SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 June 30, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________________ to
_______________.
Commission file number: 0-24784
PINNACLE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 94-3003809
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
870 Maude Avenue, Sunnyvale, CA 94086
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: (408) 720-9669
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of 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. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing sale price of the Common Stock on
August 30, 1996 as reported on the Nasdaq National Market System, was
approximately $62,798,790. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of August 30, 1996, registrant had outstanding 7,478,191 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for Registrant's Annual Meeting of
Shareholders to be held October 24, 1996. Portions of the Registrant's Annual
Report to Shareholders for the fiscal year ended June 30, 1996 are incorporated
by reference into Parts II and IV of this Form 10-K.
<PAGE>
PART I
Special Note Regarding Forward-Looking Statements
Certain statements in this Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: the dependence on Alladin product; the
uncertainty as to the continued development of the market for desktop video
systems; the uncertainty of continued market acceptance of professional video
products; significant fluctuations in the Company's operating results; the
historical absence of backlog; the history of losses and accumulated deficit;
the Company's highly competitive industry and rapid technological change within
the Company's industry; the risks associated with dependence on resellers,
contract manufacturers and other third-party relationships; the absence of a
direct sales force; the risks associated with development and introduction of
new products; the need to manage product transitions; the risks associated with
product defects and reliability problems; the risks associated with single
source suppliers; the uncertainty of patent and proprietary technology
protection and reliance on technology licensed from third parties; the risks of
third party claims of infringement; the Company's dependence on retention and
attraction of key employees; the need to manage growth; the risks associated
with future acquisitions; the risks associated with international licensing and
operations; general economic and business conditions; and other factors
referenced in this Report.
Pinnacle Systems is a registered trademark of Pinnacle Systems, Inc.,
and Pinnacle Systems, Inc. believes that all of its product names, other than
Alladin, are trademarks of Pinnacle Systems, Inc. This Report also includes
trademarks of companies other than Pinnacle Systems, Inc.
ITEM 1. BUSINESS
Pinnacle Systems, Inc. ("Pinnacle" or the "Company") designs,
manufactures, markets and supports video post-production tools for high quality
real time video processing. The Company's products are used to perform a variety
of video manipulation functions, including the addition of special effects,
graphics and titles to multiple streams of live or previously recorded video
material. The Company has historically offered video products for the
traditional video production market and since 1987 has shipped over 3,700
traditional video systems to customers in more than 60 countries. In 1994 the
Company introduced Alladin, a PC-based desktop video product that offers
performance comparable to traditional video products but at a substantially
lower price. Targeted at both the traditional video market and the emerging
desktop video market, over 6,600 units of Alladin have been sold since June
1994. In June 1996, the Company began shipping GeniePlus, the first of a new
family of desktop video products. The Genie family offers a wide array of
professional-quality video editing tools on a single PCI board at a lower price
level than other Pinnacle products.
Industry Background
The video production industry has historically created program material
for commercial broadcast and television advertising. Producers of commercial
program material and advertising have traditionally used video editing suites
equipped with expensive, dedicated video production equipment to produce high
quality video programming. A large and established market exists for video
equipment used in traditional
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video editing suites. Expanding channels of distribution, including cable
television, direct satellite broadcast, CD-ROMs and video-on demand, have led to
a rapid increase in demand for video content for existing and new applications.
New applications for video content include multimedia entertainment, video
games, music videos, special event videos, education and training and corporate
communications. These new applications cannot, in general, support the high cost
and complexity of video production associated with traditional editing suites.
Desktop video products, which combine personal computers with video processing
hardware and software, have recently been introduced to provide quality video
output comparable to that of video editing suites at significantly lower cost.
In addition to addressing the traditional video production market, desktop video
products address the emerging and more diverse market for new video production
applications.
Video Production Process
The development of a video program involves three distinct processes,
which together comprise video production. The first phase, pre-production,
involves planning and preparation for the recording, or "shooting," of the video
program and includes scripting, storyboarding (the artist's rendering of planned
video segments) and developing the production budget. The second phase,
production, involves the actual shooting of video material either on location or
in a studio. This process follows the pre-production script, recording actual
video segments outlined by the storyboard sketches. Production also includes the
creation of still-images and computer animated images to be included in the
program.
The final phase, post-production, involves the organization of raw
video segments acquired in the production phase into a cohesive and appealing
program. During the post-production phase, the producer utilizes sophisticated
equipment to incorporate essential elements such as titles, graphics and
transitions between video segments and to composite multiple layers of video and
graphics. The overall quality and impact of a video production is, in many
cases, judged by the quality of the video processing performed in the
post-production phase. Viewers expect the same level of video program quality
that they see daily with broadcast television programming, where high quality
graphics, smooth transitions and compositing of multiple layers of graphics and
video are commonplace.
Video Editing Suites
To implement high quality post-production video effects, producers of
commercial broadcast and television advertising have traditionally used multiple
pieces of dedicated equipment, linked together with a complex interconnection,
routing and control system to form a video "editing suite." Typical editing
suites incorporate switchers, digital video effects systems, still stores,
character generators, electronic paint and compositing systems and 3D modeling
and animation tools, typically provided by multiple manufacturers and used to
implement a single effect or group of related effects. Traditional editing
suites allow video professionals to produce a high quality finished product in
real time, whereby the operator can touch a button or move a joystick or mouse
and see the desired effect instantaneously. Real time interactivity, which
allows the video producer spontaneously and interactively to try many different
video manipulations and fine tune the resulting video content, is a critical
requirement in the video post-production process.
Because of the complexity and large number of components required,
video editing suites are expensive, ranging in cost from $100,000 to several
million dollars for a fully equipped suite. Furthermore, each component within
the suite has its own user interface and therefore its own user training
equipment. A video professional therefore requires significant training to
become proficient in the operation of a traditional editing suite. Because
editing suites are expensive and complex, they are usually operated as
time-shared
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resources. Producers typically rent a video editing suite together with highly
trained operators for a cost ranging from $100 to $1,000 per hour. The high cost
of traditional editing suites makes them unsuitable for many new video
applications where high development costs cannot be supported.
Desktop Video
Desktop video post-production is a rapidly developing alternative to
traditional video editing. Desktop video post-production tools are based on a
combination of personal computers, graphical user interfaces and video
input/output and processing hardware and software. Desktop video tools are
designed to be lower cost, easier to use and dedicated to an individual user
rather than time-shared between multiple projects.
Desktop video post-production tools are well-suited for many new video
applications, including multi-media entertainment, video games, music videos,
special event videos, education and training and corporate communications. The
low-cost of desktop video tools allows these new types of video programs to be
developed inexpensively. The lower cost and increased ease of use of desktop
video tools makes it easy for a large number of creative individuals, previously
untrained in video production, to produce professional video programming.
Historically, the inability of desktop video post-production tools to
implement, in real time, the same sophisticated high quality video effects as
are available in traditional editing suites has limited their use. To produce
special effects and compositing, desktop tools have relied upon software to
render the desired effect. The initial creation and each subsequent alteration
of complex video manipulations can require many hours of software rendering
time. While computer processing times have dramatically improved in recent
years, improvements in video rendering time are generally limited not by the
actual processing of data but by the large amounts of data that must be moved
into and out of the computer. Compression of video data does not improve
processing time because video manipulation must, in general, be performed on
uncompressed data. In addition, there are few interfaces for connecting desktop
tools to equipment found in traditional editing suites.
The lack of high quality real time interactivity of traditional desktop
video solutions has increased development time and costs and limited programmer
flexibility and creativity. The lack of sufficient interface standards has
increased the cost and complexity of using desktop solutions in conjunction with
traditional video editing suites. The Company believes desktop video products
overcome many of these limitations and address the needs of the traditional
professional video market as well as the emerging market for new applications.
The Pinnacle Approach
Pinnacle offers products for both traditional video editing suites and
desktop video production. The Company's proprietary architecture and video
manipulation hardware and software technology allow it to develop products
designed to offer both markets significant price/performance and quality
advantages over competing approaches. The Company's products offer the following
benefits:
o Sophisticated video manipulation. Pinnacle's products provide
advanced video manipulation capabilities. Video professionals
constantly seek effects to give their productions a new look
and to allow them to differentiate and enhance the value of
their end product.
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o Real-time interactivity. Pinnacle's products allow producers
to select an effect and instantly see the result. This real
time interactivity gives producers the flexibility to try many
different effects and fine-tune the resulting content.
o Open systems. Pinnacle's products conform to generally
accepted industry standards for video input/output and
control, allowing interoperability with a wide variety of
video processing and storage equipment. Furthermore, Pinnacle
has developed and published, and is encouraging others to
adopt, open interface specifications for video input/output,
manipulation and control for desktop video post-production.
o Upgradeability. Pinnacle's products are designed to allow
users to upgrade to expanded capabilities. The Company
provides product upgrades through either software only or
combined software and hardware modules.
o Ease of use. Pinnacle's products include a menu driven
interface for selecting and controlling the various video
manipulation functions. This reduces the technical obstacles
to the operation of the system, permitting the user to focus
on the artistic aspects of the post-production process.
Pinnacle offers two families of video products for use in traditional
editing suites. The Prizm product family integrates 3D video effects, montage
creation, still storage and the DVEator module for mapping live video onto
animated 3D objects. Prizm products are used primarily by post-production
companies, broadcasters and high-end corporate and industrial users. The
FlashFile product family integrates sophisticated still image capture and
storage, video mixing and compositing functions. FlashFile products are used
primarily by broadcasters, especially for news and sports programs.
The Alladin product, first shipped in June 1994, works with industry
standard Windows-based or Macintosh personal computers and addresses the need
for high quality real time video manipulation for desktop video editing systems.
The Alladin allows desktop editing systems to provide high quality real time
manipulation functions historically available only in high end video editing
suites. In addition to distributing Alladin through a dealer distribution
channel, the Company has developed specially configured Alladin units under OEM
agreements with Avid Technology, Inc. ("Avid") and Matrox Corporation
("Matrox"), each a leading supplier of desktop video editing systems.
The Genie family of products, the first of which shipped in June 1996,
are based on a single PCI card designed to work with industry standard Windows
95 or Macintosh personal computers. The Genie card combines a sophisticated 3-D
DVE, switcher, character generator and paint system for affordable real-time
post-production. The Company intends on distributing the Genie family of
products through dealer and master dealer distribution channels, and through
system integrators and OEM's.
In June 1996, the Company acquired the VideoDirector product line from
Gold Disk, Inc. VideoDirector is a low-cost video software package sold
primarily to home video enthusiasts. VideoDirector enables the user to edit
their home videotapes.
Pinnacle Strategy
Pinnacle's strategy is to leverage its position as a technological
leader in the traditional video market to become the industry standard solution
for high quality real time video processing for the emerging desktop
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video market. To achieve these objectives, the Company is pursuing a strategy
that includes the following key elements:
o Expand Product Line. The Company is expanding its product line
to serve the needs of a growing spectrum of video content
producers. In June 1994, the Company shipped Alladin for
Windows, its first product to serve the video manipulation
needs of desktop video users. In June 1996 the Company
introduced the Genie family of products, designed to meet the
needs of desktop video users at a much lower price point. Also
in June 1996, the Company purchased from Gold Disk, Inc. the
VideoDirector product line, designed for the home video
market. The Company intends to extend the family of products
at different price points with different functionalities to
further its competitive position in the desktop video market.
o Maintain Technology Leadership. The Company intends to
maintain its technology leadership position by leveraging its
core technological strengths in real time digital video
processing, real time software algorithms, video input/output
and advanced user interfaces to provide solutions for both the
traditional and desktop markets.
o Provide Upgrades. The Company has a significant and growing
installed base of products that can be upgraded to provide new
capabilities. The Company's strategy is to actively develop
and sell product upgrades.
o Support and Set Industry Standards. The Company intends to
continue to support recognized video industry interface
standards where they exist and to establish standards for the
desktop market segment. The Company's goal is to have its
video manipulation interface standards widely adopted by
manufacturers of desktop video post-production tools.
o Utilize Balanced Distribution Channels. To reach a diverse
target market of video professionals, the Company distributes
its products primarily through a combination of independent
dealers and selected OEMs. The Company has established a
worldwide network of independent dealers, which as of June 30,
1996, included over 170 dealers. The Company attempts to
identify and align itself with OEMs that are market share and
technology leaders in the Company's target market segments.
o Leverage Established Reputation. The Company intends to take
advantage of its established reputation in the traditional
video industry in marketing its products to the emerging
desktop market.
Products
The Company's Prizm and FlashFile products are targeted at traditional
video users and include a host computer embedded within the video processing
system. The Company's Alladin and Genie products are targeted at both the
traditional video market and the desktop video market and are used in
conjunction with a standalone personal computer generally provided by the end
user. The Video Director product, targeted at the home video market, is
generally used to edit camcorder programs by trimming unwanted footage and
arranging the sequence of segments of video. The following table summarizes the
Company's current products.
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Date of First Suggested U.S.
Product Shipment Retail Price(1) Primary Functions
- --------------------------------------------------------------------------------------------
PRIZM FAMILY2
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Prizm 11/90 $ 26,990 High quality real time video manipulation
for broadcast and post-production facilities.
Key Options:
- -----------
3D Montage 11/90 $ 6,990 Compositing and recursive effects.
Key Channel 12/90 $ 3,990 Key processing (deposit and overlay).
StillStore 2/91 $ 1,990 Still capture and storage.
DVEator 9/91 $ 15,990 Real time mapping of live video onto
animated 3D objects.
- --------------------------------------------------------------------------------------------
FLASHFILE FAMILY(2)
- --------------------------------------------------------------------------------------------
Flash File 8/92 $ 21,990 Broadcast video stillstore manipulation
system.
FlashGrafix Composer 8/93 $ 26,990 Broadcast video stillstore creation and
manipulation system.
Key Options:
Second Channel 8/92 $ 4,990 Preview capability.
Shotbox 3/93 $ 2,490 Dedicated control for on-air applications.
FlashBrowse 7/93 $ 3,990 PC software to browse image databases.
Third Channel 6/95 $ 8,990 Enhanced preview capability.
- --------------------------------------------------------------------------------------------
ALLADIN FAMILY
- --------------------------------------------------------------------------------------------
Alladin
NTSC 6/94 $ 9,990 High quality real time video manipulations
PAL 9/94 $ 11,990 for NTSC and PAL-based desktop video
producers.
Key Options:
Component I/O 11/94 $ 2,990 High quality video input/output.
Digital I/O 6/96 $ 6,490 Industry standard CCIR 601 digital
input/output.
StudioPak 1/96 $ 990 Software enhancement.
- --------------------------------------------------------------------------------------------
GENIE FAMILY
- --------------------------------------------------------------------------------------------
GeniePlus
NTSC 6/96 $ 5,990 High quality real time video manipulations
PAL 6/96 $ 6,990 on PCI card.
- --------------------------------------------------------------------------------------------
VIDEO DIRECTOR FAMILY(2)
- --------------------------------------------------------------------------------------------
VideoDirector
Home 6/96(3) $ 99 Home video editing software.
Studio 6/96(3) $ 199 Advanced home video editing software.
- --------------------------------------------------------------------------------------------
</TABLE>
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1 Prices as of June 30, 1996. Actual end user prices may vary due to customer
selected options and package pricing discounts.
2 Prizm, FlashFile and VideoDirector products support multiple international
standards, including National Television Standards Committee ("NTSC"), the
principal video standard in North America, Phase Alternating Line ("PAL"),
a principal international video standard, and component standards.
3 Product line acquired from Gold Disk, Inc. in June 1996.
Prizm Family
The Company's Prizm family of products is designed to provide
sophisticated 3D digital video effects for the traditional post-production
editing suite. The basic Prizm video workstation provides real time 3D
positioning, sizing, rotation with perspective and clipping of live video
images. Prizm products support industry standard video manipulation and control
protocols and, as a result, work with other video processing equipment which
allows users to integrate Prizm products into existing editing suites. A variety
of Prizm options are available for compositing, key processing, still image
capture and storage and other effects. One such option, DVEator, combines the
flexibility of 3D modeling techniques with aspects of digital effects systems to
map live video in real time onto animated 3D shapes created by the user. DVEator
permits the creation of special effects that include realistic highlights and
shadows and simultaneous animation of graphics and live video-mapped images. The
Company was awarded an EMMY in 1994 for technical achievement related to the
development of the technology incorporated in DVEator.
FlashFile Family
The FlashFile family of products provides broadcast quality, open
architecture, cost effective video still image creation and storage for
broadcast television markets. The FlashFile stillstore offers a broad set of
features for video still image acquisition, storage and on-air playback,
including transitions, file import and export and library management.
FlashGrafix Composer, an enhanced version of FlashFile, includes paint and 3D
animation functionality in addition to the basic FlashFile capability. Both
products offer a computer-based graphical user interface and may also be
controlled using a dedicated hardware control panel for fast, on-air
applications. The Company offers a networked version of FlashFile, FlashNet,
that is targeted toward broadcast applications requiring online storage of up to
several hundred thousand still images with distributed access using standard
Ethernet networking. Using the FlashBrowse PC software package, a standard
personal computer may be connected to the FlashNet network enabling viewing and
cataloging of video still images stored on a network server. The FlashFile
product family utilizes industry standard personal computer technology for local
control, industry standard Ethernet networking for network access to graphics
libraries, and industry standard database servers for storing and cataloging
online still images.
In December 1993, the Company entered into an agreement with Capital
Cities/ABC, Inc. ("ABC") to provide FlashFile products for use with ABC's
Graphics Library System. The Company implemented significant enhancements to the
FlashFile product to meet ABC's requirements. The Company shipped the first
enhanced FlashFile products to ABC in June 1995. This Graphics Library System
provides ABC newscasters access to an extensive on-line library of video still
images. The Company intends to market the enhanced FlashFile products to ABC
affiliates in the United States. In November 1994, the Company entered into an
agreement with Capital Cities/ESPN, Inc. ("ESPN") to provide similarly enhanced
FlashFile products. The Company shipped the first enhanced FlashFile products to
ESPN in June 1996.
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Alladin Family
The Alladin product family, which commenced shipment in June 1994, is
designed to bring high quality real time video manipulation tools to desktop
video post-production, and is offered at significantly lower cost than systems
having comparable capabilities. Alladin's capabilities and low price provide
independent video producers the ability to develop high quality video material
for a variety of applications. Alladin allows the user to process up to four
simultaneous streams of live video supplied either from tape or computer disk.
Alladin provides a variety of high quality real time video effects including
dissolves, compositing of live video with text or graphics, transparency,
clipping of a live image, sizing, rotation with perspective, 3D positioning and
warping (e.g., page turns and water ripples). The Alladin product connects to
and is controlled by a standard Microsoft Windows-based personal computer. The
user selects and controls video manipulation functions through a graphical user
interface.
Alladin products support NTSC and PAL video formats as well as certain
industry standard video control protocols common in traditional editing suites.
Furthermore, the Company has developed and published as open standards video
input/output specifications for control of desktop video editing systems.
Several manufacturers of desktop video editing systems, including Avid, Fast
Electronic GmbH ("Fast Electronic"), Japan Victor Company ("JVC"), Sundance
Digital, Inc., Technical Aesthetics Operations, Inc., United Media, Inc. and
VideoMedia, Inc. have either modified or are currently developing interface
specifications which conform to these standards. The Company's goal is to make
these interface specifications an industry standard for desktop video editing
systems. In addition, the Company has OEM agreements with Avid and Matrox, who
sell specially configured versions of Alladin with their products.
The Company is dependent on the continued market acceptance of Alladin
to increase revenues and profitability. There can be no assurance that Alladin
will continue to achieve market acceptance by the desktop video market and a
decline in demand or the failure of Alladin to maintain such market acceptance,
as a result of competition, technological change or other factors, will have a
material adverse effect on the Company's business, operating results and
financial condition.
Genie Family
Building on the success of the Alladin family products, the Company
commenced shipments of the Genie product family in June 1996. The Genie offers a
complete set of professional quality, real-time 3D digital effects, switching,
character generation, paint and still storage on a single PCI board. GeniePlus
integrates into linear desktop editing environments and includes an input/output
piggyback card and software allowing the user to process up to two simultaneous
streams of live video supplied from tape sources.
GenieFusion, which is expected to commence shipment in late 1996 or
early 1997, will work in non-linear editing environments. The Company intends on
selling GenieFusion to OEM vendors to integrate this product into their
non-linear editing products. The successful introduction of GenieFusion will be
dependent on the demand of OEMs to integrate GenieFusion into their products.
There can be no assurance that GenieFusion will achieve market acceptance by
OEMs, and the failure of GenieFusion to achieve market acceptance as a result of
competition, technological change or other factors will have a material adverse
effect on the Company's business, operating results and financial condition.
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VideoDirector
The VideoDirector product line was acquired from Gold Disk, Inc. in
June 1996. VideoDirector is a low-cost video software package sold through
traditional software distribution channels to home video enthusiasts. Compatible
with most camcorders and VCRs, VideoDirector uses a PC to control the editing
process. Available in both Windows and Macintosh versions, over 100,000 units of
VideoDirector have been shipped since the product was introduced. The Company
anticipates developing a new family of products that combine a subset of its
video manipulation technology with VideoDirector technology to create a new
category of products enabling home video enthusiasts to create
professional-looking video content.
Technology
The Company is a technological leader in video manipulation technology.
The National Academy of Television Arts and Sciences' Outstanding Technical
Achievement EMMY award that has been awarded to the Company on two occasions. In
1990, the Company received an EMMY for pioneering the concept of the video
workstation, and in 1994 the Company received an EMMY for developing technology
incorporated in DVEator which allows real time mapping of live video onto
animated 3D surfaces created by the user.
Video Manipulation Architecture
All of the Company's products share a common internal architecture.
This design approach allows the Company to maximize the return on its research
and development expenditures by utilizing similar hardware and software modules
in multiple products. The Company's video manipulation architecture is
fundamental to the performance and capabilities of its products.
o Industry Standard Microprocessor Control. All of the Company's
products use or work with an industry standard Intel x86 or
Pentium microprocessor running the Microsoft DOS/Windows or
Apple Macintosh operating systems for control of video
manipulation functions. In the Prizm and FlashFile product
families the control microprocessor is embedded within the
product. The Alladin product family relies on an external user
supplied Windows or Macintosh personal computer for control.
Using industry standard microprocessors for control offers
three main advantages: lower software development costs due to
the availability of powerful off-the-shelf software
development tools; lower product manufacturing costs due to
the low costs of standard microprocessors; and the ability to
easily integrate third party software such as networking
software or 3D rendering software to provide additional user
functionality.
o Digital Video Bus. Essentially all real-time video
manipulation must be performed on uncompressed video data.
Since uncompressed digital video rates are too high to be
processed by a microprocessor in real-time, video signals are
internally distributed over a separate high-speed (27
megabytes per second) digital video bus ("DVB") and processed
using the Company's proprietary real time video manipulation
hardware. The video data on the DVB is processed in the
standard digital component format, which fully complies with
the highest digital component video standards of the
International Radio Consultation Committee ("CCIR"), an
organization which develops and publishes standards for
international telecommunication systems. The DVB supports a
digital key channel that defines the edges of an irregularly
shaped image for proper manipulation. The wide
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bandwidth and industry standard format of the DVB helps to
ensure that performing video manipulations will not result in
degraded image quality.
o Modular Software Architecture. The software in all of the
Company's video manipulation products is divided into two
layers: the user interface layer and the video manipulation
algorithm layer. The user interface layer is different and has
been optimized for each product family. The video manipulation
algorithm layer is, for the most part, common to all Pinnacle
products and incorporates all the proprietary low level
routines which allow Pinnacle products to perform high quality
real-time video manipulations. This software architecture has
three main advantages: real-time video manipulation algorithms
that are complex and difficult to develop can be used in
multiple products; the user interface can be tailored to meet
specific user requirement; and the user interface can
independently be ported to alternative computer platforms.
Core Technologies
The Company's core technical expertise is in real-time digital video
processing, real-time software algorithms, video input/output, advanced user
interfaces and, in the case of Video Director, software control of commercially
available camcorders and VCRs.
o Real-Time Digital Video Processing. The Company has devoted
significant resources to the development of proprietary
technology for real time video processing, including high
speed digital filters, image transformation buffers, plane and
perspective addressing, and nonlinear image manipulation. The
DVEator module uses the Company's patented technology to
perform real-time mapping of live video onto multiple,
complex, animated 3D shapes and surfaces. This technology
includes a proprietary data compression algorithm that
compresses the address information and allows inexpensive
decompression of this data in real time.
o Real-Time Software Algorithms. The digital video manipulation
functions of the Company's products use common core software
that performs complex computations in real-time (at video
rates) under user control. The Company has developed several
techniques that allow high speed computation of multiple
complex equations which are required for real-time video
effects. The Company has expended significant resources on the
development of these real time video manipulation software
algorithms on standard platforms.
o Video Input/Output. The Company has developed technology for
video input and output of both analog and digital video data
streams. All of the Company's products work with NTSC and PAL
video standards as well as composite and component video
digital and analog input/output standards. In addition, the
Company has developed interfaces to support input/output of
video streams stored on computer disks.
o User Interface Design. The Company has extensive experience in
design of computer-based user interfaces for video
manipulation. The Company uses interactive menu driven user
interfaces to control video manipulation functions. The
Company's FlashFile, Alladin, Genie and VideoDirector products
each utilize graphical user interface technology to facilitate
ease of use.
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o Camcorder and VCR Control. Upon the acquisition of the
VideoDirector product line in June 1996, the Company obtained
software code enabling a computer to control most commercially
available camcorders and VCRs. This capability provides the
user a simple tool to organize and edit home movies.
The Company has historically devoted a significant portion of its
resources to engineering and product development programs and expects to
continue to allocate significant resources to these efforts. The Company's
engineering and product development efforts are focused on the design of new
desktop products, support of the incorporation of Genie into the products
offered by the Company's OEM customers, improvement and enhancement of existing
product performance and features and cost reductions and improvements in the
manufacturability of existing products, particularly Genie. The Company's future
operating results will depend to a considerable extent on its ability to
continually develop, introduce and deliver new hardware and software products
that offer its customers additional features and enhanced performance at
competitive prices. Delays in the introduction or shipment of new or enhanced
products, the inability of the Company to timely develop and introduce such new
products, the failure of such products to gain market acceptance or problems
associated with new product transitions could adversely affect the Company's
business, operating results and financial condition, particularly on a quarterly
basis.
As of June 30, 1996, the Company had 41 people engaged in engineering
and product development. The Company's engineering and product development
expenses (excluding purchased in process research and development) in fiscal
1996, 1995 and 1994 were $5.1 million, $2.4 million and $1.8 million,
respectively, and represented 11.1%, 10.8% and 17.7%, respectively, of net
sales.
Customers, Marketing and Sales
Customers
Since the introduction of its first video workstation in 1987, the
Company has shipped over 10,300 systems to customers in more than 60 countries.
End users of the Company's products, none of whom accounted for a material
amount of the Company's net sales during any period, range from individual users
to major corporate/government, video production and broadcast facilities
worldwide. There can be no assurance that any of the end users of the Company's
products will purchase the Company's products in the future. The Company's
customers and their locations include:
Broadcast Corporate/Government
- --------- --------------------
The Walt Disney Co./ABC-New York ABC Home Health Services, Inc. - Georgia
ESPN-Singapore and USA Essex Corp. - New Mexico
Providence Journal Broadcast
Corp.-Rhode Island Federal Reserve Bank - San Francisco
MCOT-Thailand Hyundai Corporate Culture Office - Korea
Australis-Australia National Cattlemens' Assn. - Colorado
Swiss Television-Switzerland Nissan Motors - Tennessee
RTBF-Belgium Primerica - Georgia
Gameshow Network-California PSE&G Training Center - New Jersey
Trane Corporation - Tennessee
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Post-Production Independent Videographers
- --------------- -------------------------
Armour Productions - California Christie Entertainment - Illinois
Cable Video Entertainment - Colin Campbell Communications -
New Jersey North Carolina
China Motion Picture Co. - Taiwan Eric Blum Productions - California
Helical Post - Colorado Innovision - Pennsylvania
Studio Hamburg - Germany Northwest Video - Washington
Terra Firma Productions - California Spot Productions - California
The Video Company - Louisiana Video Vision - Maryland
Video Imagen Communications Ltd. - Brazil Video Productions - Florida
Marketing
The Company's marketing efforts are targeted at users of traditional
video editing suites and desktop video post-production tools. In order to
increase awareness of its products, the Company attends major video tradeshows
such as the convention of the National Association of Broadcasters (NAB) in the
United States and the International Broadcasters Convention (IBC) in Europe. The
Company uses targeted direct mail campaigns and advertisements in trade and
computer publications. The Company also participates in joint marketing
activities with its OEM partners and with other desktop video companies. The
Company plans to expand its desktop video joint marketing activities.
Sales
The Company sells its products to end users through an established
domestic and international network of independent dealers and through OEMs. The
Company also maintains a sales management organization consisting of five US
regional sales managers and five international regional sales managers primarily
responsible for supporting independent dealers and making direct sales in
geographic regions without dealer coverage or to customers that prefer to
transact directly with the Company.
The Company's products are sold to end users through independent
dealers who specialize in selling video production equipment. As of June
30,1996, the Company had over 170 dealers covering more than 40 countries. These
independent entities are selected for their ability to provide effective field
sales and technical support to the Company's customers. Dealers generally carry
the Company's products as demonstration units, advise customers on system
configuration and installation and perform ongoing post-sales customer support.
The Company believes that many end users depend on the technical support offered
by independent dealers in making product purchase decisions. In North America,
the Company manages its independent dealers with five regional sales managers
and 15 independent sales representatives. In Europe, the Company manages its
independent dealers with two regional sales managers located in the United
Kingdom. Independent dealers in the Far East are managed by two regional sales
managers located in Japan and Singapore. Central and South America are managed
by the Company's sales staff at its Sunnyvale headquarters. No single dealer
individually accounted for more than 10% of the Company's net sales in fiscal
1996, 1995 and 1994.
The Company sells and distributes its products through OEMs that
incorporate the Company's products with their own complementary video editing
products and resell these products to end users and other resellers. OEM
partners generally purchase the Company's products and are responsible for
conducting
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their own marketing, sales and support activities. The Company attempts to
identify and align itself with OEMs that are market share and technology leaders
in the Company's target market segments.
In particular, the Company is highly dependent on sales of Alladin to
Avid. Avid is a leading supplier of digital, nonlinear video and audio editing
systems for the professional video and film editing market. Sales to Avid
accounted for approximately 43.3% of net sales in fiscal 1996. No customer
accounted for more than 10% of the Company's net sales during fiscal 1995, while
one customer accounted for approximately 19.8% of net sales in fiscal 1994. This
concentration of the Company's net sales to a single OEM customer subjects the
Company to a number of risks, in particular the risk that its operating results
will vary on a quarter to quarter basis as a result of variations in the
ordering patterns of the OEM customer. Variations in the timing of revenues can
cause significant fluctuations in quarterly results of operations. The Company's
results of operations could be materially adversely affected by the failure of
anticipated orders to materialize and by deferrals or cancellations of orders as
a result of changes in Avid's requirements. As a result, if the Company were to
lose Avid as a customer, or if orders from Avid were to otherwise decrease, the
Company's business, operating results and financial condition would be
materially adversely affected.
With the introduction of the Genie product line, the Company adopted a
similar OEM distribution strategy. The Company expects that a substantial
portion of sales of the Genie product line will be to OEMs who could also
develop and offer products which compete with Genie. The Company is dependent
upon these resellers to assist it in promoting market acceptance of the
professional video products and desktop video systems and creating demand for
the Company's products. There can be no assurance that these dealers and OEMs
will devote the resources necessary to provide effective sales and marketing
support to the Company. In addition, there is a risk that these dealers may give
higher priority to products of other supplies, thus reducing their efforts to
sell the Company's products. If a significant number of its dealers were to
experience financial difficulties, or otherwise become unable or unwilling to
promote, sell or pay for the Company's products, the Company's results of
operations would be adversely affected.
With the acquisition of the VideoDirector product line, the Company
adopted a new distribution strategy. VideoDirector products are sold primarily
through large computer software distributors such as Merisel America, Inc. and
Ingram Micro Inc. These distributors sell VideoDirector product to large
computer software and hardware retailers such as CompUSA, ComputerCity and
Egghead Software who in turn sell the products to end-users. In addition,
VideoDirector products are sold via direct telemarketing and mail order
catalogs. The computer software market is characterized by longer payment terms
and higher sales returns than the Company's traditional video editing markets.
There can be no assurance that computer retailers will continue to stock and
sell VideoDirector products. If a significant number of computer retailers were
to discontinue selling VideoDirector products, the Company's results of
operations would be adversely affected.
Sales outside of North America represented approximately 38.7%, 46.5%
and 47.6% of the Company's net sales for fiscal 1996, 1995 and 1994,
respectively. All of the Company's international sales through fiscal 1994 were
denominated in U.S. dollars. In fiscal 1995, the Company began foreign currency
denominated sales in the United Kingdom. The Company may engage in foreign
currency denominated sales in other countries in the future. International sales
and operations may be subject to risks such as the imposition of governmental
controls, export license requirements, restrictions on the export of critical
technology, currency exchange fluctuations, generally longer receivable
collection periods, political instability, trade restrictions, changes in
tariffs, difficulties in staffing and managing international operations,
potential insolvency of international dealers and difficulty in collecting
accounts receivable. There can be no
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assurance that these factors will not have an adverse effect on the Company's
future international sales and, consequently, on the Company's business,
operating results and financial condition.
Service and Support
The Company believes that its ability to provide customer service and
support is an important element in the marketing of its products. The customer
service and support operation also provides the Company with a means of
understanding customer requirements for future product enhancements. The Company
maintains an in-house repair facility and also provides telephone access to its
technical support staff. The Company's technical support engineers not only
provide assistance in diagnosing problems, but work closely with customers to
address system integration issues and to assist customers in increasing the
efficiency and productivity of their systems. The Company supports its customers
in Europe and Asia primarily through its international dealers. The Company
typically warrants its products against defects in materials and workmanship for
one year after shipment to the dealer. The Company believes its warranties are
similar to those offered by other video production equipment suppliers. To date,
the Company has not encountered any significant product maintenance problems.
Competition
The video production equipment market is highly competitive and is
characterized by rapid technological change, new product development and
obsolescence, evolving industry standards and significant price erosion over the
life of a product. Competition is fragmented with several hundred manufacturers
supplying a variety of products to this market. The Company anticipates
increased competition in the video post-production equipment market from both
existing manufacturers and new market entrants.
Competition for equipment sold into traditional video editing suites is
based on product performance, breadth and modularity of product line, service
and support, market presence and price. The Company believes that it competes
favorably for sales of video production equipment to be used in traditional
editing suites in situations where price/performance is a primary factor in
equipment selection. The Company's principal competitors in this market include
Scitex Video (a division of Scitex Corporation Ltd.)("Scitex"), The Grass Valley
Group, Inc. (a subsidiary of Tektronix, Inc.) ("Grass Valley Group"), Matsushita
Electric Industrial Co. Ltd. ("Matsushita"), Quantel Ltd. (a division of Carlton
Communications Plc) ("Quantel") and Sony Corporation ("Sony"), each of which has
substantially greater financial, technical, marketing, sales and customer
support resources, greater name recognition and larger installed customer bases
than the Company. In addition, these companies have established relationships
with current and potential customers of the Company. Some of the Company's
competitors also offer a wide variety of video equipment, including professional
video tape recorders, video cameras and other related equipment. In some cases,
these competitors may have a competitive advantage based upon their ability to
bundle their equipment in certain large system sales.
The desktop video market in which Alladin and Genie compete is an
emerging market and the sources of competition are not yet well defined. There
are several established video companies that are currently offering products or
solutions that compete indirectly with Alladin and Genie by providing many of
the same features and video manipulation capabilities. In addition, the Company
expects that existing manufacturers and new market entrants will develop new,
higher performance, lower cost real time desktop video products that will
compete directly with Alladin and Genie. The Company expects that competition
will intensify significantly as the market for desktop video systems develops.
The Company expects that
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potential competition in the desktop market is likely to come from one or more
of four general classes of video companies. Suppliers of traditional video
equipment such as Grass Valley Group, Matsushita, Quantel, Scitex and Sony have
the financial resources and technical know-how to develop high quality real time
video manipulation products for the desktop video market. Suppliers of desktop
video systems such as Avid, Data Translation, Fast Electronic, Matrox, Newtek,
Inc., Truevision, Inc. and Scitex, which have established desktop video
distribution channels, experience in marketing low price products and
significant financial resources, may acquire or develop high quality real time
video manipulation products for the desktop video market. Suppliers of video
manipulation software such as Adobe Systems Incorporated will also compete with
the Company in the desktop video market. The software products supplied by these
companies are, and will continue to be, significantly less expensive than the
systems marketed by the Company. Finally, larger well established software
companies, such as Microsoft Corporation which purchased SOFTIMAGE Inc., a
developer of software products that enable designers and animators to create
high quality 3D imagery, have the resources and technical ability to develop
competitive products for the desktop market. Increased competition could result
in price reductions, reduced margins and loss of market share, all of which
would materially and adversely affect the Company's business, operating results
and financial condition. There can be no assurance that the Company will be able
to compete successfully against current and future competitors.
Manufacturing and Suppliers
The Company's manufacturing operations, located at its Sunnyvale,
California facility, consist primarily of testing printed circuit assemblies,
final product assembly, configuration and testing, quality assurance and
shipping. Each of the Company's products undergoes quality inspection and
testing at the board level and final assembly stage. The Company manages its
materials with a software system that integrates purchasing, inventory control
and cost accounting.
The Company relies on independent subcontractors who manufacture to the
Company's specifications major subassemblies used in the Company's products.
This approach allows the Company to concentrate its manufacturing resources on
areas where it believes it can add the most value, such as product testing and
final assembly, and reduces the high cost of owning and operating a full scale
manufacturing facility. The Company has manufacturing agreements with Wyle
Laboratories and with Bell Microproducts Inc. for the manufacture of major
subassemblies used in its products. The Company's reliance on subcontractors to
manufacture major subassemblies used in its products involves a number of
significant risks including the loss of control over the manufacturing process,
the potential absence of adequate capacity, the unavailability of or
interruptions in access to certain process technologies and reduced control over
delivery schedules, manufacturing yields, quality and costs. In the event that
any significant subcontractor were to become unable or unwilling to continue to
manufacture these subassemblies in required volumes, the Company's business,
operating results and financial condition would be materially adversely
affected.
To the extent possible, the Company and its manufacturing
subcontractors use standard parts and components available from multiple
vendors. However, the Company and its subcontractors are dependent upon single
or limited source suppliers for a number of key components and parts used in all
of its products, including a proprietary application specific integrated circuit
manufactured only by LSI Logic Corp., several video processing integrated
circuits manufactured only by Raytheon Corporation, a field programmable gate
array manufactured only by Altera Corporation and serial RAM memory modules
manufactured only by Hitachi, Ltd. The Company's manufacturing subcontractors
generally purchase these single or limited source components pursuant to
purchase orders placed from time to time in the ordinary course of business, do
not carry significant inventories of these components and have no guaranteed
supply arrangements with such
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<PAGE>
suppliers. In addition, the availability of many of these components to the
Company's manufacturing subcontractors is dependent in part on the Company's
ability to provide its manufacturers, and their ability to provide suppliers,
with accurate forecast of its future requirements. The Company and its
manufacturing subcontractors endeavor to maintain ongoing communication with its
suppliers to guard against interruptions in supply. Any extended future
interruption or limitation of any of the components currently obtained from
single or limited source suppliers could result in delays or reductions in
product shipments which would have a material adverse effect on the Company's
results of operations. Also, because of the reliance on these single or limited
source components, the Company may be subject to increases in component costs
which could have an adverse effect on the Company's results of operations. The
Company has experienced interruptions in the supply of certain key integrated
circuits from suppliers which accordingly delayed product shipments, and any
extended interruption or reduction in the future supply of any key components
currently obtained from a single or limited source could have a significant
adverse effect on the Company's business, operating results and financial
condition in any given period.
In the traditional video market segment, the Company's customers
generally order on an as-needed basis. The Company typically ships its products
within 30 to 60 days of receipt of an order, depending on customer requirements,
although certain customers, including OEMs, may place substantial orders with
the expectation that shipments will be staged over several months. A substantial
majority of product shipments in a period relate to orders received in that
period, and accordingly, the Company generally operates with a limited backlog
of orders. The absence of a significant historical backlog means that quarterly
results are difficult to predict and delays in product delivery and in the
closing of sales near the end of a quarter can cause quarterly revenues to fall
below anticipated levels. In addition, customers may cancel or reschedule orders
without significant penalty and the prices of products may be adjusted between
the time the purchase order is booked into backlog and the time the product is
shipped to the customer. As a result of these factors, the Company believes that
the backlog of orders as of any particular date is not necessarily indicative of
the Company's actual sales for any future period.
The Company's VideoDirector products are manufactured, assembled and
shipped by a specialized software manufacturer located in Ontario, Canada. The
Company maintains an ample supply of the component raw materials for the
VideoDirector product, and is expected to respond promptly to the demands of the
computer software distributors.
Proprietary Rights and Licenses
The Company's ability to compete successfully and achieve future
revenue growth will depend, in part, on its ability to protect its proprietary
technology and operate without infringing the rights of others. The Company
relies on a combination of patent, copyright, trademark and trade secret laws
and other intellectual property protection methods to protect its proprietary
technology. In addition, the Company generally enters into confidentiality and
nondisclosure agreements with its employees and OEM customers and limits access
to and distribution of its proprietary technology. The Company currently holds
one United States patent and two foreign patents, each covering certain aspects
of the technologies utilized by DVEator. Although the Company intends to pursue
a policy of obtaining patents for appropriate inventions, the Company believes
that the success of its business will depend primarily on the innovative skills,
technical expertise and marketing abilities of its personnel, rather than upon
the ownership of patents.
Certain technology used in the Company's products is licensed from
third parties on a royalty-bearing basis. Such royalties to date have not been,
and are not expected to be, material. Generally, such agreements grant to the
Company nonexclusive, worldwide rights with respect to the subject technology
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<PAGE>
and terminate only upon a material breach by the Company.
The Company has in the past received communications suggesting that its
products may utilize concepts covered by patent rights of third parties and, in
the future, may receive communications asserting that the Company's products
infringe patents or other intellectual property rights of third parties. There
can be no assurance that there will not be any future such communications. The
Company's policy is to investigate the factual basis of such communications and
to negotiate licenses where appropriate. While it may be necessary or desirable
in the future to obtain licenses relating to one or more of its products, or
relating to current or future technologies, there can be no assurance that the
Company will be able to do so on commercially reasonable terms or at all. There
can be no assurance that these or other future communications can be settled on
commercially reasonable terms or that they will not result in protracted and
costly litigation.
There has been substantial industry litigation regarding patent,
trademark and other intellectual property rights involving technology companies.
In the future, litigation may be necessary to enforce any patents issued to the
Company to protect trade secrets, trademarks and other intellectual property
rights owned by the Company to defend the Company against claimed infringement
of the rights of others and to determine the scope and validity of the
proprietary rights of others. Any such litigation could be costly and a
diversion of management's attention, which could have material adverse effect on
the Company's business, operating results and financial condition. Adverse
determinations in such litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require the
Company to seek licenses from third parties or prevent the Company from
manufacturing or selling its products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition.
Employees
As of June 30, 1996, the Company had 130 full-time employees, including
41 engaged in engineering and product development activities, 34 in
manufacturing, 44 in marketing and sales and 11 in administration and finance.
The Company believes that its future success will depend, in part, on its
continuing ability to attract, retain and motivate qualified technical,
marketing and managerial personnel. None of the Company's employees is
represented by a collective bargaining agreement, nor has the Company
experienced work stoppages. The Company believes that its relations with its
employees are good.
ITEM 2. PROPERTIES
The Company's principal administrative, marketing, manufacturing and
product development facility is located in Sunnyvale, California. This facility
occupies approximately 30,000 square feet pursuant to a lease which will
terminate November 15, 1996. In June 1996, the Company entered into an operating
lease agreement for another facility in Mountain View, California which
commences on August 15, 1996 and terminates on December 31, 2003. This facility
occupies approximately 106,500 square feet, of which approximately 41,500 square
feet has been sublet to a third party until August 31, 1997. The Company expects
to move into the new facility, located approximately one mile from the current
facility, in October 1996.
In addition, the Company occupies sales and customer support facilities
in Uxbridge, United Kingdom; Singapore; and Tokyo, Japan consisting of 6,000
square feet, 850 square feet, and 350 square feet, respectively. The Company
also has a product development facility in Gainesville, Florida, consisting of
1,000 square feet.
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ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of August 31,
1996 are as follows:
Name Age Position
---- --- --------
Mark L. Sanders............ 53 President, Chief Executive Officer and
Director
Ajay Chopra................ 39 Chairman of the Board and Chief Technology
Officer
Arthur D. Chadwick......... 39 Vice President, Finance and Administration
and Chief Financial Officer
Brian R. Conner............ 50 Vice President, Sales, Europe, Africa &
Middle East
Tavy A. Hughes............. 41 Vice President, Manufacturing
William Loesch............. 42 Vice President, New Business Development
Amir Majidimehr............ 36 Vice President, Engineering
Kevin B. McDonald.......... 38 Vice President, Marketing and Domestic Sales
Walter E. Werdmuller....... 49 Vice President, Sales
Mr. Sanders has served as President, Chief Executive Officer and a
director of the Company since January 1990. From 1988 to 1990, Mr. Sanders was
an independent business consultant. Prior to that time, Mr. Sanders served in a
variety of management positions, most recently as Vice President and General
Manager of the Recording Systems Division, of Ampex Incorporated, a manufacturer
of video broadcast equipment.
Mr. Chopra, a founder of the Company, has served as Chairman of the
Board of Directors since January 1990, and has served as a director of the
Company since its inception in May 1986. Mr. Chopra has served as Chief
Technology Officer since June 1996, Vice President of Engineering from January
1990 to June 1996, and President and Chief Executive Officer of the Company from
its inception to January 1990. From 1983 to 1986, Mr. Chopra served as
Engineering Supervisor for Mindset Corporation, a computer graphics
manufacturer.
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<PAGE>
Mr. Chadwick has served as Vice President, Finance and Administration
and Chief Financial Officer of the Company since January 1989. From 1979 to
January 1989, Mr. Chadwick served in a variety of financial and management
positions, most recently as plant manager of Philippines operations, at Gould
Semiconductor, a semiconductor company.
Mr. Conner has served as Vice President, Sales of the Company and
General Manager of Pinnacle Systems Ltd., the Company's sales subsidiary
covering Europe, Africa and the Middle East, since February 1995. From January
1993 to February 1995, Mr. Conner was a founder and served as President of BCA
Inc., an independent European sales representative company. From January 1991 to
January 1993, Mr. Conner served as General Manager of European, African and
Middle East Sales of Videomedia, Inc., a manufacturer of video editing systems.
Prior to that, Mr. Conner was Managing Director of Videomedia Europe Ltd., a
European sales representative.
Ms. Hughes has served as Vice President, Manufacturing of the Company
since January 1995, Director of Manufacturing from April 1994 to January 1995
and a Manager from September 1993 until April 1994. From July 1991 to September
1993, Ms. Hughes served as an independent business consultant. From 1985 to June
1991, Ms. Hughes served as Manufacturing Manager of Alta Group, Inc., a
manufacturer of digital video post-production equipment.
Mr. Loesch has served as Vice President, New Business Development since
joining the Company in May 1994. From July 1993 to May 1994, Mr. Loesch served
as an independent business consultant. From June 1990 to November 1992, Mr.
Loesch co-founded and served as President of SHOgraphics Inc., a 3D graphics
systems company, and from November 1992 until July 1993 served as its Executive
Vice President and Chief Technical Officer. From 1989 to June 1990, Mr. Loesch
was an independent business consultant. Prior to that time, Mr. Loesch
co-founded and served as Chief Executive Officer and President of IKOS Systems,
Inc., a computer aided engineering company.
Mr. Majidimehr has served as Vice President, Engineering since June
1996, and Vice President, Product Engineering since joining the Company in
November 1995 until June 1996. From April 1994 to November 1995, Mr. Majidimehr
served as Vice President of Engineering of Abekas Video Systems, a manufacturer
of video editing systems. From September 1989 to April 1994, Mr. Majidimehr
served as an Engineering Director at Sony Microsystems.
Mr. McDonald has served as Vice President, Marketing and Domestic Sales
of the Company since June 1996, and Vice President, Marketing from March 1995 to
June 1996. From 1986 to February 1995, Mr. McDonald served in a variety of
marketing positions, most recently as Brand Manager for the Macintosh Performa,
at Apple Computer, Inc., a computer company.
Mr. Werdmuller has served as Vice President, Sales of the Company since
January 1990. Mr Werdmuller also served as the Company's Director of Sales from
June 1989 to December 1989 and as International Sales and Marketing Manager from
March 1987 to May 1989. Mr. Werdmuller has announced his intentions to resign
from the Company effective in September 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to
inside the back cover page of the Company's 1996 Annual Report to Shareholders
for the fiscal year ended June 30, 1996, filed as Exhibit 13.1 hereto (the
"Annual Report to Shareholders").
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to
page 10 of the Company's Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to
pages 11-15 of the Company's Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to
pages 16-26 of the Company's Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's
directors is incorporated by reference from the section captioned "Election of
Directors" contained in the Company's Proxy Statement related to the Annual
Meeting of Shareholders to be held October 24, 1996, to be filed by the Company
with the Securities and Exchange Commission within 120 days of the end of the
Company's fiscal year pursuant to General Instruction G(3) of Form 10-K (the
"Proxy Statement"). The information required by this item concerning executive
officers is set forth in Part I of this Report. The information required by this
item concerning compliance with Section 16(a) of the Exchange Act is
incorporated by reference from the section captioned "Compliance with Section
16(a) of the Exchange Act" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the section captioned "Executive Compensation and Other Matters" contained in
the Proxy Statement.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the section captioned "Record Date and Principal Share Ownership" contained in
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the sections captioned "Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions With Management" contained in the Proxy
Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a)(1) Financial Statements
The financial statements are incorporated by reference in Item 8 of
this Report:
Independent Auditors' Report
Balance Sheets, June 30, 1996 and 1995
Statements of Operations for years ended June 30, 1996, 1995 and 1994
Statement of Shareholders' Equity for the years ended June 30, 1996, 1995
and 1994
Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994
Notes to Financial Statements
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(a)(3) Exhibits
3.1(1) Restated Articles of Incorporation of the
Registrant.
3.2(1) Bylaws of the Registrant, as amended to date.
10.1(1) Registration Rights Agreement, dated December 21,
1990, as amended on September 9, 1993.
10.2(1) Series G Preferred Stock Purchase Agreement, dated
September 9, 1993.
10.3(1) 1987 Stock Option Plan, as amended, and form of
agreements thereto.
10.4(1) 1994 Employee Stock Purchase Plan, and form of
agreement thereto.
10.5(1) 1994 Director Stock Option Plan, and form of
agreement thereto.
10.6(1) Form of Indemnification Agreement between the
Registrant and its officers and directors.
10.7(1) Business Loan Agreement and ancillary documents
thereto between Registrant and Imperial Bank,
dated January 3, 1994.
10.8(1) Amendment to Business Loan Agreement between
Registrant and Imperial Bank, dated October 12,
1994.
10.9(1) Software Development and License Agreement,
effective as of November 23, 1987, between
Registrant and CrystalGraphics, Inc.
10.10*(1) Systems Marketing Agreement, dated December 7,
1990, as amended, between Registrant and BTS
Broadcast Television Systems.
10.11*(1) Development and Original Equipment Manufacturing
and Supply Agreement, dated March 16, 1994,
between Registrant and Avid Technology, Inc.
10.12*(1) Value-added Reseller Agreement, dated July 15,
1994, between Registrant and Matrox Corporation.
-22-
<PAGE>
10.13*(1) Letter Agreement, dated December 17, 1993, between
Registrant and Capital Cities/ABC, Inc.
10.14(1) Master Agreement, dated March 4, 1994, between
Registrant and Bell Microproducts, Inc.
10.15*(1) Contract Services Agreement, dated May 31, 1994,
between Registrant and Liberty Contract Services,
a division of Wyle Laboratories.
10.16.1(1) Industrial Lease Agreement, dated July 20, 1992,
as amended, between Registrant and Aetna Life
Insurance Company.
10.16.2(2) Amendment to Industrial Lease Agreement, dated
June 8, 1995 between Registrant and Aetna Life
Insurance Company.
10.17(1) Agreement, dated September 8, 1994, between
Registrant and Mark L. Sanders.
10.18.1 Agreement Concerning Assignment of Leases, dated
June 5, 1996, between Registrant and Network
Computing Devices, Inc.
10.18.2 Assignment and Modification of Leases, dated
August 16, 1996, between Registrant, Network
Computing Devices, Inc. and D.R. Stephens &
Company.
11.1 Statement of Computation of Net Income (Loss) Per
Share.
13.1 Annual Report to Shareholders for the fiscal year
ended June 30, 1996.
22.1 List of subsidiaries of the Registrant.
23.1 Consent of Independent Auditors and Report on
Schedule.
24.1 Power of Attorney (See Page 24).
27.1 Financial Data Schedule.
- ------------------
* Confidential treatment has been granted with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
1 Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S- 1 (Reg. No. 33-83812) as declared
effective by the Commission on November 8, 1994.
2 Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1995.
(b) Reports on Form 8-K. The Company did not file any reports on
Form 8-K during the last quarter of the fiscal year ended June
30, 1996.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedule. See Item 14(a)(2) above.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PINNACLE SYSTEMS, INC.
By: /s/ MARK L. SANDERS
-------------------------------------
Mark L. Sanders
President, Chief Executive Officer and
Director
Date: September 17, 1996
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mark L. Sanders and Arthur D. Chadwick,
and each of them, his true and lawful attorneys-in-fact and agents, each with
full power of substitution and resubstitution, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, or any of
them, shall do or cause to be done by virtue hereof.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, 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
- ----------------------------------- ----------------------------------------------------- -------------------------
<S> <C> <C>
/s/ MARK L. SANDERS President, Chief Executive Officer and Director September 17, 1996
- ----------------------------------- (Principal Executive Officer)
Mark L. Sanders
/s/ ARTHUR D. CHADWICK Vice President, Financial and Administration and September 17, 1996
- ----------------------------------- Chief Financial Officer (Principal Financial and
Arthur D. Chadwick Accounting Officer)
/s/ AJAY CHOPRA Chairman of the Board and Chief Technology Officer September 17, 1996
- -----------------------------------
Ajay Chopra
-24-
<PAGE>
/s/ JOHN LEWIS Director September 17, 1996
- -----------------------------------
John Lewis
/s/ CHARLES J. VAUGHAN Director September 17, 1996
- -----------------------------------
Charles J. Vaughan
/s/ NYAL D. McMULLIN Director September 17, 1996
- -----------------------------------
Nyal D. McMullin
/s/ GLENN E. PENISTEN Director September 17, 1996
- -----------------------------------
Glenn E. Penisten
</TABLE>
-25-
<PAGE>
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<CAPTION>
Balance at Provision Balance
beginning charged to Account at end
of period expense charge-off of period
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended June 30, 1994, allowance for doubtful
accounts and returns............................. $101 $89 $17 $173
==== === === ====
Year ended June 30, 1995, allowance for doubtful
accounts and returns............................. $173 $204 $16 $361
==== ==== === ====
Year ended June 30, 1996, allowance for doubtful
accounts and returns............................. $361 $522 $43 $840
==== ==== === ====
</TABLE>
AGREEMENT CONCERNING ASSIGNMENT OF LEASES
THIS AGREEMENT ("Agreement") is made for reference purposes only as of
June 5, 1996, between PINNACLE SYSTEMS, INC., a California corporation
("Assignee"), and NETWORK COMPUTING DEVICES, INC., a California corporation
("Assignor").
BACKGROUND
A. Assignor, Assignee and D.R. Stephens & Company, a California limited
partnership ("Lessor"), have entered into that certain Agreement to Assign and
Modify Leases of even date herewith (the "Assignment") providing for the
assignment to Assignee and modification of that (i) Standard
Industrial/Commercial Single-Tenant Lease-Net (the "280A Lease") between Lessor
and Assignor dated August 18, 1992 for approximately 53,300 square feet of
premises located at 280(A) North Bernardo Avenue, Mountain View, California (the
"280A Premises"), and (ii) Standard Industrial/Commercial Single-Tenant
Lease-Net (the "280B Lease") between Lessor and Assignor dated August 18, 1992
for approximately 53,160 square feet of premises located at 280(B) North
Bernardo Avenue, Mountain View, California (the "280B Premises"), each dated as
of August 18, 1992. The 280A and 280B Leases are collectively referred to herein
as the "Leases"; the 280A and 280B Premises are collectively referred to herein
as the "Premises".
B. Assignor and Assignee desire to enter into this Agreement to define
their mutual rights and obligations with respect to the Assignment; in this
regard, this Agreement is intended to supplement and expand upon the terms and
conditions of the Assignment.
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth in this Agreement, the parties hereto agree as follows:
1. Assignor's Representations. On the Effective Date (as defined
below), and again as of the closing date of the Assignment (as defined in
Paragraph 3 of the Assignment, and hereafter referred to as the "Closing Date"),
Assignor represents to Assignee that to the best of its current actual
knowledge: (i) that the Leases are in full force and effect, and there exists
under the Leases no "Breach" or "Default" by either Lessor or Assignor, nor has
there occurred any event which, with the giving of notice or passage of time or
both, could constitute such a Default or Breach; (ii) that the Premises,
including all buildings located thereon (a) conform to all requirements of
covenants, conditions, restrictions and encumbrances ("CC&R's"), all
underwriter's requirements, and all rules, regulations, statutes, ordinances,
laws and building codes, (collectively, "Laws") then in effect, and (b) are in
good operating condition and repair and the electrical, mechanical, HVAC,
plumbing, elevator and other systems serving the Premises are in good operating
condition and repair; (iii) that there are no pending or threatened actions,
suits or proceedings before any court or administrative agency against Lessor or
against Assignor or third parties which could, in the aggregate, adversely
affect the Premises or any part thereof or the ability of Assignee to perform
its obligations under the Leases or of Lessor to perform its obligations under
the Leases; (iv) that there is no pending or threatened condemnation or similar
proceeding affecting the Premises or any portion thereof; (v) that Assignor has
not received any notice from any insurance company of any defects or
inadequacies in
1
<PAGE>
the Premises or any part thereof which could adversely affect the insurability
of the Premises or the premiums for the insurance thereof; (vi) that, (a) no
Hazardous Material is present on or about the Premises, or, except as otherwise
set forth in that certain Phase 1 Environmental Site Assessment dated July 29,
1996, prepared by Secor International Incorporated for Assignor with respect to
the premises located at 303 Ravendale Drive, Mountain View, California, adjacent
to the Premises, or the soil, surface water or groundwater thereof, (b) no
underground storage tanks or asbestos-containing building materials are present
on the Premises, and (c) no action, proceeding, or claim is pending or
threatened regarding the Premises concerning any hazardous material or pursuant
to any environmental law. As used in this Agreement, "Hazardous Material" shall
mean any material which is now or hereafter regulated by any governmental
authority or which poses a hazard to the environment or human life.
2. Early Entry of Premises. Save for the portion of the Premises
("Subleased Premises") identified in that certain sublease between Assignor and
Assignee attached to the Agreement (the "Sublease"), on or before June 1, 1996,
Assignor shall vacate and leave the Premises in good operating condition and
repair, clean and free of debris and any personal property of Assignor, and
provide Assignee, its agents, employees, contractors and consultants, with
unrestricted, rent and operating expense free, access to the Premises, for the
purpose of installing the tenant improvements described in Exhibit 1 to the
Assignment. Except to the extent caused by any act, omission, negligence or
wilful misconduct of Assignor or its employees or agents, Assignee shall
protect, indemnify, defend, and hold harmless Assignor from and against any and
all claims, demands, causes of action and liabilities arising out of or relating
to Assignee's (or its employees', agents', contractors' or consultants') early
entry upon the Premises pursuant to this Paragraph 2.
3. Access to the Premises. In addition to the early entry rights set
forth in Paragraph 2, Assignor shall allow Assignee, its agents, employees,
contractors and consultants, reasonable access to the Premises to engage in such
examinations and inspections of the Premises as Assignor may reasonably desire
in connection with the Assignment. Except to the extent caused by any act,
omission, negligence or wilful misconduct of Assignor or its employees or
agents, Assignee shall protect, indemnify, defend, and hold harmless Assignor
from and against any and all claims, demands, causes of action and liabilities
arising out of or relating to Assignee's (or its employees', agents',
contractors' or consultants') examinations or inspections of the Premises prior
to the Closing Date.
4. Proration of Utility and Other Charges. All utility charges, real
estate taxes and any other periodic charges due under the Leases shall be
prorated by Assignor and Assignee as of the Closing Date. If the prorations
cannot be accurately calculated on the Closing Date, then they shall be
calculated as soon thereafter as is feasible, and any sums owed shall bear
interest at the rate of ten percent (10%) per annum or the highest amount
allowed by law, whichever is less, if payment is not made by the responsible
party within ten (10) days after its receipt of a bill for any amounts owed.
5. Indemnity.
A. Assignor's Indemnity. In amplification and not in
restriction of Assignor's other indemnity obligations to Assignee (including,
without limitation, Assignor's indemnity
2
<PAGE>
obligations under the Sublease), Assignor shall indemnify, defend (with counsel
reasonably acceptable to Assignee), protect and hold harmless Assignee and its
officers, employees, shareholders, agents and assigns from and against all
claims, demands, losses, costs (including attorney's fees and costs) or
liabilities (i) under the Leases (including, without limitation, all liability
due to the presence of Hazardous Materials on or about the Premises in any way
caused by Assignor, its employees, agents or contractors), or as a consequence
of Assignor's breach or default of the obligations on its part to be performed
under the Leases, accruing on or before the Closing Date, (ii) arising from
Assignor's use or occupancy of the Premises on or before the Closing Date, and
(iii) arising from the breach of any of Assignor's covenants or representations
to Assignee under this Agreement or the Assignment, regardless of whether
Assignee has waived any of the conditions set forth in Paragraph 2(b) or 2(e) of
the Assignment. The foregoing provisions shall survive the expiration or
termination of the Leases, this Agreement or the Assignment.
B. Assignee's Indemnity. Assignee shall indemnify, defend (with counsel
reasonably acceptable to Assignee), protect and hold harmless Assignor and its
officers, employees, shareholders, agents and assigns from and against all
claims, demands, causes of action, costs (including attorney's fees and costs)
or liabilities (i) under the Leases (including, without limitation, all
liability due to the presence of Hazardous Materials on or about the Premises
caused by Assignee or any of its agents or employees) accruing at any time after
the Closing Date, except as otherwise provided in the Sublease, or (ii) arising
from the breach of any of Assignee's covenants or representations to Assignor
under this Agreement or the Assignment. The foregoing provisions shall survive
the expiration or termination of the Leases, this Agreement or the Assignment.
6. Effective Date. This Agreement shall not be effective unless and
until both Assignor and Assignee have executed this Agreement and each has
received a fully executed original copy thereof. The date by which the foregoing
shall have occurred is referred to herein as the "Effective Date".
7. Miscellaneous. Should any provisions of this Agreement prove to be
invalid or illegal, such invalidity or illegality shall in no way affect, impair
or invalidate any other provision hereof, and such remaining provisions shall
remain in full force and effect. Time is of the essence with respect to the
performance of every provision of this Agreement in which time of performance is
a factor. The captions used in this Agreement are for convenience only and shall
not be considered in the construction or interpretation of any provision hereof.
This Agreement may be executed in counterparts, each of which shall constitute
an original and all of which together shall constitute one instrument. This
Agreement shall apply to and bind the respective heirs, successors, executors,
administrators and assigns of Assignor and Assignee. This Agreement shall be
construed and enforced in accordance with the laws of the State of California.
The language in all parts of this Agreement shall in all cases be construed as a
whole according to its fair meaning, and not strictly for or against either
Assignor or Assignee. When a party is required to do something by this
Agreement, it shall do so at its sole cost and expense without right of
reimbursement from the other party unless specific provision is made therefor.
Assignor shall not become or be deemed a partner nor a joint venturer with
Assignee by reason of the provisions of this Agreement. No subsequent change or
addition to this Agreement shall be binding unless in writing and signed by the
parties hereto.
3
<PAGE>
8. Interpretation. The parties hereto intend that the provisions of the
Assignment and this Agreement will not conflict, and that this Agreement and the
Assignment shall be construed harmoniously so as to give effect to all of the
terms, covenants and conditions of both documents. If there is any conflict
between the terms and conditions of this Agreement and the Assignment, then as
between Assignor and Assignee, the terms and conditions of this Agreement shall
control.
IN WITNESS WHEREOF, this Agreement is executed as of the date first
above written.
ASSIGNOR: ASSIGNEE:
NETWORK COMPUTING DEVICES, INC., PINNACLE SYSTEMS, INC.,
a California corporation a California corporation
By: /s/ Jack Bradley By: /s/ Arthur Chadwick
----------------------------- -----------------------------
Printed Printed
Name: Jack Bradley Name: Arthur Chadwick
--------------------------- ---------------------------
Its: CFO Its: CFO
---------------------------- ----------------------------
4
ASSIGNMENT AND MODIFICATION OF LEASES
THIS ASSIGNMENT AND MODIFICATION OF LEASES (this "Assignment) is made
as of the 16th day of August, 1996, by and among the D. R. STEPHENS & COMPANY, a
California limited partnership ("Lessor"), NETWORK COMPUTING DEVICES, INC., a
California corporation ("Assignor"), and PINNACLE SYSTEMS, INC., a California
corporation ("Assignee").
Recitals
A. Lessor and Assignor, as Lessee, entered into that certain Standard
Industrial/Commercial Single-Tenant Lease-Net for the approximately 53,300
square foot premises located at 280(A) North Bernardo Avenue, Mountain View,
California, and that certain Standard Industrial/Commercial SingleTenant
Lease-Net for the approximately 53,160 square foot premises located at 280(B)
North Bernardo Avenue, Mountain View, California, each dated as of August 18,
1992. Said Leases are referred to herein collectively as the "Leases" and
individually as the "280(A) Lease" and the "280(B) Lease". Copies of the Leases
are attached hereto as Exhibits A and B and made a part hereof by reference.
B. On the terms and conditions hereinafter provided:
(i) Assignor desires to assign the Leases to Assignee and be
released by Lessor from all further obligations in connection with the Leases,
except as otherwise herein provided and except with respect to that certain
Sublease attached hereto as Exhibit E (the "Sublease") between Assignor and
Assignee of even date herewith concerning the 280(A) North Bernardo premises;
(ii) Assignee desires to accept the assignment and assume the
lessee's obligations under each of the Leases, provided the Leases are modified
in certain respects; and
(iii) Lessor is willing to modify the Leases as desired by
Assignee and to approve the assignment to Assignee and the Sublease, provided
the Leases are modified in certain additional respects.
THEREFORE, Lessor, Assignor and Assignee agree as follows:
1. Assignment. Subject and pursuant to the terms and conditions set
forth herein and in that certain Agreement to Assign and Modify Leases between
the parties hereto dated June 5, 1996 (the "Agreement") and in that certain
Agreement Concerning Assignment of Leases of even date therewith between
Assignor and Assignee (the "Agreement Concerning Assignment"), for value
received, receipt of which is hereby acknowledged, Assignor hereby assigns and
transfers to Assignee all of its right, title, and interest in and to each of
the Leases. Assignee shall succeed to all rights and privileges under the
Leases, except as herein otherwise provided. Assignor covenants with Assignee
that Assignor is the lawful owner of the assigned interests; that the
Commencement Date under each of the Leases was October 1, 1992; that the Leases
are in full force and effect and not in default or subject to a condition which,
with the giving of notice or passage of time or both, would constitute a
default; that the assigned interests are free and clear of and from all liens
and encumbrances; that Assignor has good right to sell
<PAGE>
and assign said interests as aforesaid; and that Assignor has no claims against
Lessor under the Leases and this assignment is made without reservation of any
kind as against Lessor.
2. Return of Assignor Deposits. Assignor acknowledges the receipt of
its security deposits which have been returned to Assignor by Lessor in the
combined amount of $83,040, less any amounts which may have been applied by
Lessor in accordance with the provisions of the Leases. Assignor acknowledges
that the amount it is receiving concurrently with the execution and exchange of
this Assignment is in full satisfaction of Lessor's obligation to Assignor with
respect to amounts deposited by Assignor pursuant to the Leases. Assignee
acknowledges that Lessor is returning Assignor's deposits to Assignor, that such
deposits are not among the interests of Assignor which are assigned pursuant to
this Assignment, and that Assignee is depositing its own funds pursuant to this
Assignment.
3. Condition of Premises. Assignor acknowledges that it has had
occupancy and control of the premises under the Leases at all time from the
Commencement Date thereunder through the date hereof, that Lessor completed its
obligations for improvements and repairs under the Leases, including without
limitation, all obligations under the Work Letter Agreements of the Leases and
the roof replacement and any and all work indicated by the inspection report
pursuant to Sections 2 and 3 of the Addenda to the Leases; and that Assignor has
been responsible for all maintenance and repairs of the premises except for
Lessor's obligation to replace, if necessary, the air conditioner compressors
and heat exchangers pursuant to Section 2(b) of the Addendum to each of the
Leases. Accordingly, Assignor, rather than Lessor, has been in a position to
know the condition of the premises and has been responsible for their condition.
Except as otherwise provided herein or in the Agreement, any warranty or
representation to Assignee as to the condition of the premises is being made
under the Agreement Concerning Assignment to which Lessor is not a party, except
that, to the extent possible, Assignor and Lessor hereby assign to Assignee, on
a nonexclusive basis, the benefits of the warranty for the aforesaid roof
replacement.
4. Lessor Disclaimer as to Condition. Lessor makes only those limited
representations set forth in the Agreement but absolutely no representation or
warranty as to the condition of the buildings located on the premises. All such
representations or warranties included in the Addenda and the Work Letter
Agreements to the Leases no longer apply. Assignee acknowledges that Assignor
has made access to the premises available to Assignee, that Assignee has
inspected the premises to its satisfaction, and that, as to Lessor and except as
otherwise provided herein or in the Agreement, Assignee accepts the premises in
their present condition, as is, without conditions, reservations,
representations or warranties whatsoever; provided, however, that the foregoing
shall not be deemed to release Lessor from any liability Lessor otherwise might
have arising from the presence of any hazardous substances in the soil or
groundwater of the premises prior to the date of this Assignment; and provided
further, without limiting the generality of Assignee's foregoing
acknowledgments, that Lessor shall have no liability whatsoever in connection
with or as a result of any hazardous materials which may be present within the
buildings on the premises, including without limitation, asbestos containing
materials as disclosed in a report by Reel Grobeman which has been made
available to Assignee through Assignor and which materials Lessor understands
were removed or otherwise remediated in accordance with applicable laws in the
course of Assignor's improvements to the premises. Any representations or
warranties Assignee may have received with respect to the conditions of the
buildings located on the premises have been made
-2-
<PAGE>
only by Assignor; Assignee agrees to look solely to Assignor with respect
thereto; and Assignor releases Lessor from and acknowledges and agrees it has no
claim against Lessor for, damages, indemnification, contribution or any other
cause in any way arising out of or in connection with the condition of the
premises, and Assignor further agrees to defend, indemnify, and hold Lessor
harmless from and against any such claims, except to the extent caused by the
active or gross negligence or wilful misconduct of Lessor or Lessor's employees,
agents or contractors. Assignee acknowledges that, as between Assignee and
Lessor, Assignee is responsible for all maintenance, repair and improvement on
or about the premises as and when required under the Leases, including without
limitation, any work required to conform to codes and regulation, whether
currently applicable or enacted or applied in the future, and specifically
including, without limitation, the Americans with Disabilities Act.
5. Compressor and Exchanger Replacement. Except as otherwise set forth
under the Leases (as modified by this Assignment), the only obligation of Lessor
with respect to the condition of the premises for the duration of the Leases,
including all possible extensions thereof, shall be as follows: If the air
conditioner compressors and heat exchangers servicing the premises under either
of the Leases should require replacement prior to June 30, 2000, Lessor shall be
responsible for such replacement. Pending any such replacement, Assignee shall
be responsible for repair and maintenance of said compressors and exchangers.
After any such replacement and after June 30, 2000, in any event, Assignee shall
be responsible for all further repair, maintenance and replacement of the
compressors and exchangers as well as all other repairs, maintenance and
replacements necessary to keep the premises in good order, condition and repair
in accordance with Paragraph 7.1(a) of the Leases, and Lessor shall use best
efforts to assure that Assignee is an express beneficiary of any warranty
received by Lessor in connection with such replacement of the air conditioner
compressors and heat exchangers.
6. Acceptance and Assumption. Assignee accepts the assignment of the
Leases as hereinafter modified and expressly assumes and agrees to keep,
perform, and fulfill all the terms, covenants, conditions, and obligations
required to be kept, performed, and fulfilled by the Lessee under each of the
Leases as so modified, and as between Assignee and Lessor, whether the
obligation shall have occurred on, before or after the date hereof. Lessor shall
look to Assignee for payment of all costs and expenses from and after the date
hereof which are the responsibility of "Lessee" under the Leases (as modified by
this Assignment); and it shall be the responsibility of Assignor and Assignee to
agree between themselves by separate instrument as to any prorations or
allocations they desire to make. Lessor shall not be a party to or involved with
such prorations or allocations.
7. Contribution to Tenant Improvements. Assignee acknowledges receipt
of the sum of $16,000 from Lessor to be used towards the construction of tenant
improvements to be made by Assignee. Except as otherwise set forth in the
Agreement, and, as between Assignor and Assignee, as may be set forth in the
Agreement Concerning Assignment, Assignee agrees that all other costs of tenant
improvements or alterations of any kind shall be the sole responsibility of
Assignee.
8. Construction of Tenant Improvements. Assignee may construct tenant
improvements as shown on the plans and specifications referenced in Exhibit C
hereto, which plans and specifications are approved by Lessor. Assignee's
agreement to observe and perform in accordance with the provisions of the Leases
includes, without limitation, abiding by the provisions of Paragraphs 7.3 and
7.4 governing
-3-
<PAGE>
Utility Installations, Trade Fixtures and Alteration, with respect to these
tenant improvements. Upon surrender of the premises, Assignee may leave in place
all improvements made by Assignor and all improvements made by Assignee pursuant
to the plans and specifications referenced in Exhibit C, except to the extent
Lessor, as part of its approvals of said plans and specifications, has reserved
in writing the right to require Assignee to remove certain aspects of the
Exhibit C improvements on or before surrender of the premises. All other
conditions of the Leases required for the premises upon surrender shall continue
in full force and effect.
9. Consent to Assignment. Lessor consents to the assignment to Assignee
of the Lessee's interest in and to each of the Leases as modified hereby. Except
for Assignor's obligations under the Sublease, Lessor waives, releases and
discharges Assignor from all obligations under the Leases; provided that neither
this release nor the modification of the Leases shall in any way affect any
obligation or liability of Assignor to Assignee with respect to the condition of
the premises, the state of Assignor's right or title in and to the interests
assigned hereunder, or any other matter between Assignor and Assignee, or any
obligations or liabilities of the parties to one another pursuant to this
Assignment. Lessor's consent to this assignment shall not be deemed or construed
to be a waiver of any term, covenant, condition or provision of either of the
Leases (except as otherwise expressly herein provided) nor a consent to any
further, subsequent or other assignment or subleasing under either of the
Leases, all rights of Lessor under each of the Leases as modified by this
Assignment being hereby reserved.
10. Assignee Rent Payment. Lessor acknowledges receipt of the sum of
$45,305.00 to be applied towards the rent due for the calendar month as of which
this Assignment is dated, under the 280(A) Lease and the sum of $45,186.00 to be
applied towards the rent due for the same month under the 280(B) Lease. Assignee
shall be responsible to Lessor for all rent from and after the date hereof.
11. Assignee Security Deposit. Lessor acknowledges receipt of the
additional sum of $100,700 to be held as a combined security deposit for
Assignee's performance under the Leases, to be held by Lessor and refundable to
Assignee as provided in Paragraph 5 of the Leases.
12. Modification of Leases. The Leases are modified as follows:
a. Term. The Original Term of each of the Leases is extended
to the last day of December, 2003, but this shall not extend the period of
Lessor's obligation for any required replacement of air conditioner compressors
and heat exchangers.
b. Rent. The Base Rent payable each month under each of the
Leases shall be as follows:
Period 280(A) Lease 280(B) Lease
- ---------------------------------------- -------------- --------------
Date hereof to May 31, 2001 $45,305.00 $45,186.00
June 1, 2001, to December 31, 2003 $50,635.00 $50,502.00
-4-
<PAGE>
c. Insuring Party. Paragraph 1.9 of each of the Leases is
amended to provide that the "Insuring Party" is the Lessee.
d. Option to Extend. The option to extend each of the Leases
as granted to Assignor at Section 8 of the Addenda is granted to Assignee and
the "Lessee" pursuant to any Permitted Transfer (as defined in Paragraph 12.j),
revised as set forth in Exhibit D attached hereto and made a part hereof by
reference.
e. Late Charges. The grace period for payment of rent and
other sums due under each of the Leases is extended from the five (5) days
provided in Paragraph 13.4 of the Leases to seven (7) days.
f. Right of First Refusal. Assignor's right of first refusal
is terminated by this Assignment. Assignee shall have no right of first refusal
at any time after Assignee's receipt of written notice of delinquency from
Lessor. The right of first refusal shall apply only in the event of an outright
sale of the premises, and Assignee shall have no right of first refusal in the
event Lessor transfers the premises by way of a capital contribution to another
entity, including without limitation, a REIT. In the event Lessor's intended
sale of the property is structured as an exchange or other tax-advantaged
transfer, Assignee's right of first refusal shall apply only if Assignee is able
to and does cooperate in the exchange or structure the other transfer so that
Lessor achieves the intended tax advantage.
g. Signage. Paragraph 34 of the Leases is deleted. Assignee
shall have the right, at Assignee's sole cost, to install and maintain at, in or
around the premises any and all signage advertising Assignee's business and
operations at the premises that Assignee desires. The size, location, and nature
of such signs shall be subject to all applicable governmental ordinances and
regulations. The means of affixing the signs shall be subject to Lessor's prior
written approval, and the signs shall be subject to provisions of Paragraph 7 of
the Leases (Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations). Lessor reserves the right to have "for lease" and/or "for sale"
signs posted on or about the premises at any time after November 30, 2002, if
Assignee has not given notice of its election to exercise the option to extend
the term, and at any time after November 30, 2012, if Assignee does extend the
Leases for the Option Term.
h. Permitted Uses. The permissible uses specified under
Paragraph 1.8 of each of the Leases is amended to read, "Light manufacturing,
assembly, research and development, warehouse, sales, general office and all
other legal uses."
i. Rent. Paragraph l(d) of the Addendum to each of the Leases
is deleted.
j. Assignment. Notwithstanding anything to the contrary set
forth in the Leases, Assignee may, with only prior notice to Lessor and without
the consent of Lessor, and, without any participation by Lessor in assignment or
subletting proceeds ("transfer considerations"), assign the Leases or sublease
the premises to (i) a subsidiary, affiliate, division or corporation
controlling, controlled by or under common control with Assignee, (ii) a
successor corporation related to Assignee by merger, consolidation,
nonbankruptcy reorganization, or government action, or (iii) a purchaser of
substantially
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all of Assignee's assets; provided that the transferee pursuant to any such
assignment or sublease shall promptly execute and deliver to Lessor an
instrument assuming all obligations of the lessee under the Leases. In addition,
any public or private offering of Assignee's capital stock or sale of Assignee's
capital stock through any public exchange shall not be deemed an assignment,
subletting or other transfer of the Leases or the premises. A sublease,
assignment or similar transfer under the conditions of this provision shall be
referred to as a "Permitted Transfer". The assumption instrument by the
transferee notwithstanding, no assignment, Sublease or similar transfer shall
relieve Assignee of any obligations under either of the Leases.
k. Subletting. Lessor hereby approves the Sublease. By this
approval, Lessor shall not be deemed to have entered into the Sublease or to
have consented to any further assignment of subletting of the premises.
Additionally, the second sentence of Paragraph 12.2(c) shall not apply to this
Sublease.
l. Property Insurance. Notwithstanding anything to the
contrary contained in the Leases, (i) Assignee shall, by endorsement to the
property insurance policies Assignee is required to carry pursuant to Paragraph
8.3(c) of the Leases, maintain separately scheduled property insurance coverage
on all of Assignee's personal property and "Lessee Owned Alterations and Utility
Installations" (as defined in the Leases, and which together with Assignee's
personal property, shall collectively be referred to hereafter as "Assignee's
Property"), and (ii) all proceeds available form the insurance carried by
Assignee with respect to Assignee's Property shall be paid or assigned by Lessor
to and become the property of Assignee, regardless of whether or not the Leases
are terminated by either Lessor or Assignee pursuant to Paragraph 9 of the
Leases.
13. Brokers. Each party warrants and represents to the other that it
has not employed or had dealings with any brokers or finders in connection with
this transaction, except Grubb & Ellis Company who has represented Assignee and
Spallino Reid who has represented Assignor. Each party agrees to indemnify,
protect, defend and hold harmless each other party from and against any claims
for such commissions or fees and from and against all claims, losses, costs,
expenses and damages (including reasonable attorneys' fees) resulting from a
breach of the foregoing warranty. Lessor shall pay $50,000.00 for total
commissions due Grubb & Ellis Company and Spallino Reid in connection with the
transactions encompassed by this Assignment, and Assignor shall pay any other or
additional commissions or fees payable to any person in connection herewith and
shall defend and indemnify Lessor from and against any and all claims for such
other or additional commissions or fees.
14. Attorneys' Fees. In the event of any litigation involving any of
the parties hereto for the enforcement or interpretation of any of the
provisions of this Assignment, or of any right of any party hereunder, the
unsuccessful party in such litigation hereby agrees to pay to the successful
party all costs and expenses, including without limitation, reasonable
attorneys' fees and court costs incurred by the successful party in such
litigation, whether at the trial, appellate and/or administrative levels, all of
which fees and costs may be included in, and as part of, any judgment or
decision rendered in such litigation.
15. Entire Agreement. Except as to matters specifically left to
separate agreement between Assignor and Assignee, the terms of this Assignment
are intended by the parties as a final expression of
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their agreement with respect to the subject matter hereof, and may not be
contradicted by evidence of any prior or contemporaneous agreement. Such parties
further intend that this Assignment constitute the complete and exclusive
statement of its terms and that no extrinsic evidence whatsoever may be
introduced in any proceedings (judicial or otherwise) involving this Assignment,
except for evidence of a subsequent written amendment hereto.
16. Modification. This Assignment may not be modified, amended or
otherwise changed in any manner, nor may the Leases be further modified, amended
or otherwise changed in any manner, except by a written amendment executed by
the applicable parties hereto, or their respective successors in interest.
Except as modified hereby, all terms and conditions of the Leases remain
unchanged and in full force and effect.
17. Partial Invalidity. If any provision hereof is held invalid or not
enforceable to its full extent, such provision shall be enforced to the fullest
extent permitted by law, and the validity of the remaining provisions hereof
shall not be affected thereby.
18. Headings. The headings of various sections in this Assignment are
for convenience only and are not to be utilized in construing the content or
meaning of the substantive provisions hereof.
19. Successors. All of the terms, covenants and conditions of this
Assignment shall be binding upon, and shall inure to the benefit of, the heirs,
executors, administrators, successors and permitted assigns of the parties.
IN WITNESS WHEREOF, the parties have executed this Assignment as of the
date first above stated.
ASSIGNOR:
NETWORK COMPUTING DEVICES, INC.
By /s/ Jack Bradley
---------------------------
Jack Bradley
------------------------------
[Print Name]
Its Chief Financial Officer
--------------------------
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ASSIGNEE:
PINNACLE SYSTEMS, INC.
By /s/ Arthur Chadwick
------------------------------
Aruthur Chadwick
---------------------------------
[Print Name]
Its Chief Financial Officer
-----------------------------
LESSOR:
D.R. STEPHENS & COMPANY
By /s/ Donald R. Stephens
------------------------------
Donald R. Stephens, General Partner
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EXHIBIT A
280(A) Lease
(including Addendum and Work Letter Agreement)
<PAGE>
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
(Do not use this form for Multi-Tenant Property)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
August 18, 1992 is made by and between D.R. Stephens & Company ("Lessor") and
Network Computing Devices, Inc., a California corporation ("Lessee"),
(collectively the "Parties" or individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 280(A) North Bernardo Avenue, Mountain View
(formerly occupied by Synoptics) located in the County of Santa Clara, State of
California, and generally described as (describe briefly the nature of the
property), also known as Assessor's Parcel No. 165-37-009 ("Premises"). (See
Paragraph 2 for further provisions.)
1.3 Term: Approximately seven (7) years and 1 month ("Original Term").
(See Paragraph 3 and Work Letter for further provisions.)
1.4 [paragraph intentionally deleted]
1.5 Base Rent: $41,575.00 per month ("Base Rent"), payable on the First
(1st) day of each month. (See Paragraph 4 for further provisions.)
|X| If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted.
1.6 Base Rent Paid Upon Execution: $41,575.00 as Base Rent for the
first full month following the Commencement Date.
1.7 Security Deposit: $41,575.00 ("Security Deposit"). (See Paragraph 5
for further provisions.)
1.8 Permitted Use: Office and testing, packaging and shipping of
computers, monitors and related devices. (See Paragraph 6 for further
provisions.)
1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise
stated herein. (See Paragraph 8 for further provisions.)
1.10 Real Estate Brokers: The following real estate brokers
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes): J.R.
Parish, Inc. -- Colliers International represents
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|X| Lessor exclusively ("Lessor's Broker");
|_| both Lessor and Lessee,
and Spallino Reid represents
|X| Lessee exclusively ("Lessee's Broker");
|_| both Lessee and Lessor. (See Paragraph 15 for further provisions.)
1.11 [paragraph intentionally deleted]
1.12 Addenda. Attached hereto is an Addendum and Work Letter all of
which constitute a part of this Lease.
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 [paragraph intentionally deleted]
2.3 [paragraph intentionally deleted]
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.
2.5 [paragraph intentionally deleted]
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3, and the Work Letter.
3.2 [paragraph intentionally deleted]
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3.3 [paragraph intentionally deleted]
4. Rent.
4.1 Base Rent. Lessee shall cause Payment of Base Rent and other rent
or charges, as the same may be adjusted from time to time, to be received by
Lessor in lawful money of the United States, without offset or deduction, on or
before the day on which it is due under the terms of this Lease. Base Rent and
all other rent and charges for any period during the term hereof which is for
less than one (1) full calendar month shall be prorated based upon the actual
number of days of the calendar month involved. Payment of Base Rent and other
charges shall be made to Lessor at its address stated herein or to such other
persons or at such other addresses as Lessor may from time to time designate in
writing to Lessee.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the
Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful
performance of Lessee's obligations under this Lease. If Lessee fails to pay
Base Rent or other rent or charges due hereunder, or otherwise Defaults under
this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all
or any portion of said Security Deposit for the payment of any amount due Lessor
or to reimburse or compensate Lessor for any liability, cost, expense, loss or
damage (including attorneys' fees) which Lessor may suffer, or incur by reason
thereof. If Lessor uses or applies all or any portion of said Security Deposit,
Lessee shall within ten (10) days after written request therefor deposit moneys
with Lessor sufficient to restore said Security Deposit to the full amount
required by this Lease. Lessor shall not be required to keep all or any part of
the Security Deposit separate from its general accounts. Lessor shall, at the
expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed in
writing by Lessor, no part of the Security Deposit shall be considered to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that unreasonably disturbs owners
and/or occupants of, or causes damage to, neighboring premises or properties.
Lessor hereby agrees to not unreasonably withhold or delay its consent to any
written request by Lessee, Lessees assignees or subtenants, and by prospective
assignees and subtenants of the Lessee, its assignees and subtenants, for a
modification of said permitted purpose for which the premises may be used or
occupied, so long as the same will not impair the structural integrity of the
improvements on the Premises, the mechanical or electrical systems therein, is
not significantly more burdensome to the Premises and the improvements thereon,
and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to
withhold such consent, Lessor shall within five (5) business days give a written
notification of same, which notice shall include an explanation of Lessor's
reasonable objections to the change in use.
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6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous
Substance" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill release or effect,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety or
welfare, the environment or the Premises, (ii) regulated or monitored by any
governmental authority, or (iii) a basis for liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in, on or about the Premises
which constitutes a Reportable Use (as hereinafter defined) of Hazardous
Substances without the express prior written consent of Lessor and compliance in
a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as
defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or
use of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority.
Reportable Use shall also include Lessee's being responsible for the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Law requires that a notice be given to persons entering or occupying
the Premises or neighboring properties. Notwithstanding the foregoing, Lessee
may without Lessor's prior consent, but in compliance with all Applicable Law,
use any ordinary and customary materials reasonably required to be used by
Lessee in the normal course of Lessee's business permitted on the Premises, so
long as such use is not a Reportable Use and does not expose the Premises or
neighboring properties to any meaningful risk of contamination or damage or
expose Lessor to any liability therefor. In addition, Lessor may (but without
any obligation to do so) condition its consent to the use or presence of any
Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving
Lessor such additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefrom or therefor,
including, but not limited to, the installation (and removal on or before Lease
expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the deposit
of an additional Security Deposit under Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has
reasonable cause to believe, that a Hazardous Substance, or a condition
involving or resulting from same, has come to be located in, on, under or about
the Premises, other than as previously consented to by Lessor, Lessee shall
immediately give written notice of such fact to Lessor. Lessee shall also
immediately give Lessor a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action or proceeding given
to, or received from, any governmental authority or private party, or persons
entering or occupying the Premises, concerning the presence, spill, release,
discharge of, or exposure to, any Hazardous Substance or contamination in, on,
or about the Premises, including but not limited to all such documents as may be
involved in any Reportable Uses involving the Premises.
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(c) Indemnification. Lessee shall indemnify, protect,
defend and hold Lessor, its agents, employees, lenders and ground Lessor, if
any, and the Premises, harmless from and against any and all loss of rents
and/or damages, liabilities, judgments, costs, claims, liens, expenses,
penalties, permits and attorney's and consultant's fees arising out of or
involving any Hazardous Substance or storage tank brought onto the Premises by
or for Lessee or under Lessee's control. Lessee's obligations under this
Paragraph 6 shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created by or for
Lessee, and the cost of investigation (including consultants and attorney's fees
and testing), removal, remediation, restoration and/or abatement thereof, or of
any contamination therein involved, and shall survive the expiration or earlier
termination of this Lease. No termination, cancellation or release agreement
entered into by Lessor and Lessee shall release Lessee from its obligations
under this Lease with respect to Hazardous Substances or storage tanks, unless
specifically so agreed by Lessor in writing at the time of such agreement.
6.3 Lessee's Compliance with Law. Except as otherwise provided in
Section 2 of the Addendum, Lessee, shall, at Lessee's sole cost and expense,
fully, diligently and in a timely manner, comply with all "Applicable Law,"
which term is used in this Lease to include all laws, rules, regulations,
ordinances, directives, covenants, easements and restrictions of record permits,
the requirements of any applicable fire insurance underwriter or rating bureau,
and the recommendations of Lessor's engineers and/or consultants relating in any
manner to Lessee's occupancy or use of the Premises (including but not limited
to matters pertaining to (i) industrial hygiene, (ii) environmental conditions
on, in, under or about the Premises, including soil and groundwater conditions
created by or for Lessee and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill or release of
any Hazardous Substance or storage tank), now in effect or which may hereafter
come into effect, and whether or not reflecting a change in policy from any
previously existing policy. Lessee shall, within five (5) days after receipt of
Lessor's written request, provide Lessor with copies of all documents and
information, including, but not limited to, permits, registrations, manifests,
applications, reports and certificates, evidencing Lessee's compliance with any
Applicable Law specified by Lessor, and shall immediately upon receipt, notify
Lessor in writing (with copies of any documents involved) of any threatened or
actual claim, notice, citation, warning, complaint or report pertaining to or
involving failure by Lessee or the Premises to comply with any Applicable Law.
6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined
in paragraph 8.3(a)) shall have the right to enter the Premises at any time, in
the case of an emergency, and otherwise at reasonable times upon prior notice,
whether written or oral, for the purpose of inspecting the condition of the
Premises and for verifying compliance by Lessee with this Lease and all
Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or
consultants in connection therewith and/or to advise Lessor with respect to
Lessee's activities including but not limited to the installation, operation,
use, monitoring, maintenance, or removal of any Hazardous Substance or storage
tank on or from the Premises. The costs and expenses of any such inspections
shall be paid by the party requesting same, unless a Default or Breach of this
Lease, violation of Applicable Law, or a contamination, caused or materially
contributed to by Lessee is found to exist or be imminent, or unless the
inspection is requested or ordered by a governmental authority as the result of
any such existing or imminent violation or contamination. In any such case,
Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may
be, for the costs and expenses of such inspections.
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7. Maintenance; Repairs: Utility Installations: Trade Fixtures and Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Sections 2 and 3 in the
Addendum, 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and
14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair, structural and non-structural (whether or not such portion of the
Premises requiring repairs, or the means of repairing the same, are reasonably
of readily accessible to Lessee, and whether or not the need for such repairs
occurs as a result of Lessee's use, any prior use, the elements or the age of
such portion of the Premises), including, without limiting the generality of the
foregoing all equipment or facilities serving the Premises, such as plumbing,
heating, air conditioning, ventilating, electrical, lighting facilities,
boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and
hose or other automatic fire extinguishing system, including fire alarm and/or
smoke detection systems and equipment, fire hydrants, fixtures, walls (interior
and exterior), foundations, ceilings, roofs, floors, windows, doors, plate
glass, skylights, landscaping, driveways, parking lots, fences, retaining walls,
signs, sidewalks and parkways located in, on, about, or adjacent to the
Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled
or released in, on, under or about the Premises (including through the plumbing
or sanitary sewer system) and shall promptly, at Lessee's expense, take all
investigatory and/or remedial action reasonably recommended, whether or not
formally, ordered or required, for the cleanup of any contamination of, and for
the maintenance, security and/or monitoring of the Premises, the elements
surrounding same, or neighboring properties, that was caused or materially
contributed to by Lessee, or pertaining to or involving any Hazardous Substance
and/or storage tank brought onto the Premises by or for Lessee or under its
control. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair. If Lessee occupies the Premises for seven (7) years or
more, Lessor may require Lessee to repaint the exterior of the buildings on the
Premises as reasonably required, but not more frequently than once every seven
(7) years.
(b) Lessee shall, at Lessee's sole cost and expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in, the
inspection, maintenance and service of the following equipment and improvements,
if any, located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance.
7.2 Lessor's Obligations. Except for the warranties and agreements of
Lessor contained in Sections 2 and 3 of the Addendum, Section 9 (relating to
destruction of the Premises) and 14 (relating to condemnation of the Premises),
it is intended by the Parties hereto that Lessor have no obligation, in any
manner whatsoever, to repair and maintain the Premises, the improvements located
thereon, or the equipment therein, whether structural or non structural, all of
which obligations are intended to be that of the Lessee and under Paragraph 7.1
hereof. It is the intention of the Parties that the terms of this
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Lease govern the respective obligations of the Parties as to maintenance and
repair of the Premises. Lessee and Lessor expressly waive the benefit of any
statute now or hereafter in effect to the extent it is inconsistent with the
terms of this Lease with respect to, or which affords Lessee the right to make
repairs at the expense of Lessor or to terminate this Lease by reason of any
needed repairs.
7.3 Utility Installations; Trade Fixtures: Alterations.
(a) Definitions; Consent Required. The term "Utility
Installations" is used in this lease to refer to all carpeting, window
coverings, air lines, power panels, electrical distribution, security, fire
protection systems, communication systems, lighting fixtures, heating,
ventilating, and air conditioning equipment, plumbing, and fencing in, on or
about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and
equipment that can be removed without doing material damage to the premises. The
term "Alterations" shall mean any modification of the improvements on the
Premises from that which are provided by Lessor under the terms of this Lease,
other than Utility Installations or Trade Fixtures, whether by addition or
deletion. "Lessee Owned Alterations and/or Utility Installations" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations
or Utility installations in, on, under or about the Premises without Lessor's
prior written consent which shall not be unreasonably withheld or delayed.
Lessee may, however, make non-structural Utility Installations to the interior
of the Premises (excluding the roof), as long as they are not visible from the
outside, do not involve puncturing, relocating or removing the roof or any
existing walls, and the cumulative cost thereof during each calendar year of the
Lease does not exceed $25,000.
(b) Consent. Any Alterations or Utility Installations
that Lessee shall desire to make and which require the consent of the Lessor
shall be presented to Lessor in written form with proposed detailed plans. All
consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by
subsequent, specific consent, shall be deemed conditioned upon: (i) Lessee's
acquiring all applicable permits required by governmental authorities, (ii) the
furnishing of copies of such permits together with a copy of the plans and
specifications for the Alteration or Utility Installation to Lessor prior to
commencement of the work thereon, and (iii) the compliance by Lessee with all
conditions of said permits in a prompt and expeditious manner. Any Alterations
or utility Installations by Lessee during the term of this Lease shall be done
in a good and workmanlike manner, with good and sufficient materials, and in
compliance with all Applicable Law. Lessee shall promptly upon completion
thereof furnish Lessor with as-built plans and specifications therefor.
(c) Indemnification. Lessee shall pay, when due, all
claims for labor or materials furnished or alleged to have been furnished to or
for Lessee at or for use on the Premises, which claims are or may be secured by
any mechanics' or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior to
the commencement of any work, in, on or about the Premises, and Lessor shall
have the right to post notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises. If Lessor shall require,
Lessee shall furnish
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to Lessor a surety bond satisfactory to Lessor in an amount equal to one and
one-half times the amount of such contested lien claim or demand, indemnifying
Lessor against liability for the same, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorneys fees and costs in participating in such
action if Lessor shall decide it is to its best interest to do so.
7.4 Ownership; Removal: Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require their
removal or become the owner thereof as hereinafter provided in this Paragraph
7.4, all Alterations and Utility Installations made to the Premises by Lessee
shall be the property of and owned by Lessee, but considered a part of the
Premises. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee
Owned Alterations and Utility Installations shall, at the expiration or earlier
termination of this Lease, become the property of Lessor and remain upon and be
surrendered by Lessee with the premises.
(b) Removal. Unless otherwise agreed in writing Lessor
may require that any or all Lessee Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
their installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall Surrender the
Premises by the end of the last day of the Lease term or any earlier termination
date, with all of the improvements, parts and surfaces thereof clean and free of
debris and in good operating order, condition and state of repair, ordinary wear
and tear excepted. "Ordinary wear and tear" shall not include any damage or
deterioration, that would have been prevented by good maintenance practice or by
Lessee performing all of its obligations under this Lease. Except as otherwise
agreed or specified in writing by Lessor, the Premises, as surrendered. shall
include the Utility Installations. The obligation of Lessee shall include the
repair of any damage occasioned by the installation, maintenance or removal of
Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good service practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation to
repair and restore the Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee
is the Insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8 except to the extent of the cost attributable to liability insurance
carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy
periods commencing prior to or extending beyond the Lease term shall be prorated
to correspond to the Lease term. Payment shall be made by Lessee to Lessor with
ten (10) days following receipt of an invoice for any amount due.
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8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in
force during the term of this Lease a Commercial General Liability policy of
insurance protecting Lessee and Lessor (as an additional insured) against claims
for bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an occurrence basis
providing single limit coverage in an amount not less than $1,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises"
Endorsement and contain the "Amendment of the Pollution Exclusion" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not contain
any intra-insured exclusions as between insured persons or organizations, but
shall include coverage for liability assumed under this Lease as an "insured
contract" for the performance of Lessee's indemnity obligations under this
Lease. The limits of said insurance required by this Lease or as carried by
Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of
any obligation hereunder. All insurance to be carried by Lessee shall be primary
to and not contributory with any similar insurance carried by Lessor, whose
insurance shall be considered excess insurance only.
(b) Carried by Lessor. In the event Lessor is the
Insuring Party, Lessor shall also maintain liability insurance described in
Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance
required to be maintained by Lessee. Lessee shall not be named as an additional
insured therein.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall
obtain and keep in force during the term of this Lease a policy or policies in
the name of Lessor, with loss payable to Lessor and to the holders of any
mortgages, deeds of trust or ground leases on the Premises ("Lender(s)"),
insuring loss or damage to the Premises. The amount of such insurance shall be
equal to the full replacement cost of the Premises, as the same shall exist from
time to time, or the amount required by Lenders, but in no event more than the
commercially reasonable and available insurable value thereof if, by reason of
the unique nature or age of the improvements involved, such latter amount is
less than the full replacement costs. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations shall be insured by Lessee
under Paragraph 8.4 rather than by Lessor. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all risks
of direct physical loss or damage (except the perils of flood and /or earthquake
unless required by a Lender), including coverage for any additional costs
resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
of any undamaged sections of the Premises required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of loss. Said policy or policies shall also
contain an agreed valuation provision in lieu of any coinsurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located. If such insurance coverage has a
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deductible clause, the deductible amount shall not exceed $1,000 per occurrence,
and Lessee shall be liable for such deductible amount in the event of an Insured
Loss, as defined in Paragraph 9.1(c).
(b) Rental Value. The Insuring Party shall, in addition,
obtain and keep in force during the term of this Lease a policy or policies in
the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss
of the full rental and other charges payable by Lessee to Lessor under this
Lease for one (1) year (including all real estate taxes, insurance costs, and
any scheduled rental increases). Said insurance shall provide that in the event
the Lease is terminated by reason of an insured loss, the period of indemnity
for such coverage shall be extended beyond the date of the completion of repairs
or replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part of a
larger building, or if the Premises are part of a group of buildings owned by
Lessor which are adjacent to the Premises, the Lessee shall pay for any increase
in the premiums for the property insurance of such building or buildings if said
increase is caused by Lessee's acts, omissions, use or occupancy of the
Premises.
(d) Tenant's Improvements. If the Lessor is the Insuring
Party, the Lessor shall not be required to insure Lessee Owned Alterations and
Utility Installations unless the item in question has become the property of
Lessor under the terms of this Lease. If Lessee is the Insuring Party, the
policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned
Alterations and Utility Installations.
8.4 Lessee's Property Insurance. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Lessee Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $5,000.00 per
occurrence. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property or the restoration of Lessee Owned Alterations
and Utility Installations. Lessee shall be the Insuring Party with respect to
the insurance required by this Paragraph 8.4 and shall provide Lessor with
written evidence that such insurance is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term "General Policyholders Rating"
of at least B-, V, or such other rating as may be required by a Lender having a
lien on the Premises, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done anything which shall
invalidate the insurance policies referred to in this Paragraph 8. If Lessee is
the Insuring Party, Lessee shall cause to be delivered to Lessor certified
copies of policies of such insurance or certificates evidencing the existence
and amounts of such insurance with the insured and loss payable clauses as
required by this Lease. No such policy shall be cancellable or subject to
modification except after thirty (30) days prior written notice to Lessor.
Lessee shall at least
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thirty (30) days prior to the expiration of such policies, furnish Lessor with
evidence of renewals or "insurance binders" evidencing renewal thereof, or
Lessor may order such insurance and charge the cost thereof to Lessee, which
amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party
shall fail to procure and maintain the insurance required to be carried by the
Insuring Party under this Paragraph 8, the other Party may, but shall not be
required to, procure and maintain the same, but at Lessee's expense.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 8. The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by an deductibles applicable thereto.
8.7 Indemnity. Except for Lessor's gross negligence, willful misconduct
and/or breach of express warranties or obligations, Lessee shall indemnify,
protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's
master or ground Lessor, partners and Lenders, from and against any and all
claims, loss of rents and/or damages, costs, liens, judgments, penalties,
permits, attorney's and consultant's fees, expenses and/or liabilities arising
out of, involving, or in dealing with, the occupancy of the Premises by Lessee,
the conduct of Lessee's business, any act, omission or neglect of Lessee, its
agents, contractors, employees or invites, and out of any Default or Breach by
Lessee in the performance in a timely manner of any obligation on Lessee's part
to be performed under this Lease. The foregoing shall include, but not be
limited to, the defense or pursuit of any claim or any action or proceeding
involved therein, and whether or not (in the case of claims made against Lessor)
litigated and/or reduced to judgment, and whether well founded or not. In case
any action or proceeding be brought against Lessor by reason of any of the
foregoing matters, Lessee upon notice from Lessor shall defend the same at
Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall
cooperate with Lessee in such defense. Lessor need not have first paid any such
claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Except for Lessor's gross
negligence, willful misconduct, Lessor's breach of express warranty or
obligations, Lessor shall not be liable for injury or damage to the person or
goods, wares, merchandise or other property of Lessee. Lessee's employees,
contractors, invites, customers, or any other person in or about the Premises,
whether such damage or injury is caused by or results from fire, steam,
electricity, gas, water or rain, or from the breakage, leakage, obstruction or
other defects of pipes, fire sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures, or from any other cause, whether the said
injury or damage results from conditions arising upon the Premises or upon other
portions of the building of which the Premises are a part, or from other sources
or places, and regardless of whether the cause of such damage or injury or the
means of repairing the same is accessible or not. Lessor shall not be liable for
any damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's gross negligence or breach of this Lease, Lessor shall
under no circumstances be liable for injury to Lessee's business or for any loss
of income or profit therefrom.
9. Damage or Destruction.
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9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or
destruction to the improvements on the Premises, other than Lessee Owned
Alterations and Utility Installations, the repair cost of which damage or
destruction is less than 50% of the then Replacement Cost of the Premises
immediately prior to such damage or destruction, excluding from such calculation
the value of the land and Lessee Owned Alterations and Utility Installations.
(b) "Premises Total Destruction" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations the repair cost of which damage or destruction is 50%, or more of
the then Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "Insured Loss" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible amounts
or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the
occurrence or discovery of a condition involving the presence of, or a
contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on,
or under the Premises.
9.2 Partial Damage--Insured Loss. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the insurance
proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or the
insurance proceeds are not sufficient to effect such repair, the Insuring Party
shall promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said repairs.
In the event, however, the shortage in proceeds was due to the fact that, by
reason of the unique nature of the improvements, full replacement cost insurance
coverage was not commercially reasonable and available, Lessor shall have no
obligation to pay for the shortage in insurance proceeds or to fully restore the
unique aspects of the Premises unless Lessee provides Lessor with the funds to
cover same, or adequate assurance thereof, within ten (10) days following
receipt of written notice of such shortage and request therefor. If Lessor
receives said funds or adequate assurance thereof within said ten (10) day
period, the party responsible for making the repairs shall complete them as soon
as reasonably possible
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and this Lease shall remain in full force and effect. If Lessor does not receive
such funds or assurance within said period, Lessor may nevertheless elect by
written notice to Lessee within ten (10) days thereafter to make such
restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect. If in such case Lessor does not so elect, then this Lease shall
terminate sixty (60) days following the occurrence of the damage or destruction.
Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 Partial Damage--Uninsured Loss. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within twenty (20) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above this Lease shall terminate
as of the date specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall be deemed to have terminated as
of the date of such Premises Total Destruction, whether or not the damage or
destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("Exercise Period"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or
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adequate assurance thereof) needed to make the repairs. If Lessee duly exercises
such option during said Exercise Period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during said Exercise Period,
then Lessor may at Lessor's option terminate this Lease as of the expiration of
said sixty (60) day period following the occurrence of such damage by giving
written notice to Lessee of Lessor's election to do so within ten (10) days
after the expiration of the Exercise Period, notwithstanding any term or
provision in the grant of option to the contrary.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in Paragraph 9.2
(Partial Damage--Insured), whether or not Lessor or Lessee repairs or restores
the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired. Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee to the extent it is not prevented
by such damage, and Lessee shall have no claim against Lessor for any damage
suffered by reason of any such repair or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety days (90) days after such obligation shall accrue, Lessee may, at any
time prior to the commencement of such repair or restoration give written notice
to Lessor and to any Lenders of which Lessee has actual notice of Lessee's
election to terminate this Lease on a date not less than sixty (60) days
following the giving of such notice. If Lessee gives such notice to Lessor and
such Lenders and such repair or restoration is not commenced within thirty (30)
days after receipt of such notice, this Lease shall terminate as of the date
specified in said notice. If Lessor or a Lender commences the repair or
restoration of the Premises within thirty (30) days after receipt of such
notice, this Lease shall continue in full force and effect. "Commence" as used
in this Paragraph shall mean the beginning of the actual work on the Premises.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, provided Lessee's use of the Premises is not
prevented, or (ii) if the estimated cost to investigate and remediate such
condition exceeds twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater, give written notice to Lessee within thirty (30) days
after receipt by Lessor of knowledge of the occurrence of such Hazardous
Substance Condition of Lessor's desire to terminate this Lease as of the date
sixty (60) days following the giving of such notice. In the event Lessor elects
to give such notice of Lessor's intention to terminate this Lease,
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Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except to the extent of
an amount equal to twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater. Lessee shall provide Lessor with the funds required of
Lessee or satisfactory assurance thereof within thirty (30) days following
Lessee's said commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and remediation
as soon as reasonably possible and the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance Condition
occurs for which Lessee is not legally responsible, there shall be abatement of
Lessee's obligations under this Lease to the same extent as provided in
Paragraph 9.6(a) for a period of not to exceed twelve (12) months. If after
12-months, Lessee proceeds to cure such Hazardous Substance Condition, and
provided that Lessee is not legally responsible therefor; Lessor will reimburse
Lessee for its actual and necessary out-of-pocket costs incurred to cure such
Hazardous Substance condition.
9.8 Termination-Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor,
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been, or is not then required to be used by Lessor under the terms of
this Lease.
9.9 Waive Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 (a) Payment of Taxes. Lessee shall pay the Real Property
Taxes as defined in Paragraph 10.2 applicable to the premises during the term of
this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at
least ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes to be paid by Lessee shall cover any period of
time prior to or after the expiration or earlier termination of the term hereof,
Lessee's share of such taxes shall be equitably prorated to cover only the
period of time within the tax fiscal year this Lease is in effect, and Lessor
shall reimburse Lessee for any overpayment after such proration. If Lessee shall
fail to pay any Real Property Taxes required by this Lease to be paid by Lessee,
Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor
therefor upon demand.
(b) Advance Payment. In order to insure payment when due
and before delinquency of any or all Real Property Taxes, Lessor reserves the
right, at Lessor's option to estimate the current Real Property Taxes applicable
to the Premises, and to require such current year's Real Property Taxes to be
paid in advance to Lessor by Lessee monthly in advance with the payment of the
Base Rent. If Lessor elects
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to require payment monthly in advance, the monthly payment shall be that equal
monthly amount which, over the number of months remaining before the month in
which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated installment of taxes to be paid. When the actual
amount of the applicable tax bill is known, the amount of such monthly advance
payment shall be adjusted as required to provide the fund needed to pay the
applicable taxes before delinquency. If the amounts paid to Lessor by Lessee
under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Real Property Taxes as the same become due,
Lessee shall pay to Lessor upon Lessor's demand, such additional sums as are
necessary to pay such obligations. All moneys paid to Lessor under this
Paragraph may be intermingled with other moneys of Lessor and shall not bear
interest.
10.2 Definition of "Real Property Taxes." As used herein, the term
"Real Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary; and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith
shall be conclusive.
10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b).
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion to be
determined by Lessor of all charges jointly metered with other premises.
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12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or otherwise transfer or encumber: (collectively,
"assignment") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale, acquisition,
financing, refinancing, transfer, leveraged buy-out or otherwise) whether or not
a formal assignment or hypothecation of this Lease or Lessee's assets occurs,
which results or will result in a reduction of the Net Worth of Lessee, as
hereinafter defined, by an amount equal to or greater than fifty-one percent
(51%) of such Net Worth of Lessee as it was represented to Lessor at the time of
the execution by Lessor of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net
Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee
(excluding any guarantors) established under generally accepted accounting
principles consistently applied.
(d) As assignment or subletting of Lessee's interest in
this Lease without Lessor's specific prior written consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable
Breach without the necessity of any notice and grace period. If Lessor elects to
treat such unconsented to assignment or subletting as a noncurable Breach,
Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon
thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base
Rent to fair market rental value or one hundred ten percent (110%) of the Base
Rent then in effect, whichever is greater. Pending determination of the new fair
market rental value, if disputed by Lessee, Lessee shall pay the amount set
forth in Lessor's Notice, with any overpayment credited against the next
installment(s) of Base Rent coming due, and any underpayment for the period
retroactively to the effective date of the adjustment being due and payable
immediately upon the determination thereof. Further, in the event of such Breach
and market value adjustment, (i) the purchase price of any option to purchase
the Premises held by Lessee shall be subject to similar adjustment to the then
fair market value (without the Lease being considered an encumbrance or any
deduction for depreciation or obsolescence, and considering the Premises at its
highest and best use and in good condition), or one hundred ten percent (110%)
of the price previously in effect, whichever is greater, (ii) any index-oriented
rental or price adjustment formulas contained in this Lease shall be adjusted to
require that the base index be determined with reference to the index applicable
to the time of such adjustment, and (iii) any fixed rental adjustments scheduled
during the remainder of the Lease
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term shall be increased in the same ratio as the new market rental bears to the
Base Rent in effect immediately prior to the market value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1
by Lessor shall be limited to compensatory damages and injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not: (i) be effective without the express written assumption by
such assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting
shall not constitute a consent to any subsequent assignment or subletting by
Lessee or to any subsequent or successive assignment or subletting by the
sublessee. However, Lessor may consent to subsequent sublettings and assignments
of the sublease or any amendments or modifications thereto without notifying
Lessee or anyone else liable on the Lease or sublease and without obtaining
their consent, and such action shall not relieve such persons from liability
under this Lease or sublease.
(d) In the event of any Default or Breach of Lessee's
obligations under this Lease, Lessor may proceed directly against Lessee, any
Guarantors or any one else responsible for the performance of the Lessee's
obligations under this Lease, including the sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor or Lessee.
(e) Each request for consent to an assignment or
subletting shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or subleases, including but not limited
to the intended use and/or required modification of the Premises. Lessee agrees
to provide Lessor with such other or additional information and/or documentation
as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease
shall, by reason of accepting such assignment or entering into such sublease, be
deemed for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to be
observed or performed by Lessee during the term of said assignment or sublease,
other than such
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obligations as are contrary to or inconsistent with provisions of an assignment
or sublease to which Lessor has specifically consented in writing.
(g) [provision intentionally deleted]
(h) Lessor, as a condition to giving its consent to any
assignment or subletting, may require that the amount and adjustment structure
of the rent payable under this Lease be adjusted to what is then the market
value and/or adjustment structure for property similar to the Premises as then
constituted.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease of all or
a portion of the Premises heretofore or hereafter, made by Lessee, and Lessor
may collect such rent and income and apply same toward Lessee's obligations
under this Lease; provided, however, that until a Breach (as defined in
Paragraph 13.1) shall occur in the performance of Lessee's obligations under
this Lease, Lessee may, except as otherwise provided in this Lease, receive,
collect and enjoy the rents accruing under such sublease. Lessor shall not, by
reason of this or any other assignment of such sublease to Lessor, nor by reason
of the collection of the rents from a sublessee, be deemed liable to the
sublessee for any failure of Lessee to perform and comply with any of Lessee's
obligations to such sublessee under such sublease. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written notice from
Lessor stating that a Breach exists in the performance of Lessee's obligations
under this Lease, to pay to Lessor the rents and other charges due and to become
due under the sublease. Sublessee shall rely upon any such statement and request
from Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against said sublessee or, until the Breach has
been cured against Lessor for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance
of its obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of such
sublease; provided, however, Lessor shall not be liable for any prepaid rents or
security deposit paid by such sublessee to such sublessor or for any other prior
Defaults or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the
sublessor under a sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or
any part of the Premises without Lessor's prior written consent.
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(e) Lessor shall deliver a copy of any notice of Default
or Breach by Lessee to the sublessee, who shall have the right to cure the
Default of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. A "Default" is defined as a failure by the Lessee
to observe, comply with or perform any of the terms, covenants, conditions or
rules applicable to Lessee under this Lease. A "Breach" is defined as the
occurrence of any one or more of the following Defaults, and, where a grace
period for cure after notice is specified herein, the failure by Lessee to cure
such Default prior to the expiration of the applicable grace period, shall
entitle Lessor to pursue the remedies set forth in Paragraph 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease,
the failure by Lessee to make any payment of Base Rent or any other monetary
payment required to be made by Lessee hereunder whether to Lessor or to a third
party, as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease,
the failure by Lessee to provide Lessor with reasonable written evidence (in
duly executed original form, if applicable) of (i) compliance with Applicable
Law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts
required under Paragraph 7.1(b), (iii) the recision of an unauthorized
assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per
Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease
per Paragraph 30, (vi) [clause intentionally omitted], (vii) the execution of
any document requested under Paragraph 42 (easements), or (viii) any other
documentation or information which Lessor may reasonably require of Lessee under
the terms of this Lease, where any such failure continues for a period of ten
(10) days following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants,
conditions or provisions of this Lease, or of the rules adopted under Paragraph
40 hereof that are to be observed, complied with or performed by Lessee, other
than those described in subparagraphs (a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of the
Lessee's default is such that more than thirty (30) days are reasonably required
for its cure, then it shall not be deemed to be a Breach of this Lease by
Lessee, if Lessee commences such cure within said thirty (30) day period and
thereafter diligently prosecutes such cure to completion.
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(e) The occurrence of any of the following events: (i)
The making by Lessee of any general arrangement or assignment for the benefit of
creditors, (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. ss. 101 or
any successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within one hundred twenty (120) days, (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where possession is not restored to Lessee within sixty (60) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within sixty (60) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any applicable
law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by Lessor that any financial statement
given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) [paragraph intentionally deleted]
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the
Premises by any lawful means, in which case this Lease and the term hereof shall
terminate and Lessee shall immediately surrender possession of the Premises to
Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the
worth at the time of the award of the unpaid rent which had been earned at the
time of termination; (ii) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time or award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus
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one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's
Default or Breach of this Lease shall not waive Lessor's right to recover
damages under this Paragraph. If termination of this Lease is obtained through
the provisional remedy of unlawful detainer, Lessor shall have the right to
recover in such proceeding the unpaid rent and damages as are recoverable
therein, or Lessor may reserve therein the right to recover all or any part
thereof in a separate suit for such rent and/or damages. If a notice and grace
period required under subparagraphs 13.1(b), (c) or (d) was not previously
given, a notice to pay rent or quit, or to perform or quit, as the case may be,
given to Lessee under any statute authorizing the forfeiture of leases for
unlawful detainer shall also constitute the applicable notice for grace period
purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the
applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the
unlawful detainer statute shall run concurrently after the one such statutory
notice, and the failure of Lessee to cure the Default within the greater of the
two such grace periods shall constitute both an unlawful detainer and a Breach
of this Lease entitling Lessor to the remedies provided for in this Lease and/or
by said statute.
(b) Continue the Lease and Lessee's right to possession
in effect (in California under California Civil Code Section 1951.4) after
Lessee's Breach and abandonment and recover the rent as it becomes due, provided
Lessee has the right to sublet or assign, subject only to reasonable
limitations. See paragraphs 12 and 36 for the limitations on assignment and
subletting which limitations Lessee and Lessor agree are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under the Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or
the termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 Inducement Recapture In Event Of Breach. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions," shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.l, any such
inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph shall not be deemed a waiver by Lessor of the provisions of this
Paragraph unless specifically so stated in writing by Lessor at the time of such
acceptance.
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13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within five (5) days
after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall Pay to Lessor a late charge equal to six percent (6%) of
such overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Lessor will incur by reason of late
payment by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's Default or Breach with respect to such overdue
amount, nor prevent Lessor from exercising any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder, whether
or nor collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the land area
not occupied by any building, is taken by condemnation, Lessee may, at Lessee's
option, to be exercised in writing within ten (10) days after Lessor shall have
given Lessee written notice of such taking (or in the absence of such notice,
within ten (10) days after the condemning authority shall have taken possession)
terminate this Lease as of the date the condemning authority takes such
possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building and such taking does not interfere materially with Lessee's
use of the premises. Any award for the taking of all or any part of the Premises
under the power of eminent domain or any payment made under threat of the
exercise of such power shall be the property of Lessor, whether such award shall
be made as compensation for diminution in value of the leasehold or for the
taking of the fee, or as severance damages; provided, however, that Lessee shall
be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
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15. Broker's Fee.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of
this Lease.
15.2 [paragraph intentionally deleted]
15.3 [paragraph intentionally deleted]
15.4 [paragraph intentionally deleted]
15.5 Lessee and Lessor each represent and warrant to the other that it
has had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said transaction.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. Tenancy Statement.
16.1 Each Party (as "Responding Party") shall within ten (10) days
after written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Tenancy Statement" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises, or, if this is
a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or in this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or
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assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within thirty (30) days
following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises, Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
23. Notices.
23.1 All notices required or permitted by this Lease shall be in
writing and may be delivered in person (by hand or by messenger or courier
service) or may be sent by regular, certified or registered mail or U.S. Postal
Service Express Mail, with postage prepaid, or by facsimile transmission, and
shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease
shall be that Party's address for delivery or mailing of notice purposes. Either
Party may by written notice to the other specify a different address for notice
purposes, except that upon Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to be
given to Lessor hereunder shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time hereafter designate by
written notice to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same
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is addressed as required herein and mailed with postage prepaid. Notices
delivered by United States Express Mail or overnight courier that guarantees
next day delivery shall be deemed given twenty-four (24) hours after delivery of
the same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be deemed
served or delivered upon telephone confirmation of receipt of the transmission
thereof, provided a copy is also delivered via delivery or mail. If notice is
received on a Sunday or legal holiday, it shall be deemed received on the next
business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any preceding Default or Breach by
Lessee of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted. Any payment given Lessor by Lessee may be accepted
by Lessor on account of moneys or damages due Lessor notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other execute,
acknowledge and deliver to the other a short form memorandum of this Lease for
recording purposes. The Party requesting recordation shall be responsible for
payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county which the
Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device
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(collectively, "Security Device"), now or hereafter placed by Lessor upon the
real property of which the Premises are part, to any and all advances made on
the security thereof, and to all renewals, modifications, consolidations,
replacements and extensions thereof. Lessee agrees that the Lenders holding any
such Security Device shall have no duty, liability or obligation to perform any
of the obligations of Lessor under this Lease, but that in the event of Lessor's
default with respect to any such obligation, Lessee will give any Lender whose
name and address have been furnished Lessee in writing for such purpose notice
of Lessor's default and allow such Lender thirty (30) days following receipt of
such notice for the cure of said default before invoking any remedies Lessee may
have by reason thereof. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquired
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defense
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any option to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
such subordination or non-subordination, attornment and/or non-disturbance
agreement as is provided for herein.
31. Attorney's Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) or Broker in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorney's fees. Such fees may be awarded in the
same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term "Prevailing Party" shall
include, without limitation, a Party or Broker who substantially obtains or
defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorney's fees award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and
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consultations in connection therewith whether or not a legal action is
subsequently commenced in connection with such Default or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times upon prior notice, whether written or oral,
for the purpose of showing the same to prospective purchasers, lenders, or
lessees, and making such alterations, repairs, improvements or additions to the
Premises or to the building of which they are a part, as Lessor may reasonably
deem necessary. Lessor may at any time place on or about the Premises or
building any ordinary "For Sale" signs and Lessor may at any time during the
last one hundred twenty (120) days of the term hereof place on or about the
Premises any ordinary "For Lease" signs. All such activities of Lessor shall be
without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the Premises, except that Lessee
may, with Lessor's prior written consent, install (but not on the roof) such
signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations).
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as
otherwise provided herein, wherever in this Lease the consent of a Party is
required to an act by or for the other Party, such consent shall not be
unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses
(including but not limited to architects', attorneys', engineers' or other
consultants' fees) incurred in the consideration of, or response to, a request
by Lessee for any Lessor consent pertaining to this Lease or the Premises,
including but not limited to consents to an assignment, a subletting or the
presence or use of a Hazardous Substance, practice or storage tank, shall be
paid by Lessee to Lessor upon receipt of an invoice and supporting documentation
therefor. Subject to Paragraph 12.2(e) (applicable to assignment or subletting),
Lessor may, as a condition to considering any such request by Lessee, require
the Lessee
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deposit with Lessor an amount of money (in addition to the Security Deposit held
under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor
will incur in considering and responding to Lessee's request. Except as
otherwise provided, any unused portion of said deposit shall be refunded to
Lessee without interest. Lessor's consent to any act, assignment of this Lease
or subletting of the Premises by Lessee shall not constitute an acknowledgment
that no Default or Breach by Lessee of this Lease exists, nor shall such consent
be deemed a waiver of any then existing Default or Breach, except as may be
otherwise specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this
Lease are acknowledged by Lessee as being reasonable. The failure to specify
herein any particular condition to Lessor's consent shall not preclude the
imposition by Lessor at the time of consent of such further or other conditions
as are then reasonable with reference to the particular matter for which consent
is being given.
37. [paragraph intentionally deleted]
38. [paragraph intentionally deleted]
39. [paragraph intentionally deleted]
40. Multiple Buildings. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, with the consent of Lessee, which shall not be unreasonably withheld or
delayed, such easements, rights and dedications that Lessor deems necessary, and
to cause the recordation of parcel maps and restrictions, so long as such
easements, rights, dedications, maps and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation
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on the part of said Party to pay such sum or any part thereof, said Party shall
be entitled to recover such sum or so much thereof as it was not legally
required to pay under the provisions of this Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by Lessor or Lessor's agent and submission
of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is
not intended to be binding until executed by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION
TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED
TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE
OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION
OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR
EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF
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THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN
CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS
LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates
specified above to their respective signatures.
Executed at San Francisco, California Executed at Mountain View, California
-------------------------- -------------------------
on August 18, 1992 on August 18, 1992
---------------------------------- ---------------------------------
by LESSOR: D.R. Stephens & Company by LESSEE: Network Computing
550 Montgomery Street Devices, Inc.
- -------------------------------------- -------------------------------------
San Francisco, CA 94111 350 North Bernardo Avenue
- -------------------------------------- -------------------------------------
Mountain View, CA 94043
By /s/ D.R. Stephens By /s/ Jack Bradley
---------------------------------- ---------------------------------
Name Printed: D.R. Stephens Name Printed: Jack Bradley
----------------------- -----------------------
Title: General Partner Title: Chief Financial Officer
------------------------------ ------------------------------
By By
----------------------------------- ----------------------------------
Name Printed: Name Printed:
------------------------ -----------------------
Title: Title:
-------------------------------- ------------------------------
Address: Address:
----------------------------- -----------------------------
Tel. No. ( ) Tel. No. ( )
-------- ------------------ -------- ------------------
NOTICE: These forms are often modified to meet changing requirements
of law and industry needs. Always write or call to make sure
you are utilizing the most current form: American Industrial
Real Estate Association, 345 South Figueroa Street, Suite M-1,
Los Angeles, CA 90071, (213) 687-8777, Fax. No. (213)
687-8616.
(C) Copyright 1990 - By American Industrial Real Estate Association.
All rights reserved. No part of these works may be reproduced in
any form without permission in writing.
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LEASE ADDENDUM TO 280(A) N. BERNARDO LEASE
(Formerly Occupied by Synoptics)
This Lease Addendum ("Addendum") is made to the Standard
Industrial/Commercial Single-Tenant - Net Lease executed concurrently herewith
(the "Lease") by and between D. R. Stephens & Company ("Landlord") and Network
Computing Devices, Inc., a California corporation ("Tenant").
Landlord and Tenant hereby agree that, notwithstanding anything
contained in the Lease to the contrary, the provisions set forth below shall be
deemed to be part of the Lease and shall supersede, to the extent appropriate,
any contrary provision in the Lease. All references in the Lease and in this
Addendum shall be construed to mean the Lease and the exhibits, as amended or
supplemented by this Addendum. All terms used in this Addendum, unless
specifically defined in this Addendum, shall have the same meanings as the terms
used in the Lease.
1. Rent. Commencing on the Commencement Date and continuing throughout
the Lease Term, Tenant shall pay the following as additional rent:
a. All Real Property Taxes applicable to the Premises as
required by Section 10 of the Lease;
b. All water, gas, heat, light, power, telephone, trash
disposal and other utilities and services supplied to the Premises as required
by Section 11 of the Lease;
c. Any late charges or interest due pursuant to Sections 13.4
and 19 of the Lease; and
d. At Landlord's election, any other reasonable payments due
to Landlord pursuant to this Lease.
2. Condition of the Premises. Landlord shall deliver the Premises to
Tenant clean and free of debris on the Commencement Date.
a. Building Systems. Landlord warrants, to the best of its
actual knowledge, that the existing plumbing, fire sprinkler system, lighting,
air conditioning, heating and loading doors (collectively, the "building
systems"), if any, in the Premises, other than those constructed by Tenant,
shall be in good working order and condition on the Commencement Date.
Notwithstanding the foregoing, Tenant acknowledges that the building system
services may be temporarily interrupted during the course of the construction of
that portion of the Tenant Improvements completed after the Commencement Date.
Tenant agrees that it shall, at its sole cost and expense, engage a
qualified inspector, contractor or engineer to inspect the building systems.
Such inspection shall be completed within sixty (60) days after the Commencement
Date. Tenant shall provide Landlord with a copy of the inspection report and
Landlord agrees to make such repairs or replacements, (at Landlord's cost and
without deduction or
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offset from the Construction Allowance as defined in the Work Letter executed
concurrently herewith), as are reasonably recommended by the inspection report;
provided, that, Landlord may make reasonable objections thereto within sixty
(60) days after receiving the inspection report. If Tenant does not give
Landlord written notice of a non-compliance with this warranty within sixty (60)
days following the Commencement Date, correction of that non-compliance shall be
the obligation of Tenant at Tenant's sole cost and expense.
In no event shall Landlord be liable for costs to repair, replace or
maintain the building systems from and after the date the repair or replacement
of such systems has been completed by Landlord in accordance with the
recommendations on the inspection report.
b. Air Conditioner Compressors and Heat Exchangers.
Notwithstanding the provisions contained in Section 2(a) above, Landlord shall,
once during the original Lease Term, replace, if and when necessary, the air
conditioner compressors (except those marked Trane Unit Serial Nos. 776-13581
and 776-13580) and heat exchangers servicing the Premises.
c. Roof. Landlord and Tenant have reviewed a report on the
roof which recommends certain repairs be made thereto. On or before the
Commencement Date, Landlord agrees, at its sole cost and expense, to make such
repairs to the roof as are reasonably necessary. Within three (3) years after
the Commencement Date, Landlord agrees to commence replacing the roof. Prior to
Landlord's replacement of the roof, Landlord shall be responsible for the
maintenance of the roof. Following the replacement of the roof, Tenant shall, at
its sole cost and expense, be liable for the repair and maintenance thereof.
d. Tenant's Obligations. Except as expressly provided in
Sections 9 and 14 of the Lease and Section 1 of Work Letter, and without
limiting the provisions of Section 7.2 of the Lease, Tenant shall be
responsible, at its sole cost and expense, for the repair, maintenance and
replacement, if necessary, of the following:
the parking lot,
dock, and
landscaping.
3. Compliance with Covenants, Restrictions and Building Code. Landlord
warrants, to the best of its actual knowledge, that the improvements on the
Premises comply with all applicable covenants, or restrictions of record and
applicable building codes, regulations, zoning and other applicable laws in
effect on the Commencement Date. Said warranty does not apply to the use to
which Tenant will put the Premises or any Alterations or Utility Installations
(as defined in Section 7.3(a) of the Lease) made or to be made by Tenant. If,
following the inspection described in Section 2 above, the Premises do not
comply with said warranty, Landlord shall, subject to the limitations described
in Section 2 above, promptly after receipt of written notice from Tenant setting
forth with specificity the nature and extent of such non-compliance, rectify the
same at Landlord's expense (without deduction or offset against the
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Construction Allowance). If Tenant does not give Landlord written notice of a
non-compliance with this warranty within sixty (60) days following the
Commencement Date, correction of that non-compliance shall be the obligation of
Tenant at Tenant's sole cost and expense.
4. Ownership of Alterations and Utility Installations.
a. Alterations. Notwithstanding anything contained in Section
7.4 of the Lease to the contrary, Landlord reserves the right, until expiration
or termination of the Lease, to require removal or become the owner of any and
all Alterations made to the Premises by the Tenant.
b. Utility Installations. At the time Tenant submits detailed
plans to Landlord for review for the purpose of obtaining Landlord's consent to
any proposed Utility Installation, Tenant may request Landlord to indicate
whether or not such proposed Utility Installation is to be removed from the
Premises upon the expiration or termination of the Lease and whether Tenant is
to perform all restoration made necessary by the removal of any such Utility
Installation. If Tenant does not request Landlord to make such indication, or if
Tenant does not obtain Landlord's prior consent to Tenant's removal of such
Utility Installation, then all such alterations shall be property of Landlord
and remain upon and be surrendered with the Premises upon expiration or
termination of the Lease. Landlord shall have the right to require Tenant to
remove any Utility Installation and to perform all restoration made necessary by
such removal.
c. Security and Communication Systems. Notwithstanding
anything contained herein to the contrary, all security and communication
systems installed by Tenant shall be deemed to be Trade Fixtures and shall be
removed by Tenant at the expiration or earlier termination of the Lease;
provided, that Tenant shall repair and restore any and all damage to the
Premises caused by the removal of such systems.
5. Hazardous Waste. Subject to the provisions of Section 6 of this
Addendum, Landlord shall indemnify, protect, defend and hold Tenant, its agents
and employees harmless from and against any and all damages, liabilities,
judgements, costs, claims, liens, expenses, penalties, permits and attorney's
fees and consultant's fees arising out of or involving any Hazardous Substance
or storage tank brought onto the Premises on or before the Commencement Date of
this Lease by or for Landlord or under Landlord's control.
6. Limitation on Liability. The liability of Landlord in connection
with the Premises shall be limited to its interest in the Premises, and in no
event shall any other assets of Landlord be subject to any claim arising out of
or in connection with the Lease or the Premises. Tenant expressly agrees that so
long as Landlord is a corporation, trust, partnership, joint venture,
unincorporated association or other form of business entity, the obligations of
Landlord shall not constitute personal obligations of the officers, directors,
trustees, partners, joint venturers, members, owners, stockholders or other
principals or repre sentatives ("principals") of such business entity. In this
regard, Tenant agrees that in the event of any actual or alleged failure, breach
or default by Landlord of its obligations under this Lease, that (i) no
principal shall be sued or named as a party in any suit or action (except as may
be necessary to secure jurisdiction of Landlord) , (ii) no principal shall ever
be required to answer or otherwise plead to any
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service of process, (iii) no judgment will be taken against any principal, (iv)
any judgment taken against any principal may be vacated and set aside at any
time without hearing, (v) no writ of execution shall be levied against the
assets of any principal, and (vi) these agreements by Tenant are enforceable
both by Landlord and by any principal.
7. Sale by Landlord. Notwithstanding anything contained in the Lease to
the contrary, Landlord shall have the right at any time to sell, transfer,
convey or assign its interest in this Lease or in the Premises or any part
thereof. To the extent that Landlord's covenants and obligations under this
Lease are expressly assumed in writing or by operation of applicable law by a
transferee or assignee, Landlord without further written agreement shall be
freed and relieved of such covenants and obligations. Landlord (or the
transferee or assignee) shall give Tenant prompt notice of such a transfer or
assignment.
In the event of such sale, transfer, conveyance or assignment, from and
after the date thereof Landlord shall be (i) automatically relieved, without any
further act by any person or entity, of all liability for the performance of the
obligations of the Landlord hereunder, and (ii) relieved of all liability for
the performance of the obligations of the Landlord hereunder which have accrued
before the date of transfer, but only if its transferee agrees to assume and be
bound by the terms of this Lease and to perform all obligations of the Landlord
hereunder. As used herein, the term "Landlord" shall mean the Landlord
originally named herein, but following any transfer of its interest in the
Premises other than to a lender as security for a debt, the term shall
thereafter mean the transferee of such interest.
8. Option To Extend Term. Tenant shall have the right to extend the
term of this Lease for an additional term of sixty (60) months (the "Option")
commencing upon the Expiration Date of the Original Term (the "Option Term")
upon the following terms and conditions:
a. When it notifies Landlord of its election to exercise the
Option and on the last day of the Original Term of this Lease Tenant shall (i)
not be in default under any of the terms, covenants, conditions, provisions or
agreements of this Lease, (ii) not have committed any act which, with the
passage of time or the giving of notice, would constitute an event of default
and (iii) not have assigned or otherwise transferred its interest in this Lease.
The Option is intended to be personal to Tenant and may not be assigned,
voluntarily or involuntarily, separate from or as a part of the Lease.
b. The base monthly rent for the Premises shall be ninety-five
percent (95%) of the Fair Market Rental (as hereinafter defined) for the
Premises prevailing at the commencement of the Option Term; provided that in no
event shall the base monthly rent be less than the base monthly rent for any
year immediately preceding the Option Term.
The term "Fair Market Rental" shall mean the base monthly rent
(expressed as a net rental rate per square foot of rentable area per month)
payable by a tenant and actually being received by a landlord for comparable
space in other first class buildings in Mountain View of like quality and
location, adjusted to account for floor level, views, leasehold improvements or
allowances provided by Landlord, rental abatements, equity participation, lease
takeovers or assumptions, rent credits, moving expenses and other forms of
rental concessions, management or cost recovery fees, proposed term of the
lease, and any other relevant terms or conditions.
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Landlord, by notice to Tenant delivered on or before one hundred twenty
(120) days prior to the commencement of the Option Term shall determine the Fair
Market Rental. If Tenant objects to Landlord's determination, Landlord and
Tenant shall negotiate in good faith in an effort to mutually agree upon the
Fair Market Rental. If Landlord and Tenant have not been able to agree upon the
Fair Market Rental prior to the commencement of the Option Term, Landlord and
Tenant shall each prepare their own final written proposed determination of Fair
Market Rental, which shall be exchanged by the parties and which shall
constitute the final proposed determination submitted by each party to the
arbitrators in the event of arbitration as described below. If the parties
cannot agree on the Fair Market Rental for the period in question, the parties
shall proceed to arbitration to determine Fair Market Rental. Should Tenant
elect to arbitrate and should the arbitration not have been concluded prior to
the date the Option Term is to commence, Tenant shall pay the base monthly rent
to Landlord commencing at the Option Term, adjusted to reflect Fair Market
Rental as Landlord has so determined. If the amount of Fair Market Rental as
determined by arbitration differs from Landlord's determination, any adjustment
required to correct the amount previously paid shall be made by payment by the
appropriate party after such determination of Fair Market Rental.
If arbitration occurs, the judgment or the award rendered in any such
arbitration may be entered in any court having jurisdiction and shall be final
and binding between the parties. The arbitration shall be conducted and
determined in San Jose in accordance with the then prevailing rules of the
American Arbitration Association or its successor for arbitration of commercial
disputes, except to the extent that the procedures mandated by said rules shall
be modified as follows: Tenant shall make demand to Landlord for arbitration in
writing within thirty (30) days after receiving Landlord's determination of Fair
Market Rental, specifying therein the name and address of the person to act as
the arbitrator on its behalf. The arbitrator shall be qualified as a real estate
appraiser familiar with the Fair Market Rental of comparable office building
projects in Mountain View who would qualify over objection as an expert witness
to give opinion testimony addressed to the issue in a court of competent
jurisdiction. Within twenty (20) days after receiving the demand for
arbitration, Landlord shall give notice to Tenant, specifying the name and
address of the person designated by Landlord to act as arbitrator on its behalf,
who shall be similarly qualified. If Landlord fails to timely notify Tenant of
the appointment of its arbitrator, the arbitrator appointed by Tenant shall be
the arbitrator to determine the issue. In the event that two (2) arbitrators are
chosen, they shall appoint a third arbitrator, who shall be a competent and
impartial person with qualifications similar to those required of the first two
arbitrators.
Within ten (10) days following the appointment of the third arbitrator
or the lapse of time when a party may appoint an arbitrator after the other
party has appointed one, Landlord and Tenant shall each state in writing their
determination of the Fair Market Rental supported by the reasons therefor, with
counterpart copies delivered to the other party and to the arbitrators). If
either party fails timely to submit its proposal for the Fair Market Rental in
accordance with the later of the time periods provided for above, the Fair
Market Rental shall be that submitted by the other party, and the arbitration
shall be deemed concluded. The arbitrator(s) shall arrange for a simultaneous
exchange of such proposed determinations. If there are three arbitrators, the
concurrence of two of the three arbitrators shall be controlling. The
arbitrators (or sole arbitrator) shall select one of the two proposed
determinations as the Fair Market Rent, and shall have no right to propose a
middle ground or any modification of either of the two proposed determinations.
The determination they or he chooses shall constitute the decision
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of the arbitrator(s) and shall be final and binding upon the parties. The
arbitrator(s) shall attempt to decide the issue within ten (10) days after the
appointment of the third arbitrator. Each party shall pay the fee and expenses
of its respective arbitrator and both shall share the fee and expenses of the
third arbitrator, if any. The arbitrator(s) shall have the right to consult
experts and competent authorities with factual information or evidence
pertaining to a determination of Fair Market Rental, but any such consultation
shall be made in the presence of both parties with full right of the other party
to crossexamine. The arbitrator(s) shall render their or his decision and award
in writing with counterpart copies to each party.
c. Tenant shall have notified Landlord no later than six (6)
months prior to the Expiration Date of the Original Term of Tenant's election to
exercise such right, otherwise the Option shall be automatically null and void.
d. The lease for 280(B) N. Bernardo Avenue ("Adjacent
Property") is still in full force and effect and Tenant shall have concurrently
notified Landlord of Tenant's election to exercise its option to extend the term
for the Adjacent Property.
e. All of the other terms, covenants, conditions, provisions
and agreements of this Lease shall remain in full force and effect.
f. There shall be no further right to extend the term of this
Lease, or any right to renew this Lease, beyond the Option Term.
9. Right of First Refusal. Landlord hereby grants to Tenant the
exclusive right, at Tenant's option, to purchase the Premises, upon the same
terms and conditions and for the same purchase price as any bona fide offer
which Landlord desires to accept for the purchase of the Premises from any
person or entity. Upon receipt of a bona fide offer which is acceptable to
Landlord, Landlord shall notify Tenant in writing of the purchase price, closing
schedule, and such other terms as Landlord has negotiated and accepted,
whereupon Tenant shall have five (5) business days from the date of such notice
in which to elect to exercise Tenant's right to purchase. In the event Tenant
elects to exercise its right to purchase as granted herein, then Tenant must do
so by notifying Landlord in writing of its acceptance of all the terms in the
bona fide offer within such five-day period. If Tenant declines to exercise its
right of first refusal or otherwise fails to exercise its right in the manner or
within the time period set forth herein, then Landlord shall be free to accept
the offer of said third party.
10. Assignment and Subletting.
As a material part of the economic bargain between the parties
and as consideration for Tenant's rights in the Premises, if (i) Tenant assigns
its interest in this Lease, Tenant shall pay Landlord fifty percent (50%) of the
transfer consideration received by Tenant in connection with the assignment, and
(ii) Tenant sublets the transfer space, Tenant shall pay to Landlord fifty
percent (50%) of the positive difference, if any, between (A) all transfer
consideration received by Tenant in connection with the sublease and (B) the
Base Monthly Rent and additional rent allocated to the transfer space paid by
Tenant to Landlord pursuant to this Lease. Such amount shall be paid to Landlord
on the same basis, whether
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periodic or in lump sum, that it is received by Tenant. As used herein, the term
"transfer consideration" shall mean any consideration of any kind received, or
to be received, by Tenant as a result of the transfer (other than the
transferee's promise to assume Tenant's obligations under this Lease), if such
sums are related to Tenant's interest in this Lease or in the Premises;
including without limitation payments (in excess of the book value thereof) for
Tenant's assets, trade fixtures, leasehold improvements, inventory, accounts,
goodwill, equipment, furniture, general intangibles and capital stock or other
equity ownership interest in Tenant. Tenant's obligations under this paragraph
shall survive any and all transfers. At the time Tenant makes any payment
required by this paragraph, Tenant shall deliver to Landlord an itemized
statement of the method used to calculate Landlord's share of transfer
consideration, certified by Tenant as true and correct. Landlord shall have the
right to inspect Tenant's books and records relating to the payments due
pursuant to this paragraph. Upon request, Tenant shall deliver to Landlord
copies of all agreements, bills, invoices or other documents related to such
calculations. Landlord may condition its approval of any transfer upon obtaining
a certification from both Tenant and the proposed transferee of all transfer
consideration that is to be paid to Tenant in connection with such transfer.
11. Cross-Default. Concurrently herewith, Tenant is entering into a
lease with Landlord for the Adjacent Property ("280(B) N. Bernardo Lease").
Notwithstanding anything contained in Section 13 of the Lease to the contrary,
the occurrence of any one or more of the events in Section 13.1 of the 280(B) N.
Bernardo Lease shall constitute a material default and breach of this Lease by
Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Addendum.
LANDLORD:
D. R. STEPHENS & COMPANY
By: /s/ D.R. Stephens
-------------------------------
D. R. Stephens, General Partner
TENANT:
NETWORK COMPUTING DEVICES, INC.,
a California corporation
By /s/ Jack Bradley
-------------------------------
Jack Bradley
- ----------------------------------
Print name
Its:Chief Financial Officer
------------------------------
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WORK LETTER AGREEMENT - 280(A) N. Bernardo Avenue
(Formerly Occupied by Synoptics)
THIS WORK LETTER AGREEMENT is made as of August 18, 1992, by and
between D. R. Stephens & Company ("Landlord") and Network Computing Devices,
Inc., a California corporation ("Tenant"), for the premises located at 280(A)
North Bernardo, Mountain View, California -- formerly occupied by Synoptics --
(the "Premises") pursuant to that certain Lease and Lease Addendum executed
concurrently herewith, by and between Landlord and Tenant (the "Lease"). The
words and phrases which are capitalized in this Work Letter shall have the same
meaning as such words and phrases have in the Lease.
1. Landlord has no obligation to improve, alter or remodel the
Premises, except as follows:
a. Landlord shall make the repairs and replace the building
systems and roof as required pursuant to Section 2 of the Addendum,
b. On or before the Commencement Date (hereinafter defined) or
as soon thereafter as reasonably possible, Landlord shall, at its sole cost and
expense (and without deduction or offset against the Construction Allowance
defined below), do the following:
paint the exterior of the building;
seal, repair and restripe the parking lot to
be suitable for the loading, unloading and
travel of commercial vehicles, including
semi's (together with the repair of the
loading area not to exceed $20,400); and
repair the dock high truck loading area
(together with the repair of the parking lot
not to exceed $20,400).
c. Within six months after the Commencement Date or as soon
thereafter as reasonably possible, Landlord shall, at its sole cost and expense
(and without deduction or offset against the Construction Allowance defined
below), landscape the exterior area in a manner comparable to the landscaping at
350 N. Bernardo Avenue, Mountain View, CA, which will include:
thatching and seeding lawn,
installing a total of 8 to 10 shrubs on the
Premises and Adjacent Property,
installing a total of 10 flats of color on
the Premises and Adjacent Property,
planting, for fill-in purposes, shrubs and
ivy as needed, and
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pruning trees and shrubs along the Central
Expressway.
d. On or before the Commencement Date or as soon thereafter as
reasonably possible, Landlord shall, at its sole cost and expense (and without
deduction or offset against the Construction Allowance defined below), make such
changes, if any, to the exterior area of the Premises as are required to be made
by the American Disabilities Act in effect as of the Commencement Date.
e. Subject to Landlord's prior approval, Tenant may select the
color of the paint for the Building.
f. Landlord shall construct or cause to be constructed the
Tenant Improvements as provided for in this Work Letter.
2. Landlord hereby agrees to allocate the sum of Four Hundred Fourteen
Thousand Six Hundred and no/100ths Dollars ($414,600.00) as a construction
allowance ("Construction Allowance") for the design and construction of the
Tenant Improvements (hereinafter defined). Any and all fees and costs for the
Tenant Improvements in excess of the Construction Allowance shall be the sole
and exclusive obligation of the Tenant. In the event the fees and costs of the
Tenant Improvements are in excess of the Construction Allowance, Tenant shall
pay such overage on a monthly pro rata basis concurrently with Landlord's
monthly disbursement of the Construction Allowance immediately after receiving
written notice from Landlord of the amount payable by Tenant and invoices
substantiating the payment to be made. In the event Tenant fails to pay its
monthly pro rata payment on the date when due, then Landlord shall have no
obligation to continue constructing the Tenant Improvements until such payment
is made, and Tenant shall be chargeable with any delay in the completion of the
Premises resulting therefrom.
The costs of the Tenant Improvements to be paid from the Construction
Allowance shall include:
a. The costs for preparation of the Construction Documents,
including the Grobman's fees and costs;
b. The costs for obtaining permits and other necessary
authorizations from the City of Mountain View, County of Santa Clara and the
State of California;
c. All costs of interior design and finish schedule plans and
specifications including as-built drawings; and
d. All direct and indirect costs of procuring and installing
the Tenant Improvements in the Premises, including the construction fee for
overhead and profit and the cost of all on-site supervisory and administrative
staff, office, equipment and temporary services in connection with construction
of the Tenant Improvements.
Notwithstanding the foregoing, Tenant shall be liable for all
costs and fees for the services described above which are in excess of the
Construction Allowance. In no event shall the costs of the
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Tenant Improvements include any costs for procuring or installing in the
Premises any trade fixtures, equipment, furniture, furnishings, telephone
equipment or other personal property ("Personal Property") to be used in the
Premises by Tenant, and the cost of such Personal Property shall be paid by
Tenant.
3. All space plans, design and working drawings required for the Tenant
Improvements ("Construction Documents") shall be prepared by Reel/Grobman &
Associates ("Grobman"). Tenant acknowledges that it has reviewed and approved
the proposal from Grobman dated August 3, 1992, a copy of which is attached
hereto, and that Tenant is satisfied with the terms and conditions set forth
therein. Tenant and Landlord shall each review the Construction Documents on or
before the dates set forth in the schedule contained in the Grobman proposal.
Any such approval is to be evidenced by Tenant's and Landlord's initials on each
sheet of the Construction Documents. If Tenant does not approve any of the
Construction Documents it receives from Grobman within the time periods set
forth in the schedule or if Tenant desires to make any modifications to the
same, any delay attributable to such disapproval or modifications shall be a
Tenant Delay (as defined herein below).
All real property improvements shown on the Construction Documents are
referred to herein as the "Tenant Improvements."
4. Tenant shall devote such time as may be necessary to enable Landlord
or Grobman to submit for approval the Construction Documents to the appropriate
government authorities of the Construction Documents for the Premises by October
23, 1992. In the event any governmental authority whose approval is necessary to
proceed with the construction of Tenant Improvements fails to approve the
Construction Documents prior to December 7, 1992 as a result of Tenant's
insistence on certain improvements being included as a part of Tenant's
Improvements, such failure shall be deemed to be a Tenant Delay.
5. Tenant, by signing the Construction Documents and approving the
general contractor with Grobman, shall give Landlord authorization to complete
the Tenant Improvements to the Premises in accordance with such Construction
Documents. If such authorization and approval is not received by Landlord and
Grobman within the time periods set forth in the Grobman schedule, Landlord
shall not be obligated to commence the Tenant Improvements on the Premises until
such authorization and approval is received and Tenant shall be chargeable with
any delay in the completion of the Premises resulting therefrom.
6. Subject to the provisions in Paragraph 7 below, the Commencement
Date shall mean the earlier to occur of:
a. the date Tenant actually occupies any portion of the
Premises, or
b. the date of Substantial Completion of the Tenant
Improvements, which the parties estimate will occur on June 1, 1993 (the
"Scheduled Commencement Date"). "Substantial Completion" shall be determined by
Grobman and shall be deemed to have occurred notwithstanding a requirement to
complete "punchlist" or similar minor corrective work.
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<PAGE>
Subject to the provisions in Paragraph 7 below, the Expiration Date
shall mean the date actually established as the Expiration Date in the lease for
the Adjacent Property.
If the Commencement Date is a date other than the Scheduled
Commencement Date, Landlord and Tenant shall promptly execute an amendment to
the Lease specifying the Commencement Date and Expiration Date.
7. The Commencement Date and Expiration Date shall be subject to and
modified by the following:
a. If Substantial Completion of the Tenant Improvements in the
Premises is delayed as a result of any delay attributable to Tenant's acts or
failure to act ("Tenant Delay"), then the Original Term of the Lease and the
Rent (including all Additional Rent) shall commence to accrue one day earlier
for each day of delay attributable to Tenant's acts or failure to act. A Tenant
Delay shall include, but not be limited to the following:
Tenant's request for a delay;
Tenant's request to change the Construction
Documents previously approved;
Tenant's failure to approve within three (3)
working days after Tenant's receipt of
Landlord's request for any changes in the
Construction Documents necessary due to
governmental requirements together with a
copy of the proposed changes;
Tenant's failure to pay any monetary
obligations it is obligated to pay within
the time periods set forth hereunder and
under the Lease, including but not limited
to the payment for the Tenant Improvements
in excess of the Construction Allowance;
Tenant's failure to comply with the
provisions of this Agreement;
Tenant's request to have additional or
different work not included within the
Construction Documents constructed in the
Premises and/or the construction thereof;
Tenant's failure to approve the Construction
Documents within the time periods set forth
hereinabove;
The occurrence of any event which is deemed
a Tenant Delay under this Agreement; and
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<PAGE>
Prior to approval by both parties of the
Construction Documents, any delay which
Grobman reasonably determines is
attributable to changes or additions to
requirements of Tenant or the information
theretofore supplied by Tenant to Grobman or
the general contractor, outside of the
normal scope of such changes or additions
which would be customary in a construction
project of the scope contemplated by this
Work Letter Agreement.
b. Tenant acknowledges that the Premises are, as of the date
hereof, subject to a lease. If, for any reason other than a Tenant Delay,
Landlord cannot deliver possession of the Premises to Tenant by June 1, 1993,
then in that event, Landlord shall not be subject to any liability therefor, nor
shall such failure affect the validity of the Lease or the obligations of Tenant
hereunder, but in such case, Tenant shall not be obligated to pay rent or
perform any other obligation of Tenant until Landlord delivers possession of the
Premises to Tenant.
c. It is the intent of the parties hereto that the lease term
for the Premises shall run concurrently with and expire simultaneously with the
lease for the Adjacent Property.
8. In the event either party requests that any portion of the work to
be performed by Landlord be delayed, the party requesting such delay shall pay
all costs and any expenses occasioned by such delay including, without
limitation, any costs and expenses attributable to increases in the cost of
labor or materials.
9. Any and all Tenant Improvements paid for in whole or in part by
Landlord shall at once become and remain the property of Landlord.
10. In the event of any breach by either party of the provisions of
this Work Letter, the non-defaulting party may elect to treat such breach as a
default under the Lease which shall entitle the non-defaulting party to any of
the rights and remedies provided thereunder.
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<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this
Work Letter Agreement as of the date and year first above written.
LANDLORD:
D. R. STEPHENS & COMPANY
By /s/ D.R. Stephens
-------------------------------
D. R. Stephens, General Partner
TENANT:
NETWORK COMPUTING DEVICES, INC.,
a California corporation
By /s/ Jack Bradley
-------------------------------
Jack Bradley
- ----------------------------------
Print name
Its: Chief Financial Officer
-----------------------------
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EXHIBIT B
280(B) Lease
(including Addendum and Work Letter Agreement)
<PAGE>
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
(Do not use this form for Multi-Tenant Property)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
August 18, 1992 is made by and between D.R. Stephens & Company ("Lessor") and
Network Computing Devices, Inc., a California corporation ("Lessee"),
(collectively the "Parties" or individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 280(B) North Bernardo Avenue, Mountain View
(formerly occupied by GTE) located in the County of Santa Clara, State of
California, and generally described as (describe briefly the nature of the
property), also known as Assessor's Parcel No. 165-37-008 ("Premises"). (See
Paragraph 2 for further provisions.)
1.3 Term: Approximately seven (7) years and 8 months ("Original Term").
(See Paragraph 3 and Work Letter for further provisions.)
1.4 [paragraph intentionally deleted]
1.5 Base Rent: $41,465.00 per month ("Base Rent"), payable on the First
(1st) day of each month. (See Paragraph 4 for further provisions.)
|X| If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted.
1.6 Base Rent Paid Upon Execution: $41,465.00 as Base Rent for the
first full month following the Commencement Date.
1.7 Security Deposit: $41,465.00 ("Security Deposit"). (See Paragraph 5
for further provisions.)
1.8 Permitted Use: Office and testing, packaging and shipping of
computers, monitors and related devices. (See Paragraph 6 for further
provisions.)
1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise
stated herein. (See Paragraph 8 for further provisions.)
1.10 Real Estate Brokers: The following real estate brokers
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes): J.R.
Parish, Inc. -- Colliers International represents
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Lessor exclusively ("Lessor's Broker");
|_| both Lessor and Lessee,
and Spallino Reid represents
|X| Lessee exclusively ("Lessee's Broker");
|_| both Lessee and Lessor. (See Paragraph 15 for further provisions.)
1.11 [paragraph intentionally deleted]
1.12 Addenda. Attached hereto is an Addendum and Work Letter all of
which constitute a part of this Lease.
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 [paragraph intentionally deleted]
2.3 [paragraph intentionally deleted]
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.
2.5 [paragraph intentionally deleted]
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3, and the Work Letter.
3.2 [paragraph intentionally deleted]
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3.3 [paragraph intentionally deleted]
4. Rent.
4.1 Base Rent. Lessee shall cause Payment of Base Rent and other rent
or charges, as the same may be adjusted from time to time, to be received by
Lessor in lawful money of the United States, without offset or deduction, on or
before the day on which it is due under the terms of this Lease. Base Rent and
all other rent and charges for any period during the term hereof which is for
less than one (1) full calendar month shall be prorated based upon the actual
number of days of the calendar month involved. Payment of Base Rent and other
charges shall be made to Lessor at its address stated herein or to such other
persons or at such other addresses as Lessor may from time to time designate in
writing to Lessee.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the
Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful
performance of Lessee's obligations under this Lease. If Lessee fails to pay
Base Rent or other rent or charges due hereunder, or otherwise Defaults under
this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all
or any portion of said Security Deposit for the payment of any amount due Lessor
or to reimburse or compensate Lessor for any liability, cost, expense, loss or
damage (including attorneys' fees) which Lessor may suffer, or incur by reason
thereof. If Lessor uses or applies all or any portion of said Security Deposit,
Lessee shall within ten (10) days after written request therefor deposit moneys
with Lessor sufficient to restore said Security Deposit to the full amount
required by this Lease. Lessor shall not be required to keep all or any part of
the Security Deposit separate from its general accounts. Lessor shall, at the
expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed in
writing by Lessor, no part of the Security Deposit shall be considered to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that unreasonably disturbs owners
and/or occupants of, or causes damage to, neighboring premises or properties.
Lessor hereby agrees to not unreasonably withhold or delay its consent to any
written request by Lessee, Lessees assignees or subtenants, and by prospective
assignees and subtenants of the Lessee, its assignees and subtenants, for a
modification of said permitted purpose for which the premises may be used or
occupied, so long as the same will not impair the structural integrity of the
improvements on the Premises, the mechanical or electrical systems therein, is
not significantly more burdensome to the Premises and the improvements thereon,
and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to
withhold such consent, Lessor shall within five (5) business days give a written
notification of same, which notice shall include an explanation of Lessor's
reasonable objections to the change in use.
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6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous
Substance" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill release or effect,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety or
welfare, the environment or the Premises, (ii) regulated or monitored by any
governmental authority, or (iii) a basis for liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in, on or about the Premises
which constitutes a Reportable Use (as hereinafter defined) of Hazardous
Substances without the express prior written consent of Lessor and compliance in
a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as
defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or
use of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority.
Reportable Use shall also include Lessee's being responsible for the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Law requires that a notice be given to persons entering or occupying
the Premises or neighboring properties. Notwithstanding the foregoing, Lessee
may without Lessor's prior consent, but in compliance with all Applicable Law,
use any ordinary and customary materials reasonably required to be used by
Lessee in the normal course of Lessee's business permitted on the Premises, so
long as such use is not a Reportable Use and does not expose the Premises or
neighboring properties to any meaningful risk of contamination or damage or
expose Lessor to any liability therefor. In addition, Lessor may (but without
any obligation to do so) condition its consent to the use or presence of any
Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving
Lessor such additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefrom or therefor,
including, but not limited to, the installation (and removal on or before Lease
expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the deposit
of an additional Security Deposit under Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has
reasonable cause to believe, that a Hazardous Substance, or a condition
involving or resulting from same, has come to be located in, on, under or about
the Premises, other than as previously consented to by Lessor, Lessee shall
immediately give written notice of such fact to Lessor. Lessee shall also
immediately give Lessor a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action or proceeding given
to, or received from, any governmental authority or private party, or persons
entering or occupying the Premises, concerning the presence, spill, release,
discharge of, or exposure to, any Hazardous Substance or contamination in, on,
or about the Premises, including but not limited to all such documents as may be
involved in any Reportable Uses involving the Premises.
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(c) Indemnification. Lessee shall indemnify, protect,
defend and hold Lessor, its agents, employees, lenders and ground Lessor, if
any, and the Premises, harmless from and against any and all loss of rents
and/or damages, liabilities, judgments, costs, claims, liens, expenses,
penalties, permits and attorney's and consultant's fees arising out of or
involving any Hazardous Substance or storage tank brought onto the Premises by
or for Lessee or under Lessee's control. Lessee's obligations under this
Paragraph 6 shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created by or for
Lessee, and the cost of investigation (including consultants and attorney's fees
and testing), removal, remediation, restoration and/or abatement thereof, or of
any contamination therein involved, and shall survive the expiration or earlier
termination of this Lease. No termination, cancellation or release agreement
entered into by Lessor and Lessee shall release Lessee from its obligations
under this Lease with respect to Hazardous Substances or storage tanks, unless
specifically so agreed by Lessor in writing at the time of such agreement.
6.3 Lessee's Compliance with Law. Except as otherwise provided in
Section 2 of the Addendum, Lessee, shall, at Lessee's sole cost and expense,
fully, diligently and in a timely manner, comply with all "Applicable Law,"
which term is used in this Lease to include all laws, rules, regulations,
ordinances, directives, covenants, easements and restrictions of record permits,
the requirements of any applicable fire insurance underwriter or rating bureau,
and the recommendations of Lessor's engineers and/or consultants relating in any
manner to Lessee's occupancy or use of the Premises (including but not limited
to matters pertaining to (i) industrial hygiene, (ii) environmental conditions
on, in, under or about the Premises, including soil and groundwater conditions
created by or for Lessee and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill or release of
any Hazardous Substance or storage tank), now in effect or which may hereafter
come into effect, and whether or not reflecting a change in policy from any
previously existing policy. Lessee shall, within five (5) days after receipt of
Lessor's written request, provide Lessor with copies of all documents and
information, including, but not limited to, permits, registrations, manifests,
applications, reports and certificates, evidencing Lessee's compliance with any
Applicable Law specified by Lessor, and shall immediately upon receipt, notify
Lessor in writing (with copies of any documents involved) of any threatened or
actual claim, notice, citation, warning, complaint or report pertaining to or
involving failure by Lessee or the Premises to comply with any Applicable Law.
6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined
in paragraph 8.3(a)) shall have the right to enter the Premises at any time, in
the case of an emergency, and otherwise at reasonable times upon prior notice,
whether written or oral, for the purpose of inspecting the condition of the
Premises and for verifying compliance by Lessee with this Lease and all
Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or
consultants in connection therewith and/or to advise Lessor with respect to
Lessee's activities including but not limited to the installation, operation,
use, monitoring, maintenance, or removal of any Hazardous Substance or storage
tank on or from the Premises. The costs and expenses of any such inspections
shall be paid by the party requesting same, unless a Default or Breach of this
Lease, violation of Applicable Law, or a contamination, caused or materially
contributed to by Lessee is found to exist or be imminent, or unless the
inspection is requested or ordered by a governmental authority as the result of
any such existing or imminent violation or contamination. In any such case,
Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may
be, for the costs and expenses of such inspections.
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7. Maintenance; Repairs: Utility Installations: Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Sections 2 and 3 in the
Addendum, 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and
14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair, structural and non-structural (whether or not such portion of the
Premises requiring repairs, or the means of repairing the same, are reasonably
of readily accessible to Lessee, and whether or not the need for such repairs
occurs as a result of Lessee's use, any prior use, the elements or the age of
such portion of the Premises), including, without limiting the generality of the
foregoing all equipment or facilities serving the Premises, such as plumbing,
heating, air conditioning, ventilating, electrical, lighting facilities,
boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and
hose or other automatic fire extinguishing system, including fire alarm and/or
smoke detection systems and equipment, fire hydrants, fixtures, walls (interior
and exterior), foundations, ceilings, roofs, floors, windows, doors, plate
glass, skylights, landscaping, driveways, parking lots, fences, retaining walls,
signs, sidewalks and parkways located in, on, about, or adjacent to the
Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled
or released in, on, under or about the Premises (including through the plumbing
or sanitary sewer system) and shall promptly, at Lessee's expense, take all
investigatory and/or remedial action reasonably recommended, whether or not
formally, ordered or required, for the cleanup of any contamination of, and for
the maintenance, security and/or monitoring of the Premises, the elements
surrounding same, or neighboring properties, that was caused or materially
contributed to by Lessee, or pertaining to or involving any Hazardous Substance
and/or storage tank brought onto the Premises by or for Lessee or under its
control. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair. If Lessee occupies the Premises for seven (7) years or
more, Lessor may require Lessee to repaint the exterior of the buildings on the
Premises as reasonably required, but not more frequently than once every seven
(7) years.
(b) Lessee shall, at Lessee's sole cost and expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in, the
inspection, maintenance and service of the following equipment and improvements,
if any, located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance.
7.2 Lessor's Obligations. Except for the warranties and agreements of
Lessor contained in Sections 2 and 3 of the Addendum, Section 9 (relating to
destruction of the Premises) and 14 (relating to condemnation of the Premises),
it is intended by the Parties hereto that Lessor have no obligation, in any
manner whatsoever, to repair and maintain the Premises, the improvements located
thereon, or the equipment therein, whether structural or non structural, all of
which obligations are intended to be that of the Lessee and under Paragraph 7.1
hereof. It is the intention of the Parties that the terms of this
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Lease govern the respective obligations of the Parties as to maintenance and
repair of the Premises. Lessee and Lessor expressly waive the benefit of any
statute now or hereafter in effect to the extent it is inconsistent with the
terms of this Lease with respect to, or which affords Lessee the right to make
repairs at the expense of Lessor or to terminate this Lease by reason of any
needed repairs.
7.3 Utility Installations; Trade Fixtures: Alterations.
(a) Definitions; Consent Required. The term "Utility
Installations" is used in this lease to refer to all carpeting, window
coverings, air lines, power panels, electrical distribution, security, fire
protection systems, communication systems, lighting fixtures, heating,
ventilating, and air conditioning equipment, plumbing, and fencing in, on or
about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and
equipment that can be removed without doing material damage to the premises. The
term "Alterations" shall mean any modification of the improvements on the
Premises from that which are provided by Lessor under the terms of this Lease,
other than Utility Installations or Trade Fixtures, whether by addition or
deletion. "Lessee Owned Alterations and/or Utility Installations" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations
or Utility installations in, on, under or about the Premises without Lessor's
prior written consent which shall not be unreasonably withheld or delayed.
Lessee may, however, make non-structural Utility Installations to the interior
of the Premises (excluding the roof), as long as they are not visible from the
outside, do not involve puncturing, relocating or removing the roof or any
existing walls, and the cumulative cost thereof during each calendar year of the
Lease does not exceed $25,000.
(b) Consent. Any Alterations or Utility Installations
that Lessee shall desire to make and which require the consent of the Lessor
shall be presented to Lessor in written form with proposed detailed plans. All
consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by
subsequent, specific consent, shall be deemed conditioned upon: (i) Lessee's
acquiring all applicable permits required by governmental authorities, (ii) the
furnishing of copies of such permits together with a copy of the plans and
specifications for the Alteration or Utility Installation to Lessor prior to
commencement of the work thereon, and (iii) the compliance by Lessee with all
conditions of said permits in a prompt and expeditious manner. Any Alterations
or utility Installations by Lessee during the term of this Lease shall be done
in a good and workmanlike manner, with good and sufficient materials, and in
compliance with all Applicable Law. Lessee shall promptly upon completion
thereof furnish Lessor with as-built plans and specifications therefor.
(c) Indemnification. Lessee shall pay, when due, all
claims for labor or materials furnished or alleged to have been furnished to or
for Lessee at or for use on the Premises, which claims are or may be secured by
any mechanics' or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior to
the commencement of any work, in, on or about the Premises, and Lessor shall
have the right to post notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises. If Lessor shall require,
Lessee shall furnish
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to Lessor a surety bond satisfactory to Lessor in an amount equal to one and
one-half times the amount of such contested lien claim or demand, indemnifying
Lessor against liability for the same, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorneys fees and costs in participating in such
action if Lessor shall decide it is to its best interest to do so.
7.4 Ownership; Removal: Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require their
removal or become the owner thereof as hereinafter provided in this Paragraph
7.4, all Alterations and Utility Installations made to the Premises by Lessee
shall be the property of and owned by Lessee, but considered a part of the
Premises. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee
Owned Alterations and Utility Installations shall, at the expiration or earlier
termination of this Lease, become the property of Lessor and remain upon and be
surrendered by Lessee with the premises.
(b) Removal. Unless otherwise agreed in writing Lessor
may require that any or all Lessee Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
their installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall Surrender the
Premises by the end of the last day of the Lease term or any earlier termination
date, with all of the improvements, parts and surfaces thereof clean and free of
debris and in good operating order, condition and state of repair, ordinary wear
and tear excepted. "Ordinary wear and tear" shall not include any damage or
deterioration, that would have been prevented by good maintenance practice or by
Lessee performing all of its obligations under this Lease. Except as otherwise
agreed or specified in writing by Lessor, the Premises, as surrendered. shall
include the Utility Installations. The obligation of Lessee shall include the
repair of any damage occasioned by the installation, maintenance or removal of
Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good service practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation to
repair and restore the Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee
is the Insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8 except to the extent of the cost attributable to liability insurance
carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy
periods commencing prior to or extending beyond the Lease term shall be prorated
to correspond to the Lease term. Payment shall be made by Lessee to Lessor with
ten (10) days following receipt of an invoice for any amount due.
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8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in
force during the term of this Lease a Commercial General Liability policy of
insurance protecting Lessee and Lessor (as an additional insured) against claims
for bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an occurrence basis
providing single limit coverage in an amount not less than $1,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises"
Endorsement and contain the "Amendment of the Pollution Exclusion" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not contain
any intra-insured exclusions as between insured persons or organizations, but
shall include coverage for liability assumed under this Lease as an "insured
contract" for the performance of Lessee's indemnity obligations under this
Lease. The limits of said insurance required by this Lease or as carried by
Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of
any obligation hereunder. All insurance to be carried by Lessee shall be primary
to and not contributory with any similar insurance carried by Lessor, whose
insurance shall be considered excess insurance only.
(b) Carried by Lessor. In the event Lessor is the
Insuring Party, Lessor shall also maintain liability insurance described in
Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance
required to be maintained by Lessee. Lessee shall not be named as an additional
insured therein.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall
obtain and keep in force during the term of this Lease a policy or policies in
the name of Lessor, with loss payable to Lessor and to the holders of any
mortgages, deeds of trust or ground leases on the Premises ("Lender(s)"),
insuring loss or damage to the Premises. The amount of such insurance shall be
equal to the full replacement cost of the Premises, as the same shall exist from
time to time, or the amount required by Lenders, but in no event more than the
commercially reasonable and available insurable value thereof if, by reason of
the unique nature or age of the improvements involved, such latter amount is
less than the full replacement costs. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations shall be insured by Lessee
under Paragraph 8.4 rather than by Lessor. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all risks
of direct physical loss or damage (except the perils of flood and /or earthquake
unless required by a Lender), including coverage for any additional costs
resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
of any undamaged sections of the Premises required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of loss. Said policy or policies shall also
contain an agreed valuation provision in lieu of any coinsurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located. If such insurance coverage has a
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deductible clause, the deductible amount shall not exceed $1,000 per occurrence,
and Lessee shall be liable for such deductible amount in the event of an Insured
Loss, as defined in Paragraph 9.1(c).
(b) Rental Value. The Insuring Party shall, in addition,
obtain and keep in force during the term of this Lease a policy or policies in
the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss
of the full rental and other charges payable by Lessee to Lessor under this
Lease for one (1) year (including all real estate taxes, insurance costs, and
any scheduled rental increases). Said insurance shall provide that in the event
the Lease is terminated by reason of an insured loss, the period of indemnity
for such coverage shall be extended beyond the date of the completion of repairs
or replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part of a
larger building, or if the Premises are part of a group of buildings owned by
Lessor which are adjacent to the Premises, the Lessee shall pay for any increase
in the premiums for the property insurance of such building or buildings if said
increase is caused by Lessee's acts, omissions, use or occupancy of the
Premises.
(d) Tenant's Improvements. If the Lessor is the Insuring
Party, the Lessor shall not be required to insure Lessee Owned Alterations and
Utility Installations unless the item in question has become the property of
Lessor under the terms of this Lease. If Lessee is the Insuring Party, the
policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned
Alterations and Utility Installations.
8.4 Lessee's Property Insurance. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Lessee Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $5,000.00 per
occurrence. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property or the restoration of Lessee Owned Alterations
and Utility Installations. Lessee shall be the Insuring Party with respect to
the insurance required by this Paragraph 8.4 and shall provide Lessor with
written evidence that such insurance is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term "General Policyholders Rating"
of at least B-, V, or such other rating as may be required by a Lender having a
lien on the Premises, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done anything which shall
invalidate the insurance policies referred to in this Paragraph 8. If Lessee is
the Insuring Party, Lessee shall cause to be delivered to Lessor certified
copies of policies of such insurance or certificates evidencing the existence
and amounts of such insurance with the insured and loss payable clauses as
required by this Lease. No such policy shall be cancelable or subject to
modification except after thirty (30) days prior written notice to Lessor.
Lessee shall at least
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thirty (30) days prior to the expiration of such policies, furnish Lessor with
evidence of renewals or "insurance binders" evidencing renewal thereof, or
Lessor may order such insurance and charge the cost thereof to Lessee, which
amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party
shall fail to procure and maintain the insurance required to be carried by the
Insuring Party under this Paragraph 8, the other Party may, but shall not be
required to, procure and maintain the same, but at Lessee's expense.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 8. The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by an deductibles applicable thereto.
8.7 Indemnity. Except for Lessor's gross negligence, willful misconduct
and/or breach of express warranties or obligations, Lessee shall indemnify,
protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's
master or ground Lessor, partners and Lenders, from and against any and all
claims, loss of rents and/or damages, costs, liens, judgments, penalties,
permits, attorney's and consultant's fees, expenses and/or liabilities arising
out of, involving, or in dealing with, the occupancy of the Premises by Lessee,
the conduct of Lessee's business, any act, omission or neglect of Lessee, its
agents, contractors, employees or invites, and out of any Default or Breach by
Lessee in the performance in a timely manner of any obligation on Lessee's part
to be performed under this Lease. The foregoing shall include, but not be
limited to, the defense or pursuit of any claim or any action or proceeding
involved therein, and whether or not (in the case of claims made against Lessor)
litigated and/or reduced to judgment, and whether well founded or not. In case
any action or proceeding be brought against Lessor by reason of any of the
foregoing matters, Lessee upon notice from Lessor shall defend the same at
Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall
cooperate with Lessee in such defense. Lessor need not have first paid any such
claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Except for Lessor's gross
negligence, willful misconduct, Lessor's breach of express warranty or
obligations, Lessor shall not be liable for injury or damage to the person or
goods, wares, merchandise or other property of Lessee. Lessee's employees,
contractors, invites, customers, or any other person in or about the Premises,
whether such damage or injury is caused by or results from fire, steam,
electricity, gas, water or rain, or from the breakage, leakage, obstruction or
other defects of pipes, fire sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures, or from any other cause, whether the said
injury or damage results from conditions arising upon the Premises or upon other
portions of the building of which the Premises are a part, or from other sources
or places, and regardless of whether the cause of such damage or injury or the
means of repairing the same is accessible or not. Lessor shall not be liable for
any damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's gross negligence or breach of this Lease, Lessor shall
under no circumstances be liable for injury to Lessee's business or for any loss
of income or profit therefrom.
9. Damage or Destruction.
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9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or
destruction to the improvements on the Premises, other than Lessee Owned
Alterations and Utility Installations, the repair cost of which damage or
destruction is less than 50% of the then Replacement Cost of the Premises
immediately prior to such damage or destruction, excluding from such calculation
the value of the land and Lessee Owned Alterations and Utility Installations.
(b) "Premises Total Destruction" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations the repair cost of which damage or destruction is 50%, or more of
the then Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "Insured Loss" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible amounts
or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the
occurrence or discovery of a condition involving the presence of, or a
contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on,
or under the Premises.
9.2 Partial Damage--Insured Loss. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the insurance
proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or the
insurance proceeds are not sufficient to effect such repair, the Insuring Party
shall promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said repairs.
In the event, however, the shortage in proceeds was due to the fact that, by
reason of the unique nature of the improvements, full replacement cost insurance
coverage was not commercially reasonable and available, Lessor shall have no
obligation to pay for the shortage in insurance proceeds or to fully restore the
unique aspects of the Premises unless Lessee provides Lessor with the funds to
cover same, or adequate assurance thereof, within ten (10) days following
receipt of written notice of such shortage and request therefor. If Lessor
receives said funds or adequate assurance thereof within said ten (10) day
period, the party responsible for making the repairs shall complete them as soon
as reasonably possible
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and this Lease shall remain in full force and effect. If Lessor does not receive
such funds or assurance within said period, Lessor may nevertheless elect by
written notice to Lessee within ten (10) days thereafter to make such
restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect. If in such case Lessor does not so elect, then this Lease shall
terminate sixty (60) days following the occurrence of the damage or destruction.
Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 Partial Damage--Uninsured Loss. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within twenty (20) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above this Lease shall terminate
as of the date specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall be deemed to have terminated as
of the date of such Premises Total Destruction, whether or not the damage or
destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("Exercise Period"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or
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adequate assurance thereof) needed to make the repairs. If Lessee duly exercises
such option during said Exercise Period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during said Exercise Period,
then Lessor may at Lessor's option terminate this Lease as of the expiration of
said sixty (60) day period following the occurrence of such damage by giving
written notice to Lessee of Lessor's election to do so within ten (10) days
after the expiration of the Exercise Period, notwithstanding any term or
provision in the grant of option to the contrary.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in Paragraph 9.2
(Partial Damage--Insured), whether or not Lessor or Lessee repairs or restores
the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired. Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee to the extent it is not prevented
by such damage, and Lessee shall have no claim against Lessor for any damage
suffered by reason of any such repair or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety days (90) days after such obligation shall accrue, Lessee may, at any
time prior to the commencement of such repair or restoration give written notice
to Lessor and to any Lenders of which Lessee has actual notice of Lessee's
election to terminate this Lease on a date not less than sixty (60) days
following the giving of such notice. If Lessee gives such notice to Lessor and
such Lenders and such repair or restoration is not commenced within thirty (30)
days after receipt of such notice, this Lease shall terminate as of the date
specified in said notice. If Lessor or a Lender commences the repair or
restoration of the Premises within thirty (30) days after receipt of such
notice, this Lease shall continue in full force and effect. "Commence" as used
in this Paragraph shall mean the beginning of the actual work on the Premises.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, provided Lessee's use of the Premises is not
prevented, or (ii) if the estimated cost to investigate and remediate such
condition exceeds twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater, give written notice to Lessee within thirty (30) days
after receipt by Lessor of knowledge of the occurrence of such Hazardous
Substance Condition of Lessor's desire to terminate this Lease as of the date
sixty (60) days following the giving of such notice. In the event Lessor elects
to give such notice of Lessor's intention to terminate this Lease,
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Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except to the extent of
an amount equal to twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater. Lessee shall provide Lessor with the funds required of
Lessee or satisfactory assurance thereof within thirty (30) days following
Lessee's said commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and remediation
as soon as reasonably possible and the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance Condition
occurs for which Lessee is not legally responsible, there shall be abatement of
Lessee's obligations under this Lease to the same extent as provided in
Paragraph 9.6(a) for a period of not to exceed twelve (12) months. If after
12-months, Lessee proceeds to cure such Hazardous Substance Condition, and
provided that Lessee is not legally responsible therefor; Lessor will reimburse
Lessee for its actual and necessary out-of-pocket costs incurred to cure such
Hazardous Substance condition.
9.8 Termination-Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor,
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been, or is not then required to be used by Lessor under the terms of
this Lease.
9.9 Waive Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 (a) Payment of Taxes. Lessee shall pay the Real Property
Taxes as defined in Paragraph 10.2 applicable to the premises during the term of
this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at
least ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes to be paid by Lessee shall cover any period of
time prior to or after the expiration or earlier termination of the term hereof,
Lessee's share of such taxes shall be equitably prorated to cover only the
period of time within the tax fiscal year this Lease is in effect, and Lessor
shall reimburse Lessee for any overpayment after such proration. If Lessee shall
fail to pay any Real Property Taxes required by this Lease to be paid by Lessee,
Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor
therefor upon demand.
(b) Advance Payment. In order to insure payment when due
and before delinquency of any or all Real Property Taxes, Lessor reserves the
right, at Lessor's option to estimate the current Real Property Taxes applicable
to the Premises, and to require such current year's Real Property Taxes to be
paid in advance to Lessor by Lessee monthly in advance with the payment of the
Base Rent. If Lessor elects
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to require payment monthly in advance, the monthly payment shall be that equal
monthly amount which, over the number of months remaining before the month in
which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated installment of taxes to be paid. When the actual
amount of the applicable tax bill is known, the amount of such monthly advance
payment shall be adjusted as required to provide the fund needed to pay the
applicable taxes before delinquency. If the amounts paid to Lessor by Lessee
under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Real Property Taxes as the same become due,
Lessee shall pay to Lessor upon Lessor's demand, such additional sums as are
necessary to pay such obligations. All moneys paid to Lessor under this
Paragraph may be intermingled with other moneys of Lessor and shall not bear
interest.
10.2 Definition of "Real Property Taxes." As used herein, the term
"Real Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary; and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith
shall be conclusive.
10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b).
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion to be
determined by Lessor of all charges jointly metered with other premises.
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12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or otherwise transfer or encumber: (collectively,
"assignment") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale, acquisition,
financing, refinancing, transfer, leveraged buy-out or otherwise) whether or not
a formal assignment or hypothecation of this Lease or Lessee's assets occurs,
which results or will result in a reduction of the Net Worth of Lessee, as
hereinafter defined, by an amount equal to or greater than fifty-one percent
(51%) of such Net Worth of Lessee as it was represented to Lessor at the time of
the execution by Lessor of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net
Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee
(excluding any guarantors) established under generally accepted accounting
principles consistently applied.
(d) As assignment or subletting of Lessee's interest in
this Lease without Lessor's specific prior written consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable
Breach without the necessity of any notice and grace period. If Lessor elects to
treat such unconsented to assignment or subletting as a noncurable Breach,
Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon
thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base
Rent to fair market rental value or one hundred ten percent (110%) of the Base
Rent then in effect, whichever is greater. Pending determination of the new fair
market rental value, if disputed by Lessee, Lessee shall pay the amount set
forth in Lessor's Notice, with any overpayment credited against the next
installment(s) of Base Rent coming due, and any underpayment for the period
retroactively to the effective date of the adjustment being due and payable
immediately upon the determination thereof. Further, in the event of such Breach
and market value adjustment, (i) the purchase price of any option to purchase
the Premises held by Lessee shall be subject to similar adjustment to the then
fair market value (without the Lease being considered an encumbrance or any
deduction for depreciation or obsolescence, and considering the Premises at its
highest and best use and in good condition), or one hundred ten percent (110%)
of the price previously in effect, whichever is greater, (ii) any index-oriented
rental or price adjustment formulas contained in this Lease shall be adjusted to
require that the base index be determined with reference to the index applicable
to the time of such adjustment, and (iii) any fixed rental adjustments scheduled
during the remainder of the Lease
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term shall be increased in the same ratio as the new market rental bears to the
Base Rent in effect immediately prior to the market value adjustment.
(c) Lessee's remedy for any breach of this Paragraph 12.1
by Lessor shall be limited to compensatory damages and injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not: (i) be effective without the express written assumption by
such assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting
shall not constitute a consent to any subsequent assignment or subletting by
Lessee or to any subsequent or successive assignment or subletting by the
sublessee. However, Lessor may consent to subsequent sublettings and assignments
of the sublease or any amendments or modifications thereto without notifying
Lessee or anyone else liable on the Lease or sublease and without obtaining
their consent, and such action shall not relieve such persons from liability
under this Lease or sublease.
(d) In the event of any Default or Breach of Lessee's
obligations under this Lease, Lessor may proceed directly against Lessee, any
Guarantors or any one else responsible for the performance of the Lessee's
obligations under this Lease, including the sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor or Lessee.
(e) Each request for consent to an assignment or
subletting shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or subleases, including but not limited
to the intended use and/or required modification of the Premises. Lessee agrees
to provide Lessor with such other or additional information and/or documentation
as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease
shall, by reason of accepting such assignment or entering into such sublease, be
deemed for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to be
observed or performed by Lessee during the term of said assignment or sublease,
other than such
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obligations as are contrary to or inconsistent with provisions of an assignment
or sublease to which Lessor has specifically consented in writing.
(g) [provision intentionally deleted]
(h) Lessor, as a condition to giving its consent to any
assignment or subletting, may require that the amount and adjustment structure
of the rent payable under this Lease be adjusted to what is then the market
value and/or adjustment structure for property similar to the Premises as then
constituted.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease of all or
a portion of the Premises heretofore or hereafter, made by Lessee, and Lessor
may collect such rent and income and apply same toward Lessee's obligations
under this Lease; provided, however, that until a Breach (as defined in
Paragraph 13.1) shall occur in the performance of Lessee's obligations under
this Lease, Lessee may, except as otherwise provided in this Lease, receive,
collect and enjoy the rents accruing under such sublease. Lessor shall not, by
reason of this or any other assignment of such sublease to Lessor, nor by reason
of the collection of the rents from a sublessee, be deemed liable to the
sublessee for any failure of Lessee to perform and comply with any of Lessee's
obligations to such sublessee under such sublease. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written notice from
Lessor stating that a Breach exists in the performance of Lessee's obligations
under this Lease, to pay to Lessor the rents and other charges due and to become
due under the sublease. Sublessee shall rely upon any such statement and request
from Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against said sublessee or, until the Breach has
been cured against Lessor for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance
of its obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of such
sublease; provided, however, Lessor shall not be liable for any prepaid rents or
security deposit paid by such sublessee to such sublessor or for any other prior
Defaults or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the
sublessor under a sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or
any part of the Premises without Lessor's prior written consent.
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(e) Lessor shall deliver a copy of any notice of Default
or Breach by Lessee to the sublessee, who shall have the right to cure the
Default of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. A "Default" is defined as a failure by the Lessee
to observe, comply with or perform any of the terms, covenants, conditions or
rules applicable to Lessee under this Lease. A "Breach" is defined as the
occurrence of any one or more of the following Defaults, and, where a grace
period for cure after notice is specified herein, the failure by Lessee to cure
such Default prior to the expiration of the applicable grace period, shall
entitle Lessor to pursue the remedies set forth in Paragraph 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease,
the failure by Lessee to make any payment of Base Rent or any other monetary
payment required to be made by Lessee hereunder whether to Lessor or to a third
party, as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease,
the failure by Lessee to provide Lessor with reasonable written evidence (in
duly executed original form, if applicable) of (i) compliance with Applicable
Law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts
required under Paragraph 7.1(b), (iii) the recision of an unauthorized
assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per
Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease
per Paragraph 30, (vi) [clause intentionally omitted], (vii) the execution of
any document requested under Paragraph 42 (easements), or (viii) any other
documentation or information which Lessor may reasonably require of Lessee under
the terms of this Lease, where any such failure continues for a period of ten
(10) days following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants,
conditions or provisions of this Lease, or of the rules adopted under Paragraph
40 hereof that are to be observed, complied with or performed by Lessee, other
than those described in subparagraphs (a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice therefor by or
on behalf of Lessor to Lessee; provided, however, that if the nature of the
lessee's default is such that more than thirty (30) days are reasonably required
for its cure, then it shall not be deemed to be a Breach of this Lease by
Lessee, if Lessee commences such cure within said thirty (30) day period and
thereafter diligently prosecutes such cure to completion.
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(e) The occurrence of any of the following events: (i)
The making by Lessee of any general arrangement or assignment for the benefit of
creditors, (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. ss. 101 or
any successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within one hundred twenty (120) days, (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where possession is not restored to Lessee within sixty (60) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within sixty (60) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any applicable
law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by Lessor that any financial statement
given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) [paragraph intentionally deleted]
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the
Premises by any lawful means, in which case this Lease and the term hereof shall
terminate and Lessee shall immediately surrender possession of the Premises to
Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the
worth at the time of the award of the unpaid rent which had been earned at the
time of termination; (ii) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time or award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus
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one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's
Default or Breach of this Lease shall not waive Lessor's right to recover
damages under this Paragraph. If termination of this Lease is obtained through
the provisional remedy of unlawful detainer, Lessor shall have the right to
recover in such proceeding the unpaid rent and damages as are recoverable
therein, or Lessor may reserve therein the right to recover all or any part
thereof in a separate suit for such rent and/or damages. If a notice and grace
period required under subparagraphs 13.1(b), (c) or (d) was not previously
given, a notice to pay rent or quit, or to perform or quit, as the case may be,
given to Lessee under any statute authorizing the forfeiture of leases for
unlawful detainer shall also constitute the applicable notice for grace period
purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the
applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the
unlawful detainer statute shall run concurrently after the one such statutory
notice, and the failure of Lessee to cure the Default within the greater of the
two such grace periods shall constitute both an unlawful detainer and a Breach
of this Lease entitling Lessor to the remedies provided for in this Lease and/or
by said statute.
(b) Continue the Lease and Lessee's right to possession
in effect (in California under California Civil Code Section 1951.4) after
Lessee's Breach and abandonment and recover the rent as it becomes due, provided
Lessee has the right to sublet or assign, subject only to reasonable
limitations. See paragraphs 12 and 36 for the limitations on assignment and
subletting which limitations Lessee and Lessor agree are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under the Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or
the termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 Inducement Recapture In Event Of Breach. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions," shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.l, any such
inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph shall not be deemed a waiver by Lessor of the provisions of this
Paragraph unless specifically so stated in writing by Lessor at the time of such
acceptance.
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13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within five (5) days
after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall Pay to Lessor a late charge equal to six percent (6%) of
such overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Lessor will incur by reason of late
payment by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's Default or Breach with respect to such overdue
amount, nor prevent Lessor from exercising any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder, whether
or nor collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the land area
not occupied by any building, is taken by condemnation, Lessee may, at Lessee's
option, to be exercised in writing within ten (10) days after Lessor shall have
given Lessee written notice of such taking (or in the absence of such notice,
within ten (10) days after the condemning authority shall have taken possession)
terminate this Lease as of the date the condemning authority takes such
possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building and such taking does not interfere materially with Lessee's
use of the premises. Any award for the taking of all or any part of the Premises
under the power of eminent domain or any payment made under threat of the
exercise of such power shall be the property of Lessor, whether such award shall
be made as compensation for diminution in value of the leasehold or for the
taking of the fee, or as severance damages; provided, however, that Lessee shall
be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
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15. Broker's Fee.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of
this Lease.
15.2 [paragraph intentionally deleted]
15.3 [paragraph intentionally deleted]
15.4 [paragraph intentionally deleted]
15.5 Lessee and Lessor each represent and warrant to the other that it
has had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said transaction.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. Tenancy Statement.
16.1 Each Party (as "Responding Party") shall within ten (10) days
after written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Tenancy Statement" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises, or, if this is
a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or in this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or
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assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within thirty (30) days
following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises, Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
23. Notices.
23.1 All notices required or permitted by this Lease shall be in
writing and may be delivered in person (by hand or by messenger or courier
service) or may be sent by regular, certified or registered mail or U.S. Postal
Service Express Mail, with postage prepaid, or by facsimile transmission, and
shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease
shall be that Party's address for delivery or mailing of notice purposes. Either
Party may by written notice to the other specify a different address for notice
purposes, except that upon Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to be
given to Lessor hereunder shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time hereafter designate by
written notice to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same
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is addressed as required herein and mailed with postage prepaid. Notices
delivered by United States Express Mail or overnight courier that guarantees
next day delivery shall be deemed given twenty-four (24) hours after delivery of
the same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be deemed
served or delivered upon telephone confirmation of receipt of the transmission
thereof, provided a copy is also delivered via delivery or mail. If notice is
received on a Sunday or legal holiday, it shall be deemed received on the next
business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any preceding Default or Breach by
Lessee of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted. Any payment given Lessor by Lessee may be accepted
by Lessor on account of moneys or damages due Lessor notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other execute,
acknowledge and deliver to the other a short form memorandum of this Lease for
recording purposes. The Party requesting recordation shall be responsible for
payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county which the
Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device
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(collectively, "Security Device"), now or hereafter placed by Lessor upon the
real property of which the Premises are part, to any and all advances made on
the security thereof, and to all renewals, modifications, consolidations,
replacements and extensions thereof. Lessee agrees that the Lenders holding any
such Security Device shall have no duty, liability or obligation to perform any
of the obligations of Lessor under this Lease, but that in the event of Lessor's
default with respect to any such obligation, Lessee will give any Lender whose
name and address have been furnished Lessee in writing for such purpose notice
of Lessor's default and allow such Lender thirty (30) days following receipt of
such notice for the cure of said default before invoking any remedies Lessee may
have by reason thereof. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquired
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defense
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any option to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
such subordination or non-subordination, attornment and/or non-disturbance
agreement as is provided for herein.
31. Attorney's Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) or Broker in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorney's fees. Such fees may be awarded in the
same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term "Prevailing Party" shall
include, without limitation, a Party or Broker who substantially obtains or
defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorney's fees award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and
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consultations in connection therewith whether or not a legal action is
subsequently commenced in connection with such Default or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times upon prior notice, whether written or oral,
for the purpose of showing the same to prospective purchasers, lenders, or
lessees, and making such alterations, repairs, improvements or additions to the
Premises or to the building of which they are a part, as Lessor may reasonably
deem necessary. Lessor may at any time place on or about the Premises or
building any ordinary "For Sale" signs and Lessor may at any time during the
last one hundred twenty (120) days of the term hereof place on or about the
Premises any ordinary "For Lease" signs. All such activities of Lessor shall be
without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the Premises, except that Lessee
may, with Lessor's prior written consent, install (but not on the roof) such
signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations).
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as
otherwise provided herein, wherever in this Lease the consent of a Party is
required to an act by or for the other Party, such consent shall not be
unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses
(including but not limited to architects', attorneys', engineers' or other
consultants' fees) incurred in the consideration of, or response to, a request
by Lessee for any Lessor consent pertaining to this Lease or the Premises,
including but not limited to consents to an assignment, a subletting or the
presence or use of a Hazardous Substance, practice or storage tank, shall be
paid by Lessee to Lessor upon receipt of an invoice and supporting documentation
therefor. Subject to Paragraph 12.2(e) (applicable to assignment or subletting),
Lessor may, as a condition to considering any such request by Lessee, require
the Lessee
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deposit with Lessor an amount of money (in addition to the Security Deposit held
under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor
will incur in considering and responding to Lessee's request. Except as
otherwise provided, any unused portion of said deposit shall be refunded to
Lessee without interest. Lessor's consent to any act, assignment of this Lease
or subletting of the Premises by Lessee shall not constitute an acknowledgment
that no Default or Breach by Lessee of this Lease exists, nor shall such consent
be deemed a waiver of any then existing Default or Breach, except as may be
otherwise specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this
Lease are acknowledged by Lessee as being reasonable. The failure to specify
herein any particular condition to Lessor's consent shall not preclude the
imposition by Lessor at the time of consent of such further or other conditions
as are then reasonable with reference to the particular matter for which consent
is being given.
37. [paragraph intentionally deleted]
38. [paragraph intentionally deleted]
39. [paragraph intentionally deleted]
40. Multiple Buildings. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, with the consent of Lessee, which shall not be unreasonably withheld or
delayed, such easements, rights and dedications that Lessor deems necessary, and
to cause the recordation of parcel maps and restrictions, so long as such
easements, rights, dedications, maps and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation
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on the part of said Party to pay such sum or any part thereof, said Party shall
be entitled to recover such sum or so much thereof as it was not legally
required to pay under the provisions of this Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by Lessor or Lessor's agent and submission
of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is
not intended to be binding until executed by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION
TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED
TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE
OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION
OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR
EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF
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THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN
CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS
LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates
specified above to their respective signatures.
Executed at Executed at
San Francisco, California Mountain View, California
- ---------------------------------- ----------------------------------
on August 18, 1992 on August 18, 1992
------------------------------ -------------------------------
by LESSOR: D.R. Stephens & Company by LESSEE: Network Computing Devices, Inc.
550 Montgomery Street 350 North Bernardo Avenue
- ---------------------------------- ----------------------------------
San Francisco, CA 94111 Mountain View, CA 94043
- ---------------------------------- ----------------------------------
By /s/ D.R. Stephens By /s/ Jack Bradley
------------------------------ ------------------------------
Name Printed: D.R. Stephens Name Printed: Jack Bradley
------------------- -------------------
Title: General Partner Title: Chief Financial Officer
-------------------------- --------------------------
By By
-------------------------------- --------------------------------
Name Printed: Name Printed:
--------------------- ---------------------
Title: Title:
---------------------------- ----------------------------
Address: Address:
-------------------------- --------------------------
Tel. No. ( ) Tel. No. ( )
----- ----------------- ----- ----------------
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: American Industrial Real Estate Association, 345
South Figueroa Street, Suite M-1, Los Angeles, CA 90071, (213)
687-8777, Fax. No. (213) 687-8616.
(C) Copyright 1990 - By American Industrial Real Estate Association. All rights
reserved. No part of these works may be reproduced in any form without
permission in writing.
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LEASE ADDENDUM TO 280(B) N. BERNARDO LEASE
(Formerly occupied by GTE)
This Lease Addendum ("Addendum") is made to the Standard
Industrial/Commercial Single-Tenant - Net Lease executed concurrently herewith
(the "Lease") by and between D. R. Stephens & Company ("Landlord") and Network
Computing Devices, Inc., a California corporation ("Tenant").
Landlord and Tenant hereby agree that, notwithstanding anything
contained in the Lease to the contrary, the provisions set forth below shall be
deemed to be part of the Lease and shall supersede, to the extent appropriate,
any contrary provision in the Lease. All references in the Lease and in this
Addendum shall be construed to mean the Lease and the exhibits, as amended or
supplemented by this Addendum. All terms used in this Addendum, unless
specifically defined in this Addendum, shall have the same meanings as the terms
used in the Lease.
1. Rent. Commencing on the Commencement Date and continuing throughout
the Lease Term, Tenant shall pay the following as additional rent:
a. All Real Property Taxes applicable to the Premises as
required by Section 10 of the Lease;
b. All water, gas, heat, light, power, telephone, trash
disposal and other utilities and services supplied to the Premises as required
by Section 11 of the Lease;
c. Any late charges or interest due pursuant to Sections 13.4
and 19 of the Lease; and
d. At Landlord's election, any other reasonable payments due
to Landlord pursuant to this Lease.
2. Condition of the Premises. Landlord shall deliver the Premises to
Tenant clean and free of debris on the Commencement Date.
a. Building Systems. Landlord warrants, to the best of its
actual knowledge, that the existing plumbing, fire sprinkler system, lighting,
air conditioning, heating and loading doors (collectively, the "building
systems"), if any, in the Premises, other than those constructed by Tenant,
shall be in good working order and condition on the Commencement Date.
Notwithstanding the foregoing, Tenant acknowledges that the building system
services may be temporarily interrupted during the course of the construction of
that portion of the Tenant Improvements completed after the Commencement Date.
Tenant agrees that it shall, at its sole cost and expense, engage a
qualified inspector, contractor or engineer to inspect the building systems.
Such inspection shall be completed within sixty (60) days after the Commencement
Date. Tenant shall provide Landlord with a copy of the inspection report and
Landlord agrees to make such repairs or replacements (at Landlord's cost and
without deduction or offset
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from the Construction Allowance as defined in the Work Letter executed
concurrently herewith), as are reasonably recommended by the inspection report;
provided, that, Landlord may make reasonable objections thereto within sixty
(60) days after receiving the inspection report. If Tenant does not give
Landlord written notice of a non-compliance with this warranty within sixty (60)
days following the Commencement Date, correction of that non-compliance shall be
the obligation of Tenant at Tenant's sole cost and expense.
In no event shall Landlord be liable for costs to repair, replace or
maintain the building systems from and after the date the repair or replacement
of such systems has been completed by Landlord in accordance with the
recommendations on the inspection report.
b. Air Conditioner Compressors and Heat Exchangers.
Notwithstanding the provisions contained in Section 2(a) above, Landlord shall,
once during the Original Lease Term, replace, if and when necessary, the air
conditioner compressors and heat exchangers servicing the Premises.
c. Roof. Landlord and Tenant have reviewed a report on the
roof which recommends certain repairs be made thereto. On or before the
Commencement Date, Landlord agrees, at its sole cost and expense, to make such
repairs to the roof as are reasonably necessary. Within five (5) years after the
Commencement Date, Landlord agrees to commence replacing the roof. Prior to
Landlord's replacement of the roof, Landlord shall be responsible for the
maintenance of the roof. Following the replacement of the roof, Tenant shall, at
its sole cost and expense, be liable for the repair and maintenance thereof.
d. Tenant's Obligations. Except as expressly provided in
Sections 9 and 14 of the Lease and Section 1 of Work Letter, and without
limiting the provisions of Section 7.2 of the Lease, Tenant shall be
responsible, at its sole cost and expense, for the repair, maintenance and
replacement, if necessary, of the following:
the parking lot, and
landscaping.
3. Compliance with Covenants, Restrictions and Building Code. Landlord
warrants, to the best of its actual knowledge, that the improvements on the
Premises comply with all applicable covenants, or restrictions of record and
applicable building codes, regulations, zoning and other applicable laws in
effect on the Commencement Date. Said warranty does not apply to the use to
which Tenant will put the Premises or any Alterations or Utility Installations
(as defined in Section 7.3(a) of the Lease) made or to be made by Tenant. If,
following the inspection described in Section 2 above, the Premises do not
comply with said warranty, Landlord shall, subject to the limitations described
in Section 2 above, promptly after receipt of written notice from Tenant setting
forth with specificity the nature and extent of such noncompliance, rectify the
same at Landlord's expense (without deduction or offset against the Construction
Allowance). If Tenant does not give Landlord written notice of a non-compliance
with this warranty within sixty (60) days following the Commencement Date,
correction of that non-compliance shall be the obligation of Tenant at Tenant's
sole cost and expense.
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<PAGE>
4. Ownership of Alterations and Utility Installations.
a. Alterations. Notwithstanding anything contained in Section
7.4 of the Lease to the contrary, Landlord reserves the right, until expiration
or termination of the Lease, to require removal or become the owner of any and
all Alterations made to the Premises by the Tenant.
b. Utility Installations. At the time Tenant submits detailed
plans to Landlord for review for the purpose of obtaining Landlord's consent to
any proposed Utility Installation, Tenant may request Landlord to indicate
whether or not such proposed Utility Installation is to be removed from the
Premises upon the expiration or termination of the Lease and whether Tenant is
to perform all restoration made necessary by the removal of any such Utility
Installation. If Tenant does not request Landlord to make such indication, or if
Tenant does not obtain Landlord's prior consent to Tenant's removal of such
Utility Installation, then all such alterations shall be property of Landlord
and remain upon and be surrendered with the Premises upon expiration or
termination of the Lease. Landlord shall have the right to require Tenant to
remove any Utility Installation and to perform all restoration made necessary by
such removal.
c. Security and Communication Systems. Notwithstanding
anything contained herein to the contrary, all security and communication
systems installed by Tenant shall be deemed to be Trade Fixtures and shall be
removed by Tenant at the expiration or earlier termination of the Lease;
provided, that Tenant shall repair and restore any and all damage to the
Premises caused by the removal of such systems.
5. Hazardous Waste. Subject to the provisions of Section 6 of this
Addendum, Landlord shall indemnify, protect, defend and hold Tenant, its agents
and employees harmless from and against any and all damages, liabilities,
judgements, costs, claims, liens, expenses, penalties, permits and attorney's
fees and consultant's fees arising out of or involving any Hazardous Substance
or storage tank brought onto the Premises on or before the Commencement Date of
this Lease by or for Landlord or under Landlord's control.
6. Limitation on Liability. The liability of Landlord in connection
with the Premises shall be limited to its interest in the Premises, and in no
event shall any other assets of Landlord be subject to any claim arising out of
or in connection with the Lease or the Premises. Tenant expressly agrees that so
long as Landlord is a corporation, trust, partnership, joint venture,
unincorporated association or other form of business entity, the obligations of
Landlord shall not constitute personal obligations of the officers, directors,
trustees, partners, joint venturers, members, owners, stockholders or other
principals or representatives ("principals") of such business entity. In this
regard, Tenant agrees that in the event of any actual or alleged failure, breach
or default by Landlord of its obligations under this Lease, that (i) no
principal shall be sued or named as a party in any suit or action (except as may
be necessary to secure jurisdiction of Landlord) , (ii) no principal shall ever
be required to answer or otherwise plead to any service of process, (iii) no
judgment will be taken against any principal, (iv) any judgment taken against
any principal may be vacated and set aside at any time without hearing, (v) no
writ of execution shall be levied against the assets of any principal, and (vi)
these agreements by Tenant are enforceable both by Landlord and by any
principal.
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<PAGE>
7. Sale by Landlord. Notwithstanding anything contained in the Lease to
the contrary, Landlord shall have the right at any time to sell, transfer,
convey or assign its interest in this Lease or in the Premises or any part
thereof. To the extent that Landlord's covenants and obligations under this
Lease are expressly assumed in writing or by operation of applicable law by a
transferee or assignee, Landlord without further written agreement shall be
freed and relieved of such covenants and obligations. Landlord (or the
transferee or assignee) shall give Tenant prompt notice of such a transfer or
assignment. Notwithstanding the foregoing, Landlord shall not, without Tenant's
consent, which consent shall not be unreasonably withheld or delayed, sell the
Premises before the date that the real property commonly known as 280(A) North
Bernardo Avenue, Mountain View, California (also formerly occupied by Synoptics)
("Adjacent Property") is delivered to Tenant pursuant to a lease executed
concurrently herewith.
In the event of such sale, transfer, conveyance or assignment, from and
after the date thereof Landlord shall be (i) automatically relieved, without any
further act by any person or entity, of all liability for the performance of the
obligations of the Landlord hereunder, and (ii) relieved of all liability for
the performance of the obligations of the Landlord hereunder which have accrued
before the date of transfer, but only if its transferee agrees to assume and be
bound by the terms of this Lease and to perform all obligations of the Landlord
hereunder. As used herein, the term "Landlord" shall mean the Landlord
originally named herein, but following any transfer of its interest in the
Premises other than to a lender as security for a debt, the term shall
thereafter mean the transferee of such interest.
8. Option To Extend Term. Tenant shall have the right to extend the
term of this Lease for an additional term of sixty (60) months (the "Option")
commencing the day after the Expiration Date of the Original Term (the "Option
Term") upon the following terms and conditions:
a. When it notifies Landlord of its election to exercise the
Option and on the last day of the Original Term of this Lease Tenant shall (i)
not be in default under any of the terms, covenants, conditions, provisions or
agreements of this Lease, (ii) not have committed any act which, with the
passage of time or the giving of notice, would constitute an event of default
and (iii) not have assigned or otherwise transferred its interest in this Lease.
The Option is intended to be personal to Tenant and may not be assigned,
voluntarily or involuntarily, separate from or as a part of the Lease.
b. The base monthly rent for the Premises shall be ninety-five
percent (95%) of the Fair Market Rental (as hereinafter defined) for the
Premises prevailing at the commencement of the Option Term; provided that in no
event shall the base monthly rent be less than the base monthly rent for any
year immediately preceding the Option Term.
The term "Fair Market Rental" shall mean the base monthly rent
(expressed as a net rental rate per square foot of rentable area per month)
payable by a tenant and actually being received by a landlord for comparable
space in other first class buildings in Mountain View of like quality and
location, adjusted to account for, floor level, views, leasehold improvements or
allowances provided by Landlord, rental abatements, equity participation, lease
takeovers or assumptions, rent credits, moving expenses and other forms of
rental concessions, management or cost recovery fees, proposed term of the
lease, and any other relevant terms or conditions.
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<PAGE>
Landlord, by notice to Tenant delivered on or before one hundred twenty
(120) days prior to the commencement of the Option Term shall determine the Fair
Market Rental. If Tenant objects to Landlord's determination, Landlord and
Tenant shall negotiate in good faith in an effort to mutually agree upon the
Fair Market Rental. If Landlord and Tenant have not been able to agree upon the
Fair Market Rental prior to the commencement of the Option Term, Landlord and
Tenant shall each prepare their own final written proposed determination of Fair
Market Rental, which shall be exchanged by the parties and which shall
constitute the final proposed determination submitted by each party to the
arbitrators in the event of arbitration as described below. If the parties
cannot agree on the Fair Market Rental for the period in question, the parties
shall proceed to arbitration to determine Fair Market Rental. Should Tenant
elect to arbitrate and should the arbitration not have been concluded prior to
the date of the Option Term is to commence, Tenant shall pay the base monthly
rent to Landlord commencing at the Option Term, adjusted to reflect Fair Market
Rental as Landlord has so determined. If the amount of Fair Market Rental as
determined by arbitration differs from Landlord's determination, any adjustment
required to correct the amount previously paid shall be made by payment by the
appropriate party after such determination of Fair Market Rental.
If arbitration occurs, the judgment or the award rendered in any such
arbitration may be entered in any court having jurisdiction and shall be final
and binding between the parties. The arbitration shall be conducted and
determined in San Jose in accordance with the then prevailing rules of the
American Arbitration Association or its successor for arbitration of commercial
disputes, except to the extent that the procedures mandated by said rules shall
be modified as follows: Tenant shall make demand to Landlord for arbitration in
writing within thirty (30) days after receiving Landlord's determination of Fair
Market Rental, specifying therein the name and address of the person to act as
the arbitrator on its behalf. The arbitrator shall be qualified as a real estate
appraiser familiar with the Fair Market Rental of comparable office building
projects in Mountain View who would qualify over objection as an expert witness
to give opinion testimony addressed to the issue in a court of competent
jurisdiction. Within twenty (20) days after receiving the demand for
arbitration, Landlord shall give notice to Tenant, specifying the name and
address of the person designated by Landlord to act as arbitrator on its behalf,
who shall be similarly qualified. If Landlord fails to timely notify Tenant of
the appointment of its arbitrator, the arbitrator appointed by Tenant shall be
the arbitrator to determine the issue. In the event that two (2) arbitrators are
chosen, they shall appoint a third arbitrator, who shall be a competent and
impartial person with qualifications similar to those required of the first two
arbitrators.
Within ten (10) days following the appointment of the third arbitrator
or the lapse of time when a party may appoint an arbitrator after the other
party has appointed one, Landlord and Tenant shall each state in writing their
determination of the Fair Market Rental supported by the reasons therefor, with
counterpart copies delivered to the other party and to the arbitrator(s). If
either party fails timely to submit its proposal for the Fair Market Rental in
accordance with the later of the time periods provided for above, the Fair
Market Rental shall be that submitted by the other party, and the arbitration
shall be deemed concluded. The arbitrator(s) shall arrange for a simultaneous
exchange of such proposed determinations. The arbitrators (or sole arbitrator)
shall select one of the two proposed determinations as the Fair Market Rent, and
shall have no right to propose a middle ground or any modification of either of
the two proposed determinations. If there are three arbitrators, the concurrence
of two of the three arbitrators shall be controlling. The determination they or
he chooses shall constitute the decision of the
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<PAGE>
arbitrator(s) and shall be final and binding upon the parties. The arbitrator(s)
shall attempt to decide the issue within ten (10) days after the appointment of
the third arbitrator. Each party shall pay the fee and expenses of its
respective arbitrator and both shall share the fee and expenses of the third
arbitrator, if any. The arbitrator(s) shall have the right to consult experts
and competent authorities with factual information or evidence pertaining to a
determination of Fair Market Rental, but any such consultation shall be made in
the presence of both parties with full right of the other party to
cross-examine. The arbitrator(s) shall render their or his decision and award in
writing with counterpart copies to each party.
c. Tenant shall have notified Landlord no later than six (6)
months prior to the Expiration Date of the Original Term of Tenant's election to
exercise such right, otherwise, the Option shall be automatically null and void.
d. The lease for the Adjacent Property is still in full force
and effect and Tenant shall have concurrently notified Landlord of Tenant's
election to exercise its option to extend the term for the Adjacent Property.
e. All of the other terms, covenants, conditions, provisions
and agreements of this Lease shall remain in full force and effect.
f. There shall be no further right to extend the term of this
Lease, or any right to renew this Lease, beyond the Option Term.
9. Right of First Refusal. Landlord hereby grants to Tenant the
exclusive right, at Tenant's option, to purchase the Premises, upon the same
terms and conditions and for the same purchase price as any bona fide offer
which Landlord desires to accept for the purchase of the Premises from any
person or entity. Upon receipt of a bona fide offer which is acceptable to
Landlord, Landlord shall notify Tenant in writing of the purchase price, closing
schedule, and such other terms as Landlord has negotiated and accepted,
whereupon Tenant shall have five (5) business days from the date of such notice
in which to elect to exercise Tenant's right to purchase. In the event Tenant
elects to exercise its right to purchase as granted herein, then Tenant must do
so by notifying Landlord in writing of its acceptance of all the terms in the
bona fide offer within such five-day period. If Tenant declines to exercise its
right of first refusal or otherwise fails to exercise its right in the manner or
within the time period set forth herein, then Landlord shall be free to accept
the offer of said third party.
10. Assignment and Subletting. As a material part of the economic
bargain between the parties and as consideration for Tenant's rights in the
Premises, if (i) Tenant assigns its interest in this Lease, Tenant shall pay
Landlord fifty percent (50%) of the transfer consideration received by Tenant in
connection with the assignment, and (ii) Tenant sublets the transfer space,
Tenant shall pay to Landlord fifty percent (50%) of the positive difference, if
any, between (A) all transfer consideration received by Tenant in connection
with the sublease and (B) the Base Monthly Rent and additional rent allocated to
the transfer space paid by Tenant to Landlord pursuant to this Lease. Such
amount shall be paid to Landlord on the same basis, whether periodic or in lump
sum, that it is received by Tenant. As used herein, the term "transfer
consideration" shall mean any consideration of any kind received, or to be
received, by Tenant as a result of the transfer (other than the transferee's
promise to assume Tenant's
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<PAGE>
obligations under this Lease), if such sums are related to, Tenant's interest in
this Lease or in the Premises; including without limitation payments (in excess
of the book value thereof) for Tenant's assets, trade fixtures, leasehold
improvements, inventory, accounts, goodwill, equipment, furniture, general
intangibles and capital stock or other equity ownership interest in Tenant.
Tenant's obligations under this paragraph shall survive any and all transfers.
At the time Tenant makes any payment required by this paragraph, Tenant shall
deliver to Landlord an itemized statement of the method used to calculate
Landlord's share of transfer consideration, certified by Tenant as true and
correct. Landlord shall have the right to inspect Tenant's books and records
relating to the payments due pursuant to this paragraph. Upon request, Tenant
shall deliver to Landlord copies of all agreements, bills, invoices or other
documents related to such calculations. Landlord may condition its approval of
any transfer upon obtaining a certification from both Tenant and the proposed
transferee of all transfer consideration that is to be paid to Tenant in
connection with such transfer.
11. Cross-Default. Concurrently herewith, Tenant is entering into a
lease with Landlord for the Adjacent Property ("280(A) N. Bernardo Lease").
Notwithstanding anything contained in Section 13 of the Lease to the contrary,
the occurrence of any one or more of the events in Section 13.1 of the 280(A) N.
Bernardo Lease shall constitute a material default and breach of this Lease by
Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Addendum.
LANDLORD:
D. R. STEPHENS & COMPANY
By /s/ D.R. Stephens
-----------------------------------
D. R. Stephens, General Partner
TENANT:
NETWORK COMPUTER DEVICES, INC.,
a California corporation
By /s/ Jack Bradley
-----------------------------------
Jack Bradley
- --------------------------------------
Print name
Its: Chief Financial Officer
---------------------------------
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<PAGE>
WORK LETTER AGREEMENT - 280(B) N. Bernardo Avenue
(Formerly occupied by GTE)
THIS WORK LETTER AGREEMENT is made as of August 18, 1992, by and
between D. R. Stephens & Company ("Landlord") and Network Computing Devices,
Inc., a California corporation ("Tenant"), for the premises located at 280(B)
North Bernardo, Mountain View, California -- formerly occupied by GTE -- (the
"Premises") pursuant to that certain Lease and Lease Addendum executed
concurrently herewith, by and between Landlord and Tenant (the "Lease"). The
words and phrases which are capitalized in this Work Letter shall have the same
meaning as such words and phrases have in the Lease.
1. Landlord has no obligation to improve, alter or remodel the
Premises, except as follows:
a. Landlord shall make the repairs and replace the building
systems and roof as required pursuant to Section 2 of the Addendum,
b. On or before the Commencement Date (hereinafter defined) or
as soon thereafter as reasonably possible, Landlord shall, at its sole cost and
expense (and without deduction or offset against the Construction Allowance
defined below), do the following:
paint the exterior of the building; and
seal, repair and restripe the parking lot to
be suitable for the loading, unloading and
travel of commercial vehicles, including
semi's not to exceed $14,000.
c. Within six months after the Commencement Date or as soon
thereafter as reasonably possible, Landlord shall, at its sole cost and expense
(and without deduction or offset against the Construction Allowance defined
below), landscape the exterior area in a manner comparable to the landscaping of
the property located at 350 N. Bernardo Avenue, Mountain View, CA, which will
include:
pruning trees and shrubs along the Central
Expressway,
installing a total of 8 to 10 shrubs on the
Premises and Adjacent Property,
installing a total of 10 flats of color on
the Premises and Adjacent Property,
cleaning the patio area, and
planting, for fill-in purposes, shrubs and
ivy, as needed.
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<PAGE>
d. On or before the Commencement Date or as soon thereafter as
reasonably possible, Landlord shall, at its sole cost and expense (and without
deduction or offset against the Construction Allowance defined below), make such
changes, if any, to the exterior area of the Premises as are required to be made
by the American Disabilities Act in effect as of the Commencement Date.
e. Subject to Landlord's prior approval, Tenant may select the
color of the paint for the Building.
f. Landlord shall construct or cause to be constructed the
Tenant Improvements as provided for in this Work Letter.
2. Landlord hereby agrees to allocate the sum of Six Hundred Fifty
Thousand and no/100ths Dollars ($650,000.00) as a construction allowance
("Construction Allowance") for the design and construction of the Tenant
Improvements (hereinafter defined). Any and all fees and costs for the Tenant
Improvements in excess of the Construction Allowance shall be the sole and
exclusive obligation of the Tenant. In the event the fees and costs of the
Tenant Improvements are in excess of the Construction Allowance, Tenant shall
pay such overage on a monthly pro rata basis concurrently with Landlord's
monthly disbursement of the Construction Allowance immediately after receiving
written notice from Landlord of the amount payable by Tenant and invoices
substantiating the payment to be made. In the event Tenant fails to pay its
monthly pro rata payment on the date when due, then Landlord shall have no
obligation to continue constructing the Tenant Improvements until such payment
is made, and Tenant shall be chargeable with any delay in the completion of the
Premises resulting therefrom.
The costs of the Tenant Improvements to be paid from the Construction
Allowance shall include:
a. The costs for the preparation of the Construction Documents
(hereinafter defined), including Grobman's fees and costs;
b. The costs for obtaining permits and other necessary
authorizations from the City of Mountain View, County of Santa Clara and the
State of California;
c. All costs of interior design and finish schedule plans and
specifications including as-built drawings; and
d. All direct and indirect costs of procuring and installing
the Tenant Improvements in the Premises, including the construction fee for
overhead and profit and the cost of all onsite supervisory and administrative
staff, office, equipment and temporary services in connection with construction
of the Tenant Improvements.
Notwithstanding the foregoing, Tenant shall be liable for all
costs and fees for the services described above which are in excess of the
Construction Allowance. In no event shall the costs of the Tenant Improvements
include any costs for procuring or installing in the Premises any trade
fixtures, equipment, furniture, furnishings, telephone equipment or other
personal property ("Personal Property") to be used in the Premises by Tenant,
and the cost of such Personal Property shall be paid by Tenant.
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<PAGE>
3. All space plans, design and working drawings required for the Tenant
Improvements ("Construction Documents") shall be prepared by Reel/Grobman &
Associates ("Grobman"). Tenant acknowledges that it has reviewed and approved
the proposal from Grobman dated August 3, 1992, a copy of which is attached
hereto, and that Tenant is satisfied with the terms and conditions set forth
therein. Tenant and Landlord shall each review the Construction Documents on or
before the dates set forth in the schedule contained in the Grobman proposal.
Any such approval is to be evidenced by Tenant's and Landlord's initials on each
sheet of the Construction Documents. If Tenant does not approve any of the
Construction Documents it receives from Grobman within the time periods set
forth in the schedule or if Tenant desires to make any modifications to the
same, any delay attributable to such disapproval or modifications shall be a
Tenant Delay (as defined herein below).
All real property improvements shown on the Construction Documents are
referred to herein as the "Tenant Improvements."
4. Tenant shall devote such time as may be necessary to enable Landlord
or Grobman to submit for approval the Construction Documents to the appropriate
government authorities of the Construction Documents for the Premises by October
23, 1992. In the event any governmental authority whose approval is necessary to
proceed with the construction of Tenant Improvements fails to approve the
construction Documents prior to December 7, 1992 as a result of Tenant's
insistence on certain improvements being included as a part of Tenants
Improvements, such failure shall be deemed to be a Tenant Delay.
5. Tenant, by signing the Construction Documents and approving the
general contractor with Grobman, shall give Landlord authorization to complete
the Tenant Improvements to the Premises in accordance, with such Construction
Documents. If such authorization and approval is not received by Landlord and
Grobman within the time periods set forth in the Grobman schedule, Landlord
shall not be obligated to commence the Tenant Improvements on the Premises until
such authorization and approval is received and Tenant shall be chargeable with
any delay in the completion of the Premises resulting therefrom.
6. Subject to the provisions in Paragraph 7 below, the Commencement
Date shall mean the earlier to occur of:
a. the date Tenant actually occupies the entire Premises, or
b. the date of Substantial Completion of the Tenant
Improvements, which the parties estimate will occur on January 25, 1993 (the
"Scheduled Commencement Date"). "Substantial completion" shall be determined by
Grobman and shall be deemed to have occurred notwithstanding a requirement to
complete "punchlist" or similar minor corrective work.
Subject to the provisions in Paragraph 7 below, the Expiration Date
shall mean the date which is eight (8) years and seven (7) months after the
Commencement Date.
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<PAGE>
If the Commencement Date is a date other than the Scheduled
Commencement Date, Landlord and Tenant shall promptly execute an amendment to
the Lease specifying the Commencement Date and Expiration Date.
7. The Commencement Date and the Expiration Date shall be subject to
and modified by the following:
a. If Substantial Completion of the Tenant Improvements in the
Premises is delayed as a result of any delay attributable to Tenant's acts or
failure to act ("Tenant Delay"), then the original Term of the Lease and the
Rent (including all Additional Rent) shall commence to accrue one day earlier
for each day of delay attributable to Tenant's acts or failure to act. A Tenant
Delay shall include, but not be limited to the following:
Tenant's request for a delay;
Tenant's request to change the Construction
Documents previously approved;
Tenant's failure to approve within three (3)
working days after Tenant's receipt of
Landlord's request for any changes in the
Construction Documents necessary due to
governmental requirements together with a
copy of the proposed changes;
Tenant's failure to pay any monetary
obligations it is obligated to pay within
the time periods set forth hereunder and
under the Lease, including but not limited
to the payment for the Tenant Improvements
in excess of the Construction Allowance;
Tenant's failure to comply with the
provisions of this Agreement;
Tenant's request to have additional or
different work not included within the
Construction Documents constructed in the
Premises and/or the construction thereof;
Tenant's failure to approve the Construction
Documents within the time periods set forth
hereinabove;
The occurrence of any event which is deemed
a Tenant Delay under this Agreement; and
Prior to approval by both parties of the
Construction Documents, any delay which
Grobman reasonably determines is
attributable to changes or additions to
requirements of Tenant or the information
theretofore supplied by Tenant to Grobman or
the general contractor, outside of the
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<PAGE>
normal scope of such changes or additions
which would be customary in a construction
project of the scope contemplated by this
Work Letter Agreement.
b. Tenant acknowledges that the Premises are, as of the date
hereof, subject to a lease. If, for any reason other than a Tenant Delay,
Landlord cannot deliver possession of the Premises to Tenant by January 25,
1993, then in that event, Landlord shall not be subject to any liability
therefor, nor shall such failure affect the validity of the Lease or the
obligations of Tenant hereunder, but in such case, Tenant shall not be obligated
to pay rent or perform any other obligation of Tenant until Landlord delivers
possession of the Premises to Tenant.
c. It is the intent of the parties hereto that the lease term
for the Premises shall run concurrently with and expire simultaneously with the
lease for the Adjacent Property.
8. Upon substantial completion of that portion of the Tenant
Improvements in the area of the Premises devoted primarily to field repair and
manufacturing, Tenant may occupy that portion of the Premises; provided, that,
Tenant shall pay its pro-rata share of (i) the Base Rent (ii) the insurance
premiums incurred by Landlord, and (iii) the Real Property Taxes. Tenant's
pro-rata share shall be determined by a ratio, the numerator of which is the
number of occupied square feet in the Premises and the denominator is 53,160
square feet. Any such partial, early occupancy shall not advance nor affect the
Commencement Date or Expiration Date of the Original Term. Except as modified
herein, Tenant shall be otherwise subject to all other terms and conditions of
the Lease, including the obligation to pay for any and all utility, water,
heating, air conditioning, janitorial, garbage and telephone expenses relating
to Tenant's use or occupancy of the Premises.
9. In the event either party requests that any portion of the work to
be performed by Landlord be delayed, the party requesting such delay shall pay
all costs and any expenses occasioned by such delay including, without
limitation, any costs and expenses attributable to increases in the cost of
labor or materials.
10. Any and all Tenant Improvements paid for in whole or in part by
Landlord shall at once become and remain the property of Landlord.
11. In the event of any breach by either party of the provisions of
this Work Letter, the non-defaulting party may elect to treat such breach as a
default under the Lease which shall entitle such non-defaulting party to any of
the rights and remedies provided thereunder.
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<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this
Letter Agreement as of the date and year first above written.
LANDLORD:
D. R. STEPHENS & COMPANY
By /s/ D.R. Stephens
-----------------------------------
D. R. Stephens, General Partner
TENANT:
NETWORK COMPUTING DEVICES, INC.,
a California corporation
By /s/ Jack Bradley
-----------------------------------
Jack Bradley
- --------------------------------------
Print name
Its: Chief Financial Officer
---------------------------------
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<PAGE>
EXHIBIT C
Plans and Specifications for
Assignee's Tenant Improvements
[Document Not Provided to Registrant with Master Lease]
<PAGE>
EXHIBIT D
Option to Extend Term
8. Option To Extend Term. Tenant shall have the right to extend the
term of this Lease for an additional term of ten (10) years (the "Option")
commencing on December 1, 2003, and terminating on November 30, 2013 (the
"Option Term"), upon the following terms and conditions:
a. Tenant shall have notified Landlord no later than November
30, 2002, of Tenant's election to exercise such right, otherwise the Option
shall be automatically null and void.
b. The leases for both 280(A) and 280(B) N. Bernardo Avenue
(each being the "Adjacent Property" to the other) must still be in full force
and effect, Tenant shall have concurrently notified Landlord of Tenant's
election to exercise its option to extend the term for the Adjacent Property and
the term for the Adjacent Property must be extended concurrently with the Option
Term under this Lease.
c. When it notifies Landlord of its election to exercise the
Option and on the last day of the Original Term of this Lease Tenant shall (i)
not be in default under any of the terms, covenants, conditions, provisions or
agreements of this Lease, (ii) not have committed any act which, with the
passage of time or the giving of notice, would constitute an event of default
and (iii) not have assigned or otherwise transferred its interest in this Lease
or subleased more than a combined total of 84,800 square feet of the premises
under this Lease and the Lease for the Adjacent Property. The Option is intended
to be personal to Tenant and may not be assigned, voluntarily or involuntarily,
separate from or as a part of the Lease.
d. The initial base monthly rent for the Premises for the
Option Term shall be ninety percent (90%) of the Fair Market Rental (as
hereinafter defined) for the Premises prevailing at the commencement of the
Option Term; provided that in no event shall the base monthly rent be less than
the base monthly rent for any year immediately preceding the Option Term nor
more than one hundred forty percent (140%) of the highest base monthly payable
for any month during the Original Term. The base rent shall be increased by
$0.05 per square foot per month over the initial base monthly rent for the
period June 1, 2006, through November 30, 2008; there shall be an additional
increase of $0.05 per square foot per month for base monthly rent for the period
December 1, 2008, through May 30, 2011; and there shall be a final increase of
an additional $0.05 per square foot per month for the base rent for the period
June 1, 2011, through the termination of the Option Term.
The term "Fair Market Rental" shall mean the base monthly rent
(expressed as a net rental rate per square foot of rentable area per month)
payable by a tenant and actually being received by a landlord for comparable
space in other comparable buildings in Mountain View of like quality and
location, adjusted to account for, floor level, views, leasehold improvements or
allowances provided by Landlord, rental abatements, equity participation, lease
takeovers or assumptions, rent credits, moving expenses and
<PAGE>
other forms of rental concessions, management or cost recovery fees, proposed
term of the lease, and any other relevant terms or conditions.
Landlord, by notice to Tenant delivered on or before nine (9) months
prior to the commencement of the Option Term shall determine the Fair Market
Rental. If Tenant objects to Landlord's determination, Landlord and Tenant shall
negotiate in good faith in an effort to mutually agree upon the Fair Market
Rental. If Landlord and Tenant have not been able to agree upon the Fair Market
Rental at least six (6) months prior to the commencement of the Option Term,
Landlord and Tenant shall each prepare their own final written proposed
determination of Fair Market Rental, which shall be exchanged by the parties and
which shall constitute the final proposed determination submitted by each party
to the arbitrators in the event of arbitration as described below. If the
parties cannot agree on the Fair Market Rental for the period in question, the
parties shall proceed to arbitration to determine Fair Market Rental. Should
Tenant elect to arbitrate and should the arbitration not have been concluded
prior to the date the Option Term is to commence, then pending determination of
Fair Market Rental by arbitration, Tenant shall continue to pay the same base
monthly rent during the Option Term as Tenant paid for the last month of the
Original Term. If the amount of Fair Market Rental as determined by arbitration
differs from the rent theretofore paid during the Option Term, any adjustment
required to correct the amount previously paid shall be made by payment by the
appropriate party after such determination of Fair Market Rental.
If arbitration occurs, the judgment or the award rendered in any such
arbitration may be entered in any court having jurisdiction and shall be final
and binding between the parties. The arbitration shall be conducted and
determined in San Jose in accordance with the then prevailing rules of the
American Arbitration Association or its successor for arbitration of commercial
disputes, except to the extent that the procedures mandated by said rules shall
be modified as follows: Tenant shall make demand to Landlord for arbitration in
writing within thirty (30) days after receiving Landlord's final written
proposed determination of Fair Market Rental, specifying therein the name and
address of the person to act as the arbitrator on its behalf. The arbitrator
shall be qualified as a real estate appraiser familiar with the Fair Market
Rental of comparable office building projects in Mountain View who would qualify
over objection as an expert witness to give opinion testimony addressed to the
issue in a court of competent jurisdiction. Within twenty (20) days after
receiving the demand for arbitration, Landlord shall give notice to Tenant,
specifying the name and address of the person designated by Landlord to act as
arbitrator on its behalf, who shall be similarly qualified. If Landlord fails to
timely notify Tenant of the appointment of its arbitrator, the arbitrator
appointed by Tenant shall be the arbitrator to determine the issue. In the event
that two (2) arbitrators are chosen, they shall appoint a third arbitrator, who
shall be a competent and impartial person with qualifications similar to those
required of the first two arbitrators.
Within ten (10) days following the appointment of the third arbitrator
or the lapse of time when a party may appoint an arbitrator after the other
party has appointed one, Landlord and Tenant shall each state in writing their
determination of the Fair Market Rental supported by the reasons therefor, with
counterpart copies delivered to the other party and to the arbitrator(s). If
either party fails timely to submit its proposal for the Fair Market Rental in
accordance with the later of the time periods provided for above, the Fair
Market Rental shall be that submitted by the other party, and the arbitration
shall be deemed concluded. The arbitrator(s) shall arrange for a simultaneous
exchange of such proposed
-2-
<PAGE>
determinations. If there are three arbitrators, the concurrence of two of the
three arbitrators shall be controlling. The arbitrators (or sole arbitrator)
shall select one of the two proposed determinations as the Fair Market Rent, and
shall have no right to propose a middle ground or any modification of either of
the two proposed determinations. The determination they or he chooses shall
constitute the decision of the arbitrator(s) and shall be final and binding upon
the parties. The arbitrator(s) shall attempt to decide the issue within (10)
days after the appointment to the third arbitrator. Each party shall pay the fee
and expenses of its respective arbitrator and both shall share the fee and
expenses of the third arbitrator, if any. The arbitrator(s) shall have the right
to consult experts and competent authorities with factual information or
evidence pertaining to a determination of Fair Market Rental, but any such
consultation shall be made in the presence of both parties with full right of
the other party to crossexamine. The arbitrator(s) shall render their or his
decision and award in writing with counterpart copies to each party.
e. All of the other terms, covenants, conditions, provisions
and agreements of this Lease shall remain in full force and effect.
f. There shall be no further right to extend the term of this
Lease, or any right to renew this Lease, beyond the Option Term.
-3-
<PAGE>
EXHIBIT E
280(A) Sublease
(including Addendum)
<PAGE>
STANDARD INDUSTRIAL SUBLEASE
American Industrial Real Estate Association
1. Parties. This Sublease, dated for reference purposes only June 5, 1996, is
made by and between PINNACLE SYSTEMS, INC., a California corporation (herein
called "Sublessor") and NETWORK COMPUTING DEVICES, INC., a California
corporation (herein called "Sublessee").
2. Premises. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain real property situated in the County
of Santa Clara, State of California, commonly known as approximately 41,460
square feet of space ("Premises") within the building commonly known as 280 (A)
North Bernardo Avenue, Mountain View, California as more particularly described
on the Floor Plan, attached hereto as Exhibit 2, and made a part hereof. Said
Building, including the surrounding and improvements, is hereinafter called the
Master Premises.
3. Term.
3.1 Term. The term of this Sublease shall be for twelve (12) months
commencing on (See Paragraph 1 of the First Addendum to Standard Industrial
Sublease attached hereto ("First Addendum")).
3.2 Delay in Commencement. Notwithstanding said commencement date, if
for any reason Sublessor cannot deliver possession of the Premises to Sublessee
on said date, Sublessor shall not be subject to any liability therefore, nor
shall such failure affect the validity of this Lease or the obligations of
Sublessee hereunder or extend the term hereof, but in such case Sublessee shall
not be obligated to pay rent until possession of the Premises is tendered to
Sublessee.
4. Rent. Sublessee shall pay to Sublessor as rent for the Premises equal monthly
payments of (See Paragraph 2 of the First Addendum) in advance, on the 1st day
of each month of the term hereof. Sublessee shall pay Sublessor upon the
execution hereof $30,000.00 as rent for the first month's Base Rent. Rent for
any period during the term hereof which is for less than one month shall be a
pro rata portion of the monthly installment. Rent shall be payable in lawful
money of the United States to Sublessor at the address stated herein or to such
other persons or at such other places as Sublessor may designate in writing.
5. Security Deposit. Sublessee shall deposit with Sublessor upon execution
hereof $32,339.00 as security for Sublessee's faithful performance of
Sublessee's obligations hereunder. If Sublessee fails to pay rent or other
charges due hereunder, or otherwise defaults with respect to any provision of
this Sublease, Sublessor may use, apply or retain all or any portion of said
deposit for the payment of any rent or other charge in default or for the
payment of any other sum to which Sublessor may become obligated by reason of
Sublessee's default, or to compensate Sublessor for any loss or damage which
Sublessor may suffer thereby. If Sublessor so uses or applies all or any portion
of said deposit, Sublessee shall within ten (10) days after written demand
therefore deposit cash with Sublessor in an amount sufficient to restore said
deposit to the full amount hereinabove stated and Sublessee's failure to do so
shall be a
-1-
<PAGE>
material breach of this Sublease. Sublessor shall not be required to keep said
deposit separate from its general accounts. If Sublessee performs all of
Sublessee's obligations hereunder, said deposit, or so much thereof as has not
theretofore been applied by Sublessor, shall be returned, without payment of
interest or other increment for its use to Sublessee (or at Sublessor's option
to the last assignee, if any, of Sublessee's interest hereunder) at the
expiration of the term hereof, and after Sublessee has vacated the Premises. No
trust relationship is created herein between Sublessor and Sublessee with
respect to said Security Deposit.
6. Use.
6.1 Use. The Premises shall be used and occupied only for general
office, testing, packaging and shipping of computers, monitors and related
electronic devices and for no other purpose.
6.2 [paragraph intentionally omitted]
6.3 [paragraph intentionally omitted]
7. Master Lease.
7.1 Sublessor is the lessee of the Premises by virtue of a lease
between D.R. Stephens & Company, a California limited partnership ("Master
Lessor") and Sublessee dated August 18, 1992 ("Original Lease"). Pursuant to the
certain Assignment and Modification of Leases of even date herewith among
Sublessor, Sublessee and Master Lessor (the "Assignment"), the Original Lease
was amended and Sublessee's interest therein was assigned to Sublessor. The
Original Lease as so amended and assigned is hereinafter referred to as the
Master Lease, a copy of which is attached hereto marked Exhibit 1.
7.2 This Sublease is and shall be at all times subject and subordinate
to the Master Lease.
7.3 [paragraph intentionally omitted]
7.4 [paragraph intentionally omitted]
7.5 [paragraph intentionally omitted]
7.6 [paragraph intentionally omitted]
7.7 [paragraph intentionally omitted]
7.8 [paragraph intentionally omitted]
8.0 [paragraph intentionally omitted]
9.0 [paragraph intentionally omitted]
-2-
<PAGE>
10. [paragraph intentionally omitted]
11. Attorney's fees. If any party named herein brings an action to enforce the
terms hereof or to declare rights hereunder, the prevailing party in any such
action on trial and appeal, shall be entitled to his reasonable attorneys' fees
to be paid by the losing party as fixed by the Court.
12. Additional Provisions. If there are no additional provisions draw a line
from this point to the next printed word after the space left here. If there are
additional provisions place the same here.
SEE FIRST ADDENDUM.
Executed at /s/ Arthur Chadwick
--------------- ----------------------------------------
on By Arthur Chadwick
------------------------ -----------------------------------------
address By
------------------- ------------------------------------------
"Sublessor" (Corporate Seal)
- --------------------------
Executed at /s/ Jack Bradley
--------------- ----------------------------------------
on By Jack Bradley
------------------------ -----------------------------------------
address By
------------------- ------------------------------------------
"Sublessee" (Corporate Seal)
- --------------------------
Executed at /s/ D.R. Stephens
--------------- ----------------------------------------
on By D.R. Stephens
------------------------ -----------------------------------------
address By
------------------- ------------------------------------------
- -------------------------- "Master Lessor" (Corporate Seal)
-3-
<PAGE>
Exhibit I
Master Lease
[to be inserted]
<PAGE>
Exhibit 2
Floor Plan
[to be inserted]
<PAGE>
FIRST ADDENDUM TO STANDARD INDUSTRIAL SUBLEASE
THIS FIRST ADDENDUM TO STANDARD INDUSTRIAL SUBLEASE ("First Addendum")
is made between PINNACLE SYSTEMS, INC., as Sublessor ("Sublessor"), and NETWORK
COMPUTING DEVICES, INC., as Sublessee ("Sublessee"), to be a part of that
certain Standard Industrial Sublease ("Sublease") of even date herewith between
Sublessor and Sublessee for approximately 41,460 square feet of space
("Premises") within the Building ("Building") located at 280(A) North Bernardo
Avenue, Mountain View, California ("Master Premises").
1. Term:
a. Term: The term of this Sublease (the "Term") shall be for a
period of twelve (12) months and shall commence (the "Sublease Commencement
Date") upon the "Closing" as defined in the Agreement to Assign and Modify
Leases of even date herewith among Sublessor, Sublessee and Master Lessor
("Agreement"), and shall expire (the "Expiration Date") on the last calendar day
of the twelfth (12th) month following the Sublease Commencement Date, unless the
Sublease is sooner terminated pursuant to its terms or the Master Lease is
sooner terminated pursuant to its terms. If for any reason the Closing does not
occur as and when required under the Agreement, then this Sublease shall be of
no force and effect and shall automatically be deemed terminated.
b. No Option to Extend: The parties hereto acknowledge that
Sublessee has no option to extend the Term of the Sublease beyond the Expiration
Date.
c. Right of First Offer: If at any time during the Term,
Sublessor desires to sublet, rather than occupy, the Premises after the
Expiration Date, and if Sublessee is not then in default (or would not then be
in default but for the pendency of any grace period) under this Sublease, then
Sublessor shall notify Sublessee in writing of the terms on which Sublessor is
willing to sublease the Premises after the Expiration Date. If within ten (10)
days after receipt of Sublessor's notice, Sublessee agrees in writing to
sublease the Premises upon such terms or such other terms as are mutually
acceptable to Sublessor and Sublessee, and Master Lessor approves in writing of
same, then Sublessor and Sublessee shall execute a sublease upon such terms
within twenty (20) days of Sublessee's receipt of Sublessor's notice. If either
Sublessee does not deliver its notice of intent to sublease the Premises within
said ten (10) day period, if Sublessor and Sublessee do not enter into a
fully-executed sublease within said twenty (20) period, or if Sublessor is
unable to obtain Master Lessor's written approval of such sublease within said
twenty (20) day period, then this right of first offer to sublease shall lapse
and be of no further force or effect; in such event, Sublessor shall have the
right to sublease the Premises to a third party on the same or on any other
terms more or less favorable than those offered to Sublessee. This right of
first offer is personal to Sublessee and is not transferable.
2. Monthly Rent:
a. Monthly Base Rent: Sublessee shall pay to Sublessor as Base
Rent ("Base Rent") for the Premises equal monthly installments of Thirty
Thousand Dollars ($30,000). Base Rent shall be
-1-
<PAGE>
paid monthly on or before the first (1st) day of each calendar month. Rent for
any period during the term hereof which is for less than a complete calendar
month shall be a pro rata portion of the monthly installment based upon a
thirty-day month. All rent shall be payable without notice or demand and without
any deduction, offset, or abatement, in lawful money of the United States of
America. All rent shall be paid directly to Sublessor c/o Mr. Arthur Chadwick,
Pinnacle Systems, Inc., 870 West Maude Avenue, Sunnyvale, California 94086, or
to such other persons or at such other addresses as may be designated in writing
from time to time by Sublessor.
b. Additional Rent: All monies required to be paid by
Sublessee under this Sublease, including without limitation, any amounts payable
by Sublessee or Sublessor to Master Lessor shall be deemed additional rent
hereunder.
c. Operating Expenses and Real Property Taxes: Sublessee shall
pay to Sublessor upon demand all insurance expenses. Real Property Taxes (as
defined in the Master Lease and incorporated herein), or any installment
thereof, and any other expenses under the Master Lease that are required to be
paid by Sublessor to Master Lessor, or otherwise required to be paid by
Sublessor under the Master Lease.
3. [Paragraph Intentionally Omitted.]
4. Use; Compliance with Laws: As Sublessor has been in possession of
the Premises under the Original Lease, Sublessor has not made and does not make
any representations or warranties regarding the suitability of the Premises for
Sublessee's intended use, the permissibility of Sublessee's intended use under
applicable laws, or the requirements, if any, which may be imposed by
governmental authorities with respect to such use. Sublessee, at Sublessee's
sole cost and expense, shall comply with all laws, ordinances, underwriter's
requirements, statutes, rules, regulations, court orders and requirements of
every governmental authority (collectively, "Laws") pertaining to Sublessee's
use of the Premises and the conduct of Sublessee's business at the Premises,
including without limitation all health and safety Laws, environmental Laws and
Laws regarding construction of improvements in, on, or about the Premises
(including without limitation the Americans with Disabilities Act).
5. Condition: As Sublessor has been in possession of the Premises under
the Original Lease, Sublessor has not made and does not make any representations
or warranties regarding the quality or condition of the Premises or any
improvements located thereon. The Premises are subleased to Sublessee "AS IS" in
their current condition. Sublessor shall have no obligation whatsoever to make
or pay the cost of any alterations, improvements or repairs to the Premises,
including, without limitation, any alteration, improvement or repair required to
comply with any Laws. Sublessee shall look solely to Master Lessor for the
performance of any maintenance, repairs and/or restoration required to be
performed by Master Lessor under the terms of the Master Lease.
6. Status of Master Lease: This Sublease is and shall at all times be
subject in all respects and subordinate to the Master Lease. Sublessee hereby
expressly assumes and agrees, except to the extent expressly provided to the
contrary in this Sublease (i) to comply with all provisions of the Master Lease,
(ii) to perform all obligations of the "Lessee" under the Master Lease in favor
of Sublessor and
-2-
<PAGE>
Master Lessor, and (iii) to hold Sublessor free and harmless of and from all
liability, judgments, costs, damages, claims, demands, and expenses (including
reasonable attorneys' and experts' fees) arising out of Sublessee's failure to
comply with or to perform Sublessee's obligations hereunder or the obligations
of the "Lessee" under the Master Lease as herein provided. In the event of the
termination of Sublessor's interest as "Lessee" under the Master Lease for any
reason, then this Sublease shall terminate concurrently therewith without any
liability of Sublessor or Master Lessor to Sublessee. If, however, there is any
conflict between the terms and conditions of this Sublease and the terms and
conditions of the Master Lease, as between Sublessor and Sublessee, the terms
and conditions of this Sublease shall control.
7. Broker: Sublessee agrees to pay for and hold Sublessor harmless from
and against all claims for brokerage commissions, finder's fees, or other
compensation made by any agent, broker, salesman or finder in connection with
this transaction.
8. Sublessee's Indemnity: In amplification and not in restriction of
Sublessee's other indemnity obligations to Sublessor as stated in that certain
Agreement Concerning Assignment of Leases between the parties of even date
herewith (the "Assignment Agreement"), Sublessee shall indemnify, defend,
protect, and hold Sublessor harmless from and against all claims, demands,
causes of action, losses and expenses (collectively "Claims") which may be
brought against Sublessor or which Sublessor may pay or incur by reason of a
Breach of this Sublease by Sublessee, a misrepresentation by Sublessee of the
matters set forth herein, or the negligence or willful misconduct of Sublessee
or Sublessee's employees, agents, contractors, or invitees in or about the
Premises during the Term to the extent that the Claims are not caused by the
negligence or willful misconduct of Sublessor or Sublessor's agents. Without
limiting the generality of the foregoing, Sublessee shall indemnify defend,
protect and hold Sublessor harmless from and against any Claims which may be
brought against Sublessor or which Sublessor may pay or incur by reason of any
violation of law by Sublessee or its employees, agents or contractors during the
Term.
9. Assignment and Subletting: Sublessee shall not assign this Sublease,
or sublet all or any portion of the Premises. If Sublessee assigns or sublets
the Premises, such assignment or subletting shall be null and void and shall
constitute a Breach of this Sublease.
10. Effect of Conveyance: As used in this Sublease, the term
"Sublessor" means the holder of the interest of the "Lessee" under the Master
Lease. In the event of any transfer of said Lessee's interest, Sublessor shall
be and hereby is entirely relieved and released of all covenants and obligations
of the Sublessor hereunder, and it shall be deemed and construed, without
further agreement between the parties, that the transferee has assumed and shall
carry out all covenants and obligations thereafter to be performed by the
Sublessor hereunder. Sublessor may transfer and deliver any security of
Sublessee to the transferee of said Lessee's interest in the Master Lease, and
thereupon Sublessor shall be discharged from any further liability with respect
thereto.
11. Incorporation of Master Lease: Unless specifically excluded or
modified, the terms and conditions of this Sublease shall include all Articles
and Paragraphs of the Original Lease as modified by the Assignment, which are
incorporated into this Sublease as if fully set forth, except that: (i) each
-3-
<PAGE>
reference in such incorporated Articles and Paragraphs to "Lease" shall be
deemed a reference to "Sublease"; (ii) each reference to the "Premises" shall be
deemed a reference to the subleased "Premises" herein; (iii) each reference to
"Lessor" and "Lessee" shall be deemed a reference to "Sublessor" and
"Sublessee", respectively, except as otherwise expressly set forth herein; (iv)
with respect to work, services, repairs, restoration, insurance or the
performance of any other obligation of Master Lessor under the Master Lease, the
sole obligation of Sublessor shall be to request the same in writing from Master
Lessor as and when requested to do so by Sublessee, and to use Sublessor's
reasonable efforts (excluding the payment of money or other items of value) to
obtain Master Lessor's performance; (v) with respect to any obligation of
Sublessee to be performed under this Sublease, wherever the Master Lease grants
to Sublessor a specified number of days to perform its obligations under the
Lease, except as otherwise provided herein, Sublessee shall have three (3) fewer
days to perform the obligation, including, without limitation, curing any
defaults; and (vi) with respect to any approval required to be obtained from the
"Landlord" under the Master Lease, such consent must be obtained from both
Master Lessor and Sublessor, and the approval of Sublessor may be withheld if
Master Lessor's consent is not obtained. The following Articles, Paragraphs,
Addenda and Exhibits of and to the Original Lease as amended by the Assignment,
are hereby excluded from this Sublease: Article 1, except for Paragraph 1.8 and
1 .9: Articles 3, 12 and 15; the second sentence of Article 22; Article 25;
Lease Addendum Paragraphs 2, 3, 8, 9, 10 and 11, and the Work Letter.
12. Surrender of Premises: Prior to the expiration of this Sublease,
Sublessee shall remove all of its trade fixtures and personal property (and
repair any damage caused by such removal) and shall surrender the Premises to
Sublessor in good condition, reasonable wear and tear, excepted, and free of any
Hazardous Materials released or otherwise caused by Sublessee, its agents,
employees or contractors. If the Premises are not so surrendered, then Sublessee
shall be liable to Sublessor for all costs incurred by Sublessor in returning
the Premises to the required condition. Sublessee shall indemnify Sublessor
against all loss and liability resulting from Sublessee's delay in surrendering
the Premises.
13. Survival: All provisions of the Sublease which, by their import
should survive the termination or sooner expiration of this Sublease (including,
without limitation, all indemnifications hereunder) shall so survive.
14. Effect of Addendum: All terms with initial capital letters used
herein as defined terms shall have the meanings ascribed to them in the
Sublease, unless specifically defined herein. In the event of any inconsistency
between this First Addendum (and any exhibits attached hereto) and the Sublease
(and any exhibits attached thereto), the terms of this First Addendum shall
prevail. As used herein, the
-4-
<PAGE>
term "Sublease" shall mean the Sublease, this First Addendum and all addenda,
riders, exhibits, rules, regulations, covenants, conditions and restrictions
referred to in the Sublease or this First Addendum.
SUBLESSOR: SUBLESSEE:
PINNACLE SYSTEMS, INC. NETWORK COMPUTING DEVICES, INC.
By: /s/ Arthur Chadwick By: /s/ Jack Bradley
---------------------------- ----------------------------
Printed Printed
Name: Arthur Chadwick Name: Jack Bradley
-------------------------- --------------------------
Title: Chief Financial Officer Title: Chief Financial Officer
------------------------- -------------------------
Date: May 31, 1996 Date: May 31, 1996
-------------------------- --------------------------
-5-
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
EXHIBIT 11.1--STATEMENT OF COMPUTATION OF
NET INCOME (LOSS) PER SHARE
(In thousands, except per share data)
<CAPTION>
Fiscal year ended June 30,
--------------------------------
1996 1995 1994(2)
-------- ------- -------
<S> <C> <C> <C>
Weighted average shares of common stock outstanding(1).......................... 7,165 4,266 2,568
Common stock equivalents........................................................ 524 800 --
Shares related to Staff Accounting Bulletin No. 83.............................. -- 44 177
------- ------- -------
Shares used to compute net income (loss) per share.............................. 7,689 5,110 2,745
======= ======= ======
Net income (loss) used in per share calculation................................. $3,684 $2,240 $ (566)
======= ====== ======
Net income (loss) per share..................................................... $ 0.48 $ 0.44 $(0.21)
======= ======= ======
<FN>
- --------------
(1) Convertible preferred stock has been included in the 1994 calculation on an as if converted basis.
(2) See Note 1 of Notes to Consolidated Financial Statements.
</FN>
</TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
- ------------------------------------
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes thereto included
elsewhere herein. The consolidated statement of operations data for the fiscal
years ended June 30, 1996, 1995 and 1994 and the consolidated balance sheet data
as of June 30, 1996 and 1995 are derived from the consolidated financial
statements of the Company, which financial statements have been audited by KPMG
Peat Marwick LLP, independent auditors, and are included elsewhere in this
report. The consolidated statement of operations data for the fiscal years ended
June 30, 1993 and 1992 and the consolidated balance sheet data as of June 30,
1994, 1993 and 1992 are derived from financial statements of the Company audited
by KPMG Peat Marwick LLP that are not included herein.
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------
(In thousands, except per share data) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Statement of Operations Data:
Net sales $46,151 $22,193 $10,230 $7,331 $8,997
Cost of sales 23,854 11,291 5,057 3,816 3,974
------- ------- ------- ------ ------
Gross profit 22,297 10,902 5,173 3,515 5,023
------- ------- ------- ------ ------
Operating expenses:
Engineering and product development 5,140 2,405 1,806 1,447 1,064
Sales and marketing 8,907 5,340 3,274 2,054 1,793
General and administrative 2,186 1,088 567 546 933
In process research and development 3,991 -- -- -- --
------- ------- ------- ------ ------
Total operating expenses 20,224 8,833 5,647 4,047 3,790
------- ------- ------- ------ ------
Operating income (loss) 2,073 2,069 (474) (532) 1,233
Interest income (expense), net 3,345 738 (90) (282) (258)
Income (loss) before income taxes 5,418 2,807 (564) (814) 975
Income tax expense (1,734) (567) (2) (2) (57)
------- ------- ------- ------ ------
Net income (loss) $ 3,684 $ 2,240 $ (566) $ (816) $ 918
======= ======= ======= ====== ======
Net income (loss) per share $ 0.48 $ 0.44 $ (0.21)
======= ======= =======
Shares used to compute net income
(loss) per share 7,689 5,110 2,745
======= ======= =======
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JUNE 30,
-----------------------------------------
(In thousands) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Balance Sheet Data:
Working capital $72,337 $26,588 $ 2,647 $ 275 $3,096
Total assets 84,561 32,724 5,904 3,731 4,735
Long-term debt -- -- -- -- 2,000
Retained earnings (deficit) 2,330 (1,354) (3,594) (3,028) (2,269)
Shareholders equity 80,198 27,743 3,125 677 1,442
- --------------------------------------------------------------------------------
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
CERTAIN FORWARD-LOOKING INFORMATION
Certain Statements in this Management's Discussion and Analysis, elsewhere in
this Annual Report to Shareholders and in the Company's 1996 Annual Report on
Form 10-K into which this discussion and analysis is incorporated are
forward-looking statements based on current expectations, and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements. Such risks and
uncertainties are set forth below under "Overview". These forward-looking
statements include paragraphs below relating to "Net Sales," the last sentence
of the paragraph below relating to "Engineering and Product Development," the
statements below under "Overview," the statements regarding the Company's
expected investment in property, machinery and equipment under "Liquidity and
Capital Resources" below, and the statements in the last paragraph under
"Liquidity and Capital Resources" below, among others.
OVERVIEW
The Company designs, manufactures, markets and supports video post-production
tools for high quality real time video processing. The Company's products are
used to perform a variety of video manipulation functions, including the
addition of special effects, graphics and titles to multiple streams of live or
previously recorded video material.
From the Company's inception in 1986 until 1994, substantially all of
the Company's revenues were derived from the sale of products into the
traditional video market. The Company currently has two product families
designed to serve this market; Prizm, and FlashFile. Prizm provides real time
digital video effects capabilities, compositing, 3D modeling and animation
tools, and FlashFile provides sophisticated still store library management
capabilities with optional titling, paint and video clips.
With the introduction of the Alladin in June 1994, the Company began
sales into the desktop video market. The Alladin product family provides real
time digital video manipulation capabilities for the desktop video market. Since
the introduction of Alladin, the Company's sales growth has been largely
dependent on the success of Alladin. Sales of Alladin products represented
approximately 71.3% and 55.7% of net sales for fiscal 1996 and fiscal 1995,
respectively. A decline in demand for Alladin or the failure of Alladin to
maintain market acceptance, as a result of competition, technological change or
other factors, would have a material adverse effect on the Company's business,
operating results and financial condition.
The Company distributes and sells its products to end users through the
combination of independent domestic and international dealers, original
equipment manufacturers ("OEMs") and, to a lesser extent, a direct sales force.
Sales to dealers and OEMs are generally at a discount to the published list
prices. Generally, products sold to OEMs are integrated into systems sold by the
OEMs to their customers. The amount of discount, and consequently the Company's
gross profit, varies depending on the product and the channel of distribution
through which it is sold, the volume of product purchased and other factors. In
the United States, the Company supports the sale of desktop products with
independent sales representatives that earn commissions based on sales into
their region.
The Company is highly dependent on sales of Alladin through OEM's, in
particular Avid Technology, Inc. ("Avid"). Sales to Avid accounted for
approximately 43.3% of net sales in fiscal 1996. No other customer accounted for
more than 10% of the Company's net sales during such period or during the fiscal
year ended June 30, 1995. This concentration of the Company's net sales to a
single OEM customer, subjects the Company to a number of risks, in particular
the risk that its operating results will vary on a quarter to quarter basis as a
result of variations in the ordering patterns of
11
<PAGE>
the OEM customer. Variations in the timing of revenues can cause significant
fluctuations in quarterly results of operations. The Company's results of
operations could be materially adversely affected by the failure of anticipated
orders to materialize and by deferrals or cancellations of orders as a result of
changes in Avid's requirements. For example, sales to Avid in the fourth quarter
of 1996 were lower than sales in the third quarter of 1996 leading to a decline
in overall net sales. As a result, if the Company were to lose Avid as a
customer, or if orders from Avid were to otherwise decrease, the Company's
business, operating results and financial condition would be materially
adversely affected. (See "Results of Operations - Net Sales").
In April 1996, the Company announced Genie, a new desktop video product
family and commenced shipment of the first Genie products in June 1996. The
Company will be dependent upon the successful introduction, market acceptance,
manufacture, distribution and sale of Genie to increase revenue and
profitability in the future. In order to successfully introduce Genie, the
Company will be required to rapidly bring it into volume production, a process
that will require the attainment of acceptable manufacturing yields and costs.
New products typically have lower initial manufacturing yields and higher
initial manufacturing costs than more mature products. In addition, despite
testing by the Company, as is typical with any new product introduction, quality
and reliability problems may arise and any such problems could result in reduced
bookings, manufacturing rework costs, delays in collecting accounts receivable,
additional service warranty costs and a limitation on market acceptance of the
product. The successful introduction of Genie will also require the Company to
manage the introduction in order to minimize disruption in customer's ordering
patterns for Alladin. Sales of Genie will also be dependent on the successful
integration of Genie by various OEM's into their non-linear editing products.
Any delay in the Company's ability to manufacture and ship Genie, the failure of
Genie to gain market acceptance, a disruption in customer ordering pattern for
Alladin, and the timing and success in which Genie is integrated into non-linear
OEM systems could adversely affect the Company's business, operating results and
financial condition, particularly on a quarterly basis.
In June 1996, the Company acquired the Video Director product line from
Gold Disk, Inc. Video Director is a low-cost video software package sold
primarily to home video enthusiasts. Pinnacle anticipates developing a new
family of products that combine a subset of its video manipulation technology
with Video Director technology to create a new category of products enabling
home video enthusiasts to create professional-looking video content. The
introduction of these products is directed at a new market and depends on
expected technology and market acceptance. There can be no assurance that the
market for home video systems will expand, or that these new products will be
accepted by that market. The sources of competition on the home video market are
not yet well defined. The Company expects that existing computer software
manufacturers and new market entrants will develop products that may compete
directly with the Video Director derivative products to be developed by the
Company. Suppliers or other computer software products have established
distribution channels and experience in marketing low price products and may
acquire or develop high quality home video editing and manipulation products for
this market. Increased competition could result in lower prices, margins and
market share than are currently anticipated in designing and developing these
products. There can be no assurance that the Company will be able to compete
successfully against current and future competitors in the video markets. To the
extent the Company is not successful with the development and sales of products
in this market segment, the Company's business, operating results and financial
condition could be adversely affected.
The Company currently intends to develop and market follow-on products
for the traditional video market. The introduction of such products would have
the same market acceptance, manufacture, distribution and sales risks as
described above for the Genie family. The introduction of new traditional
products could significantly slow or replace sales of Prizm and/or FlashFile. If
this were to occur prior to shipment of any new products, sales of the Company
video traditional products and total sales could be adversely affected. In
addition, if sales of the Prizm and/or FlashFile products were to decrease more
rapidly than expected, the Company could be left with excess Prizm and FlashFile
inventory which could materially affect the Company's financial condition.
12
<PAGE>
The Company is nearing capacity at its Sunnyvale, California
headquarters facility. In June 1996, the Company entered into an operating lease
agreement for another facility in Mountain View, California, which commences on
August 15, 1996. The Company expects to move into the new facility, located
approximately one mile from the current facility, in October 1996. During the
transition to the new facility, the Company will be required to maintain an
uninterrupted supply of products in order to avoid any disruption in customer
shipments. Any failure to maintain acceptable production levels during the
transition to the new facility could adversely affect the Company's operating
results, particularly in the quarter of the transition. The Company is obligated
to continue lease payments on the Sunnyvale facility through November 15, 1996.
The Company's financial results may be affected as a result of this move, since
rent expenses will be incurred on two facilities from August 15 through November
15, 1996. Additionally, the Company will incur relocation and other moving costs
of up to $200,000 during the transition period.
Results of Operations
The following table sets forth, for the periods indicated, certain consolidated
statement of operations data as a percentage of net sales:
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30,
---------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 51.7 50.9 49.4
Gross profit 48.3 49.1 50.6
Operating expenses:
Engineering and product development 11.1 10.8 17.7
Sales and marketing 19.3 24.1 32.0
General and administrative 4.7 4.9 5.5
In process research and development 8.7 -- --
---- ---- ----
Total operating expenses 43.8 39.8 55.2
---- ---- ----
Operating income (loss) 4.5 9.3 (4.6)
Interest income (expense), net 7.2 3.3 (0.9)
---- ---- ----
Income (loss) before income taxes 11.7 12.6 5.5
Income tax expense (3.8) (2.6) (0.0)
---- ---- ----
Net income (loss) 7.9% 10.0% (5.5)%
- --------------------------------------------------------------------------------
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Net Sales. The Company's net sales increased by 108.0% to $46.2 million in
fiscal 1996 from $22.2 million in fiscal 1995 and by 116.9% in fiscal 1995 from
$10.2 million in fiscal 1994. The increases in net sales in each period were
primarily attributable to shipment of the Alladin product, particularly to Avid
in fiscal 1996. See "Overview." Sales outside of North America were
approximately 32.7%, 46.5% and 47.6% of the Company's net sales in fiscal 1996,
1995 and 1994, respectively. The decrease in sales outside of North America in
fiscal 1996 was primarily attributable to the significant increase in sales of
Alladin to Avid's North American facility.
As previously mentioned, sales to the Company's largest customer, Avid,
declined from the third quarter to the fourth quarter of fiscal 1996. Also,
sales of Alladin products to customers other than Avid declined during the same
period. The Company believes these trends will likely continue into the first
quarter of fiscal 1997, and as a result, net sales in the first quarter of
fiscal 1997 will decline sequentially from the fourth quarter of fiscal 1996. As
a result of this decline in net sales and an increase in operating expenses, the
Company expects operating income to decline significantly in the first quarter
of fiscal 1997.
13
<PAGE>
Cost of Sales. Cost of sales consists primarily of costs related to the
acquisition of components and subassemblies, labor and overhead associated with
procurement, assembly and testing of finished products, warehousing, shipping
and warranty costs. Gross profit as a percentage of net sales was 48.3%, 49.1%
and 50.6 % in fiscal 1996, 1995 and 1994, respectively. The decrease in gross
profits as a percentage of net sales between fiscal 1996 and 1995 was due
primarily to an increase in sales to OEM customers, which typically carry a
lower gross profit percentage. The decrease in gross profits as a percentage net
sales between fiscal 1995 and 1994 was primarily due to higher material costs as
a percentage of sales for Alladin as compared to the Company's traditional video
products. Both comparable period changes were partially offset by increased
efficiency due to higher production volume.
Engineering and Product Development. Engineering and product development
expenses increased by 113.7% to $5.1 million in fiscal 1996 from $2.4 million in
fiscal 1995 and by 33.2% in fiscal 1995 from $1.8 million in fiscal 1994. The
increase in each period was primarily attributable to increased expenditures in
connection with the continued expansion of the Company's design engineering
team. Engineering and product development expenses as a percentage of net sales
were 11.1%, 10.8% and 17.7% in fiscal 1996, 1995 and 1994, respectively. The
Company expects to continue to allocate significant resources to engineering and
product development effort.
Software development costs are expensed as incurred until technological
feasibility is established, after which any additional costs are capitalized, in
accordance with Statement of Financial Accounting Standards No. 86. During
fiscal 1996, the Company capitalized less than $100,000 and no such costs were
capitalized during fiscal 1995. The Company currently believes that future
capitalization of such costs will not be significant.
Sales and Marketing. Sales and marketing expenses include compensation and
benefits for sales and marketing personnel, commissions paid to independent
sales representatives, trade show and advertising expenses and professional fees
for marketing services. Sales and marketing expenses increased by 66.8% to $8.9
million in fiscal 1996 from $5.3 million in fiscal 1995 and by 63.1% in fiscal
1995 from $3.3 million in fiscal 1994. The increase in sales and marketing
expenses in each period was primarily attributable to increased expenditures
related to continued promotion of the Alladins including expenditures for trade
shows, advertising creation and placement, professional fees for marketing
services and increases in the number of sales and marketing personnel. Sales and
marketing expenses as a percentage of net sales were 19.3%, 24.1% and 32.0% in
fiscal 1996, 1995 and 1994, respectively. The decrease of sales and marketing as
a percentage of net sales in each period was due primarily to the increase in
sales through the OEM distribution channel, in particular through Avid, which
require less direct sales and marketing expenditures by the Company.
General and Administrative. General and administrative expenses increased by
100.9% to $2.2 million in fiscal 1996 from $1.1 million in fiscal 1995 and by
91.9% in fiscal 1995 from $0.6 million in fiscal 1994. General and
administrative expenses as a percentage of net sales were 4.7%, 4.9% and 5.5% in
fiscal 1996, 1995 and 1994, respectively. The increase in general and
administrative expenses in each period resulted from an increase in expenditures
related to the overall growth of the Company's operations, the Company's
expanded facility and in fiscal 1995 increased administrative costs associated
with being a public company.
In Process Research and Development. In June 1996, the Company purchased certain
assets for $4.5 million from Gold Disk, Inc., a developer and marketer of
software products for video editing and assembly. The assets acquired primarily
included tangible assets of $240,000, intangible assets including the Video
Director Brand name, user list, and source code technology totaling $342,000,
and in process research and development of $3,991,000. The in process research
and development were recorded as an expense during the fourth quarter of 1996.
The intangible assets will be amortized over a 3 year period.
14
<PAGE>
Interest Income (Expense), Net. Net Interest income increased to $3.3 million in
fiscal 1996 from $0.7 million in fiscal 1995 compared to a nominal net interest
expense in fiscal 1994. The increases in each period were due to interest earned
on the investment of cash proceeds received from the Company's public offerings
in November 1994 and July 1995. In general, the Company's cash and marketable
securities have maturities of less than one year. Changes in the market interest
rates may have an effect on interest income in future periods.
Income Tax Benefit (Expense). The Company recorded provisions for income taxes
of $1.7 million, $0.6 million and $2,000 for the fiscal years ended 1996, 1995
and 1994, respectively, at effective rates of 32.0% and 20.2% and zero,
respectively. During the second quarter in fiscal 1996, the Company discontinued
its Domestic International Sales Corp. ("DISC"), and established a Foreign Sales
Corporation ("FSC"). As of June 30, 1996, the Company's reported net operating
loss carryforward was approximately $0.1 million for federal income tax
purposes. The Company's general business credit carryforwards were estimated to
be approximately $0.3 million for federal tax purposes. If not utilized, these
carryforwards will expire in various amounts from 2006 through 2011. The
Company's ability to utilize these carryforwards is subject to certain
limitations due to an ownership change as defined by the provisions of Section
382 of the Internal Revenue Code of 1986.
INFLATIONARY IMPACT
Since the inception of operations, inflation has not significantly affected the
operating results of the Company. However, inflation and changing interest rates
have had a significant effect on the economy in general and therefore could
affect the operating results of the Company in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through private placements of equity
securities with aggregate net proceeds of approximately $6.9 million, long-term
debt, short-term bank borrowings and cash generated from operations. In addition
the Company completed offerings in November 1994 and July 1995 raising
approximately $65.5 million, net of offering expenses.
The Company's operating activities provided $0.9 million in fiscal 1996
and used $0.7 million and $0.1 million in fiscal 1995 and 1994, respectively.
The cash provided by operating activities during fiscal 1996 was the result of
net income as adjusted for the effects of acquired research and development,
depreciation and amortization, tax benefits from the exercise of common stock
options, partially offset by net increases in the components of working capital.
In fiscal 1995, significant increases in the accounts receivable and inventory
balances were partially offset by increases in accounts payable and accrued
expenses.
In fiscal 1996, the Company raised approximately $43.8 million in net
proceeds from the follow-on public offering, purchased $1.8 million in property
and equipment, and paid $4.4 million for Video Director Product Line. In fiscal
1995, the Company purchased $0.9 million of property and equipment.
The Company expects to continue to purchase property and equipment at an
increasing rate during fiscal 1997. In addition to increased machinery and
equipment expenditures, the Company expects to invest between $2.5 million and
$3.0 million during the first two quarters of fiscal 1997 in capital and
leasehold improvements for the new Mountain View facility. See "Overview." Such
investing will be financed from working capital.
As of June 30, 1996, the Company had working capital of approximately
$72.3 million, including $27.8 million in cash and cash equivalents and $29.3
million in marketable securities. The Company believes that the existing cash
and cash equivalent balances as well as marketable securities and anticipated
cash flow from operations will be sufficient to support the Company's working
capital requirements for the foreseeable future.
15
<PAGE>
- --------------------------------------------------------------------------------
JUNE 30,
----------------------
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 27,846 $ 12,626
Marketable securities 29,315 8,840
Accounts receivable, less allowance for doubtful
accounts and returns of $840 and $361 as of
June 30, 1996 and 1995, respectively 7,526 4,546
Inventories 9,611 5,398
Deferred taxes 2,091 --
Prepaid expenses 311 159
-------- --------
Total current assets 76,700 31,569
Property and equipment, net 2,204 1,067
Marketable securities 3,973 --
Deferred taxes 1,154 --
Other assets 530 88
-------- --------
$ 84,561 $ 32,724
-------- --------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,495 $ 3,411
Accrued expenses 2,621 1,153
Deferred revenue 247 417
-------- --------
Total current liabilities 4,363 4,981
-------- --------
Commitments
Shareholders' equity:
Common stock; authorized 15,000 shares; 7,468
and 5,256 issued and outstanding as of
June 30, 1996 and 1995, respectively 77,902 29,170
Deferred compensation, net (34) (73)
Retained earnings (deficit) 2,330 (1,354)
-------- --------
Total shareholders' equity 80,198 27,743
-------- --------
$ 84,561 $ 32,724
======== ========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
16
<PAGE>
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30,
----------------------------
(In thousands, except per share data) 1996 1995 1994
- --------------------------------------------------------------------------------
Net sales $46,151 $22,193 $10,230
Cost of sales 23,854 11,291 5,057
------- ------- -------
Gross profit 22,297 10,902 5,173
------- ------- -------
Operating expenses:
Engineering and product development 5,140 2,405 1,806
Sales and marketing 8,907 5,340 3,274
General and administrative 2,186 1,088 567
In process research and development 3,991 -- --
------- ------- -------
Total operating expenses 20,224 8,833 5,647
------- ------- -------
Operating income (loss) 2,073 2,069 (474)
Interest income (expense):
Interest income 3,354 761 11
Interest expense (9) (23) (101)
------- ------- -------
Income (loss) before income taxes 5,418 2,807 (564)
Income tax expense (1,734) (567) (2)
------- ------- -------
Net income (loss) $ 3,684 $ 2,240 $ (566)
------- ------- -------
Net income (loss) per share $ 0.48 $ 0.44 $ (0.21)
======= ======= =======
Shares used to compute net income (loss) per share 7,689 5,110 2,745
======= ======= =======
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
17
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
CONVERTIBLE
PREFERRED STOCK COMMON STOCK RETAINED TOTAL
----------------- ----------------- DEFERRED EARNINGS SHAREHOLDERS'
(In Thousands) SHARES AMOUNT SHARES AMOUNT COMPENSATION (DEFICIT) EQUITY
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of June 30, 1993 1,051 $3,526 1,038 $ 226 $ (47) $(3,028) $ 677
Issuance of Series G preferred
stock, net 500 2,978 -- -- -- -- 2,978
Exercise of common stock
options and deferred
compensation related
to the issuance of certain
stock options -- -- 19 102 (87) -- 15
Amortization of deferred
compensation -- -- -- -- 21 -- 21
Net loss -- -- -- -- -- (566) (566)
----- ------ ----- ------- ----- ------- -------
Balances as of June 30, 1994 1,551 $6,504 1,057 $ 328 $(113) $(3,594) $ 3,125
Conversion of preferred stock
to common stock (1,551) (6,504) 1,600 6,504 -- -- --
Issuance of common stock in
initial public offering, net
of issuance costs of $2,268 -- -- 2,395 21,682 -- -- 21,682
Issuance of common stock
related to stock plans
and warrants -- -- 204 269 -- -- 269
Tax benefit from common
stock option exercises -- -- -- 387 -- -- 387
Amortization of deferred
compensation -- -- -- -- 40 -- 40
Net income -- -- -- -- -- 2,240 2,240
----- ------ ----- ------- ----- ------- -------
Balances as of June 30, 1995 -- $ -- 5,256 $29,170 $ (73) $(1,354) $27,743
Issuance of common stock, net
of issuance costs of $2,831 -- -- 1,810 43,787 -- -- 43,787
Issuance of common stock
related to stock plans -- -- 402 1,248 -- -- 1,248
Tax benefit from common
stock option exercises -- -- -- 3,697 -- -- 3,697
Amortization of deferred
compensation -- -- -- -- 39 -- 39
Net income -- -- -- -- -- 3,684 3,684
----- ------ ----- ------- ----- ------- -------
Balances as of June 30, 1996 -- $ -- 7,468 $77,902 $ (34) $ 2,330 $80,198
===== ====== ===== ======= ===== ======= =======
- ----------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
18
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
----------------------------------
(In thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,684 $ 2,240 $ (566)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Acquired research and development 3,991 -- --
Depreciation and amortization 736 285 142
Deferred taxes (3,245) -- --
Tax benefit from exercise of common stock options 3,697 387 --
Changes in operating assets and liabilities:
Accounts receivable (2,980) (2,755) (894)
Inventories (4,073) (2,924) (530)
Prepaid expenses (152) (102) (20)
Other assets -- 9 61
Accounts payable (1,916) 2,350 462
Accrued expenses 1,307 526 172
Deferred revenue (170) (674) 1,091
-------- -------- ------
Net cash provided by (used in) operating activities 879 (658) (82)
-------- -------- ------
Cash flows from investing activities:
Cash payment for acquisition of Video Director
product line (4,412) -- --
Purchases of property and equipment (1,834) (931) (258)
Purchases of marketable securities (37,448) (9,840) --
Proceeds from maturity of marketable securities 13,000 1,000 --
-------- -------- ------
Net cash used in investing activities (30,694) (9,771) (258)
-------- -------- ------
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- -- 2,978
Proceeds from issuance of common stock 45,035 21,951 15
Repayment of debentures -- -- (2,000)
-------- -------- ------
Net cash provided by financing activities 45,035 21,951 993
-------- -------- ------
Net increase in cash and cash equivalents 15,220 11,522 653
Cash and cash equivalents at beginning of period 12,626 1,104 451
Cash and cash equivalents at end of period $ 27,846 $ 12,626 $1,104
-------- -------- ------
Supplemental disclosures of cash paid during the period:
Interest $ 9 $ 23 $ 62
======== ======== ======
Income taxes $ 312 $ 2 $ 2
======== ======== ======
Non-cash transactions:
Liabilities assumed in acquisition of certain assets
and liabilities $ 161 $ -- --
======== ======== ======
<FN>
- -------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(In thousands, except per share data)
NOTE 1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Company. Pinnacle Systems, Inc. and its subsidiaries (the Company) design,
manufacture and sell video post-production tools for high quality real time
video processing.
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
Intercompany balances and transactions have been eliminated in consolidation.
The Company's first three fiscal quarters end on the last Friday in September,
December and March. For financial statement presentation, the Company has
indicated its fiscal quarters as ending on the month-end.
Cash and Marketable Securities. The Company considers all highly liquid
investments purchased with an original maturity of three months or less at the
date of purchase to be cash equivalents. Marketable securities consist
principally of government securities with maturities between three and eighteen
months and are carried at cost which approximates market. These investments are
typically short-term in nature and therefore bear minimal interest rate risk.
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The Company adopted the provisions
of SFAS 115 for investments held as of or acquired after July 1, 1994. Under the
provisions of SFAS No. 115, debt securities that the Company has both the
positive intent and ability to hold to maturity are carried at amortized cost.
Presently, the Company classifies all debt securities as held-to-maturity and
carries them at amortized cost. Interest income is recorded using an effective
interest rate, with the associated premium or discount amortized to "Interest
income." The adoption of SFAS No. 115 did not have a material impact on the
Company's consolidated financial statements.
The fair value of marketable securities is substantially equal to their
carrying value as of June 30, 1996. All investments at June 30, 1996 were
classified as held-to-maturity. Such investments mature through November 1997.
Inventories. Inventories are stated at the lower of first-in, first-out cost or
market and include a provision for excess and obsolete inventory. Raw materials
inventory represents purchased materials, components and assemblies, including
fully assembled circuit boards purchased from outside vendors.
Property and Equipment. Purchased property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, generally three to five years.
In 1995, the Financial Accounting Standards Board issued SFAS No. 121.
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of," which requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the future undiscounted
cash flow attributable to such assets. SFAS No. 121 will become effective in the
Company's fiscal 1997. Adoption of SFAS No. 121 is not expected to have a
material impact on the Company's financial position or results of operations.
20
<PAGE>
Employee Stock Plans. The Company accounts for its stock option plans and its
employee stock purchase plan in accordance with provisions of the Accounting
Principles Board's Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees." In 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation." SFAS No. 123 provides an
alternative to APB 25 and is effective for fiscal years beginning after December
15, 1995. The Company intends to continue to account for its employee stock
plans in accordance with the provisions of APB 25. Accordingly, SFAS No. 123
will not have any impact on the Company's reported financial position or results
of operations.
Revenue Recognition. Revenue on product sales is recognized upon shipment.
Warranty costs are accrued at the time sales are recognized.
Income Taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Net Income (Loss) Per Share. Net income per share is computed using the weighted
average number of common shares and dilutive common stock equivalents
outstanding using the treasury stock method. Dilutive common stock equivalents
include convertible preferred stock, stock options and warrants. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock issued for consideration below the assumed initial public offering (IPO)
price and stock options granted with exercise prices below the IPO price during
the 12-month period preceding the date of the initial filing of the Company's
IPO, even when antidilutive, have been included in the calculation of common
equivalent shares, using the treasury stock method based on the IPO price, as if
they were outstanding for all periods presented prior to the IPO date. The 1994
net income per share amounts are presented on a pro forma basis using the pro
forma weighted average number of common shares outstanding and common share
equivalents outstanding during the period, after giving retroactive effect to
the automatic conversion of all series of preferred stock into shares of common
stock at the IPO date.
Concentration of Credit Risk. The Company distributes and sells its products to
end users primarily through a combination of independent domestic and
international dealers and original equipment manufacturers ("OEMs"). The Company
performs periodic credit evaluations of its customer's financial condition and
generally does not require collateral.
Use of Estimates in 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 liabilities at
the date of financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
21
<PAGE>
NOTE 2. BALANCE SHEET COMPONENTS
- --------------------------------------------------------------------------------
JUNE 30,
----------------------
1996 1995
- --------------------------------------------------------------------------------
Marketable securities:
Amortized costs $32,872 $8,778
Accrued interest 416 62
------- ------
$33,288 $8,840
======= ======
Inventories:
Raw materials $ 7,695 $ 4,387
Work in process 405 239
Finished goods 1,511 772
------- -------
$ 9,611 $ 5,398
======= =======
Property and equipment:
Machinery and equipment $ 3,072 $ 1,824
Office furniture and fixtures 747 161
------- -------
3,819 1,985
Accumulated depreciation (1,615) (918)
------- -------
$ 2,204 $ 1,067
======= =======
Accrued expenses:
Payroll and commission related $ 382 $ 320
Taxes payable 1,145 179
Warranty reserve 388 200
Other 706 454
------- -------
$ 2,621 $ 1,153
======= =======
- --------------------------------------------------------------------------------
NOTE 3. PURCHASE OF VIDEO DIRECTOR PRODUCT LINE
In June 1996, the Company purchased certain assets and liabilities from Gold
Disk Inc., a developer and marketer of software products for video editing and
assembly. The Company paid $4,412 in cash and assumed liabilities of $161. The
assets acquired primarily included intangible assets consisting of software in
the development stage and existing software. The Company acquired inventory,
accounts receivable, and other tangible property of $240; intangible assets
including the Video Director Brand name, user list, and source code technology
totaling $342; and in process research and development of $3,991. The
capitalized intangible assets and purchased software are being amortized over a
3-year period.
To determine the value of the software in the development stage, the
Company considered, among other factors, the stage of development of each
project, the time and resources needed to complete each project, expected income
and associated risks. Associated risks include the inherent difficulties and
uncertainties in completing the project and thereby achieving technological
feasibility and risks related to the viability of and potential changes in
future target markets. As a result of this analysis, the Company recorded an
expense of $3,991 for in process research and development on the acquisition
date.
22
<PAGE>
NOTE 4. COMMITMENTS
The Company leases its Sunnyvale facilities under an operating lease will
terminate November 15, 1996. In June 1996, the Company entered into an operating
lease agreement for a new location which commences in August 1996. The Company's
future minimum commitments under all noncancelable leases at June 30, 1996 are
$897, $1,104, $1,094, $1,086, $1,096 and $3,034 for 1997, 1998, 1999, 2000, 2001
and thereafter, respectively. Rental income from noncancelable subleases will be
$225 and $135 for 1997 and 1998, respectively. Rent expense was $343, $256, and
$187 for the years ended June 30, 1996, 1995, and 1994, respectively.
NOTE 5. SHAREHOLDERS' EQUITY
Common Stock. In November 1994, the Company completed its initial public
offering (IPO) selling 2,395 shares of common stock for net proceeds of $21,682
after underwriting discounts and associated costs. In conjunction therewith,
1,551 shares of preferred stock outstanding were converted to 1,600 shares of
common stock. In July 1995, the Company completed a public selling offering
selling an additional 1,810 shares of common stock for net proceeds of $43,787
after underwriting discounts and associated costs.
Stock Options. As of June 30, 1996, the Company had reserved 1,660 shares of
common stock for issuance under its 1987 Stock Option Plan (the Plan). The Plan
provides for grants of common stock options to employees, directors and
consultants to purchase common stock at a price at least equal to 85% of the
fair market value of such shares on the grant dates. The options are generally
granted for a 10-year term and the vesting periods range from immediate vesting
to vesting over a 4-year period.
A summary of stock option activity under The Plan follows:
- --------------------------------------------------------------------------------
OPTIONS OUTSTANDING
----------------------------------
NUMBER OF PRICE PER
SHARES SHARE
- --------------------------------------------------------------------------------
Balance at June 30, 1993 466 $ 0.20-$ 2.25
Exercised (19) $ 0.20-$ 1.00
Granted 183 $ 2.25
Canceled (20) $ 0.85-$ 2.25
Balance at June 30, 1994 610 $ 0.20-$ 2.25
Exercised (186) $ 0.20-$ 2.25
Granted 494 $ 6.25-$19.50
Canceled (17) $ 0.85-$17.00
Balance at June 30, 1995 901 $ 0.20-$19.50
Exercised (234) $ 0.20-$19.50
Granted 496 $16.00-$31.75
Canceled (139) $ 2.25-$31.75
Balance at June 30, 1996 1,024 $ 0.20-$31.75
- --------------------------------------------------------------------------------
Approximately 286 outstanding options were exercisable as of June 30,
1996. At June 30, 1996, 120 shares were reserved for future issuance under the
Plan.
In addition to the Plan, an officer of the Company holds 73 options at
an exercise price of $1.00 and 140 options at an exercise price of $2.25, all of
which are outside of the Plan and were exercisable as of June 30, 1996. At June
30, 1995, this officer held 207 options at an exercise price of $1.00 and 140
options at an exercise price of $2.25.
23
<PAGE>
As of June 30, 1996, the Company had reserved 75 shares of common stock
for issuance under its 1994 Directors' Option Plan. The Company issued options
to purchase 20 shares during fiscal 1996 at prices ranging from $30.25 to
$31.75. No shares were issued under this plan during fiscal 1995 or 1994, and no
shares were exercisable as of June 30, 1996. The options are granted for a
10-year term and vest over a 4-year period.
1996 Stock Option Plan. Subject to shareholder approval at 1996 annual
meeting of Shareholders, the Board of Directors adopted the 1996 Stock Option
Plan and approved the reservation of 370 shares of common stock hereunder.
Stock Purchase Plan. The Company's has a 1994 Employee Stock Purchase
Plan for which a total of 100 shares of the Company's common stock have been
reserved for issuance. The Company issued 34 and 6 shares for the years ended
June 30, 1996 and 1995, respectively.
NOTE 6. INCOME TAXES
A summary of the components of income tax expense follow:
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
----------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Current:
U.S. federal $ 1,185 $ 886 $--
State 539 242 2
Foreign 15 5 --
Less: benefit of net operating losses (457) (953) --
------- -------- ------
Total current 1,282 180 2
Deferred:
U.S. Federal (2,467) -- --
State (778) -- --
------- -------- ------
Total deferred (3,245) -- --
Charge in lieu of taxes attributable to
employer stock option plans 3,697 387 --
------- -------- ------
Total tax expense $ 1,734 $ 567 $2
======= ======== ======
- --------------------------------------------------------------------------------
Total income tax expense differs from expected income tax expense (computed by
applying the U.S. federal corporate income tax rate of 34% to profit (loss)
before taxes) as follows:
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
----------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Income taxes at federal statutory rate $ 1,842 $ 954 $(192)
State income taxes, net of federal income tax
benefit 738 143 2
Domestic international sales corporation benefit -- (215) --
Elimination of domestic international sales
corporation election 566 -- --
Unutilized net operating loss -- -- 192
Research tax credit -- (81) --
Change in beginning of the year valuation allowance (1,572) (311) --
Other, net 160 77 --
------- -------- ------
$ 1,734 $ 567 $ 2
======= ======== ======
- --------------------------------------------------------------------------------
24
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities as of June 30, 1996, 1995
and 1994, are as follows:
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
1996 1995 1994
Deferred tax assets:
Accrued expense and reserves $ 1,682 $ 811 $ 414
Acquired intangibles 1,622 -- --
Net operating loss carry forwards 122 792 1,311
Tax credit carryforwards 286 560 261
Other 146 -- --
------- ------- -------
Total gross deferred tax assets 3,858 2,163 1,986
Less: valuation allowance -- (2,115) (1,957)
------- ------- -------
Net deferred tax assets 3,858 48 29
------- ------- --------
Deferred tax liabilities:
Accumulated domestic international
sales corporation income (566) -- --
Fixed assets and other assets (47) (48) (29)
------- ------- -------
Total gross deferred tax liabilities (613) (48) (29)
Net deferred tax assets $ 3,245 $ -- $ --
======= ======= =======
- --------------------------------------------------------------------------------
As of June 30, 1996, the Company has net operating loss carryforwards of
$122 which expire in 2009 and research and experimentation credit carryforwards
of $286 which expire between 2006 and 2011.
NOTE 7. INDUSTRY AND GEOGRAPHIC INFORMATION
The Company markets its products in North America and in foreign countries
through its sales personnel, dealers, distributors and only one subsidiary.
Export sales account for a significant portion of the Companys net sales. Net
sales are summarized by geographic areas as follows:
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
---------------------
1996 1995 1994
- --------------------------------------------------------------------------------
North America 61% 53% 53%
Europe 26 26 29
Rest of World 13 21 18
--- --- ---
100% 100% 100%
- --------------------------------------------------------------------------------
One customer, Avid Technology, Inc. (Avid), accounted for approximately
43.3% of the Company's net sales for the year ended June 30, 1996. Avid also
accounted for approximately 36.7% of net accounts receivable at June 30, 1996.
No customer accounted for 10% of the Company's net sales at the year ended June
30, 1995. Another customer accounted for 19.8% of the Company's net revenues for
the year ended June 30, 1994.
NOTE 8. RETIREMENT PLAN
The Company has a defined contribution 401(k) plan covering substantially all of
its domestic employees. Participants may elect to contribute up to 15% of their
eligible earnings to this plan (up to the statutory maximum amount). The Company
can make discretionary contributions to the plan determined solely by the Board
of Directors. The Company has not made any such contributions to the plan to
date.
25
<PAGE>
NOTE 9. RELATED PARTIES
The Company and Bell Microproducts Inc. ("Bell") are parties to an agreement
("the Agreement") under which value-added turnkey services are performed by Bell
on behalf of the Company. Pursuant to the Agreement, Bell builds certain
products in accordance with the Company's specifications. A director of the
Company is also a director of Bell. During the years ended June 30, 1996, 1995
and 1994, the Company purchased materials totaling $16,466, $8,286 and $1,979,
respectively, from Bell pursuant to the Agreement.
NOTE 10. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
Summarized quarterly financial information for fiscal 1996 and 1995 is as
follows:
- -----------------------------------------------------------------------------------------
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1996:
Net sales $ 9,321 $ 11,845 $ 12,766 $ 12,219
Gross profit 4,510 5,706 6,192 5,889
In process research and development -- -- -- (3,991)
Income (loss) from operations 1,261 1,639 1,820 (2,647)
Net income (loss) 1,263 1,732 1,822 (1,133)
Net income (loss) per share 0.17 0.22 0.23 (0.15)
Shares used to compute
net income (loss) per share 7,534 7,911 7,894 7,417
Market price range for Common Stock
High 32.50 34.75 25.25 29.25
Low 22.50 24.38 16.00 17.75
Fiscal 1995:
Net sales $ 4,274 $ 4,908 $ 5,779 $ 7,232
Gross profit 1,984 2,458 2,905 3,638
Income from operations 308 385 566 810
Net income 236 389 687 928
Net income per share 0.07 0.08 0.11 0.15
Shares used to compute
net income per share 3,438 4,833 6,030 6,125
Market price range for Common Stock
High -- 15.50 18.50 24.00
Low -- 9.75 9.75 15.00
- -----------------------------------------------------------------------------------------
</TABLE>
The Company has not paid any dividends since its inception and does not intend
to pay any dividends in the foreseeable future.
The common stock of the Company has been traded on the Nasdaq National
market under the symbol PCLE since the Company's initial public offering in
November 1994. Prior to that time, there was no public market for the Company's
common stock.
At August 15, 1996, there were approximately 94 shareholders of record.
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PINNACLE SYSTEMS, INC.:
We have audited the accompanying consolidated balance sheets of Pinnacle
Systems, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pinnacle
Systems, Inc. and subsidiaries as of June 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Kent Marwick LLP
Palo Alto, California
July 17, 1996
PINNACLE SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT 22.1--LIST OF SUBSIDIARIES OF THE REGISTRANT
1. Pinnacle Domestic International Sales Corporation, a California corporation
2. Pinnacle Systems Ltd., a United Kingdom incorporated company
3. Pinnacle Foreign Sales Corporation, a U.S. Virgin Islands corporation
CONSENT OF INDEPENDENT AUDITORS AND REPORT ON SCHEDULE
The Board of Directors
Pinnacle Systems, Inc.:
The audits referred to in our report dated July 17, 1996, included the related
financial statement schedule for each of the years in the three-year period
ended June 30, 1996, included in the June 30, 1996 annual report on Form 10-K of
Pinnacle Systems, Inc. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the incorporation by reference in the registration statements No.
33-89706 and No. 333-02816 on Form S-8 of Pinnacle Systems, Inc. of our reports
dated July 17, 1996, relating to the consolidated balance sheets of Pinnacle
Systems, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1996 and the related
financial statement schedule, which reports appear or are incorporated by
reference in the June 30, 1996 annual report on Form 10-K of Pinnacle Systems,
Inc. and to the reference to our firm under the heading "Selected Consolidated
Financial Data" therein.
Palo Alto, California
September 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000774695
<NAME> PINNACLE SYSTEMS, INC.
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 27,846,000
<SECURITIES> 33,288,000
<RECEIVABLES> 8,366,000
<ALLOWANCES> 840,000
<INVENTORY> 9,611,000
<CURRENT-ASSETS> 76,700,000
<PP&E> 3,819,000
<DEPRECIATION> 1,615,000
<TOTAL-ASSETS> 84,561,000
<CURRENT-LIABILITIES> 4,363,000
<BONDS> 0
<COMMON> 77,902,000
0
0
<OTHER-SE> 2,296,000
<TOTAL-LIABILITY-AND-EQUITY> 84,561,000
<SALES> 46,151,000
<TOTAL-REVENUES> 46,151,000
<CGS> 23,854,000
<TOTAL-COSTS> 23,854,000
<OTHER-EXPENSES> 20,224,000
<LOSS-PROVISION> 522,000
<INTEREST-EXPENSE> 9,000
<INCOME-PRETAX> 5,418,000
<INCOME-TAX> 1,734,000
<INCOME-CONTINUING> 3,684,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,684,000
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
</TABLE>
