord's Mortgagees or their successors, assigns and purchasers or
their respective Affiliates, whether or not they take title to or acquire all or
substantially all of the Premises.
9. Personal Rights. Notwithstanding anything to contrary, the rights of
Tenant in this Addendum are granted only to and may be exercised only by the
Tenant originally named in this Lease, and they may not be exercised by anyone
else (other than by an assignee to whom such rights have been entirely assigned
pursuant to a valid assignment of this Lease pursuant to which Tenant has
become a Released Assignor, if at the time of such assignment the assignor and
the assignee deliver to Landlord a jointly executed written notice stating
unconditionally that the assignee has the right to exercise such rights) and
Tenant shall not, and shall not have the right or power to, otherwise assign or
otherwise Transfer any of its rights under or in connection this Addendum.
Tenant may assign this Lease without granting to the assignee the rights of
ADDENDUM # 5
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<PAGE> 150
Tenant under this Addendum, and in such event: Tenant will retain those rights
if and only if Tenant has not become a Released Assignor in connection with its
valid assignment of this Lease; and Tenant no longer will have the right
thereafter to exercise the No-sale Election, and if Tenant fails to make its
written election as and when required it will be deemed to have elected the
Existing Lease Election.
ADDENDUM # 5
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<PAGE> 151
ADDENDUM #7
BUDGET SAVINGS
1. Total Project Costs. "Total Project Costs" means all costs and
expenses of any type incurred or payable by Landlord or its Affiliates that
arise from or in connection with the acquisition of the Premises, the initial
financing (including without limitation any mortgage loans, loans secured by
the Letter of Credit and any permanent financing) of or for the Premises,
Landlord's Work, or any Liabilities of Landlord arising as a result of or in
connection with Tenant's existing leases at The Tower at Northwoods in Danvers,
Massachusetts, including, without limitation, costs and expenses for: the
purchase price for the Premises and any rights appurtenant thereto (including,
without limitation, all costs for due diligence, investigations, remedial work,
closing costs, escrow and title fees, legal fees, professional fees and
commissions); all labor, services and materials, designers, architects,
engineers, draftsman, supervision, permits and approvals, development fees, and
other fees, profit and savings payable to construction managers, contractors
and subcontractors, and all other "hard" and "soft" costs in connection with
Landlord's Work; all loan fees, commissions, appraisals, escrow and title fees,
other closing costs, interest rate hedges, "caps" or "floors," interest and
principal (if any) during the construction period and other costs in connection
with the initial financing of the Premises; and other Liabilities arising out
of or in connection with any of the foregoing or as set forth in Schedule
"7AAA" to this Addendum. (The parties acknowledge and agree that Schedule
"7AAA" is for illustrative purposes only, and is not binding in any way on the
parties nor is it a representation and warranty by Landlord of any type,
express or implied.)
2. Application of Savings. If and to the extent that the total amount
that Landlord is able to draw down and retain under the initial financing of
the Premises exceeds the Total Project Costs (after the Total Project Costs are
finally determined), then those excess proceeds shall be used by Landlord for
any or all of the following uses: as an interest reserve; to purchase interest
rate protection for floating rate financing (including, without limitation, for
hedges, swaps, caps or floors); or to reduce the principal balance of any
financing, or capital contributions or advances made by or on behalf of
Landlord or its Control Affiliates.
ADDENDUM #7
- 1 -
<PAGE> 1
EXHIBIT 21.1
<TABLE>
SUBSIDIARIES OF THE COMPANY
<CAPTION>
STATE OR OTHER JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION OR ORGANIZATION
------------------ ------------------------------
<S> <C>
PictureTel Securities Corporation............ Massachusetts
PictureTel International Corporation......... Delaware
PictureTel UK Limited........................ United Kingdom
PictureTel Japan, Inc........................ Japan
PictureTel GmbH.............................. Germany
PictureTel Switzerland Limited............... Switzerland
PictureTel FSC Limited....................... United States Virgin Islands
PictureTel Scandinavia AB.................... Sweden
PictureTel Australia Pty Limited............. Australia
PictureTel Technology Corporation............ Delaware
</TABLE>
All the subsidiaries are wholly owned by the Company and may do business
under their own name as well as PictureTel Corporation.
44
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of PictureTel Corporation on Form S-8 (File Nos. 33-7477, 33-19024, 33-31161,
33-36315, 33-44719, 33-49814, 33-81848) of our reports dated February 20, 1996,
on our audits of the consolidated financial statements and financial statement
schedule of PictureTel Corporation as of December 31, 1995 and 1994, and for
each of the three years in the period ended December 31, 1995, which reports are
included in this Annual Report on Form 10-K.
/S/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 29, 1996
45
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM PICTURETEL'S BALANCE SHEET & INCOME STATEMENT FOR THE PERIOD
ENDED 12/31/95, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH 12/31/95 10-K FILING.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 39,476
<SECURITIES> 54,547
<RECEIVABLES> 99,526
<ALLOWANCES> (1,791)
<INVENTORY> 43,791
<CURRENT-ASSETS> 12,446
<PP&E> 66,294
<DEPRECIATION> (43,779)
<TOTAL-ASSETS> 288,141
<CURRENT-LIABILITIES> 74,515
<BONDS> 0
<COMMON> 328
0
0
<OTHER-SE> 200,494
<TOTAL-LIABILITY-AND-EQUITY> 288,141
<SALES> 346,758
<TOTAL-REVENUES> 346,758
<CGS> 175,043
<TOTAL-COSTS> 175,043
<OTHER-EXPENSES> 147,413
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 971
<INCOME-PRETAX> 27,541
<INCOME-TAX> 7,915
<INCOME-CONTINUING> 19,626
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,626
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
</TABLE>
