<PAGE> 1
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the quarterly period ended March 31, 1997, 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 0-16588
OCTEL COMMUNICATIONS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0029449
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
1001 MURPHY RANCH ROAD
MILPITAS, CALIFORNIA 95035-7912
(Address of principal executive offices)
Registrant's telephone number, including area code, is (408) 321-2000
--------------------
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 [ ]
The number of shares outstanding of the registrant's Common Stock on
April 30, 1997 was 52,434,381.
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This document consists of 21 pages of which this is Page 1.
<PAGE> 2
OCTEL COMMUNICATIONS CORPORATION
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets - March 31, 1997 and
June 30, 1996.............................................................. 3
Condensed Consolidated Statements
of Operations - three and nine months ended
March 31, 1997 and 1996.................................................... 4
Condensed Consolidated Statements
of Cash Flows - nine months ended
March 31, 1997 and 1996.................................................... 5
Notes to Condensed Consolidated
Financial Statements....................................................... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations................................................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 18
Item 2. Changes in Securities...................................................... 19
Item 6. Exhibits and Reports on Form 8-K........................................... 19
SIGNATURES .................................................................................... 21
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCTEL COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA - UNAUDITED)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 42,668 $ 24,492
Short-term investments 47,658 51,257
Accounts receivable net of allowance for doubtful accounts
of $4,198 at March 31, 1997 and $3,750 at June 30, 1996 166,634 166,918
Inventories, net 36,325 40,411
Prepaid expenses and other 21,405 18,639
--------- ---------
Total current assets 314,690 301,717
Property, plant and equipment, net of accumulated depreciation and amortization
of $113,086 at March 31, 1997 and $89,864 at June 30, 1996 146,619 136,916
Deposits and other assets 34,537 30,585
--------- ---------
Total $ 495,846 $ 469,218
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables $ 16,950 $ 18,399
Accrued compensation and employee benefits 26,935 34,801
Income taxes payable 7,783 9,755
Accrued and other liabilities 44,131 40,897
--------- ---------
Total current liabilities 95,799 103,852
Long-term obligations 248 374
Stockholders' equity:
Preferred stock, $.001 par value - authorized,
5.0 million shares; none outstanding -- --
Common stock, $.001 par value - March 31, 1997 - authorized,
200.0 million shares; outstanding, 52.1 million shares, June 30, 1996 -
authorized, 100.0 million shares; outstanding, 51.4 million shares 259,257 232,250
Notes receivable from employees (10,693) (4,152)
Retained earnings 152,676 138,239
Other (1,441) (1,345)
--------- ---------
Total stockholders' equity 399,799 364,992
--------- ---------
Total $ 495,846 $ 469,218
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 4
OCTEL COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- --------------------------
March 31, March 31, March 31, March 31,
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES:
Systems $ 98,224 $ 93,752 $ 295,557 $ 259,408
Services and licenses 51,961 46,097 152,623 130,868
--------- ---------- ----------- -----------
Total net revenues 150,185 139,849 448,180 390,276
COSTS AND EXPENSES:
Cost of systems 32,470 29,276 96,822 79,761
Cost of services and licenses 31,716 28,953 94,241 82,267
Research and development 21,970 19,208 66,936 56,521
Selling, general and administrative 49,430 43,936 144,960 125,692
---------- ---------- ----------- -----------
Total costs and expenses 135,586 121,373 402,959 344,241
---------- ---------- ----------- -----------
Operating income 14,599 18,476 45,221 46,035
Interest and other income, net 1,179 670 3,184 1,742
---------- ---------- ----------- -----------
Income before income taxes 15,778 19,146 48,405 47,777
Provision for income taxes 5,150 6,900 16,650 17,200
---------- ---------- ----------- -----------
NET INCOME $ 10,628 $ 12,246 $ 31,755 $ 30,577
========== ========== =========== ===========
NET INCOME PER COMMON
AND EQUIVALENT SHARE $ 0.20 $ 0.23 $ 0.58 $ 0.58
========== ========== =========== ===========
Weighted average number of
common shares and equivalents
used in computation 54,155 53,514 54,821 53,012
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 5
OCTEL COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS - UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
March 31, March 31,
1997 1996
--------- --------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,755 $ 30,577
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 29,425 25,040
Amortization of (discount)/premium
on marketable securities (155) 43
Deferred income taxes (205) 5,183
Changes in working capital:
Accounts receivable 1,726 (17,014)
Inventories 317 (23,390)
Prepaid expenses and other (3,045) (5,622)
Trade payables (1,362) 552
Accrued compensation and employee benefits (7,840) 504
Accrued and other liabilities 9,705 5,104
--------- --------
Net cash provided by operating activities 60,321 20,977
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, net 16,300 20,166
Repurchases of common stock (23,773) (8,903)
Proceeds from payment of employees' notes receivable 528 50
Proceeds from sale of financial instruments - put warrants 3,435 1,762
Repayments of long-term obligations (226) (271)
--------- --------
Net cash provided by/(used for) financing activities (3,736) 12,804
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (270,385) (24,182)
Sales and maturities of short-term investments 274,033 29,595
Property, plant and equipment additions (37,275) (26,445)
Changes in deposits and other assets (4,518) (7,977)
--------- --------
Net cash used for investing activities (38,145) (29,009)
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (264) (360)
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 18,176 4,412
--------- --------
CASH AND CASH EQUIVALENTS:
Beginning of period 24,492 24,521
--------- --------
End of period $ 42,668 $ 28,933
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 6
OCTEL COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(MARCH 31, 1997 AND 1996 - UNAUDITED)
1. The condensed consolidated financial statements include the Company and
its wholly owned subsidiaries. Intercompany balances and transactions
are eliminated in consolidation. The preparation of financial
statements in conformity with United States' generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting
of normal recurring adjustments) necessary to present fairly the
financial position of the Company as of March 31, 1997, the results of
operations for the three and nine months ended March 31, 1997 and 1996
and cash flows for the nine months ended March 31, 1997 and 1996.
The financial statements and notes are presented as permitted by Form
10-Q and do not contain certain information included in the Company's
annual consolidated financial statements and related notes.
2. Short-term investments
At March 31, 1997 and June 30, 1996, all cash equivalents and
short-term investments were classified as "available-for-sale" and
consisted of the following (in thousands):
<TABLE>
<CAPTION>
Unrealized Unrealized Accrued Estimated
Cost Gains Losses Interest Fair Value
---- ----- ------ -------- ----------
<S> <C> <C> <C> <C> <C>
At March 31, 1997:
U.S. Government
securities $20,646 $ -- $(207) $ (47) $20,392
Municipal notes/bonds 45,290 -- (72) (436) 44,782
------- ----- ----- -------- -------
$65,936 $ -- $(279) $ (483) $65,174
======= ===== ===== ======== =======
At June 30, 1996:
U.S. Government
securities $ 8,470 $ 3 $(194) $ (87) $ 8,192
Municipal notes/bonds 47,236 38 (20) (352) 46,902
------- ----- ----- -------- -------
$55,706 $ 41 $(214) $ (439) $55,094
======= ===== ===== ======== =======
</TABLE>
These securities were classified on the balance sheet as follows (in
thousands):
<TABLE>
<CAPTION>
March 31, 1997 June 30, 1996
-------------- -------------
<S> <C> <C>
Cash equivalents $ 17,999 $ 4,276
Short-term investments 47,658 51,257
---------- ----------
$ 65,657 $ 55,533
========== ==========
</TABLE>
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<PAGE> 7
OCTEL COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(MARCH 31, 1997 AND 1996 - UNAUDITED)
The cost and estimated fair value of available-for-sale debt securities
by contractual maturity, consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1997
-------------------------
Estimated
Cost Fair Value
---------- ---------
<S> <C> <C>
Due in less than one year $ 41,180 $ 41,038
Due in one to five years 13,239 13,018
Due in five to ten years 6,559 6,228
Due thereafter 4,958 4,890
---------- ---------
$ 65,936 $ 65,174
========== =========
</TABLE>
For the three and nine months ended March 31, 1997, the Company had
$50.9 million and $286.0 million in proceeds from sales of
available-for-sale investments, respectively. Gross realized gains and
gross realized losses on those sales were not material. For the three
and nine months ended March 31, 1996, the Company had $54.0 million and
$149.8 million in proceeds from sales of available-for-sale
investments, respectively. Gross realized gains and gross realized
losses on those sales were not material.
3. Inventories, net of reserves, consist of (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
-------- -------
<S> <C> <C>
Finished goods $ 6,995 $ 7,236
Work-in-process 6,445 11,218
Raw materials 22,885 21,957
-------- -------
Total $ 36,325 $40,411
======== =======
</TABLE>
4. Net income per common and equivalent share is computed using the
weighted average number of common and dilutive common equivalent shares
from stock options (using the treasury stock method) and shares
subscribed under the Employee Stock Purchase Plan.
5. Line of credit and letters of credit
Effective June 1996, the Company obtained a $30.0 million bank
revolving line of credit which also allows the Company to obtain
stand-by letters of credit. Borrowings under the line are unsecured and
bear interest at either an adjusted London interbank offering rate
("LIBOR") plus one and one-quarter percent or the greater of the Bank's
base rate or the Federal Funds Effective Rate plus one-half of one
percent, at the Company's discretion upon borrowing the funds.
Borrowings under the line are subject to certain financial covenants
and restrictions on indebtedness, equity distributions, financial
guarantees, business combinations and other related items. The Company
was in compliance with these covenants and had no borrowings under this
line as of March 31, 1997. The line expires in June 1998.
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<PAGE> 8
OCTEL COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(MARCH 31, 1997 AND 1996 - UNAUDITED)
At March 31, 1997, the Company had $4.7 million of stand-by letters of
credit outstanding. The letters of credit are primarily to guarantee
payments for inventory purchases and facility lease payments. The
majority of the letters of credit are denominated in Pound Sterling,
Japanese Yen, French Francs and U.S. Dollars and expire on various
dates through December 25, 1999.
6. Lease commitment
On July 6, 1995, the Company entered into a one-year operating lease
for a parcel of undeveloped land adjacent to its current campus in
Milpitas, California, on which additional offices may be constructed.
On February 21, 1997, the Company entered into a second operating lease
for a parcel of undeveloped land also adjacent to its current campus.
Both leases provides for monthly payments which vary based on the LIBOR
and require the Company to maintain certain financial covenants similar
to its credit facilities. In addition, both leases provide the Company
with the option at the end of the lease term of either renewing the
lease, acquiring the property at its original cost or arranging for the
property to be acquired. The Company is contingently liable, for each
of the two leases, to the lessor under a 97% first-loss clause for up
to $9.9 million and $5.1 million for the first and second lease,
respectively. In June 1996, the first lease was extended for another
one-year period. Both leases are scheduled to be renewed in June 1997
and will be combined to form one lease to cover both parcels of land at
that time.
7. Interest and other income, net consists of the following (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ------------------------
March 31, March 31, March 31, March 31,
1997 1996 1997 1996
------- ----- ------- -------
<S> <C> <C> <C> <C>
Interest and investment income $ 889 $ 512 $ 2,549 $ 1,781
Gain (losses)on sale of short-term
investments, net 8 -- 17 (7)
Foreign exchange gains, net 359 262 850 87
Other expense, net (77) (104) (232) (119)
------- ----- ------- -------
Total $ 1,179 $ 670 $ 3,184 $ 1,742
======= ===== ======= =======
</TABLE>
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<PAGE> 9
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NET REVENUES
The Company derives revenues from the sale of voice messaging systems,
performance of services and generation of license fees from its two strategic
business units: Global Business Solutions ("GBS") and Voice Information Services
("VIS"). GBS consists of system sales, services and maintenance contract sales
to corporations and institutions, including universities and governments. VIS
consists of system sales, services and maintenance contract sales to
telecommunications service providers such as telephone companies and wireless
providers. Certain services are provided to the GBS and VIS markets by the
Company's Octel Network Services ("ONS") and OcteLink operations. The services
provided by ONS include a range of voice processing and network management
services.
Revenue by business unit was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------- ----------------------------------------
March 31, March 31, March 31, March 31, Increase/
1997 1996 Increase 1997 1996 (decrease)
--------- --------- -------- ---------- ---------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Global Business Solutions
Systems and services $ 64.2 $ 64.4 --% $ 196.9 $ 194.0 1%
ONS/OcteLink 11.2 10.5 7% 31.2 31.4 (1%)
--------- --------- ---------- ----------
Total GBS revenues $ 75.4 $ 74.9 1% $ 228.1 $ 225.4 1%
========= ========= ========== ==========
Voice Information Services
Systems and services $ 62.6 $ 57.9 8% $ 186.5 $ 144.5 29%
ONS/OcteLink 12.2 7.0 74% 33.6 20.4 65%
--------- --------- ---------- ----------
Total VIS revenues $ 74.8 $ 64.9 15% $ 220.1 $ 164.9 33%
========= ========= ========== ==========
</TABLE>
GBS and VIS systems revenues consist of software, hardware, and
upgrades and expansions to existing systems. Services revenues, as presented
below, include ONS as well as service contracts, applications development,
spares sales, installation fees and hardware repair and maintenance.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------------- -------------------------------------------
March 31, March 31, Increase/ March 31, March 31,
1997 1996 (decrease) 1997 1996 Increase
--------- --------- ---------- ---------- ---------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Systems $ 98.2 $ 93.7 5% $ 295.6 $ 259.4 14%
Services and licenses 52.0 46.1 13% 152.6 130.9 17%
--------- --------- ---------- ----------
Total net revenues $ 150.2 $ 139.8 7% $ 448.2 $ 390.3 15%
========= ========= ========== ==========
Percentage of Total Net Revenues
Systems 65% 67% (2%) 66% 66% --
Services and licenses 35% 33% 2% 34% 34% --
</TABLE>
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<PAGE> 10
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Systems
The increase in systems revenues for the third quarter of fiscal 1997
compared to the same quarter in the prior year was due primarily to an 11%
increase in the VIS market. The majority of the VIS increase (24%) occurred in
the United States followed by increases in the Asia Pacific and Canada areas
which were slightly offset by a decrease in Europe VIS sales compared to the
third quarter of fiscal 1996. GBS revenues decreased slightly during the third
quarter of fiscal 1997 compared to the third quarter of fiscal 1996. GBS revenue
increases in Europe were substantially offset by decreases in the United States
and the Asia Pacific area. Despite an overall increase in the number of new
systems sold, the average selling price decreased from the third quarter of
fiscal 1996 due primarily to a shift from direct sales to distributor sales.
The increase in systems revenues for the first nine months of fiscal
1997 was due primarily to higher VIS revenues, the most significant of which
were in Europe and the Asia Pacific. These increases were partially offset by a
decrease in VIS sales in Canada. GBS systems revenues remained flat for the
first nine months of fiscal 1997 compared to the same period in fiscal 1996. An
increase in Europe was significantly offset by decreases in the United States,
Canada and the Asia Pacific area. Although the volume of new system sales
increased on a year to date basis, the average selling price decreased due to a
shift in channel mix from direct sales to distributor sales.
Services and licenses
The increases in services revenues for both the third quarter and first
nine months of fiscal 1997 compared to the same periods of fiscal 1996 were due
primarily to an increase in ONS revenues of 33% and 25%, respectively. ONS
revenues for the quarter benefited from a favorable price structure with a major
customer as well as an increase in voice mailboxes. Such benefits from favorable
pricing structures will probably not continue in future quarters. Revenues
resulting from services provided to the Company's larger installed base (through
maintenance contracts and installation) also increased for both the third
quarter and first nine months of fiscal 1997 compared to the same periods of
fiscal 1996.
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<PAGE> 11
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
COST OF SALES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------------- -----------------------------------------
March 31, March 31, Increase/ March 31, March 31, Increase/
1997 1996 (decrease) 1997 1996 (decrease)
--------- --------- ---------- ---------- ---------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Cost of systems $ 32.5 $ 29.3 11% $ 96.8 $ 79.8 21%
Cost of services
and licenses 31.7 28.9 10% 94.2 82.2 15%
--------- --------- ---------- ----------
Total cost of sales $ 64.2 $ 58.2 10% $ 191.1 $ 162.0 18%
========= ========= ========== ==========
Percentage of Net Revenues
Cost of systems 33% 31% 2% 33% 31% 2%
Cost of services
and licenses 61% 63% (2%) 62% 63% (1%)
Total cost of sales 43% 42% 1% 43% 42% 1%
</TABLE>
Systems
The increase in cost of systems as a percentage of revenues for both
the third quarter and first nine months of fiscal 1997 was due primarily to a
shift in GBS distribution channels to distributors. The increase in cost of
systems as a percentage of systems' revenues is because distributor sales
generally carry a lower average selling price than direct sales. In addition,
during the third quarter of fiscal 1997, the Company incurred increased
amortization costs for licensed software and also an increase in its inventory
reserves for certain inventory purchases. Cost as a percentage of net revenues
may fluctuate in the future depending on product mix. Different systems and like
systems with different configurations have varying cost structures and product
mix is difficult to predict.
Services and licenses
The decrease in cost of services and licenses as a percentage of
services and licenses revenues for the third quarter and first nine months of
fiscal 1997 was due primarily to decreases in bonuses and profit sharing and
increased network operations efficiencies in the Company's outsourcing services
business. A favorable pricing structure with a major customer in the Company's
outsourcing services business was also a cause for the decrease for the first
nine months of fiscal 1997.
On a quarter-to-quarter basis, the channel, geographic and product mix
of sales can fluctuate significantly. Such fluctuations can have a positive or
negative impact on operating margins and are difficult to predict.
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<PAGE> 12
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------- --------------------------------------
March 31, March 31, March 31, March 31,
1997 1996 Increase 1997 1996 Increase
------------ ----------- -------- ----------- ----------- --------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Expenses $22.0 $19.2 14% $66.9 $56.5 18%
Percentage of revenues 15% 14% 1% 15% 14% 1%
</TABLE>
The increase in absolute dollars spent on research and development for
both the third quarter and first nine months of fiscal 1997 was due primarily to
costs associated with increased development associated with Unified Messaging,
Intelligent Messaging Architecture ("IMA") and OcteLink, as well as research
activities for additional future products and services. This increase was
partially offset by a decrease in profit sharing and bonus expense year-to-date.
The Company believes that additional research and development expenses will be
required to maintain market position and expects that expenses will increase in
absolute terms and could increase as a percentage of total net revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------ ------------------------------------
March 31, March 31, March 31, March 31,
1997 1996 Increase 1997 1996 Increase
------------ ----------- -------- ----------- --------- --------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Expenses $49.4 $43.9 13% $145.0 $125.7 15%
Percentage of revenues 33% 31% 2% 32% 32% --
</TABLE>
The increase for both the third quarter and first nine months of fiscal
1997 in selling, general and administrative expenses in absolute dollars
resulted primarily from increased headcount and costs associated with a new
marketing program effective for fiscal 1997. These increases were partially
offset by a reduction in profit sharing and bonus expenses for the first nine
months of fiscal 1997.
The Company believes that additional selling, general and
administrative expenses will be required to maintain its competitive position,
including the expansion of international sales activities, and expects that
these expenses will increase in absolute terms and could increase as a
percentage of net revenues. Additionally, the Company is currently involved in
legal matters that may cause an increase in legal expenses in the future (See
Item 1 "Legal Proceedings" in Part II).
-12-
<PAGE> 13
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST AND OTHER INCOME, NET
Interest and other income, net for the third quarter and first nine
months of fiscal 1997 increased $0.5 million and $1.4 million, respectively,
from the same periods of fiscal 1996. Interest and investment income for the
third quarter and first nine months of fiscal 1997 increased as compared to the
same periods in fiscal 1996 due primarily to higher average cash and cash
equivalent and short term investment balances in fiscal 1997 compared to fiscal
1996. Average investment yields were also slightly higher for the third quarter
of fiscal 1997 compared to fiscal 1996. However, investment yields were slightly
lower for the first nine months of fiscal 1997 compared to the same period of
fiscal 1996. Net foreign exchange gains were recognized during the third quarter
and first nine months of fiscal 1997 were higher than in the same periods in
fiscal 1996. The gains for the third quarter and first nine months of fiscal
1997 were due primarily to the favorable rate change of the Pound Sterling.
INCOME TAXES
The Company's effective tax rate was 32.6 percent in the third quarter
and 34.5 percent in the first nine months of fiscal 1997, as compared to 36.0
percent in the corresponding periods of fiscal 1996. The effective rate was
lower in fiscal 1997 due to rising export sales and, as a result, an increase in
foreign sales corporation benefits. The Company expects the tax rate for fiscal
1997 to remain at 34.5 percent and projects the fiscal 1998 tax rate to be 35.5
percent.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Various paragraphs of this Item 2 (Management's Discussion and Analysis
of Financial Condition and Results of Operations) contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
including, but not limited to, statements regarding favorable pricing structures
with major customers, fluctuations of cost of systems as a percentage of net
revenues, product mix, future levels of research and development expenses,
future levels of selling, general and administrative expenses, international
expansion, possible legal expenses and the Company's future effective tax rate.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth below and
elsewhere in this document.
The Company believes that in the future its results of operations could
be affected by various factors including, but not limited to, the Company's
ability to complete new products and product upgrades, market acceptance of new
products and upgrades, growth in the worldwide voice processing market, the
effect of increased competition, expansion of services by its VIS customers, the
outcome of litigation, foreign exchange rates and changes in general economic
conditions in any of the countries in which the Company does business.
The Company believes that the successful introduction of new
and enhanced products and services will be essential for it to maintain or
improve its competitive position. In October 1996, the Company announced the
delay of a software release for its Sierra platform. The release, which is an
upgrade for existing customers, was originally expected to begin shipping late
in the first
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<PAGE> 14
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
quarter of fiscal 1997. In March 1997, the Company began shipping the software
and recognized immaterial revenues. While the Company believes that this delay
has not put contracts or customer relationships materially at risk, and that
this delay is merely a timing issue, there can be no assurance that further
delays will not occur, that customer relationships will not be damaged or that
expected revenues related to this upgrade will not be permanently lost.
In July 1995, the Company introduced OcteLink - a global "messaging
post office" that could eventually allow the interconnection of virtually any
voice messaging system with networking capability, regardless of protocol,
system size or geographic location. OcteLink revenues may be derived from either
the sale of hardware to service providers or from OcteLink directly providing
services to a customer. Revenues from OcteLink commenced during the second
quarter of fiscal 1996 but have not been material to date. The Company has
incurred additional research and development and selling, general and
administrative expenditures to launch OcteLink and expects to incur additional
costs in future quarters. Although the Company believes OcteLink is a viable
global messaging network, there is currently no reliable data regarding the
demand for such services. Furthermore, demand for a global messaging network may
be slow to materialize, may not materialize or competitors may successfully
introduce alternative solutions to OcteLink that achieve better market
acceptance. The Company is currently evaluating the future direction of
OcteLink.
The Company is currently engaged in various new projects and product
development which are necessary to help maintain market share and Octel's
leadership position in the industry. Two of the more significant projects are
"unified messaging" products for voice, fax and electronic mail messaging and
the Company's next-generation client/server architecture for its Sierra
platform, IMA; both of which have experienced product development delays.
Unified messaging essentially unites voice, fax and e-mail together in a
client/server architecture that uses standard PC and LAN technology. This
integration brings together several discrete technologies into a single mailbox
that provides user access from a telephone or a PC. In May 1995, Octel announced
the first component of its unified messaging technology that will be available
on Microsoft Exchange, a LAN-based, enterprise-wide messaging architecture. In
the third quarter of fiscal 1997, the Company introduced the Unified Messenger
product and expects shipment of this product to commence in the late summer. The
timing of shipments will depend on completion of testing and debugging of the
initial release of Unified Messaging. IMA was originally scheduled for
first-phase release during the end of fiscal 1996; however, the release has been
delayed in order to allow for the incorporation of newly available third-party
technologies and the release of a more feature-rich product and due to general
development delays. The Company is also continuing to update the Sierra
platform. The successful introduction of IMA and other new products is dependent
on a number of factors, some of which are beyond the Company's control,
including product acceptance in the marketplace, introduction of competitive
products by existing or new competitors, changes in technology, price
competition and other factors. Continued delay in introducing new products or
failure of such products to achieve substantial market share could significantly
reduce future expected revenues or result in the need for additional expenses to
bring the product to market. Furthermore, there can be no assurance that the
Company will be successful in completing and introducing new products or that
such products will generate significant revenues or profits.
-14-
<PAGE> 15
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
During the latter half of fiscal 1995, the Company adopted a new,
capacity-based pricing approach for its largest GBS system, the XC-1000. This
pricing approach was also adopted for Overture and Sierra system sales during
fiscal 1996. This approach allows customers to purchase systems with only part
of the equipment's capacity enabled and then have additional capacity enabled
in the future upon payment of additional fees. The Company adopted contract
accounting during fiscal 1996 (based upon percentage-of-completion) to
recognize revenue in connection with capacity on demand transactions when firm
commitments to purchase additional capacity exist. Under this method, revenues
are recognized as a function of the capacity provided to the customer and costs
are recognized proportionally to revenue recognized. Consequently, certain
costs are deferred in the Balance Sheet under the caption "Deposits and other
assets." While the Company believes that capacity-based pricing will make it
more competitive, difficulties in implementing this approach, delays or adverse
results due to renegotiation of sales and distribution agreements to
accommodate capacity-based pricing or the failure to generate additional sales
could have an adverse effect on the Company's results of operations.
The Company's operating results may be adversely affected by continued
significant increase in competition from both competitors such as Nortel and
Lucent for mid-range and large systems and ActiveVoice Technology for low-end
systems in the GBS market. In addition, the GBS market has not experienced
significant overall growth in the size of the market, making it significantly
more competitive to acquire new customers. As a result of a slowly growing
market and intense competition, operating margins in the GBS unit have been and
are expected to continue to be negatively affected. The Company introduced
Unified Messenger, a new product for this market, in the third quarter of fiscal
1997 with shipment expected in late summer. However, as with any product
introduction, customers could choose to defer orders pending availability of the
enhanced product, which could adversely affect revenues and operating results.
Due to the factors noted above and elsewhere in Management's Discussion
and Analysis of Financial Condition and Results of Operations, the Company's
future earnings and Common Stock price may be subject to significant volatility,
particularly on a quarterly basis due to nonlinear sales. Past financial
performance should not be considered a reliable indicator of future performance
and investors should not use historical trends to anticipate results or trends
in future periods. Any shortfall in revenue or earnings from the levels
anticipated by securities analysts could have an immediate and significant
adverse effect on the trading price of the Company's Common Stock in any given
period. Additionally, the Company may not learn of such shortfalls until late in
a fiscal quarter, which could result in an even more immediate and adverse
effect on the trading price of the Company's Common Stock. Finally, the Company
participates in a highly dynamic industry which often results in volatility of
the Company's Common Stock price.
The Company has been and may in the future continue to be required to
litigate enforcement of its intellectual property or commercial rights or to
defend itself in litigation arising out of claims by third parties. Such
litigation, even if the Company is ultimately victorious, can be extremely
expensive and may have a material adverse effect on the Company's results of
operations in any particular period. Litigation may also occupy management
resources that would otherwise be available to address other aspects of the
Company's business.
-15-
<PAGE> 16
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and short-term investments in
the first nine months of fiscal 1997 increased $14.6 million from June 30, 1996.
Cash flows from operations resulted in a net increase of cash of $60.3 million
in the first nine months of fiscal 1997 compared to $21.0 million in the first
nine months of fiscal 1996. The increase from the prior year was due primarily
to the reduction of inventory, collection of accounts receivable and the
collection of a tax refund of $4.9 million.
The primary sources of cash during the first nine months of fiscal 1997
resulted from net income of $31.8 million, which included $29.4 million of
non-cash expenses for depreciation and amortization, cash provided by the sale
of common stock, resulting primarily from the exercise of stock options, of
$16.3 million and a tax refund of $4.9 million. The primary uses of cash during
the first nine months of fiscal 1997 were investment in property, plant and
equipment of $37.3 million and the repurchase of common stock for $20.3 million,
net of put warrant proceeds of $3.4 million. The Company expects to purchase
additional equipment and make certain leasehold improvements during the
remainder of fiscal 1997.
Effective July 6, 1995, the Company entered into a one-year operating
lease agreement to lease undeveloped land on which additional offices may be
constructed adjacent to the existing corporate offices over the next three years
under a similar leasing arrangement. In June, 1996 the operating lease was
extended for another one-year period. Under the terms of the operating lease,
the Company is contingently liable under a 97% first-loss clause for up to $9.9
million. On February 21, 1997, the Company entered into a second operating lease
for an additional parcel of undeveloped land adjacent to its existing corporate
offices. The Company is contingently liable, under the second lease, to the
lessor under a 97% first-loss clause for up to $5.1 million. Both of the above
mentioned operating leases are scheduled to be renewed in June 1997 and will be
combined to form one operating lease for both parcels of land at that time. Cash
payments under the above operating lease were not significant during the first
nine months of fiscal 1997.
In July 1994, the Company's Board of Directors approved the repurchase
of up to 3.5 million shares of its Common Stock over a period of approximately
two years. In June 1996, the Company's Board of Directors approved the
repurchase of an additional 3.5 million shares of its Common Stock over an
additional two-year period. In October 1996, the Company repurchased an
additional 1.5 million shares at an average per share price of $14.78, net of
the impact of sales of put warrants. As of March 31, 1997, the Company had
repurchased approximately 4.7 million shares of its Common Stock at an average
per share price of $11.48, net of the impact of sales of put warrants of $3.4
million. The Company expects to continue to repurchase its Common Stock under
this program if warranted by market conditions. There were no stock repurchases
during the third quarter of fiscal 1997.
The Company anticipates that cash flows from operations, its existing
cash and cash equivalents balance, its short-term investment balance and its
existing $30 million bank revolving line of credit will be adequate to meet the
Company's cash requirements at least through the end of 1997.
-16-
<PAGE> 17
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 will be
effective for fiscal years beginning after December 15, 1995, and will require
that the Company either recognize in its consolidated financial statements costs
related to its employee stock-based compensation plans, such as stock option and
stock purchase plans, or make pro forma disclosures of such costs in a footnote
to the consolidated financial statements.
The Company will continue to use the intrinsic value based method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to
account for all of its employee stock-based compensation plans. Therefore, in
its annual consolidated financial statements for fiscal 1997, the Company will
make the required pro forma disclosures in a footnote to the consolidated
financial statements. SFAS No. 123 is not expected to have a material effect on
the Company's consolidated results of operations or financial position.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." SFAS No. 128
requires the presentation of basic earnings per share ("EPS") and, for companies
with complex capital structures (or potentially dilutive securities, such as
convertible debt, options and warrants), diluted EPS. SFAS No. 128 is effective
for annual and interim periods ending after December 31, 1997. Therefore, in its
annual consolidated financial statements for fiscal 1998, the Company will make
the required disclosures. The Company expects that basic EPS will be higher than
primary earnings per share as presented in the accompanying consolidated
financial statements and that diluted EPS will not differ materially from fully
diluted earnings per share.
-17-
<PAGE> 18
OCTEL COMMUNICATIONS CORPORATION
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Theis Research, Inc.
In April 1992, the Company filed suit, in the United States District
Court in Northern California, against Theis Research, Inc. ("Theis") for a
declaratory judgment that the Company's products do not infringe three patents
of Theis and that those patents are invalid. In November 1992, Theis filed a
counterclaim against the Company alleging infringement of seven of Theis'
patents. Subsequently, Theis dismissed with prejudice the claims as to all but
four of the patents, and its claims as to one of the remaining four patents were
dismissed on summary judgment. During the first quarter of fiscal 1995, the
Company engaged in a jury trial regarding infringement of the three remaining
patents and the defense of patent invalidity. In October 1994, the jury returned
a verdict finding, among other things, that Octel was correct in its claim that
the three patents at issue were invalid. The Court entered final judgment in the
case in January 1996, declaring Octel a "prevailing party" entitled to recover
its substantial costs in connection with the lawsuit. In November 1996, the
Court reversed the jury's verdict that Octel infringed one of the patents held
invalid. The Court also reversed the jury's verdict that another patent was
invalid but affirmed the jury's finding of non-infringement of that patent.
Theis filed a notice of appeal in December 1996, and the Company thereafter
filed a notice of cross-appeal on certain issues. The parties have now submitted
their opening briefs on appeal.
Gilbarco Inc.
In January 1994, Gilbarco Inc. ("Gilbarco") filed suit in the U.S.
District Court for the District of Colorado against the Company and one of the
Company's telephone company customers, U.S. West, alleging infringement of a
Gilbarco patent and seeking unspecified damages. The Company filed an answer to
the complaint denying any infringement of the patent and raising several
affirmative defenses, including an assertion that the patent is invalid and
unenforceable. In September 1994, the claims asserted against the Company were
transferred to the U.S. District Court for the Northern District of California
and those claims asserted against U.S. West were stayed and administratively
closed pending the outcome of the California action. Both parties filed motions
for summary judgment on a variety of issues, including a motion by Octel for
summary judgment declaring the Gilbarco patent unenforceable due to inequitable
conduct during the procurement of the patent. In February 1996, the Court
granted Octel's motion for summary judgment (and denied Gilbarco's
counter-motion) and declared the patent unenforceable as a matter of law. The
Court subsequently entered judgment in favor of Octel and against Gilbarco and
awarded Octel its costs in connection with the lawsuit. Gilbarco's subsequently
filed motion for reconsideration of the Court's ruling was denied and Gilbarco
thereafter filed a notice of appeal. In April 1997, after hearing oral argument
on Gilbarco's appeal, the Federal Circuit Court of Appeal denied Gilbarco's
appeal and affirmed the summary judgment in Octel's favor.
The Company believes, based on information currently available, that
the Company is not infringing any valid patents of Theis or Gilbarco. The
Company will vigorously defend the patent infringement claims and any related
claims for compensatory damages. While litigation is inherently uncertain, the
Company believes that the ultimate resolution of these matters will not have a
material adverse effect on the Company's financial position.
-18-
<PAGE> 19
OCTEL COMMUNICATIONS CORPORATION
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On May 13, 1997, the Company and The First National Bank of Boston, as
rights agent, entered into the Second Amended and Restated Rights Agreement (the
"Amended Rights Agreement"), which supersedes the First Amended and Restated
Common Shares Rights Agreement dated August 29, 1996 (the "Prior Rights
Agreement"). The Amended Rights Agreement is substantially the same as the Prior
Rights Agreement as originally executed, with the exception that, among other
things (i) each right is now exercisable, at the times and under the
circumstances specified in the Amended Rights Agreement, for 1/100 of a share of
a new series of Preferred Stock designated "Series A Junior Participating
Preferred Stock," (ii) the term of the Amended Rights Agreement has been
extended from August 29, 2006 to May 13, 2007 and (iii) the ownership threshold
that triggers the "flip-in" provision of the rights has been changed from 21% to
20%, and the Company's Board of Directors has been given the power to reduce
this threshold to 10%. A number of other technical amendments are also reflected
in the Amended Rights Agreement. For a more detailed description of the changes
reflected in the Amended Rights Agreement, or for additional information
relating to the Amended Rights Agreement, please see the Registration Statement
on Form 8-A/A filed by the Company with the Securities Exchange Commission on
May 13, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.16 Second Amended and Restated Rights Agreement dated
as of May 13, 1997 between the Company and the First
National Bankof Boston (1).
10.19 Lease of the Land Agreement dated February 21, 1997
by and between Sumitomo Bank Leasing and Finance, Inc.
and the Company.
10.20 Waiver and Release Agreement dated as of February 14,
1997 by and among the Company, Sumitomo Bank Leasing
and Finance, Inc. and The Peery Private Investment
Company-WP, L.P., The Peery Private Investment
Company-WP L.P., as to an undivided 25% interest,
The Peery Public Investment Company-WP, L.P., a
California limited partnership, as to an undivided
25% interest and John Arrillaga, as Trustee, or
Successor Trustee under Trust Agreement dated July
20, 1977 and as amended, as to an undivided 50%
interest, and Richard T. Peery, individually, and
John Arrillaga, individually.
11.0 Statement re computation of earnings per share
27.0 Financial Data Schedule
</TABLE>
(b) Report on Form 8-K
No report on Form 8-K was filed by the Company during its
fiscal quarter ended March 31, 1997.
-19-
<PAGE> 20
OCTEL COMMUNICATIONS CORPORATION
PART II
OTHER INFORMATION
(1) Incorporated by reference to the exhibit filed with the Company's
Registration Statement on Form 8-A/A filed on May 13, 1997.
-20-
<PAGE> 21
OCTEL COMMUNICATIONS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
OCTEL COMMUNICATIONS CORPORATION
Dated: May 15, 1997
/s/ ROBERT COHN
-------------------------------------------
Robert Cohn, Chief Executive Officer
/s/ JODY BISSON
-------------------------------------------
Jody Bisson, Vice President and
Corporate Controller (Acting Chief
Financial Officer)
-21-
<PAGE> 22
OCTEL COMMUNICATIONS CORPORATION
EXHIBIT INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------- ----------- ------
<S> <C> <C>
10.16 Second Amended and Restated Rights Agreement dated as
of May 13, 1997 between the Company and the First
National Bank of Boston (1)..................................... -
10.19 Lease of the Land Agreement dated February 21, 1997
by and between Sumitomo Bank Leasing and Finance,
Inc. and the Company............................................ 2
10.20 Waiver and Release Agreement dated as of February 14,
1997 by and among the Company, Sumitomo Bank Leasing
and Finance, Inc. and The Peery Private Investment
Company-WP, L.P., The Peery Private Investment
Company-WP L.P., as to an undivided 25% interest,
The Peery Public Investment Company-WP, L.P., a
California limited partnership, as to an undivided
25% interest and John Arrillaga, as Trustee, or
Successor Trustee under Trust Agreement dated July
20, 1977 and as amended, as to an undivided 50%
interest, and Richard T. Peery, individually, and
John Arrillaga, individually.................................... 62
11.0 Statement re computation of earnings per share.................. 75
27.0 Financial Data Schedule......................................... 77
--------------
(1) Incorporated by reference to the exhibit filed with the Company's
Registration Statement on Form 8-A/A filed on May 13, 1997.
</TABLE>
<PAGE> 1
EXHIBIT 10.19
LEASE OF THE LAND
By and Between
SUMITOMO BANK LEASING AND FINANCE, INC.,
A DELAWARE CORPORATION
as Landlord
and
OCTEL COMMUNICATIONS CORPORATION,
A DELAWARE CORPORATION
as Tenant
for
Premises located in
Milpitas, California
THIS LEASE IS NOT INTENDED TO CONSTITUTE A TRUE LEASE
FOR INCOME TAX PURPOSES. SEE SECTION 18.2
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE 1
BASIC LEASE PROVISIONS
1.1 Date of Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Tenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.4 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.5 Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.6 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.7 Rent Commencement Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.8 Base Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.9 Addresses for Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.10 Wire Transfer Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 2
DEFINITIONS
2.1 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Additional Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 Base Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.5 City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.6 Commitment Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.7 Consolidated Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.8 Consolidated Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.9 Consolidated Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.10 Consolidated Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.11 Default Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.12 Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.13 ERISA Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.14 Eurocurrency Reserve Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.15 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.16 Governmental Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.17 Governmental Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.18 Guaranteed Residual Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.19 Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.20 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.21 Initial Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.22 Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.23 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.24 Landlord Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.25 Lease Investment Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.26 Legal Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.27 Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.28 LIBOR Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.29 Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.30 Multiemployer Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.31 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.32 Official Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.33 Permitted Title Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.34 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.35 Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.36 Qualified Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
2.37 Rate Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.38 Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.39 Rent Commencement Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.40 Rent Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.41 Required Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.42 SBLF Deed of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.43 Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.44 Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.45 Tenant's Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.46 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.47 Terminology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE 3
DEMISE
3.1 Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 4
TERM
4.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.2 Holding Over . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 5
RENT
5.1 Base Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.2 Proration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.3 No Abatement of Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.4 Delinquent Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.5 Additional Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 6
TAXES
6.1 Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.2 Personal Property Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.3 Right to Contest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.4 Additional Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 7
INSURANCE
7.1 Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.2 Builders' Risk Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.3 All-Risk Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.4 General Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.5 Waiver of Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.6 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 8
USE
8.1 Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.2 Contest of Legal Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
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ARTICLE 9
UTILITIES AND SERVICES
9.1 Services to the Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 10
MAINTENANCE AND REPAIRS; SURRENDER OF THE PREMISES
10.1 Tenant Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10.2 Surrender of the Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 11
ASSIGNMENT BY LANDLORD
11.1 Further Mortgages or Encumbrances by Landlord . . . . . . . . . . . . . . . . . . . . . . . . . 15
11.2 Landlord's Right to Sell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
11.3 Transfer of Funds and Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE 12
ASSIGNMENT AND SUBLEASING
12.1 Right to Assign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
12.2 Right to Sublet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
12.3 Mortgage by Tenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE 13
EMINENT DOMAIN
13.1 Total or Substantial Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
13.2 Partial Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
13.3 Temporary Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
13.4 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
13.5 Notice and Execution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 14
DAMAGE OR DESTRUCTION
14.1 Casualty Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE 15
QUIET ENJOYMENT
15.1 Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE 16
DEFAULT
16.1 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
16.2 Contest by Tenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
16.3 Landlord's Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
16.4 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
16.5 Effect of Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
16.6 Landlord Cure Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE 17
TENANT'S OPTION TO PURCHASE OR TERMINATE
17.1 Option To Purchase Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
17.2 Termination Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
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ARTICLE 18
MISCELLANEOUS
18.1 Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
18.2 Form of Transaction: Certain Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
18.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
18.4 Severability of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
18.5 Entire Agreement: Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
18.6 Memorandum of Lease of the Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
18.7 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
18.8 Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
18.9 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
18.10 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
18.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
18.12 Time Is of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
18.13 No Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
18.14 Limitations on Recourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
18.15 Estoppel Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
18.16 As-Is Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
18.17 Net Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
18.18 Landlord's Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
18.19 Tenant's Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
18.20 Tenant's Waiver of Demand for Possession . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
18.21 Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
18.22 Regulation D Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE 19
INDEMNIFICATION
19.1 Tax Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
19.2 Environmental Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
19.3 General Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE 20
COVENANTS OF LANDLORD
20.1 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
20.2 Land Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
20.3 Transfer of Property Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
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LEASE OF THE LAND
THIS LEASE OF THE LAND ("Lease") by and between SUMITOMO BANK LEASING AND
FINANCE, INC., a Delaware corporation ("Landlord"), and OCTEL COMMUNICATIONS
CORPORATION, a Delaware corporation ("Tenant"), is entered into as of the date
set forth in Article 1 and shall be effective and binding upon the parties
hereto as of such date. Capitalized terms used in this Lease shall have the
definitions set forth in Article 2 or in the text of this Lease.
In consideration of the Base Rent reserved herein, and the terms, covenants
and conditions set forth below, Landlord and Tenant hereby agree as follows:
ARTICLE 1
BASIC LEASE PROVISIONS
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1.1 DATE OF LEASE: February , 1997.
1.2 LANDLORD: Sumitomo Bank Leasing and Finance, Inc., a Delaware corporation.
1.3 TENANT: Octel Communications Corporation, a
Delaware corporation.
1.4 LAND: That certain tract of land located in the City of Milpitas, County of
Santa Clara, California, as more particularly described on Exhibit A
attached hereto together with all easements, rights of way, appurtenances
and other rights and benefits belonging or pertaining to such Land.
Landlord makes no representations as to the accuracy of the description
of the Land.
1.5 PREMISES: The Land and any improvements which Landlord may construct on the
Land for Tenant.
1.6 TERM: The term of this Lease shall commence on the Date of Lease set forth in
Section 1.1 above and shall expire on June 20, 1997 ("Expiration Date").
The Term shall cease upon, and shall not refer to any period of time after,
termination of this Lease (whether pursuant to the terms of the Lease, by
operation of law, or otherwise).
1.7 RENT COMMENCEMENT DATE: The rent commencement date shall be the Date of Lease.
1.8 BASE RENT: As described in Section 2.4.
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1.9 ADDRESSES FOR NOTICES:
---------------------
LANDLORD: TENANT:
Sumitomo Bank Leasing and Finance, Inc. Octel Communications Corporation
277 Park Avenue 1001 Murphy Ranch Road
New York, NY 10172 Milpitas, CA 95035
Attention: Chief Credit Officer Attention: William Bascom,
Treasury Analyst
With a copy to: With a copy to:
Graham & James LLP Wilson, Sonsini, Goodrich & Rosati
One Maritime Plaza, Suite 300 650 Page Mill Road
San Francisco, CA 94111 Palo Alto, CA 94304
Attention: Bruce W. Hyman, Esq. Attention: Bradford C. O'Brien, Esq.
1.10 WIRE TRANSFER INSTRUCTIONS:
---------------------------
Morgan Guaranty Trust Company of New York
ABA#021000238
For credit to The Sumitomo Bank, Limited A/C #631-28-256
Further credit to Sumitomo Bank Leasing and Finance, Inc.
A/C No. 283572
</TABLE>
This Article 1 is intended to supplement and/or summarize the
provisions set forth in the balance of this Lease. If there is any conflict
between any provisions contained in this Article 1 and the balance of this
Lease, the balance of this Lease shall control.
ARTICLE 2
DEFINITIONS
For purposes of this Lease, the following defined terms shall have the
meanings set forth in this Article 2.
2.1 ACQUISITIONS. "Acquisitions" shall mean any transaction, or
any series of related transactions, by which Tenant or any of its Subsidiaries
directly or indirectly (a) acquires any ongoing business or all or
substantially all of the assets of any firm, partnership, joint venture,
corporation or division thereof, whether through purchase of assets, merger or
otherwise, or (b) acquires (in one transaction or as the most recent
transaction in a series of transactions) control of at least a majority of the
stock of a corporation having ordinary voting power for the election of
directors, or (c) acquires control of fifty percent (50%) or more of the
ownership interest in any partnership or joint venture.
2.2 ADDITIONAL RENT. "Additional Rent" shall mean any amounts
other than Base Rent payable by Tenant to Landlord or to other Entities on
Landlord's behalf as required under this Lease, specifically including, but
without limitation, payment of the Guaranteed Residual Value and break-funding
costs of Landlord related to the Lease Investment Balance (as defined below)
arising out of unscheduled payments or exercise of the Purchase Option pursuant
to Section 17.1 below other than on a Rent Payment Date.
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<PAGE> 8
2.3 ADVANCE. "Advance" shall mean (i) the items and/or amounts
described in Exhibit B; (ii) Real Estate Taxes; and (iii) any other payment
paid by Landlord, as landlord under this Lease.
2.4 BASE RENT. "Base Rent" shall mean, as of a Rent Payment
Date, that annual amount equal to the product obtained by multiplying the Lease
Investment Balance (at the time of the relevant calculation) by the sum of the
LIBOR Rate plus 45 basis points, which annual amount is then prorated on the
basis of a 360 day year and the actual number of days elapsed.
2.5 CITY. "City" shall mean the City of Milpitas, California.
2.6 COMMITMENT AMOUNT. "Commitment Amount" shall mean FIVE
MILLION FIVE HUNDRED THOUSAND and no/100 Dollars ($5,500,000.00).
2.7 CONSOLIDATED CURRENT LIABILITIES. "Consolidated Current
Liabilities" shall mean at any date as of which the amount thereof shall be
determined, all amounts that should, in accordance with generally accepted
accounting principles, be included as current liabilities on the consolidated
balance sheet of Tenant and its Subsidiaries as of such date, plus, to the
extent not already included therein, all Loans and all Indebtedness that is
payable upon demand or within one year from the date of determination thereof
unless such Indebtedness is renewable or extendable at the option of Tenant or
any Subsidiary to a date more than one year from the date of determination.
2.8 CONSOLIDATED TANGIBLE NET WORTH. "Consolidated Tangible Net
Worth" shall mean at any date as of which the amount thereof shall be
determined, the Consolidated Total Assets of Tenant and its Subsidiaries minus
(i) the sum of any amounts attributable to (a) goodwill, (b) intangible items
such as unamortized debt discount and expense, patents, trade and service marks
and names, copyrights and research and development expenses except prepaid
expenses, (c) all reserves not already deducted from assets, (d) any write-up
in the book value of assets resulting from any revaluation thereof subsequent
to the date of the financial statements referred to in this Lease and (e) the
value of any minority interests in Subsidiaries and minus (ii) Consolidated
Total Liabilities.
2.9 CONSOLIDATED TOTAL ASSETS. "Consolidated Total Assets"
shall mean at any date as of which the amount thereof shall be determined, all
obligations that should, in accordance with generally accepted accounting
principles, be classified as assets on the balance sheet of Tenant and its
Subsidiaries.
2.10 CONSOLIDATED TOTAL LIABILITIES. "Consolidated Total
Liabilities" shall mean at any date as of which the amount thereof shall be
determined, all obligations that should, in accordance with generally accepted
accounting principles, be classified as liabilities on the consolidated balance
sheet of Tenant and its Subsidiaries, including in any event all Indebtedness.
2.11 DEFAULT RATE. "Default Rate" shall mean with respect to the
Lease Investment Balance, the one (1) month LIBOR Rate plus 245 basis points.
Notwithstanding the foregoing, in the event that the foregoing Default Rate
shall be in violation of any usury or similar law, then the Default Rate shall
be reduced to the extent necessary to cause the Default Rate to comply with any
usury or similar law.
2.12 ENTITY. "Entity" shall mean any person, corporation,
partnership (general or limited), joint venture, association, limited liability
company, joint stock company, trust or other business entity or organization.
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<PAGE> 9
2.13 ERISA GROUP. "ERISA Group" shall mean Tenant and all
members of a controlled group of corporations and all trades or businesses
(whether or not incorporated) under common control which are treated as a
single employer under Section 414 of the Code.
2.14 EUROCURRENCY RESERVE REQUIREMENTS. "Eurocurrency Reserve
Requirements" shall mean the aggregate (without duplication) of the rates
(expressed as a decimal fraction) of reserve requirements in effect on such day
(including, without limitation, basic, supplemental, marginal and emergency
reserves under any regulations of the Board of Governors of the Federal Reserve
System ("Board") or other Governmental Authority having jurisdiction with
respect thereto) dealing with reserve requirements prescribed for eurocurrency
funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of
the Board) maintained by a member bank of the Federal Reserve System.
2.15 EVENT OF DEFAULT. "Event of Default" shall have the meaning
set forth in Section 16.1.
2.16 GOVERNMENTAL ACTION: "Governmental Action" shall mean all
permits, authorizations, registrations, consents, approvals, waivers,
exceptions, variances, orders, judgments, written interpretations, decrees,
licenses, exemptions, publications, filings, notices to and declarations of or
with, or required by, any Governmental Authority, or required by any applicable
law, and shall include without limitation, all environmental and operating
permits and licenses that are required for the full use, occupancy, zoning and
operation of the Premises.
2.17 GOVERNMENTAL AUTHORITY: "Governmental Authority" shall
mean any nation or government, any state or other political subdivision thereof
and any entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
2.18 GUARANTEED RESIDUAL VALUE: "Guaranteed Residual Value"
shall mean ninety-seven percent (97%) of the Lease Investment Balance.
2.19 GUARANTEES. "Guarantees" shall mean as applied to Tenant
and its Subsidiaries, all guarantees, arrangements having the economic effect
of guarantees, endorsements or other contingent or surety obligations with
respect to obligations of others whether or not reflected on the consolidated
balance sheet of Tenant and its Subsidiaries, including any obligation to
furnish funds directly or indirectly (whether by virtue of partnership
arrangements, by agreement to keep-well or otherwise), through the purchase of
goods, supplies or services, or by way of stock purchase, capital contribution,
advance or loan, termination of leases, or to enter into a contract for any of
the foregoing, for the purpose of payment of obligations of any other person or
entity. The amount of any Guarantee shall be deemed equal to the stated or
determinable amount of the primary obligation in respect of which such
Guarantee is made or, if not stated or if indeterminable, the maximum
reasonably anticipated liability in respect thereof.
2.20 INDEBTEDNESS. "Indebtedness" shall mean as applied to
Tenant and its Subsidiaries, (i) all obligations for borrowed money or other
extensions of credit whether or not secured or unsecured, absolute or
contingent, including, without limitation, unmatured reimbursement obligations
with respect to letters of credit and all obligations representing the deferred
purchase price of property, other than accounts payable arising in the ordinary
course of business, (ii) all obligations evidenced by bonds, notes, debentures
or other similar instruments, (iii) all obligations secured by any mortgage,
pledge, security interest or other lien on property owned or acquired by Tenant
or any of its Subsidiaries whether or not the obligations secured thereby shall
have been assumed, (iv) that portion of all obligations arising
4
<PAGE> 10
under capital leases that is required to be capitalized on the consolidated
balance sheet of Tenant and its Subsidiaries, (v) all Guarantees, (vi) all net
obligations with respect to Rate Contracts, (vii) all obligations that are
immediately due and payable out of the proceeds of or production from property
now or hereafter owned or acquired by Tenant or any of its Subsidiaries, and
(viii) all off-balance sheet interest bearing debt, including, without
limitation, all scheduled obligations under the Adjacent Property Lease.
2.21 INITIAL ADVANCE. "Initial Advance" shall mean the amounts
described in Exhibit B pertaining to execution of this Lease and the
acquisition of the Land.
2.22 INVESTMENT. "Investment" shall mean as applied to Tenant
and its Subsidiaries, the purchase or acquisition of any share of capital
stock, partnership interest, joint venture interest, evidence of indebtedness
or other equity security of any other person or entity, any loan, advance or
extension of credit to, or contribution to the capital of, any other person or
entity, any real estate held for sale or investment, any commodities futures
contracts held other than in connection with bona fide hedging transactions,
any other investment in any other person or entity, and the making of any
commitment or acquisition of any option to make an Investment.
2.23 LAND. "Land" shall have the meaning set forth in the Basic
Lease Provisions.
2.24 LANDLORD AFFILIATE. "Landlord Affiliate" shall mean any
entity which controls, is controlled by or is under the common control of
Landlord.
2.25 LEASE INVESTMENT BALANCE. "Lease Investment Balance" shall
mean, at the time in question, the aggregate amount of all Advances made by
Landlord reduced by the following: (1) the aggregate of all amounts received by
Landlord pursuant to the provisions of Article 13 (Eminent Domain), Article 14
(Damage or Destruction), Section 16.3 (Landlord's Remedies), Section 17.1
(Option to Purchase Premises), and/or Section 17.2 (Termination Option); and
(2) the aggregate of all amounts received by Landlord in respect of this Lease
or any related agreement that are not otherwise applied to reduce the Lease
Investment Balance and which constitute a repayment or reduction of the amounts
placed at risk by the Landlord, excluding for purposes of this clause amounts
paid as rent hereunder, reimbursement for expenses, fees and similar items
incurred by Landlord and payable by Tenant to Landlord under the Lease and the
SBLF Deed of Trust.
2.26 LEGAL REQUIREMENTS. "Legal Requirements" shall mean all
statutes, codes, laws, acts, ordinances, orders, judgments, decrees,
injunctions, rules, regulations, permits, licenses, authorizations, directions
and requirements of all federal, state, county, municipal and other
governments, departments, commissions, boards, courts, authorities, officials
and officers, which now or at any time hereafter are applicable to this Lease
or applicable to and enforceable against the Premises, any improvements or any
part thereof, as applicable.
2.27 LETTER OF CREDIT. "Letter of Credit" shall mean any letter
of credit issued pursuant to Section 2.3 of the Credit Agreement dated as of
June 30, 1996 executed by Tenant ("Credit Agreement"), and "Letters of Credit"
means all such letters of credit, collectively.
2.28 LIBOR RATE. "LIBOR Rate" shall mean, for each Borrowing
Period (as defined below) the annualized rate determined by The Sumitomo Bank,
Limited (the "Bank") as the rate that would be offered to Bank's San Francisco
or New York office for U.S. dollar deposits in the London Interbank Market as
quoted for the mid-morning average Libor Rate published by Reuters Monitoring
Systems for the applicable Borrowing Period for the entire then outstanding
principal balance hereof (rounded upwards to the next higher 1/16th of 1%
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<PAGE> 11
if such quoted rate is not a multiple of 1/16) for deposits by the Bank of
immediately available dollars in the London Interbank Market on the day two (2)
business days preceding the first day of the term of that Borrowing Period. In
the event the Reuters quote is not available, the British Banker's
Association's Interest Settlement Rate should be used. "Borrowing Period"
shall mean one (1) month, unless an alternate period of three (3), six (6) or
nine (9) months is elected by Tenant at least three (3) days prior to the end
of the previous Borrowing Period, provided, that (i) Tenant may not elect a
Borrowing Period which extends past the last day of the Term, (ii) if Tenant is
then in default under this Lease, a Borrowing Period of one (1) month shall be
deemed to have been selected by Tenant and (iii) there shall not be more than
three (3) LIBOR rates in effect at any time.
2.29 LOAN. "Loan" shall mean a loan made to Tenant by The First
National Bank of Boston and each other lender which may execute and deliver an
instrument or assignment with respect to the Credit Agreement, pursuant to
Section 2.1(a) of the Credit Agreement.
2.30 MULTIEMPLOYER PLAN. "Multiemployer Plan" shall mean at any
time an employee pension benefit plan within the meaning of Section 4001(a)(3)
of ERISA to which any member of the ERISA Group is then making or accruing an
obligation to make contributions or has within the preceding five (5) plan
years made contributions, including for these purposes any person which ceased
to be a member of the ERISA Group during such five (5) year period.
2.31 NOTICE. "Notice" shall mean a written advice, request,
demand or notification required or permitted by this Lease, as more
particularly provided in Section 18.3.
2.32 OFFICIAL RECORDS. "Official Records" shall mean the
official records of Santa Clara County, California.
2.33 PERMITTED TITLE EXCEPTIONS. "Permitted Title Exceptions"
shall mean the following: (1) the exceptions set forth in Exhibit C; (2) any
exceptions created or caused by Tenant or to which Tenant consents in writing;
(3) taxes and assessments (excluding Landlord Taxes as defined in Section 6.1
below) not yet due and payable; (4) the SBLF Deed of Trust; (5) all title
defects, liens, encumbrances, deeds of trust, mortgages, rights-of-way, and
restrictive covenants and conditions affecting the Land unless any of the
foregoing arise as a result of Landlord's actions or with Landlord's written
consent (unless such actions taken or consent given by Landlord are requested
in writing by Tenant); and (6) this Lease.
2.34 PLAN. "Plan" shall mean at any time an employee pension
benefit plan (other than a Multiemployer Plan) which either (i) is maintained,
or contributed to, by any member of the ERISA Group for employees of any member
of the ERISA Group, or (ii) has at any time within the preceding five (5) years
been maintained, or contributed to, by any person which was at such time a
member of the ERISA Group for employees of any person which was at such time a
member of the ERISA Group.
2.35 PREMISES. "Premises" shall have the meaning set forth in
the Basic Lease Provisions.
2.36 QUALIFIED INVESTMENTS. "Qualified Investments" shall mean
the investments as applied to Tenant and its Subsidiaries, in (i) notes, bonds
or other obligations of the United States of America or any agency thereof that
as to principal and interest constitute direct obligations of or ar guaranteed
by the United States of America; (ii) certificates of deposit or other deposit
instruments or accounts or commercial paper of First National Bank of Boston;
(iii) certificates of deposit or other deposit instruments or accounts of banks
or trust companies organized under the laws of the United States or any state
thereof that have capital
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and surplus of at least $100,000,000, (iv) commercial paper that is rated not
less than prime-one or A-1 or their equivalents by Moody's Investors Service,
Inc. or Standard & Poor's Corporation, respectively, or their successors, (v)
any repurchase agreement secured by any one or more of the foregoing; and (vi)
any Investments permitted by Tenant's written and then current investment
policy, as amended from time to time, provided that such investment policy (and
any such amendments thereto) has been approved in writing by banks then holding
at least 70% of the then aggregate unpaid principal amount of the Credit
Agreement.
2.37 RATE CONTRACT. "Rate Contract" shall mean interest rate and
currency swap agreements, cap, floor and collar agreements, interest rate
insurance, currency spot and forward contracts and other agreements or
arrangements designed to provide protection against fluctuations in interest or
currency exchange rates.
2.38 REAL ESTATE TAXES. "Real Estate Taxes" shall have the
meaning set forth in Section 6.1(b).
2.39 RENT COMMENCEMENT DATE. "Rent Commencement Date" shall have
the meaning set forth in the Basic Lease Provisions.
2.40 RENT PAYMENT DATE. "Rent Payment Date" shall have the
meaning set forth in Section 5.1.
2.41 REQUIRED PERMITS. "Required Permits" shall mean each and
every building and development permit including, without limitation, demolition
permits, site permits and addenda thereto (including, without limitation,
foundation permits and structural permits), temporary and final occupancy
permits and any other governmental or quasi-governmental approvals which must
be issued by any governmental authority, department, commission, board,
official or officer as a condition precedent to construction and occupancy of
any improvements.
2.42 SBLF DEED OF TRUST. "SBLF Deed of Trust" shall mean that
certain deed of trust executed by Tenant in favor of Landlord of even date
herewith.
2.43 SUBSIDIARY. "Subsidiary" shall mean any corporation,
association, joint stock company, business trust or other similar organization
of which 50% or more of the ordinary voting power for the election of a
majority of the members of the board of directors or other governing body of
such entity is held or controlled by Tenant or a Subsidiary of Tenant, or any
other such organization the management of which is directly or indirectly
controlled by Tenant or a Subsidiary of Tenant through the exercise of voting
power or otherwise; or any joint venture, whether incorporated or not, in which
Tenant has a 50% ownership interest.
2.44 TAKING. "Taking" shall have the meaning set forth in
Section 13.1.
2.45 TENANT'S PROPERTY. "Tenant's Property" shall mean any
process equipment, fixtures, furniture, furnishings, personal property or trade
fixtures which are purchased or constructed with funds of Tenant and not
purchased, paid for, or otherwise financed by Advances made by Landlord,
whether or not installed upon the Land.
2.46 TERM. "Term" shall have the meaning set forth in the Basic
Lease Provisions.
2.47 TERMINOLOGY. All personal pronouns used in this Lease shall
include all other genders. The singular shall include the plural and the
plural shall include the singular. Titles of Articles, Sections and
Subsections in this Lease are for convenience only and neither limit nor
amplify the provisions of this Lease, and all references in this Lease to
Articles, Sections
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or Subsections shall refer to the corresponding Article, Section or Subsection
of this Lease unless specific reference is made to the articles, sections or
other subdivisions of another document or instrument. The word "days" or
"business days" as used herein shall mean business days (i.e., excluding
holidays when banks in California, New York and London (with respect to payment
of Base Rent and the determination of the LIBOR Rate) are generally closed for
business and weekends) unless otherwise expressly stated. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with
generally accepted accounting principles as in effect from time to time,
applied on a basis consistent with the most recent audited consolidated
financial statements of the Tenant and its subsidiaries delivered to Landlord.
ARTICLE 3
DEMISE
3.1 PREMISES. Subject to the terms, covenants and conditions
contained herein, Landlord hereby leases the Premises to Tenant, and Tenant
hereby leases from Landlord, the Premises, together with all rights,
privileges, easements and appurtenances relating to the Premises.
ARTICLE 4
TERM
4.1 TERM. The Term of this Lease is specified in Article 1.
4.2 HOLDING OVER. If Tenant remains in possession of the
Premises after the expiration of the Term without executing a new lease, such
holding over shall be construed as a tenancy from month-to-month, subject to
all terms, covenants and conditions herein contained, and the Base Rent shall
be calculated based upon the Default Rate and shall be required to be paid by
Tenant during such holding over in the same manner as during the Term.
ARTICLE 5
RENT
5.1 BASE RENT. Commencing upon the Rent Commencement Date and
continuing thereafter throughout the Term, Tenant shall pay Base Rent to
Landlord, or at such other place as Landlord may from time to time instruct.
Tenant shall pay Base Rent by wire transfer. Landlord shall supply Tenant with
such bank account information as Tenant shall require to enable payment by wire
transfer of Federal funds or by ACH transfer (provided that Tenant originates
the sending of the ACH transfer) to the account described in Section 1.10.
Rental payments shall be payable monthly in arrears on the twentieth (20th) day
of each successive month, except that the last installment of Base Rent shall
be payable on the last day of the Term (each such date shall be a "Rent Payment
Date"). No sooner than thirty (30) days or later than ten (10) days prior to
the due date for any installment of Base Rent hereunder, Landlord shall deliver
to Tenant a Notice indicating the exact dollar amount of the Base Rent that is
due on such due date ("Invoice"). If Landlord fails to send the Invoice,
Tenant shall pay the amount shown on the previous month's Invoice.
5.2 PRORATION. If the Term expires or is otherwise terminated
on other than the twentieth (20th) day of a calendar month, then Base Rent
shall be prorated for the period from the immediately preceding Rent Payment
Date until the end of the Term on the basis of actual days elapsed and a three
hundred sixty (360) day year.
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5.3 NO ABATEMENT OF RENT. Except as a consequence of a
reduction in the Lease Investment Balance or the terms of Section 13.1 (Total
or Substantial Taking) and Section 13.2 (Partial Taking) Tenant shall not be
entitled to any abatement, diminution, reduction, setoff or postponement of
Base Rent as a consequence of any inconvenience to, interruption of, cessation
of or loss of Tenant's use or enjoyment of the Premises or as a result of any
reason whatsoever.
5.4 DELINQUENT RENT. Any Base Rent not paid on the due date
shall accrue interest at the Default Rate from the date such Base Rent was
originally due until the date such Base Rent is paid. All interest accrued on
past due Base Rent shall be due and payable to Landlord at the time the Base
Rent is paid, or upon demand by Landlord, if earlier.
5.5 ADDITIONAL RENT. Tenant agrees to pay all Additional Rent
when it becomes due and payable under this Lease.
ARTICLE 6
TAXES
6.1 REAL ESTATE TAXES.
(a) Tenant shall pay, during the Term of this Lease,
directly to the appropriate taxing authority all Real Estate Taxes (as defined
below). If the Term expires or otherwise terminates at any time other than the
beginning or end of a taxable year, Tenant's obligation to pay Real Estate
Taxes shall be prorated on the basis of a 365-day year, so as to include only
that portion of the taxable year which is a part of the Term.
(b) Except to the extent that Real Estate Tax bills and
statements are sent directly to Tenant by the taxing authority, upon receipt by
Landlord of the tax bills or statements, Landlord will use reasonable efforts
to promptly advise Tenant in writing of all Real Estate Taxes and shall deliver
copies of all applicable tax bills or statements to Tenant. Tenant shall pay
directly to the taxing authority all Real Estate Taxes prior to the later of
(i) thirty (30) days after receipt by Tenant from Landlord of a copy of such
bills and statements referred to above, or (ii) five (5) business days prior to
delinquency. As used herein, the term "Real Estate Taxes" shall mean any and
all taxes, governmental fees and similar charges or assessments levied or
assessed against the improvements and/or the Land including, without
limitation, ad valorem taxes and special assessments applicable to real
property; provided, however, that Real Estate Taxes shall not include any
Landlord Taxes (as defined below). Real Estate Taxes shall also include any
and all documentary, transfer, sales, mortgage, recording or similar taxes
imposed on Landlord or Tenant in connection with any sale of the Premises to a
third party in accordance with this Lease following an Event of Default by
Tenant or in a transaction to which Tenant is a party. As used herein, the
term "Landlord Taxes" shall mean any and all franchise, gains, gift,
succession, excess profits, gross receipts, revenue, estate, rental, income or
similar taxes or taxes in lieu thereof imposed upon Landlord or any party other
than Tenant (or an affiliate thereof) and any withholding tax imposed as a
collection device for, in lieu of, or otherwise related to any of the foregoing
without regard to whether such tax is required to be collected by Tenant and
without regard to whether Tenant would be liable for such withholding tax in
the event it failed to so withhold. For purposes of the foregoing, an income
tax shall include, without limitation, any tax imposed under the United States
Internal Revenue Code, as well as any tax which could qualify as an "income
tax" under United States Treasury Regulation Section 1.901-2 (except to the
extent any such statute or regulation is subsequently modified to include a tax
or other governmental charge of a materially different type and nature from the
taxes currently described therein) and any income tax which may be payable
under the laws of any
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jurisdiction either now or in the future. Real Estate Taxes for any given tax
year shall exclude assessment installments that are not due and payable during
such tax year.
6.2 PERSONAL PROPERTY TAXES. Tenant shall pay directly to the
appropriate taxing authorities prior to delinquency any and all taxes and
assessments levied or assessed during the Term upon or against Tenant's
furniture, equipment, trade fixtures and any other personal property in the
Premises.
6.3 RIGHT TO CONTEST. Tenant shall not be required to pay any
Real Estate Taxes or any other taxes for which Tenant is liable hereunder
(including, without limitation, any taxes for which Tenant is required to
indemnify Landlord under Section 19.1) (including penalties and interest), so
long as (i) Tenant shall contest the same or the validity thereof by
appropriate legal proceedings in such a manner to prevent the tax sale of any
portion of the Premises and (ii) the position to be taken by Tenant pursuant to
such contest would have a realistic possibility of success if litigated. For
purposes of this Lease, Tenant may conclusively establish that a position to be
taken in a contest would have a realistic possibility of success if litigated
by providing to Landlord a letter from counsel stating an opinion to such
effect. In the event of any such contest, Tenant shall, within thirty (30)
days after the final determination thereof, pay and discharge the amounts
determined to be due in accordance therewith and with the provisions of this
Lease, together with any penalties, fines, interest, costs and expenses that
may have accrued thereon or that may have resulted from Tenant's contest.
Tenant also shall have a right to contest any taxes for which it is liable
hereunder, but with regard to which the position to be taken pursuant to such
contest would not have a realistic possibility of success if litigated,
provided that Tenant pays such taxes on or prior to the date upon which such
taxes are asserted to be due by the relevant governmental authority.
Notwithstanding the foregoing provisions of this Section 6.3, Tenant shall have
an unconditional right to contest (without prior payment) any taxes imposed by
law upon Tenant rather than upon Landlord. Tenant's decision to pay any taxes
prior to contesting its or another party's underlying liability therefore shall
not be deemed to imply or suggest that the position to be taken in such contest
would not have a realistic possibility of success if litigated. Landlord shall
cooperate fully with Tenant in connection with the exercise of Tenant's right
of contest contained herein, and in the event that applicable law shall require
that Landlord, rather than Tenant, pursue legal proceedings for such contest,
Landlord will initiate and pursue such contest upon Tenant's request and in
accordance with Tenant's instructions (including, without limitation, Tenant's
instructions as to the selection of legal counsel and matters of strategy or
settlement); provided, however, that Landlord shall not be subject to any
liability for the payment of any costs or expenses in connection with any such
contest or proceedings, and Tenant will indemnify and save harmless Landlord
from any such costs and expenses (including, without limitation, reasonable
attorneys' fees, costs of court and appraisal costs), reimbursing Landlord
therefor upon demand (or paying such costs and expenses directly when due, all
as directed by Landlord). Tenant shall be entitled to any refund of any taxes
and penalties or interest from any governmental authority to the extent the
refund represents monies paid to the governmental authority by Tenant or paid
by Landlord and reimbursed by Tenant.
6.4 ADDITIONAL CHARGES. All payments made by Tenant under this
Lease shall be made free and clear of, and without reduction or withholding for
or on account of, any present or future taxes, levies, imposts, duties,
charges, fees, deductions or withholdings, now or hereafter imposed, levied,
collected, withheld or assessed pursuant to any Legal Requirement, excluding,
however, any Landlord Taxes (all such nonexcluded taxes, levies, imposts,
deductions, charges or withholdings being hereinafter called "Additional
Charges"). Tenant shall be responsible for the payment of any such Additional
Charges; and if any such Additional Charges are required to be withheld from
any amounts payable to Landlord hereunder, then the amounts so payable to
Landlord shall be increased by an amount
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("Additional Amount") necessary to yield to Landlord (after payment of all
Additional Charges) the Base Rent and other amounts payable hereunder at the
rates or in the amounts specified in this Lease. Whenever any Additional
Charges are required to be withheld by Tenant, such Additional Charges shall be
deducted or withheld by Tenant, and shall be paid by Tenant to the appropriate
governmental authority in accordance with applicable Legal Requirements. As
promptly as possible thereafter, Tenant shall send to Landlord for its own
account a copy of an original official receipt (or other evidence of payment)
received by Tenant showing payment thereof. If Tenant is required to pay
Landlord any Additional Amount, Landlord shall use its best efforts (consistent
with its internal policy and legal and regulatory restrictions) to change its
jurisdiction if the making of such a change would avoid the need for, or reduce
to the greatest extent possible the amount of, any such Additional Amount which
may thereafter accrue and would not, in the reasonable judgment of Landlord be
otherwise disadvantageous to Landlord. If Landlord subsequently receives a
refund of any Additional Amounts, or if such Additional Amounts result in a net
benefit to Landlord, the amount of such refund or net benefit shall be paid to
Tenant within 30 days of the receipt of such refund or net benefit; provided,
however, that the payment to Tenant shall not exceed the Additional Amount to
which the refund or net benefit relates. The agreements in this Section 6.4
shall survive the termination of this Lease with respect to any Additional
Charges that become due during the Term.
ARTICLE 7
INSURANCE
7.1 LIABILITY INSURANCE. At all times during the Term, Tenant
shall obtain at Tenant's sole cost and expense a policy or policies of
comprehensive general liability insurance on an "occurrence" basis against
claims for "personal injury" liability, including bodily injury, death or
property damage liability. The liability insurance policy shall have a
combined single limit of Five Million Dollars ($5,000,000) per occurrence.
7.2 BUILDERS' RISK INSURANCE. With respect to any improvements
which may be under construction and not yet covered by insurance under the
terms of Section 7.3, Tenant shall maintain or cause to be maintained a policy
or policies of builders' risk insurance in an amount equal to the value upon
completion of the work (exclusive of land, foundation, excavation, grading,
landscaping, architectural and development fees and other items customarily
excluded from such coverage), insuring against the risks customarily insured
against under such insurance, including fire, vandalism, malicious mischief,
sprinkler leakage, lightning, and windstorm.
7.3 ALL-RISK INSURANCE. With respect to any improvement now or
hereafter situated on the Land, prior to the termination of the builders' risk
insurance required by Section 7.2, and at all times thereafter, Tenant shall,
at Tenant's sole cost and expense, obtain and maintain, or cause to be obtained
and maintained, (a) a policy or policies of all-risk insurance covering the
improvements, providing coverage against loss or damage by fire, vandalism,
malicious mischief, sprinkler leakage, lightning, windstorm, and other
insurable perils, as, under good insurance practice, from time to time are
insured against under all-risk coverage for properties of similar character,
age and location in an amount or amounts not less than one hundred percent
(100%) of the then actual replacement cost (exclusive of land, foundation,
excavations, grading, landscaping, architectural and development fees and other
items customarily excluded from such coverage and without any deduction for
depreciation); (b) standard earthquake coverage, with a deductible not to
exceed ten percent (10%) of the insured amount; and (c) standard flood
coverage. Provided, however Tenant may elect not to obtain earthquake
insurance, in which case Tenant shall covenant to pay the cost of repairing
damage to the improvements caused by an earthquake.
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7.4 GENERAL REQUIREMENTS. The insurance required under this
Article 7 may be furnished under a "primary" policy and an "umbrella" policy or
policies. Landlord shall be named as an additional insured under Tenant's
policy of insurance required under Section 7.1; and such policies shall contain
an endorsement for cross-liability coverage. Tenant shall furnish Landlord
with certificates from Tenant's insurers with respect to the insurance required
to be carried hereunder on or before the date such insurance is required to be
carried. The certificates shall state that such insurance is in full force and
effect and that coverage will not be reduced below the amounts required under
Section 7.1 or otherwise limited or cancelled without thirty (30) days' prior
written notice to Landlord. Renewal certificates shall be furnished to
Landlord not less than thirty (30) days prior to the expiration of each such
policy, provided, however, that Tenant shall not be required to provide
Landlord with such renewal certificates prior to the expiration of each such
policy so long as (i) Tenant provides Landlord with reasonable assurances
within ten (10) days prior to the expiration of each such policy that there
will be no lapse in the insurance coverage provided under such policy, and (ii)
Tenant provides Landlord with such renewal certificates within ten (10) days
following the expiration of each such policy. Any blanket insurance policy or
policies that insure Tenant against the risks and for the amounts herein
specified shall be deemed to satisfy the obligation of Tenant hereunder,
provided that any such policy of blanket insurance shall specify the amount of
the total insurance allocated to the risks required to be insured hereunder and
such allocated amount meets the requirements of this Article 7. All insurance
required by this Article 7 shall be with an insurance company licensed to do
business in the State of California with a general policyholder's rating, as
rated by the most current available "Bests" Insurance Reports, of no less than
A/VIII, and shall be non- contributing.
7.5 WAIVER OF SUBROGATION. Notwithstanding anything to the
contrary contained herein, to the extent permitted by law and so long as any
insurance coverage maintained by Tenant is not diminished by reason thereof,
Tenant hereby (a) releases and waives any rights it may have against Landlord
and its officers, agents and employees on account of any loss or damages
occasioned to Tenant, its property or the Premises, and arising from any risk
covered by any fire and extended coverage insurance maintained by Tenant,
whether or not due to the negligence of Landlord, its agents, employees,
contractors, licensees, invitees or other persons, and (b) waives on behalf of
any insurer providing such insurance to Tenant any right of subrogation that
any such insurer may have or acquire against Landlord or such persons by virtue
of payment of any loss under such insurance. Tenant shall use its commercially
reasonable efforts to cause its insurance policies to contain a waiver of
subrogation clause in accordance with the foregoing.
7.6 INDEMNITY. After receiving written notice from Landlord of
a claim (failure to give such notice shall not relieve Tenant of its
obligations hereunder unless as a direct result of failure to give such
notice), Tenant shall protect, defend, indemnify, hold and save Landlord
harmless from and against any and all losses, costs, liabilities or damages
(including reasonable attorneys' fees and disbursements and court costs)
arising by reason of: (i) any and all injury or death of persons or damage to
property against which Tenant is obligated to maintain insurance for the
benefit of Landlord pursuant to this Article 7; (ii) the failure to obtain the
waiver of subrogation clause required by Section 7.5 hereof where such clause
could have been obtained through the exercise of Tenant's commercially
reasonable efforts; or (iii) the invalidation of such insurance policy required
to be obtained by Tenant hereunder by Tenant's insurer; provided this
subsection (iii) shall not apply to the extent Landlord actually receives
insurance for the aforesaid losses, costs, liabilities or damages (including
reasonable attorneys' fees and disbursements and court costs but excluding
costs, fees or premiums paid by Landlord in connection with such insurance) or
to the extent recovery of insurance proceeds is prevented by Landlord's gross
negligence. Tenant's duty to indemnify Landlord under this Section 7.6 shall
survive the expiration or earlier termination of this
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Lease with respect to events occurring during the Term. Landlord agrees to
cooperate with Tenant in the defense of any claim undertaken by Tenant pursuant
to this Section.
ARTICLE 8
USE
8.1 USE.
(a) PERMITTED. Tenant may use the Premises for any
lawful purpose.
(b) ENVIRONMENTAL COMPLIANCE.
1) DEFINED TERMS. The term "Applicable
Environmental Laws" shall mean any applicable laws, regulations or ordinances
pertaining to health or the environment, including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended by the Superfund Amendments and Reauthorization Act of 1986 or
otherwise (as amended, hereinafter called "CERCLA"), the Resource Conservation
and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the
Solid Waste Disposal Act Amendments of 1980, the Hazardous and Solid Waste
Amendments of 1984 or otherwise (as amended, hereinafter called "RCRA"), and
the California Health & Safety Code Section 25501(j). The terms "hazardous
substance" and "release" as used in this Lease shall have the meanings
specified in CERCLA, and the terms "solid waste" and "disposal" (or "disposed")
shall have the meanings specified in RCRA; provided, in the event either CERCLA
or RCRA is amended or superseded by other laws so as to broaden the meaning of
any term defined thereby, such broader meaning shall apply subsequent to the
effective date of such amendment or other laws: and, provided further, to the
extent that the laws of the State of California establish a meaning for
"hazardous substance", "release", "solid waste", or "disposal" which is broader
than that specified in either CERCLA or RCRA, such broader meaning shall apply.
2) TENANT'S COVENANTS. Tenant will not cause or
permit the Premises to be in violation of, or do anything or permit anything to
be done which subjects Landlord, Tenant or the Premises to any remedial
obligations relating to the Premises under or which creates a valid claim or
cause of action against Landlord, Tenant (which relates to the Premises) or the
Premises under, any Applicable Environmental Laws, including, without
limitation, CERCLA, RCRA, and the California Health and Safety Code 25501(j),
assuming disclosure to the applicable governmental authorities of all relevant
facts, conditions and circumstances, if any, pertaining to the Premises and
Tenant will promptly notify Landlord in writing of any existing, pending or
threatened investigation, claim or inquiry of which Tenant has knowledge by any
governmental authority in connection with any Applicable Environmental Laws.
Tenant shall obtain any permits, licenses or similar authorizations to
construct, occupy, operate or use any improvements, fixtures and equipment at
any time located on the Premises by reason of any Applicable Environmental
Laws. Tenant will not use the Premises in a manner which will result in the
disposal or other release of any hazardous substance or solid waste on or to
the Premises in violation of Applicable Environmental Law and covenants and
agrees to keep or cause the Premises to be kept free of any hazardous
substance, solid waste or environmental contaminants (including, without
limitation, arsenic in soil and friable asbestos and any substance containing
asbestos deemed hazardous by any Applicable Environmental Law) to the extent
required by Applicable Environmental Law, and to remove the amounts of the same
(or if removal is prohibited by law, to take whatever action is required by
law) promptly upon discovery at Tenant's sole expense to the extent required by
Applicable Environmental Law. Tenant shall promptly notify Landlord in writing
of any disposal or other release of any hazardous substance, environmental
contaminants or solid wastes on or to the Premises in violation of Applicable
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Environmental Law. In the event Tenant fails to comply with or perform any of
the foregoing covenants and obligations, after thirty (30) days' prior written
Notice to Tenant, Landlord may, but shall be under no obligation to, cause the
Premises to be freed from such hazardous substance, solid waste or
environmental contaminants (or if removal is prohibited by law, to take
whatever action is required by law) to the extent required by Applicable
Environmental Law and the reasonable cost of the removal or such other action
shall be a demand obligation owing by Tenant to Landlord pursuant to this
Lease. Notwithstanding the foregoing, Landlord shall have no right to cause
the removal of such materials and no Event of Default (or default) shall be
deemed to have occurred under this Lease so long as Tenant both: (1) is
diligently and in good faith proceeding to comply with Tenant's obligation to
remove such amounts of such materials; and (2) has the financial ability to so
comply. Subject to the foregoing, Tenant grants to Landlord and Landlord's
agents and employees access to the Premises, and the license to remove such
hazardous substance, solid waste or environmental contaminants (or if removal
is prohibited by law, to take whatever action is required by law to the extent
required by Applicable Environmental Law); and except for Landlord's willful
misconduct or gross negligence, agrees to indemnify and save Landlord harmless
from all reasonable costs and expenses involved and from all claims (including
consequential damages) asserted or proven against Landlord by any party in
connection therewith. Upon Landlord's reasonable request for "good cause"
(defined below), at any time and from time to time during the Term, Tenant will
provide at Tenant's sole expense an inspection or audit of the Premises from an
engineering or consulting firm approved by Landlord, indicating the presence or
absence of any hazardous substance, solid waste or environmental contaminants
located on the Premises. If Tenant fails to provide same after sixty (60)
days' notice, Landlord may order same, and Tenant grants to Landlord and
Landlord's employees and agents access to the Premises and a license to
undertake any testing reasonably required to obtain such inspection or audit.
The reasonable cost of obtaining such inspection or audit and any expenses
incurred by Landlord in connection therewith, shall be a demand obligation
owing by Tenant to Landlord pursuant to this Lease. For purposes of this
Section 8.1(b)(2), "good cause" shall mean that Landlord shall have reasonable
grounds to believe that release or disposal of hazardous substances or solid
wastes in violation of Applicable Environmental Law has occurred on the
Premises.
(c) COMPLIANCE WITH LEGAL REQUIREMENTS. Tenant shall at
all-times comply with all material Legal Requirements applicable to the Land or
any improvements now or hereafter situated on the Land and/or the use thereof.
8.2 CONTEST OF LEGAL REQUIREMENTS. Tenant shall have the right
at its sole cost and expense to contest the validity of any Legal Requirements
applicable to the Premises by appropriate proceedings diligently conducted in
good faith; and upon the request of Tenant and at Tenant's sole cost and
expense, Landlord will join and cooperate with Tenant in such proceedings.
Subject to Section 6.3, and any other provision of this Lease to the contrary
notwithstanding, Tenant's right to contest Legal Requirements must be exercised
in such a manner as to avoid any exposure of the Premises or any part thereof
to foreclosure or execution sale or exposure of Landlord to civil or criminal
penalties arising from Tenant's non-compliance with such Legal Requirements.
Tenant shall defend and indemnify Landlord against, and hold Landlord harmless
from, any and all liability, loss, cost, damage, injury or expense (including,
without limitation, attorneys' fees and costs) which Landlord may sustain or
suffer by reason of Tenant's failure or delay in complying with, or Tenant's
contest of, any such Legal Requirements (or Landlord's contest, if requested in
writing by Tenant), and Tenant's duty to indemnify Landlord under this Section
8.2 shall survive the expiration or earlier termination of this Lease.
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ARTICLE 9
UTILITIES AND SERVICES
9.1 SERVICES TO THE PREMISES. At Tenant's sole cost and
expense, Tenant shall make its own arrangements for the provision of all
utilities and services to be provided to or consumed on the Premises,
including, without limitation, air conditioning and ventilation, service
contracts, heating, electric power, telephone, water (both domestic and fire
protection), sanitary sewer, storm drain, natural gas and janitorial services,
including for the installation, maintenance and repair of service lines and
meters to measure Tenant's consumption of such utilities.
ARTICLE 10
MAINTENANCE AND REPAIRS; SURRENDER OF THE PREMISES
10.1 TENANT OBLIGATIONS. Landlord shall have no obligation to
maintain the Premises. Tenant shall at all times and at Tenants' sole cost and
expense maintain the Premises in good repair, normal wear and tear and casualty
excepted.
10.2 SURRENDER OF THE PREMISES. Except as provided in Section
17.1 below, upon the expiration or earlier termination of the Term, Tenant
shall surrender the Premises to Landlord in its then "AS-IS" condition,
including, without limitation, any condition resulting from: (i) wear and tear;
(ii) obsolescence and damage by fire or other casualty, act of God or the
elements; (iii) damage that is caused by Landlord, its agents, employees or
contractors; and (iv) any improvements, in, to or of the Premises or on the
Land which are not Tenant's Property which Tenant may elect to remain on the
Land or the Premises. Title to all Tenant's Property, shall be and remain in
Tenant, and at any time during the Term of this Lease, the same may be removed
by Tenant, or, at Tenant's abandonment or written election, surrendered with
the Premises, in which event title to such surrendered property shall, if
Landlord so elects in Landlord's sole discretion, be deemed transferred to
Landlord. Any of such property that is not removed from the Premises on or
prior to the expiration or early termination of this Lease shall be considered
abandoned and Landlord may deal with it as Landlord elects.
ARTICLE 11
ASSIGNMENT BY LANDLORD
11.1 FURTHER MORTGAGES OR ENCUMBRANCES BY LANDLORD. Except for
the SBLF Deed of Trust (which is hereby approved by Tenant), Landlord shall not
cause or create any mortgages, deeds of trust, encumbrances or exception to
exist with respect to the Premises at any time.
11.2 LANDLORD'S RIGHT TO SELL. Landlord may not transfer all or
any portion of its right, title and interest in the Premises; provided, however
that nothing contained in this Lease shall be deemed in any way to limit,
restrict or otherwise affect the right of Landlord at any time and from time to
time to sell or transfer all but not less than all of its right, title and
estate in the Premises to: (1) a Landlord Affiliate or another financial
institution (excluding, however, a non-substantive entity that is formed
specifically for purposes of owning the Premises subject to this Lease and has
no other substantive operations or which is a special purpose entity under the
provisions of EITF 90-15), provided such Landlord Affiliate or other financial
institution has a minimum capitalization and surplus in excess of $50,000,000;
or (2) if an Event of Default has occurred and is continuing at the time of
such sale or transfer, to any Entity. Any sale or transfer by Landlord
whatsoever shall by its express terms recognize and confirm the right of
possession of Tenant to the Premises and
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Tenant's other rights arising out of this Lease shall not be affected or
disturbed in any way by any such sale, transfer, assignment or conveyance
(except for any disturbance resulting from a foreclosure sale conducted
pursuant to the laws of the State of California at which independent third
party bids were permitted pursuant to the SBLF Deed of Trust), and any
transferee shall expressly assume in writing all obligations of Landlord to be
performed following the date of transfer. Landlord shall have the right to
pledge its interest in this Lease, the SBLF Deed of Trust and any other
documents as security for a loan to Landlord from a third party Lender which
meets the standards set forth in Section 11.2(1) hereof and/or transfer its
ownership right in the Base Rent and Additional Rent to such Lender.
11.3 TRANSFER OF FUNDS AND PROPERTY. At each time Landlord
sells, assigns, transfers or conveys the entire right, title and estate of
Landlord in the Premises and in this Lease, Landlord shall turn over to the
transferee any funds or other property then held by Landlord under this Lease
and thereupon all the liabilities and obligations on the part of the Landlord
under this Lease arising after the effective date of such sale, assignment,
transfer or conveyance shall terminate as to the transferor and be binding upon
the transferee.
ARTICLE 12
ASSIGNMENT AND SUBLEASING
12.1 RIGHT TO ASSIGN.
(a) TENANT'S RIGHT. Provided that there is not an Event
of Default under this Lease which is continuing and uncured or if there is such
an Event of Default, provided that Tenant cures the Default in connection with
the assignment, Tenant shall have the right, at any time and from time to time
during the Term, to assign all or any portion of its right, title and estate in
the Premises and in this Lease without approval by Landlord. Any such
assignee, immediate or remote, shall have the same right of assignment. Any
such assignment shall be evidenced by a written instrument, properly executed
and acknowledged by all parties thereto and, at Tenant's election, duly
recorded in the Official Records, wherein and whereby the assignee assumes all
of the obligations of Tenant under this Lease. Notwithstanding any such
assignment and assumption or any sublease permitted under Section 12.2 hereof,
Tenant shall remain primarily liable for all obligations and liabilities on the
part of Tenant theretofore or thereafter arising under this Lease.
(b) NOTICE. Tenant shall, promptly after execution of
each assignment, notify Landlord of the name and mailing address of the
assignee and shall, on demand, permit Landlord to examine and copy the
assignment agreement.
12.2 RIGHT TO SUBLET.
(a) TENANT'S RIGHT. Tenant shall have the right, at any
time and from time to time during the Term, to sublet all or any portion of the
Premises and to extend, modify or renew any sublease without the approval of
Landlord.
(b) NOTICE. Tenant shall, promptly after execution of
each sublease, notify Landlord of the name and mailing address of the subtenant
and shall, on demand, permit Landlord to examine and copy the sublease.
12.3 MORTGAGE BY TENANT. Tenant shall not have the right to
mortgage, pledge or otherwise encumber all or any portion of the right, title
and estate of Tenant in the Premises or in this Lease, without the consent of
Landlord.
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ARTICLE 13
EMINENT DOMAIN
13.1 TOTAL OR SUBSTANTIAL TAKING. If title or access is taken
for any public or quasi-public use, or under any statute or by right of
condemnation or eminent domain, or by sale in lieu thereof (a "Taking") with
respect to all of the Premises, or if title to so much of the Premises or
access thereto is Taken, or if the Premises or access thereto is damaged,
blocked or impaired by the Taking, so that, in Tenant's reasonable discretion,
the Premises or access thereto, even after a reasonable amount of
reconstruction thereof, will no longer be suitable for the conduct of Tenant's
(and/or Tenant's subtenants') business, then in any such event, this Lease
shall terminate on the date of such Taking.
13.2 PARTIAL TAKING. If any part of the Premises, or access
thereto, shall be Taken, and the Premises or the remaining part thereof and
access thereto will be, in Tenant's reasonable discretion, suitable for the
conduct of Tenant's (and/or Tenant's subtenants') business in a manner
consistent with the conduct of such business prior to such Taking, all of the
terms, covenants and conditions of this Lease shall continue, except that Base
Rent shall be adjusted to reflect the decreased Lease Investment Balance
remaining after application thereto of the award made to Landlord for such
Taking.
13.3 TEMPORARY TAKING. If the whole or any part of the Premises
is Taken for temporary use or occupancy, this Lease shall not terminate by
reason thereof and Tenant shall continue to pay, in the manner and at the times
herein specified, the full amount of the Base Rent payable by Tenant hereunder,
and, except only to the extent that Tenant may be prevented from so doing by
reason of such Taking, Tenant shall continue to perform and observe all of the
other terms, covenants and conditions hereof on the part of Tenant to be
performed and observed, as though the Taking had not occurred. In the event of
any such temporary Taking, Tenant shall be entitled to receive the entire
amount of the award made for the Taking, whether paid by way of damages, rent
or otherwise. If the temporary Taking is for a term in excess of thirty (30)
days, then the Taking shall be treated as a permanent Taking and be governed by
Sections 13.1 or 13.2, as applicable.
13.4 DAMAGES. The compensation attributable to the Premises (in
each case the compensation or value shall be determined as of the date of the
Taking) awarded or paid upon any Taking (other than a temporary Taking, which
shall be governed by Section 13.3), whether awarded to Landlord, Tenant, or
both of them, shall be held by Landlord to be applied against the Lease
Investment Balance, including all accrued and unpaid Base Rent and Additional
Rent. Any compensation in excess of the Lease Investment Balance plus all
accrued and unpaid Base Rent and Additional Rent shall be paid to Tenant.
13.5 NOTICE AND EXECUTION. Immediately upon service of process
upon Landlord or Tenant in connection with any Taking relating to the Premises
or any portion thereof or access thereto, each party shall give the other
Notice thereof. Each party agrees to execute and deliver to the other all
instruments that may be required to effectuate the provisions of this Article
13. Tenant reserves the right to appear in and to contest any proceedings in
connection with any such Taking. Tenant shall immediately reimburse Landlord
on demand for all reasonable out-of-pocket costs and expenses incurred by
Landlord in complying with Landlord's obligations under this Section 13.5.
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ARTICLE 14
DAMAGE OR DESTRUCTION
14.1 CASUALTY INSURANCE PROCEEDS. In the event of any casualty,
the proceeds of any insurance policies maintained by Tenant pursuant to Section
7.2 or 7.3 shall be held, applied and dealt with as follows:
(a) Any proceeds (per occurrence) of such policies
attributable to the Premises shall be paid as follows: (1) to Landlord (but
only to the extent of the then-existing Lease Investment Balance); and (2) with
any remaining excess to be paid to Tenant.
(b) Any insurance proceeds paid to Landlord under this
Article 14 shall reduce the Lease Investment Balance by a like amount.
ARTICLE 15
QUIET ENJOYMENT
15.1 QUIET ENJOYMENT. Landlord covenants to secure to Tenant the
quiet possession of the Premises for the full Term against all persons claiming
the same, by, through or in the right of Landlord, subject to Landlord's rights
and remedies under Article 16 upon an Event of Default by Tenant. The
existence of any Permitted Title Exceptions shall not be deemed to constitute a
breach of Landlord's obligations hereunder. Tenant shall, immediately upon
demand, reimburse Landlord for all reasonable costs, expenses and damages
incurred or paid by Landlord in the performance of Landlord's obligations under
this Article 15 (except for any costs, expenses or damages arising from any
Landlord liens or Landlord's willful breach of this Lease).
ARTICLE 16
DEFAULT
16.1 DEFAULT. Each of the following events shall constitute an
event of default ("Event of Default") by Tenant:
(a) FAILURE TO PAY BASE RENT. Tenant's failure to pay
any Base Rent within five (5) days after the due date.
(b) FAILURE TO PAY ADDITIONAL RENT. Tenant's failure to
pay any Additional Rent which is due to Landlord within five (5) days after the
due date under this Lease (which due date shall be the date of Tenant's receipt
of Notice from Landlord that such Additional Rent is due).
(c) FAILURE TO CARRY INSURANCE. Tenant's failure to
carry any policy of insurance required by Article 7, and Tenant shall not cure
such failure prior to ten (10) days after written notice thereof is sent to
Tenant. If such failure is susceptible of cure but cannot with reasonable
diligence be cured within such ten day period, and if Tenant shall promptly
have commenced to cure the same and shall thereafter prosecute the curing
thereof with reasonable diligence, the period within which such failure may be
cured shall be extended for such further period (not to exceed an additional
ten days beyond the initial ten days cure period) as shall be reasonably
necessary for the curing thereof.
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(d) INSOLVENCY. Subject to Section 16.2, the occurrence
of: (i) an assignment by Tenant for the benefit of creditors generally; or
(ii) the filing of a voluntary or involuntary petition by or against Tenant
under any present or future applicable federal, state or other statute or law
having for its purpose the adjudication of Tenant as a bankrupt; (iii) the
appointment of a receiver, liquidator or trustee for all or a substantial
portion of the Premises by reason of the insolvency or alleged insolvency of
Tenant; or (iv) the taking of possession by any department of city, county,
state or federal government, or any officer thereof duly authorized, of all or
a substantial portion of the Premises by reason of the insolvency or alleged
insolvency of Tenant; and Tenant's failure to timely give any Notice it is
permitted to give pursuant to Section 16.2 (or, in the event Tenant gives
timely Notice and pursues a contest under Section 16.2, Tenant's failure to
finally prevail in the contest).
(e) DEFAULT IN PAYMENT FOR OTHER CREDIT FACILITY.
Tenant's failure to make any payment required of Tenant in connection with any
other credit facility of Tenant, which payment default is not cured within any
applicable notice and cure period provided by such credit facility.
(f) DEFAULT IN PAYMENT OF LEASE INVESTMENT BALANCE.
Failure of Tenant to pay to Landlord the Lease Investment Balance at the end of
the Term or upon an Event of Default, unless Tenant has elected its option to
purchase or terminate under Article 17 obligations thereunder.
(g) DEFAULT IN COMPLETION OF PURCHASE OPTION OR PAYMENT
OF GUARANTEED RESIDUAL VALUE. Failure of Tenant to complete the Purchase
Option after election (or deemed election) to do so, or failure of Tenant to
perform all of its obligations pursuant to the Termination Option if Tenant has
elected to exercise the Termination Option (and has not rescinded its election
to exercise such option) set forth in Section 17.2, including, without
limitation, the obligations to make the payments required pursuant to Sections
17.2(b), (d) and (e).
(h) FINANCIAL COVENANTS. Tenant's failure at any time
during the Term of the Lease, subject to quarterly compliance (as measured on
the last day of each fiscal quarter of Tenant) to comply with the following
Financial Covenants:
(i) Quick Ratio. Tenant shall maintain a
ratio of (i) the sum of cash, short term Qualified Investments and accounts
receivable on a consolidated basis to (ii) Consolidated Current Liabilities
plus, to the extent not already included as Consolidated Current Liabilities,
the principal amount of Loans and the principal amount undrawn under Letters of
Credit then outstanding of at least 1.00:1.00.
(ii) Profitability.
(1) Tenant shall not in any fiscal
quarter have an operating and/or net loss on a consolidated basis greater than
ten percent (10%) of Tenant's Consolidated Tangible Net Worth as of the end of
such fiscal quarter;
(2) Tenant shall not have an operating
and/or net loss on a consolidated basis over any two (2) consecutive fiscal
quarter period including any fiscal quarter and the immediately preceding
fiscal quarter greater than ten percent (10%) of Tenant's Consolidated Tangible
Net Worth (as defined in Section 16.1(h)(iii)) as of the end of such fiscal
year;
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(3) Tenant shall not have an operating
and/or net loss on a consolidated basis in any three (3) consecutive fiscal
quarters as measured quarterly for that fiscal quarter and each of the
immediately preceding two (2) fiscal quarters; and
(4) Tenant shall not have an operating
and/or net loss on a consolidated basis in any four (4) consecutive fiscal
quarter period including any fiscal quarter and the immediately preceding three
(3) fiscal quarters.
For the purpose of calculating operating and net losses under this Section
16.1(h) up to $25,000,000.00 of expenses attributable to non-cash charges taken
in connection with Acquisitions otherwise permitted hereunder shall be
excluded.
(iii) Consolidated Tangible Net Worth. Tenant
shall maintain Consolidated Tangible Net Worth of at least $291,000,000.00 plus
(i) a minimum of 75% of quarterly net income (after taxes) for each fiscal
quarter after March 31, 1996 in which net income shall be positive, plus (ii)
100% of any new equity raised after March 31, 1996, minus (iii) 100% of the
cost of repurchases by Tenant of its capital stock after March 31, 1996 in an
aggregate amount of up to $25,000,000.00, and minus (iv) up to $25,000,000.00
of expenses attributable to non-cash charges taken in connection with
Acquisitions otherwise permitted hereunder.
(iv) Leverage Ratio. Tenant shall maintain a
ratio of Consolidated Total Liabilities (including the undrawn amount of all
outstanding Letters of Credit) to Consolidated Tangible Net Worth not to exceed
0.75:1.00.
(i) DEFAULT UNDER ADJACENT PROPERTY LEASE. The
occurrence of an "Event of Default" as defined and set forth under the Lease of
the Land by and between Landlord and Tenant dated as of July 6, 1995, as
amended by that certain First Amendment to Lease dated June 17, 1996 (the
"Adjacent Property Lease").
16.2 CONTEST BY TENANT. If upon the filing of any involuntary
petition of the type described in Section 16.1(d) or upon the appointment of a
receiver, other than a receiver appointed in any voluntary proceeding referred
to in Section 16.1(d), or the taking of possession of all or a substantial
portion of the Premises by any department of the city, county, state or federal
government, or any officer thereof duly authorized, by reason of the alleged
insolvency of Tenant without the consent or over the objection of Tenant,
should Tenant desire to contest the same in good faith, Tenant shall, within
ninety (90) days after the filing of the petition or after the appointment or
taking of possession, give Notice to Landlord that Tenant proposes to make the
contest, and the same shall not constitute an Event of Default so long as
Tenant shall prosecute the proceedings with due diligence and no part of the
Premises shall be exposed to sale by reason of the continuance of the contest.
16.3 LANDLORD'S REMEDIES. Landlord shall have the remedies
specified below:
(a) CONTINUE LEASE. In connection with an Event of
Default, Landlord shall have the right to enforce, by suit or otherwise, all
other covenants and conditions hereof to be performed or complied with by
Tenant and to exercise all other remedies permitted by Section 1951.2 or 1951.4
of the California Civil Code whichever is applicable, or any amendments
thereof. Landlord has the remedy described in California Civil Code Section
1951.2 or 1951.4. Upon application by Landlord, a receiver may be appointed to
take possession of the Premises and exercise all rights granted to Landlord as
set forth in this Section 16.3.
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(b) TERMINATE LEASE. In connection with an Event of
Default, Landlord may terminate this Lease, by giving Tenant Notice thereof, at
any time after the occurrence of such Event of Default and whether or not
Landlord has also exercised any right under Section 16.3(a). In such event
Tenant shall be obligated to purchase the Premises for an amount equal to the
Purchase Price described in the Purchase Option contained in Section 17.1 below
(that is, all accrued Base Rent, Additional Rent and the Lease Investment
Balance). Landlord shall also have its other remedies at law (including its
rights under the SBLF Deed of Trust), provided, however, that Tenant's
obligation to purchase the Premises pursuant to Section 17.2 shall survive any
termination of this Lease up through the date of foreclosure sale under the
SBLF Deed of Trust.
(c) LANDLORD'S CONTINUING OBLIGATION TO SELL. Except in
the case of a foreclosure under the SBLF Deed of Trust, in the event Landlord
obtains possession of the Premises pursuant to the terms of this Lease (because
of Tenant's default, Lease expiration, or otherwise), Landlord shall be under a
continuing obligation to use its commercially reasonable efforts to sell the
Premises to one or more unrelated third parties; provided, however, that
Landlord shall not be required to sell or attempt to sell any portion of the
Premises (i) in a manner, or under circumstances, that could materially impair
Landlord's ability to enforce any of its rights or remedies under this Lease
(as determined in Landlord's sole discretion exercised in good faith) or (ii)
at a time when market conditions render it inadvisable to sell or attempt to
sell the Premises (as determined in Landlord's sole discretion exercised in
good faith). Upon the occurrence of any such sale Landlord shall be obligated
to pay to Tenant any excess of the amount realized by Landlord in connection
with such sale over the Purchase Price (defined below). For purposes of the
preceding sentence, the amount realized by Landlord upon a sale of the Premises
shall be net of Landlord's reasonable sale expenses and other expenses
reasonably incurred by Landlord to consummate such sale. Landlord's obligation
to pay such excess to Tenant shall survive any termination of this Lease.
Tenant agrees that the Landlord will be deemed to be acting in good faith if it
refuses to sell its interest for less than the excess of the Lease Investment
Balance over the Guaranteed Residual Value.
In the event there is a foreclosure sale under the SBLF Deed of Trust,
then the party acquiring the property sold at such foreclosure sale (the
"Purchaser") shall have the option to purchase the fee simple interest in all,
but not less than all, of the then-existing Premises owned by Landlord on the
following terms: (i) such option to purchase must be exercised by written
notice delivered to Landlord no later than thirty (30) days following the date
of completion of the foreclosure sale, as evidenced by the recordation of a
deed conveying such property so sold at foreclosure by the trustee under the
SBLF Deed of Trust; (ii) the purchase price for the fee simple interest in the
then-existing Premises shall be the Purchase Price set forth in Section 17.1(a)
of the Lease (as adjusted to take into account all reductions in the Lease
Investment Balance resulting from payments received by Landlord, including
proceeds received by Landlord as a result of the foreclosure sale); and (iii)
the purchase and sale of the then-existing Premises shall be consummated in the
manner described in Section 17.1(c) of the Lease. In the event such Purchaser
fails to timely exercise the foregoing purchase option, the purchase option
shall expire and Landlord shall thereafter have no further obligation to sell
the then-existing Premises.
16.4 NO WAIVER. No failure by Landlord or Tenant to insist upon
the strict performance of any term, covenant or condition of this Lease or to
exercise any right or remedy consequent upon a breach thereof and no acceptance
of full or partial Base Rent or Additional Rent during the continuance of any
breach shall constitute a waiver of any such breach or of the term, covenant,
or condition. No term, covenant or condition of this Lease to be performed or
complied with by Tenant or Landlord, and no breach thereof, shall be waived,
terminated, altered or modified except by a written instrument executed by
Landlord
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and Tenant. No waiver of any breach shall affect or alter this Lease, but each
and every term, covenant, and condition of this Lease shall continue in full
force and effect with respect to any other then existing subsequent breach
thereof.
16.5 EFFECT OF ASSIGNMENT. Notwithstanding an Entity's prior
assignment or transfer of its interest as Tenant under this Lease, so long as
Landlord has been given Notice of such assignment pursuant to Sections 12.1 and
18.3, Landlord shall give such Entity copies of all Notices required by this
Article 16 in connection with any Event of Default, and such Entity shall have
the period granted hereunder to Tenant to cure such Event of Default, unless
such Entity shall have been released from all obligations arising under this
Lease. Landlord may not assert any rights against such Entity in the absence of
such Notice and opportunity to cure, so long as Landlord has been given Notice
of such assignment pursuant to Sections 12.1 and 18.3.
16.6 LANDLORD CURE RIGHT. If Tenant fails to perform any
covenant or agreement to be performed by Tenant under this Lease, and if the
failure or default continues for thirty (30) days after Notice to Tenant
(except for emergencies and except for payment of any lien or encumbrance
threatening the imminent sale of the Premises or any portion thereof, in which
case payment or cure may be made as soon as necessary to minimize the damage to
person or property caused by such emergency or to prevent any such sale),
Landlord may, but shall have no obligation to, pay the same and cure such
default on behalf of and at the expense of Tenant and do all reasonably
necessary work and make all reasonably necessary payments in connection
therewith including, but not limited to, the payment of reasonable attorneys'
fees and disbursements incurred by Landlord. Notwithstanding the foregoing,
Landlord shall have no right to cure any such failure to perform by Tenant so
long as Tenant: (1) is diligently and in good faith attempting to cure such
matter and prosecuting such cure to completion; (2) has the financial ability
to so comply; and (3) commenced cure of such matter within thirty (30) days
after Tenant's receipt of Notice thereof from Landlord. Failure by Tenant to
comply with the above shall allow Landlord to commence in a reasonable and
customary manner and in good faith to attempt to cure such matter. Upon
demand, Tenant shall reimburse Landlord for the reasonable amount so paid,
together with interest at the Default Rate from the date incurred until the
date repaid.
ARTICLE 17
TENANT'S OPTION TO PURCHASE OR TERMINATE
17.1 OPTION TO PURCHASE PREMISES.
(a) PURCHASE OPTION. On any Rent Payment Date during the
Term Tenant shall have the option ("Purchase Option") to purchase all of the
then-existing Premises. The purchase price ("Purchase Price") for the Premises
shall be the sum of accrued and unpaid Base Rent, any accrued and unpaid
Additional Rent, plus the Lease Investment Balance.
(b) PURCHASE OPTION EXERCISE NOTICE. If Tenant desires
to exercise the Purchase Option, Tenant shall deliver to Landlord thirty (30)
days prior written notice ("Purchase Option Exercise Notice") of Tenant's
election. If Tenant does not exercise the Termination Option as provided in
Section 17.2 below it shall be deemed to have exercised the Purchase Option.
(c) TRANSFER. If Tenant exercises the Purchase Option,
the purchase and sale of the Premises shall be consummated as follows:
(i) Landlord shall grant and convey the
Premises to Tenant, its authorized agent or assignee, pursuant to a duly
executed and acknowledged assignment and
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assumption of leasehold interest (as to the Land) and a grant deed as to the
Premises (collectively herein the "Deed"), free and clear of all title defects,
liens, encumbrances, deeds of trust, mortgages, rights-of-way and restrictive
covenants or conditions, of record, placed against the Premises by Landlord
except for the Permitted Title Exceptions (excluding the SBLF Deed of Trust),
and any UCC-1 filed or recorded which evidence security interests encumbering
the Premises or any part thereof in favor of SBLF, which security interests
SBLF shall cause to be released so that they no longer affect the Premises).
(ii) The Purchase Price shall be paid upon
delivery of the Deed and any other documents reasonably requested by Tenant to
evidence the transfer of the Premises subject to the Permitted Title Exceptions
(excluding the SBLF Deed of Trust, and any UCC-1 filed or recorded which
evidence security interests encumbering the Premises or any part thereof in
favor of Landlord, which security interests Landlord shall cause to be released
so that they no longer affect the Premises) ("Additional Documents"). In the
event that Tenant elects to assign the Purchase Option pursuant to Section
17.1(d) below, and Tenant's assignee pays an amount less than the Purchase
Price for the Premises, Tenant shall pay to Landlord any excess of the Purchase
Price over the amount paid by such assignee. Landlord shall deliver the Deed
and the Additional Documents to Tenant on the date for closing specified by
Tenant in the Purchase Option Exercise Notice. The closing shall take place at
the location and in the manner reasonably set forth by Tenant in the Purchase
Option Exercise Notice; provided that the date of closing shall occur no later
than the last day of the Term of the Lease.
(iii) If Landlord shall fail to cause title to
be in the condition required in Section 17.1(c)(i) above within the time herein
prescribed for the delivery of the Deed, then Tenant shall have the right (in
addition to all other rights provided by law) by a written notice to Landlord:
(1) to extend the time in which Landlord shall clear title and deliver the Deed
and Additional Documents, during which extension this Lease shall remain in
full force and effect, except Tenant shall be released from its obligation to
pay Base Rent during the extension; (2) to accept delivery of the Deed and
Additional Documents subject to such title defects, liens, encumbrances, deeds
of trust, mortgages, rights-of-way and restrictive covenants or conditions
specified and set forth in the Deed and not cleared by Landlord; (3) to
rescind, by notice to Landlord and without any penalty or liability therefor,
any and all obligations Tenant may have under and by virtue of the Purchase
Option or the exercise thereof, whereupon this Lease shall remain in full force
and effect; (4) if the title exception is curable by the payment of money,
Tenant may make such payment and such payment shall be a credit against the
Purchase Price in favor of Tenant.
(iv) Base Rent shall be prorated and paid and
all Additional Rent which is then due and payable shall be paid as of the date
title to the Premises is vested of record in Tenant. Tenant shall pay the
escrow fees; the recorder's fee for recording the Deed; the premium for the
title insurance policy; all documentary transfer taxes; Tenant's attorneys'
fees; Landlord's reasonable attorneys' fees; all other costs and expenses
incurred by Tenant in consummating the transfer of the Premises; and all
reasonable expenses (except as specified in the next sentence) incurred by
Landlord in consummating the transfer of the Premises pursuant to this Section
17.1. Landlord shall pay the costs and expenses of clearing title as required
by Section 17.1(c)(i).
(d) ASSIGNMENT. Tenant shall have the right, without
Landlord's consent, to assign this Purchase Option, in whole, to any Entity at
any time, whether or not Tenant also assigns its interest in the Lease.
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17.2 TERMINATION OPTION.
(a) NOTICE. Provided that no Event of Default has occurred and
is continuing, unless Tenant has notified Landlord prior to such date that it
elects the Purchase Option, Tenant may, on the date which is four (4) months
prior to the expiration of the Term, exercise an option ("Termination Option")
to sell the Premises; provided, however that at any time Tenant can rescind its
election to exercise its Termination Option if it then exercises its Purchase
Option pursuant to Section 17.1 above. The four (4) month period is referred
to herein as the "Sales Period".
(b) TERMINATION OPTION. After giving the notice set forth in
section (a) above Tenant shall then use its best efforts to sell the Premises
for cash to a third party purchaser (who is not an affiliate of Tenant within
the meaning of Rule 405 under the Securities Act of 1933) and, if the Premises
are not conveyed to such purchaser prior to the expiration of the Term, Tenant
shall have no further right to sell the Premises and Landlord may, at its
option either allow the Tenant to holdover pursuant to Section 4.2 above, or
terminate the Lease in which case Tenant shall immediately vacate the Premises,
and quitclaim all interest of Tenant, if any, therein to Landlord, and pay to
Landlord the Guaranteed Residual Value as provided in Section 17.2(d) below.
(c) TERMINATION OPTION PROCEDURES. In the event that Tenant
elects the Termination Option, Tenant shall use its best efforts throughout the
Sales Period to obtain a purchaser (who is not an affiliate of Tenant as
described above) for the Premises. Tenant shall have the exclusive right to
market the Premises during the first three (3) months of the Sales Period (the
"Exclusive Period"). Landlord may direct Tenant to hire and pay for no more
than one (1) commission sales agent after the expiration of the Exclusive
Period. Except as otherwise provided below, any sale by Tenant shall be for
the highest cash bid submitted to Tenant, including any cash bid submitted by
Landlord. The determination of the highest bid shall be made by Landlord prior
to the end of the Sales Period. After the end of the Exclusive Period,
Landlord may accept any bid solicited by Landlord, Tenant or its agent, in
which case Tenant's sales effort may be suspended until the earlier of the
closing of such sale on the last day of the Term or revocation or rejection of
such cash bid. Notwithstanding the above provisions, Tenant may (i) accept
during the Exclusive Period any cash bid (net of expenses of sale) which
exceeds the Lease Investment Balance, and (ii) rescind the Termination Option
at any time so long as it is exercising its Purchase Option, which shall be
prior and superior to an accepted offer from a third party. If Landlord
undertakes any sales efforts, Tenant shall promptly reimburse Landlord for any
reasonable charges, costs and expenses incurred in such effort, including any
commissions, allocated time charges, costs and expenses of internal counsel,
external counsel or other attorneys' fees.
(d) PAYMENTS UNDER TERMINATION OPTION. If Tenant elects the
Termination Option, Tenant shall pay to Landlord on the last day of the Term in
immediately available funds any Base Rent or Additional Rent due and owing
under the Lease. Except as provided in Section 17.2(e), the proceeds (the
"Proceeds") of any sale of the Premises pursuant to the Termination Option
shall be paid to Landlord upon any such sale without deductions, and not later
than the expiration of the Lease Term. If the Premises are not sold and
conveyed to a purchaser in exchange for Proceeds on or before the expiration of
the Lease Term, then on the expiration of the Lease Term, Tenant shall pay to
Landlord in immediately available funds an amount equal to the then Guaranteed
Residual Value.
(e) PROCEDURES UPON SALE UNDER THE TERMINATION OPTION. Any sale
pursuant to the Termination Option shall be consummated on the last day of the
Term. To the extent the Proceeds exceed the Lease Investment Balance, such
excess shall be paid out of escrow to Tenant. Upon payment to Landlord of all
amounts due it under this Lease, Landlord shall
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execute and deliver to the purchaser of the Premises a grant deed in the same
manner and subject to the same conditions and obligations as are set forth in
Section 17.1(c) above and have the same obligation to deliver title and remove
exceptions as set forth in said Section. Except as provided in the second
sentence of this subparagraph, the Proceeds shall be applied first to the Lease
Investment Balance; and Tenant shall reimburse Landlord for the difference
between the Lease Investment Balance (calculated immediately prior to receipt
of the Proceeds) and the Proceeds, up to the amount of the Guaranteed Residual
Value.
ARTICLE 18
MISCELLANEOUS
18.1 RELATIONSHIP. Neither this Lease nor any agreements or
transactions contemplated hereby shall in any respect be interpreted, deemed or
construed as constituting Landlord and Tenant as partners or joint venturers,
one with the other, or as creating any partnership, joint venture, association
or, except as set forth in Section 18.2 below, any other relationship other
than that of landlord and tenant: and, except as set forth in Section 18.2
below, both Landlord and Tenant agree not to make any contrary assertion,
contention, claim or counterclaim in any action, suit or other legal proceeding
involving either Landlord or Tenant or the subject matter of this Lease.
18.2 FORM OF TRANSACTION: CERTAIN TAX MATTERS.
(a) Landlord and Tenant hereby agree and declare that the
transactions contemplated by this Lease are intended to constitute, both as to
matters of form and substance:
(i) an operating lease for financial accounting
purposes, and
(ii) a financing arrangement (and not a "true
lease") for purposes of Federal, state and local income, property or other
forms of tax.
Accordingly, and notwithstanding any other provision of this Lease to the
contrary, Landlord and Tenant agree and declare that (A) the transactions
contemplated hereby are intended to have a dual, rather than single, form and
(B) all references in this Lease to the "Lease" of the Premises which fail to
reference such dual form do so as a matter of convenience only and do not
reflect the intent of Landlord and Tenant as to the true form of such
arrangements.
(b) Landlord and Tenant agree that, in accordance with
their intentions and the substance of the transactions contemplated hereby,
Tenant (and not Landlord) shall be treated as the owner of the Premises for
Federal, state, local income and property tax purposes and this Lease shall be
treated as a financing arrangement. Tenant shall be entitled to take any
deduction, credit allowance or other reporting, filing or other tax position
consistent with such characterizations. Landlord shall not file any Federal,
state or local income tax returns, reports or other statements in a manner
which is inconsistent with the foregoing provisions of this Section 18.2.
(c) Tenant acknowledges that it has retained accounting, tax
and legal advisors to assist it in structuring this Lease and Tenant is not
relying on any representations of Landlord regarding the proper treatment of
this transaction for accounting, income tax or any other purpose.
18.3 NOTICES. Each Notice shall be in writing and shall be sent
by personal delivery, overnight courier (charges prepaid or billed to the
sender) or by the deposit of such with the United States Postal Service, or any
official successor thereto, designated as registered or
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certified mail, return receipt requested, bearing adequate postage and in each
case addressed as provided in the Basic Lease Provisions. Each Notice shall be
effective upon being personally delivered or actually received. The time period
in which a response to any such Notice must be given or any action taken with
respect thereto shall commence to run from the date of personal delivery or
receipt of the Notice by the addressee thereof, as reflected on the return
receipt of the Notice. Rejection or other refusal to accept shall be deemed to
be receipt of the Notice sent. By giving to the other party at least thirty
(30) days' prior Notice thereof, either party to this Lease shall have the
right from time to time during the Term of this Lease to change the address(es)
thereof and to specify as the address(es) thereof any other address(es) within
the continental United States of America.
18.4 SEVERABILITY OF PROVISIONS. If any term, covenant or
condition of this Lease shall be invalid or unenforceable, the remainder of
this Lease, or the application of such term, covenant or condition to Entities
or circumstances other than those as to which it is invalid or unenforceable,
shall not be affected thereby.
18.5 ENTIRE AGREEMENT: AMENDMENT. This Lease constitutes the
entire agreement of Landlord and Tenant with respect to the subject matter
hereof. Neither this Lease nor any provision hereof may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against whom enforcement of the change, waiver, discharge or
termination is sought.
18.6 MEMORANDUM OF LEASE OF THE LAND. Neither party shall record
this Lease. However, concurrently with the execution of this Lease, Landlord
and Tenant have executed a Memorandum of Lease of the Land ("Memorandum of
Lease") in the form attached hereto as Exhibit D and by this reference made a
part hereof, which Memorandum of Lease shall be promptly recorded in the
Official Records.
18.7 SUCCESSORS AND ASSIGNS. Subject to Articles 11 and 12, this
Lease shall inure to the benefit of and be binding upon Landlord and Tenant and
their respective heirs, executors, legal representatives, successors and
assigns. Whenever in this Lease a reference to any Entity is made, such
reference shall be deemed to include a reference to the heirs, executors, legal
representatives, successors and assigns of such Entity.
18.8 COMMISSIONS. Landlord and Tenant each represent and warrant
that neither has dealt with any broker in connection with this transaction and
that no real estate broker, salesperson or finder has the right to claim a real
estate brokerage, salesperson's commission or finder's fee by reason of contact
between the parties brought about by such broker, salesperson or finder. Each
party shall hold and save the other harmless of and from any and all loss,
cost, damage, injury or expense arising out of or in any way related to claims
for real estate broker's or salesperson's commissions or fees based upon
allegations made by the claimant that it is entitled to such a fee from the
indemnified party arising out of contact with the indemnifying party or alleged
introductions of the indemnifying party to the indemnified party.
18.9 ATTORNEYS' FEES. In the event any action is brought by
Landlord or Tenant against the other to enforce or for the breach of any of the
terms, covenants or conditions contained in this Lease, the prevailing party
shall be entitled to recover reasonable attorneys' fees to be fixed by the
court, together with costs of suit therein incurred. Tenant shall pay the
reasonable attorneys' fees incurred by Landlord for the review and negotiation
of this Lease.
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18.10 GOVERNING LAW. This Lease and the obligations of the
parties hereunder shall be governed by and interpreted, construed and enforced
in accordance with the laws of the State of California.
18.11 COUNTERPARTS. This Lease may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall comprise but a single instrument.
18.12 TIME IS OF THE ESSENCE. Time is of the essence of this Lease, and of
each provision hereof.
18.13 NO THIRD PARTY BENEFICIARIES. This Lease is entered into by
Landlord and Tenant for the sole benefit of Landlord and Tenant. There are no
third party beneficiaries to this Lease.
18.14 LIMITATIONS ON RECOURSE. Except for the gross negligence or
willful misconduct of Landlord, the obligations of Tenant and Landlord under
this Lease shall be without recourse to any partner, officer, trustee,
beneficiary, shareholder, director or employee of Tenant or Landlord.
Landlord's liability to Tenant for any default by Landlord under this Lease:
(1) shall be limited to Landlord's equity in the Premises; and (2) shall extend
to any actual damages of Tenant, but shall not extend to any foreseeable and
unforeseeable consequential damages.
18.15 ESTOPPEL CERTIFICATES. Within thirty (30) days after
request therefor by either party, the non-requesting party shall deliver, in
recordable form, a certificate to any proposed mortgagee, purchaser, sublessee
or assignee and to the requesting party, certifying (if such be the case) that
this Lease is in full force and effect, the date of Tenant's most recent
payment of Base Rent, that, to the best of its knowledge, the non-requesting
party has no defenses or offsets outstanding, or stating those claimed, and any
other information reasonably requested. Failure to deliver said statement in
time shall be conclusive upon the non-requesting party that: (a) this Lease is
in full force and effect, without modification except as may be represented by
the requesting party; (b) there are no uncured defaults in the requesting
party's performance and the non-requesting party has no right of offset,
counterclaim or deduction against the non-requesting party's obligations
hereunder; (c) no more than one month's Base Rent has been paid in advance; and
(d) any other matters reasonably requested in such certificate.
18.16 AS-IS LEASE. Landlord makes no representations or
warranties concerning the condition, suitability or any other matters relating
to the Premises, and Tenant hereby acknowledges that Tenant leases the Premises
from Landlord on an "as is" basis.
18.17 NET LEASE. Except for Landlord's Taxes or as otherwise
provided in this Lease, Tenant agrees that this Lease is an absolute net Lease,
and the Base Rent called for hereunder shall be paid as required net of all
expenses associated with the Premises, including without limitation, Real
Estate Taxes and insurance premiums for the insurance required to be carried
hereunder, and all other reasonable and customary costs and expenses incurred
by Landlord and owed to independent third parties, in connection with the
Premises or this Lease, all of which shall be paid or reimbursed by Tenant
unless otherwise specifically provided herein. Tenant agrees to reimburse
Landlord, within five (5) business days following receipt of any written demand
therefor, for all reasonable and customary fees, late charges, title
endorsement and other costs and expenses charged to Landlord which accrue
during any period.
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18.18 LANDLORD'S REPRESENTATIONS AND WARRANTIES. Landlord hereby
represents and warrants that:
(a) Landlord has the full right and authority to enter into this
Lease, consummate the sale, transfers and assignments contemplated herein and
otherwise perform its obligations under this Lease;
(b) the person or persons signatory to this Lease and any document
executed pursuant hereto on behalf of such party have full power and authority
to bind such party; and
(c) the execution and delivery of this Lease and the performance of
such party's obligations hereunder do not and shall not result in the violation
of its organizational documents or any material contract or agreement to which
such party may be a party.
18.19 TENANT'S REPRESENTATIONS AND WARRANTIES. Tenant hereby
represents and warrants to Landlord that:
(a) CORPORATE STATUS. Tenant (i) is a duly organized and validly
existing corporation in good standing under the laws of the State of Delaware,
and (ii) has duly qualified and is authorized to do business and is in good
standing in all jurisdictions where the failure to do so might have a material
adverse effect on it or its properties.
(b) CORPORATE POWER AND AUTHORITY. Tenant has the corporate power and
authority to execute, deliver and carry out the terms and provisions of the
Lease and the SBLF Deed of Trust ("Operative Documents") to which it is or will
be a party and has taken all necessary corporate action to authorize the
execution, delivery and performance of the Operative Documents to which it is a
party and has duly executed and delivered each Operative Document required to
be executed and delivered by it and, assuming the due authorization, execution
and delivery thereof on the part of each other party thereto, each such
Operative Document constitutes a legal, valid and binding obligation,
enforceable in accordance with their respective terms except as limited by
bankruptcy, insolvency, reorganization, moratorium or other laws affecting the
enforcement of creditors' rights generally, and except as the remedy of
specific performance or of injunctive relief is subject to the discretion of
the court before which any proceeding therefor may be brought and except as
otherwise stated in the opinion of Tenant's counsel delivered to Landlord in
connection with the execution and delivery of this Lease.
(c) NO VIOLATION. Neither the execution, delivery and performance by
Tenant of the Operative Documents to which it is or will be a party nor
compliance with the terms and provisions thereof, nor the consummation by the
Tenant of the transactions contemplated therein (i) will result in a violation
by the Tenant of any applicable provision of any law, statute, rule,
regulation, order, writ, injunction or decree of any court or governmental
instrumentality having jurisdiction over the Tenant or the Premises that would
materially adversely affect (x) the validity or enforceability of the Operative
Documents to which the Tenant is a party, or the title to, or value or
condition of, the Premises, or (y) to the best of the Tenant's knowledge, the
consolidated financial position, business or consolidated results of operations
of the Tenant or the ability of the Tenant to perform its obligations under the
Operative Documents, (ii) will conflict with or result in any breach which
would constitute a default under, or (other than pursuant to the Operative
Documents) result in the creation or imposition of (or the obligation to create
or impose) any lien upon any of the property or assets of the Tenant pursuant
to the terms of any indenture, loan agreement or other agreement for borrowed
money to which the Tenant is a party or by which it or any of its property or
assets is bound or to which it may be subject (other than Permitted
Exceptions), or (iii) will violate any provision of the certificate of
incorporation or by-laws of the Tenant.
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(d) LITIGATION. Except as disclosed in Exhibit E, there are no
actions, suits or proceedings pending or, to the knowledge of the Tenant,
threatened (i) that are reasonably likely to have a material adverse effect on
the Premises or on the businesses, operations, financial condition or material
assets of the Tenant, or (ii) that question the validity of the Operative
Documents or the rights or remedies of the Landlord with respect to the Tenant
or the Premises under the Operative Documents.
(e) GOVERNMENTAL APPROVALS. Except as disclosed in Exhibit F, no
Governmental Action by any Governmental Authority having jurisdiction over the
Tenant, or the Premises is required to authorize or is required in connection
with (i) the execution, delivery and performance by the Tenant of any Operative
Document to which it is a party, or (ii) the legality, validity, binding-effect
or enforceability against the Tenant of any Operative Document to which it is a
party.
(f) INVESTMENT COMPANY ACT. Tenant is not an "investment company" or
a company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940 as amended.
(g) PUBLIC UTILITY HOLDING COMPANY ACT. Tenant is not a "holding
company" or a "subsidiary company," or an "affiliate" of a "holding company" or
of a "subsidiary company" of a "holding company", within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
(h) PROVIDED INFORMATION. The information and materials which were
provided by Tenant to the Landlord prior to the Date of Lease are true and
accurate in all material respects on the date as of which such information and
materials are dated or certified and are not incomplete by omitting to state
any fact necessary to make such information (taken as a whole) not misleading
at such time in light of the circumstances under which such information was
provided.
(i) TAXES. All United States Federal income tax returns and all
other tax returns which are required to have been filed have been or will be
filed by or on behalf of the Tenant by the respective due dates, including
extensions, and all taxes due with respect to the Tenant pursuant to such
returns or pursuant to any assessment received by the Tenant have been or will
be paid. The charges, accruals and reserves on the books of the Tenant in
respect of taxes or other governmental charges are, in the opinion of the
Tenant adequate.
(j) COMPLIANCE WITH ERISA. Each member of the ERISA Group has
fulfilled its obligations under the minimum funding standards of the Employee
Retirement Income Security Act of 1974, as amended from time to time ("ERISA")
and the Internal Revenue Code of 1986, as amended from time to time (the
"Code") with respect to each Plan and is in compliance in all material respects
with the presently applicable provisions of ERISA and the Code with respect to
each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum
funding standard under Section 412 of the Code in respect of any Plan, (ii)
failed to make any contribution or payment to any Plan or Multiemployer Plan,
or made any amendment to any Plan, which has resulted or could result in the
imposition of a lien or the posting of a bond or other security under ERISA or
the Code, or (iii) incurred any liability under Title IV of ERISA other than a
liability to the Pension Benefit Guaranty Corporation (the "PBGC") for premiums
under Section 4007 of ERISA. No "Plan Termination Event" has occurred with
respect to any Plan. No member of the ERISA Group has any knowledge of any
event that could result in a liability of any such member to the PBGC, whether
under a Plan, a Multiemployer Plan, or otherwise. There have not been any nor
are there now existing any events or conditions that would permit any Plan to
be terminated under
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circumstances that would cause the lien provided under Section 4068 of ERISA to
attach to the material assets of the Tenant or the ERISA Group. The value of
the Plans' benefits guaranteed under Title IV of ERISA on the date hereof does
not exceed the value of such Plans' assets allocable to such benefits as of the
date of this Lease. No member of the ERISA Group has incurred any "withdrawal
liability" within the meaning of Title IV of ERISA with respect to a
Multiemployer Plan. No "Prohibited Transaction" within the meaning of Section
406 of ERISA exists or will exist with respect to any Plan upon the execution
and delivery of this Lease or any Operative Document.
(k) ENVIRONMENTAL LAWS. To the best of Tenant's knowledge, except as
disclosed in Exhibit G, the Tenant is in compliance with all Environmental Laws
relating to pollution and environmental control in all domestic jurisdictions
in which all real property of the Tenant, including the Land, are located,
other than those the non-compliance with which would not have a material
adverse effect on such real property including the Land, or the consolidated
results of operations, business, or consolidated financial position of the
Tenant.
(l) OFFER OF SECURITIES, ETC. Neither the Tenant nor any person
authorized to act on the Tenant's behalf has, directly or indirectly, offered
any interest in the Premises or any other interest similar thereto (the sale or
offer of which would be integrated with the sale or offer of such interest in
the Premises), for sale to, or solicited any offer to acquire any of the same
from, any person other than the Landlord and other "accredited investors" (as
defined in Regulation D of the Securities and Exchange Commission).
(m) FINANCIAL STATEMENTS.
(i) The submitted financial statements, copies of which have
been delivered to the Landlord, present fairly in all material
respects, in conformity with generally accepted accounting principles,
the financial position of the Tenant as of such date and its results
of operations and cash flows for such fiscal year.
(ii) The unaudited consolidated statement of financial
position of the Tenant as of March 31, 1996 and the related unaudited
consolidated statements of income, and cash flows for the year to
date, copies of which have been delivered to Landlord, present fairly
in all material respects, in conformity with generally accepted
accounting principles applied on a basis substantially consistent with
the financial statements referred to in clause (i) of this subsection
(m), the consolidated financial position of the Tenant as of such date
and its consolidated results of operations and cash flows for such
year-to-date period (subject to normal year-end adjustments).
(n) PREMISES. To the best of Tenant's knowledge, the Premises will
comply in all material respects with all material requirements of law
(including, without limitation, all zoning and land use laws and environmental
laws) and insurance requirements.
(o) TITLE. The Grant Deed will be in form and substance sufficient
to convey good and marketable title to the Premises in fee simple, subject only
to Permitted Exceptions.
(p) FLOOD HAZARD AREAS. To the best of Tenant's knowledge, except as
otherwise identified on the survey delivered to Landlord, no portion of the
Premises are located in an area identified as a special flood hazard area by
the Federal Emergency Management Agency or other applicable agency. If the
Premises are located in an area identified as a special flood hazard area by
the Federal Emergency Management Agency or other applicable agency, then flood
insurance has been obtained for the Premises in accordance with Article 7 and
in accordance with the National Flood Insurance Act of 1968, as amended.
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(q) LEASE. Upon the execution and delivery of this Lease, (i) the
Tenant will have unconditionally accepted the Premises (provided that nothing
contained herein shall be deemed a waiver by the Tenant of any right of action
against persons with respect to title to and condition of the Premises on the
Date of Lease other than the Landlord) and will have good and marketable title
to a valid and subsisting leasehold interest in the Premises, subject only to
Permitted Exceptions, (ii) no right of offset will exist with respect to any
Rent or other sums payable under this Lease, and (iii) no Rent under this Lease
will have been prepaid.
(r) TITLE TO PROPERTIES. The Tenant has good and marketable title to
all of its material assets reflected on the balance sheets in the submitted
financial statements, except for such material assets as has been disposed of
in the ordinary course of business, and all such material assets are free and
clear of any lien, except as reflected in said submitted financial statements
and/or notes thereto or as otherwise permitted by the provisions hereof or
under the Operative Documents, and except for Permitted Exceptions. The Tenant
has such trademarks, trademark rights, trade names, trade name rights,
franchises, copyrights, patents, patent rights and licenses as to allow it to
conduct its business as now operated, without known conflict with the rights of
others.
(s) DEFAULTS. To the best of Tenant's knowledge, the Tenant is not
in material default under (and no event has occurred which with the lapse of
time or notice or action by a third party could result in a default under), nor
has Tenant received written notice of any event of default which has not been
cured, under any instrument evidencing any debt or under any agreement relating
thereto or any indenture, mortgage, deed of trust, security agreement, lease,
franchise or other agreement or other instrument to which any such person is a
party or by which any such person or any of its material assets is subject to
or bound.
(t) USE OF ADVANCE. No part of any Advance will be used directly or
indirectly for the purpose of purchasing or carrying, or for payment in full or
in part of debt that was incurred for the purposes of purchasing or carrying,
any margin security as such term is defined in Section 207.2 of Regulation G of
the Board of Governors of the Federal Reserve System (12 C.F.R., Chapter II,
Part 207).
18.20 TENANT'S WAIVER OF DEMAND FOR POSSESSION. Tenant waives any
demand for possession of the Premises and any demand for payment of Base Rent
and notice of intent to re-enter the Premises, or of intent to terminate this
Lease, and waives any and every other notice or demand prescribed by any
applicable statutes or laws.
18.21 FINANCIAL REPORTING. Tenant shall provide to Landlord: (1)
annually, within ninety (90) days after the end of each of Tenant's fiscal
years during the Term, annual audited financial statements (including balance
sheet, income statements, and cash flow statements) of Tenant, (2) quarterly,
within forty-five (45) days after the end of each of Tenant's fiscal quarters
during the Term, quarterly unaudited financial statements (including balance
sheet, income statements, and cash flow statements) of Tenant, and (3) as well
as an officer's certificate delivered every reporting period stating that no
Event of Default has occurred under the Lease in the form attached as
Exhibit H.
18.22 REGULATION D COMPENSATION. For so long as the Landlord is
required to maintain reserves against Eurocurrency Liabilities (or any other
category of liabilities which include deposits by reference to which the LIBOR
Rate is determined or any category of extensions of credit or other assets
which includes loans by a non-United States office of the Landlord to United
States residents), and, as a result, the cost to the Landlord (or its funding
office) of making or maintaining its Advances is increased, then the Landlord
may require the Tenant to pay, contemporaneously with each payment of Base
Rent, an additional amount at a rate per annum up to but not exceeding the
excess of (i) (A) the applicable LIBOR Rate
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<PAGE> 37
divided by (B) one minus the Eurocurrency Reserve Requirements, over (ii) the
applicable LIBOR Rate. In the event that the Landlord wishes to require
payment of such additional amount, the Landlord (x) shall so notify the Tenant,
in which case such additional Base Rent shall be payable to the Landlord at the
place indicated in such notice with respect to each Borrowing Period commencing
at least three Business Days after the giving of such notice and (y) shall
furnish to the Tenant at least five Business Days prior to each date on which
Base Rent is payable a certificate setting forth the amount to which it is then
entitled under this Section 18.22 (which shall be consistent with it's good
faith estimate of the level at which the related reserves are maintained by
it). Each such certificate shall be accompanied by such information as the
Tenant may reasonably request as to the computation set forth therein.
ARTICLE 19
INDEMNIFICATION
19.1 TAX INDEMNITY. Notwithstanding anything in Article 6 to the
contrary, Tenant shall protect and defend Landlord from and against all
criminal prosecution regarding and shall indemnify and hold Landlord harmless
from and against any and all losses, costs, liabilities or damages (including
reasonable attorneys' fees and disbursements and court costs) arising by reason
of:
(a) Any and all U.S. Federal, state or local income taxes
imposed upon Landlord in consequence of Landlord being treated as the owner or
lessor of the Premises (or any part thereof) for such tax purposes; provided
Landlord has fully complied with Section 18.2;
(b) Any and all taxes imposed upon Tenant (except to the
extent of Landlord's Taxes or to the extent that such taxes are imposed upon
Tenant as a result of Landlord's failure to comply with its obligations under
this Lease);
(c) Any and all taxes required to be withheld from payments
made by Tenant to a third party not related to or affiliated with Landlord;
(d) Any and all Real Estate Taxes;
(e) Any and all taxes owed by Landlord (other than Landlord
Taxes) as a result of payment made by Tenant to Landlord pursuant to Tenant's
indemnity obligations under this Section 19.1; and
(f) Any and all costs, liabilities or damages (including
reasonable attorneys' fees) incurred by Landlord in obtaining indemnification
payments from Tenant under the provisions of this Section 19.1.
Tenant's obligation to reimburse or indemnify Landlord for any taxes,
governmental fees, penalties, interest or other supplemental tax charges under
this Lease shall be reduced by the value of any related or offsetting tax
benefits derived or realized by Landlord. Tenant's duty to indemnify Landlord
under this Section 19.1 shall apply only to taxes arising during the Term
(whether or not due and payable at the conclusion of the Term), but shall
otherwise survive the expiration or earlier termination of this Lease.
19.2 ENVIRONMENTAL INDEMNITY. Tenant agrees to indemnify and
hold Landlord harmless from and against, and to reimburse Landlord with respect
to, any and all claims, demands, causes of action, losses, damages,
liabilities, costs and expenses (including attorneys' fees and court costs),
fines and/or penalties of any and every kind or character, known or unknown,
fixed or contingent, asserted or potentially asserted against or incurred
32
<PAGE> 38
by Landlord at any time and from time to time by reason of, in connection with
or arising out of (A) the failure of Tenant to perform any obligation herein
required to be performed by Tenant regarding Applicable Environmental Laws, (B)
any violation of any Applicable Environmental Law by Tenant or with respect to
the Premises or any disposal or other release by Tenant or with respect to the
Premises of any hazardous substance, environmental contaminants or solid waste
on or to the Premises, whether or not resulting in a violation of any
Applicable Environmental Law, (C) any act, omission, event or circumstance by
Tenant or with respect to the Premises which constitutes or has constituted
violation of any Applicable Environmental Law with respect to the Premises,
regardless of whether the act, omission, event or circumstance constituted a
violation of any Applicable Environmental Law at the time of its existence or
occurrence, and (D) except to the extent of Landlord's gross negligence or
willful misconduct, any and all claims or proceedings (whether brought by
private party or governmental agencies) for bodily injury, property damage,
abatement or remediation, environmental damage or impairment or any other
injury or damage resulting from or relating to any hazardous or toxic substance
or contaminated material located upon or migrating into, from or through the
Premises (whether or not the release of such materials was caused by Tenant, a
subtenant, a prior owner of the Premises or any other Entity) which Landlord
may incur. Tenant's duty to indemnify Landlord under this Section 19.2 shall
survive the expiration or earlier termination of the Lease with respect to
events occurring during or prior to the expiration of the Term or after the
Term while Landlord has record title to and Tenant is occupying the Premises,
but shall terminate as to events occurring wholly after Tenant is in default
under the Lease and is no longer in possession of the Premises.
19.3 GENERAL INDEMNITY. Except to the extent of Landlord's gross
negligence or willful misconduct, Tenant shall defend, indemnify, and hold
Landlord harmless from and against any and all losses, costs, expenses,
liabilities, claims, causes of action and damages of all kinds that may result
to Landlord, including reasonable attorneys' fees and disbursements incurred by
Landlord, arising because of any failure by Tenant to perform any of its
obligations under this Lease or any of the documents executed by Tenant in
connection with this Lease. Tenant's duty to indemnify Landlord under this
Lease shall survive the expiration or earlier termination of this Lease.
ARTICLE 20
COVENANTS OF LANDLORD
20.1 TITLE. In the event Tenant so requests in writing (and so
long as either Tenant agrees to indemnify Landlord to Landlord's satisfaction
from any liabilities or obligations in connection therewith, or Landlord does
not incur any liabilities or obligations in connection therewith), Landlord
shall execute all documents, instruments and agreements reasonably requested by
Tenant in order to accomplish any of the following in the manner reasonably
requested by Tenant and within the time parameters reasonably requested by
Tenant: (1) remove exceptions to title to or affecting the Premises; (2)
create exceptions to title (including, without limitation, easements and rights
of way) to or affecting the Premises; or (3) modify any then-existing exception
to title. Tenant shall promptly reimburse Landlord for, or at Landlord's
request, pay directly in advance, all reasonable costs, expenses and other
amounts incurred or required to be expended by Landlord in order to comply with
Tenant's requests made in accordance with the preceding sentence, and the
failure of Tenant to reimburse or pay any such amounts shall result in the
suspension of Landlord's obligations under such sentence with respect to that
particular request until the amounts required to be paid by Tenant under this
sentence have been paid.
20.2 LAND USE. Except where requested by Tenant pursuant to this
Section 20.2, Landlord shall not cause or give its written consent to any land
use or zoning change affecting
33
<PAGE> 39
the Premises or any changes of street grade. In the event Tenant so requests
in writing (and so long as either Tenant agrees to indemnify Landlord to
Landlord's satisfaction, from any liabilities or obligations in connection
therewith, or Landlord does not incur any liabilities or obligations in
connection therewith), Landlord shall execute all documents, instruments and
agreements reasonably requested by Tenant in order to accomplish any of the
following in the manner reasonably requested by Tenant and within the time
parameters reasonably requested by Tenant: (1) cause a change in any land use
restriction or law affecting the Premises; (2) cause a change in the zoning
affecting the Premises; or (3) cause a change in the street grade with respect
to any street in the vicinity of the Premises. Tenant shall promptly reimburse
Landlord for, or at Landlord's request, pay directly in advance, all reasonable
costs, expenses and other amounts incurred or required to be expended by
Landlord in order to comply with Tenant's requests made in accordance with the
preceding sentence, and the failure of Tenant to reimburse or pay any such
amounts shall result in the suspension of Landlord's obligations under such
sentence with respect to that particular request until the amounts required to
be paid by Tenant under this sentence have been paid.
20.3 TRANSFER OF PROPERTY INTERESTS. Except as requested by
Tenant pursuant to this Lease, Landlord shall not transfer to any third party
any rights inuring to or benefits associated with the Premises (including,
without limitation, zoning rights, development rights, air space rights,
mineral, oil, gas or water rights). Nothing in this Section 20.3 shall limit
Landlord's right to transfer Landlord's interest in this Lease to a third party
or its rights to transfer the Premises, pursuant to Section 11.2; provided that
as to a transfer under Section 11.2 any purchaser of Landlord's interest in the
Premises shall be bound by the terms of this Lease, including without
limitation the terms of this Section 20.3).
34
<PAGE> 40
IN WITNESS WHEREOF, the parties hereto have duly executed this Lease as of
the day and year first above written.
TENANT: OCTEL COMMUNICATIONS
CORPORATION, a Delaware Corporation
By ______________________________
Name ______________________________
Its ______________________________
(Signatures continued on next page)
35
<PAGE> 41
IN WITNESS WHEREOF, the parties hereto have duly executed this Lease as of
the day and year first above written.
TENANT: OCTEL COMMUNICATIONS
CORPORATION, a Delaware Corporation
By /s/ W. MICHAEL WEST
------------------------------
Name W. Michael West
------------------------------
Its President/CEO
------------------------------
(Signatures continued on next page)
36
<PAGE> 42
LANDLORD: SUMITOMO BANK LEASING AND
FINANCE, INC., a Delaware corporation
By /s/ DAVID A. WARD
--------------------------------
Name David W. Ward
--------------------------------
Its Senior Vice President
--------------------------------
Dated: ________________________, 1997
<PAGE> 43
Exhibit A
All that certain Real Property in the City of Milpitas, County of Santa Clara,
State of California, described as follows:
Being a portion of Parcel 1 as shown on that certain Parcel Map filed in Book
584 of maps at Pages 13 and 14, described as follows:
Beginning at a point on the Southwesterly right-of-way line of Murphy Ranch
Road and the Northeasterly corner of said Parcel 1;
Thence along said right-of-way line and the Northeasterly line of said Parcel 1
the following two courses:
South 24 degrees 05' 11" East 153.18 feet to the beginning of a curve to the
left;
Along said curve having a radius of 830.00 feet through a central angle of
15 degrees 39' 34" an arc distance of 226.84 feet;
Thence South 52 degrees 22' 26" West 678.21 feet to the Southwesterly line of
said Parcel 1;
Thence along the Southwesterly and Northwesterly lines of said Parcel 1 the
following five courses:
North 41 degrees 07' 49" West 406.52 feet to the beginning of a curve to the
right;
Along said curve having a radius of 620.00 feet through a central angle of
9 degrees 13' 15" an arc distance of 99.78 feet;
North 65 degrees 54' 49" East 90.00 feet;
North 24 degrees 05' 11" West 50.00 feet; and
North 65 degrees 54' 49" East 679.17 feet to the Point of Beginning.
<PAGE> 44
Exhibit B
CLOSING COSTS AND FEES TO BE INCLUDED IN INITIAL ADVANCE
The following items shall be included in the definition of the Initial
Advance under Section 2.10 of the Lease:
See Title Company Closing Statement attached hereto.
<PAGE> 45
[LOGO] CHICAGO TITLE COMPANY
ESTIMATED BUYER'S/BORROWER'S SETTLEMENT STATEMENT
ESCROW NUMBER: 02970-000748780-001 ORDER NUMBER: 02970-000748780
CLOSING DATE: / / CLOSER: Sharman McKenna
BUYER: Octel Communications
SELLER: Peery Private Investment Company-WP, LLP
Peery Public Investment Compnay-WP, LLP
John Arrillaga, Trustee
PROPERTY: Undeveloped Land, Milpitas, California
CHARGE BUYER CREDIT BUYER
Sales Price $5,019,492.00 $
Loan Charges To
Attorney fees to Graham & James 19,850.00
Costs to Graham & James 1,010.80
Appraisal Fee To Cushman & Wakefield 4,500.00
Alta Lender title insurance 100.00
Alta Leasehold Owners 4,620.00
Endorsements 103.7,110.1,100.9 225.00
Endorsement 116.7 557.50
Recharacterization endorsement 1,155.00
Endorsement 115 Mod 577.50
Settlement or Closing Fee 1,350.00
Alta Owners policy 5,775.00
Document prep 50.00
Preliminary Change of Ownership 20.00
Recording Fees 150.00
City/County Tax/Stamps 5,522.00
Octel Acquisition costs 222,772.20
Funds Due From Buyer At Closing 5,287,747.00
------------- -------------
TOTALS $5,287,747.00 $5,287,747.00
- -------------------------------------- -------------------------------------
Octel Communications
<PAGE> 46
Exhibit C
PERMITTED TITLE EXCEPTIONS
1. Taxes for the fiscal year 1997-98, a lien not yet payable.
2. General and Special Taxes and Assessments, if any, for the fiscal year
1996-97.
Assessment No.: 086-01-041
Code No.: 12-012
First Installment: $523,060.13 Paid
(Includes public improvement of $51,879.37)
(PI 85K)
Second Installment: $523,060.13 Due and payable
(Includes public improvement of $51,879.37)
(PI 85K)
Assessed Valuation of
Personal Property: NONE
Homeowners Exemption: NONE
3. Diagram Assessment collected with County Taxes under Act of 1915 as
follows:
Designation: Assessment No.: 8A-2A
Assessment Code 85K
Assessment District: Milpitas Business
Park Local Imp. Dist. #12
Remaining Balance of Principal: $289,132.66
Remaining Balance of Interest: $118,799.99
The above amount of Principal and Interest to be collected with taxes
for the tax year.
Said matter affects this and other property.
4. The Lien of Supplemental Taxes, if any, assessed pursuant to the
provisions of Chapter 3.5, (commencing with Section 75) of the Revenue
and Taxation Code of the State of California.
5. An easement affecting the portion of said land and for the purposes
stated herein, and incidental purposes.
In Favor Of: Pacific Gas and Electric Company, a California
corporation
For: Installation and maintenance of underground gas and
pipe lines, and for incidental purposes
<PAGE> 47
Recorded: June 23, 1944 in Book 1200 at Page 477 Official
Records
H An Agreement, affecting said land, for the purposes, stated herein, upon
the terms, covenants and conditions referred to therein, between the
parties named herein
For: Relocation Agreement of non-exclusive easement
Dated: None Shown
Executed By: John Arrillaga et al
Recorded: September 4, 1986 in Book J832 at Page 1353 of
Official Records
Affects: As follows:
I A strip of land of the uniform width of 15 feet extending from the
Northwesterly boundary line of said lands Southwesterly to the general
Northeasterly boundary line of the parcel of land conveyed by said Deed
dated September 4, 1985 and lying 7.5 feet on each side of the line
which begins at a point outside the boundary lines of said lands and
runs thence,
1) South 24 deg 06' East 394.1 feet; thence
2) South 25 deg 57 1/2' West 844.1 feet to a point within said lands;
thence parallel with the Northwesterly boundary line of said lands
3) South 65 deg 55' West 319.9 feet; thence
4) South 67 deg 41' West 322.5 feet to a point distant 47.5 feet
Southeasterly from (measured at a right angle to) said Northwesterly
boundary line; thence parallel with said Northwesterly boundary line
5) South 65 deg 55' West 1,784.3 feet; thence
6) South 60 deg 22' West 140.0 feet to a point distant 61.0 feet
Southeasterly from (measured at a right angle to) said Northwesterly
boundary line; thence parallel with said Northwesterly boundary line
7) South 65 deg 55' West approximately 120 feet to a point in the
Northeasterly boundary line of the parcel of land conveyed by said Deed
dated September 4, 1985; said point of beginning bears North 66 deg 08'
East 4.3 feet distant from the found 1 1/2 inch iron pipe with a
combination tag stamped RCE 14705 and RCE 14900 accepted as marking the
point of intersection of the Southeasterly boundary line of State Route
237 as shown upon the Parcel Map filed for Record in Book 291 of Maps at
Page 37, Santa Clara County Records, with the Westerly line of Parcel 2
as shown
<PAGE> 48
upon said Parcel Map.
X An Agreement, affecting said land, for the purposes, stated herein, upon
the terms, covenants and conditions referred to therein, between the
parties named herein
For: Relocation
Dated: September 1, 1994
Executed by: John Arrillaga, as trustee of the trust created July 20,
1977 (John Arrillaga Separate Trust), as amended, and
Richard T. Peery, as trustee of the trust created July
20, 1977 (Richard T. Peery Separate Property Trust), as
amended
Recorded: December 22, 1994 in Book N709 at Page 1840 of Official
Records
Affects: As follows:
AA A portion of Parcel 1 as shown on the Parcel Map filed for record in
Book 584 of Maps at page 13, Santa Clara County Records, as follows:
A strip of land of the uniform width of 15 feet, extending from the
easterly boundary line of said Parcel 1, westerly to the westerly
boundary line of said Parcel 1, and lying 7.5 feet on each side of the
line described as follows:
Commencing at the found 2" brass disc accepted as marking the
northwesterly terminus of a course which has a bearing of North
24[degrees] 05' 11" West and a length of 153.18 feet in the centerline
of Magnolia Drive (now know as Murphy Ranch Road) as shown on said
parcel map, and running thence (A) south 8[degrees]03'38" west 65.80
feet; to a point in the easterly boundary line of said Parcel 1, being
the True Point of Beginning of said line; thence leaving said easterly
boundary line (1) south 65[degrees]48'00" west 428.47 feet; thence (2)
south 59[degrees]16'43" west 336.63 feet to a point in the westerly
boundary line of said Parcel 1.
6. An Agreement, affecting said land, for the purposes, stated herein, upon
the terms, covenants and conditions referred to therein, between the
parties named herein
For: Subdivision Improvement Agreement
Dated: July 19, 1983
Executed by: City of Milpitas, a Municipal Corporation, The
Redevelopment Agency of the City of Milpitas, and John
Arrillaga, Trustee, or his successor trustee UTA dated
July 20, 1977 (John Arrillaga Separate Property Trust)
as amended and Richard T. Peery, Trustee, or his
successor trustee UTA dated July 20, 1977 (Richard T.
Peery, Trustee, or his successor trustee UTA dated
<PAGE> 49
July 20, 1977 (Richard T. Peary Separate Property
Trust) as amended
Recorded: October 14, 1983 in Book H985 at Page 214 of Official
Records
Y 7. The terms, covenants and provisions of Redevelopment Project No. 1, as
amended Milpitas Redevelopment Agency executed by the City of Milpitas,
recorded November 16, 1984 in Book J043 Page 665, Official Records.
F 8. An easement affecting the portion of said land and for the purposes
stated herein, and incidental purposes,
In Favor Of: City of Milpitas, A Municipal Corporation
For: Public Service facilities, including poles, underground
wires, conduits, storm sewers, sanitary sewers, water
mains, public utilities and appurtenances
Recorded: September 30, 1986 in Book J863 at Page 867 Official
Records
Affects: The Northeasterly 10 feet of Said Land
J 9. An easement affecting the portion of said land and for the purposes
stated herein, and incidental purposes,
In Favor Of: The City of Milpitas
For: Ingress and Egress purposes
Recorded: March 18, 1987 in Book K075 at Page 430 Official
Records.
Affects: A portion of Said Land
AF 10. An easement affecting the portion of said land and for the purposes
stated herein, and incidental purposes,
In Favor Of: City of San Jose, a municipal corporation
For: underground public utilities and public services
Recorded: July 26, 1996 in Book P435 at Page 0738 Official Records
Affects: as follows:
Being a portion of Parcel 1, as shown on that certain
Parcel Map filed for record in the Office of the
Recorder of the County of Santa Clara, State of
California on February 26, 1995, in Book 584 of Maps,
pages 13 and 14 and as approved by Resolution No. 6445
Lot Line Adjustment recorded June 28, 1995, in Book N898
Official Records at page 1926 and being more
<PAGE> 50
particularly described as follows:
beginning at the most northerly corner of Parcel 1 as
shown on said Parcel Map, said corner being on the
southwesterly line of Murphy Ranch Road (formerly
Magnolia Drive) and from which the intersection of said
Murphy Ranch Road and Bellew Drive as shown on said
Parcel Map bears N 65 deg. 54' 49" E, 9.144 meters;
thence proceeding S 65 deg. 54' 49" W along the
northwesterly line of said parcel 207.011 meters to the
Lands of the City of Milpitas; thence along the boundary
of the Lands of the City of Milpitas and said parcel S
24 deg. 05' 11" E, 7.50 meters; thence leaving said
boundaries N 65 deg. 54' 49" E, 207.011 meters to the
southwesterly line of Murphy Ranch Road; thence along
said southwesterly line N 24 deg. 05' 11" W, 7.50
meters to the Point of Beginning.
The bearing N 65 deg. 54' 49" E of the northwesterly
line of Parcel 1 as shown on the Parcel Map filed for
record in the office of the Recorder of Santa Clara
County in Book 584 of Maps, pages 13 and 14, was taken
as the basis of bearings for this description.
AG Covenants, Conditions and Restrictions in the above recorded instrument.
AB 11. Any Rights, Interests or Claims which may exist or arise by reason of
the following facts shown by a survey made by Kier & Wright Civil
Engineers & Surveyors, Inc., dated August 8, 1996, Job No. 95050-1 and
inspections of said land:
None
<PAGE> 51
Exhibit D
(MEMORANDUM OF LEASE OF THE LAND)
RECORDING REQUESTED BY, AND
WHEN RECORDED, RETURN TO:
GRAHAM & JAMES LLP
One Maritime Plaza, Suite 300
San Francisco, California 94111
Attention: Bruce W. Hyman, Esq.
MEMORANDUM OF LEASE OF THE LAND
THIS MEMORANDUM OF LEASE OF THE LAND ("Memorandum of Lease") is
executed as of February , 1997, by and between SUMITOMO BANK LEASING AND
FINANCE, INC., a Delaware corporation ("Landlord"), and OCTEL COMMUNICATIONS
CORPORATION, a Delaware corporation ("Tenant").
RECITALS
WHEREAS, Landlord and Tenant have executed that certain lease ("Lease")
dated as of February , 1997, covering a leasehold interest in certain land
located on the real property located in the City of Milpitas, Santa Clara
County, California as more particularly described in Schedule 1 attached hereto
and incorporated herein by this reference ("Land") and the improvements which
may come to be located on said Land (the Land and improvements are referred to
herein as the "Premises"); and
WHEREAS, Landlord and Tenant desire to record notice of the Lease in
the real estate records of Santa Clara County, California:
NOW, THEREFORE, in consideration of the foregoing, Landlord and Tenant
hereby declare as follows:
1. Demise. Landlord hereby leases the Premises to Tenant and Tenant
hereby leases the Premises from Landlord, subject to the terms, covenants and
conditions contained in the Lease.
2. Expiration Date. The term of the Lease ("Term") shall commence with
respect to the Premises on the date hereof and shall expire on June 20, 1997.
3. Option to Purchase. Tenant has an option to purchase the Premises,
as more particularly described in the Lease, at any time during the Term
(including any extension thereof).
4. Restrictions on Encumbrances. Landlord is prohibited from recording
against the Premises liens (including, without limitation, deeds of trust),
encumbrances, and other matters that would constitute exceptions to title, and
from amending or modifying any of the foregoing that may exist now or during the
Term, as more particularly described in the Lease.
1
<PAGE> 52
5. Restrictions on Transfers by Landlord. Subject to certain
exceptions, Landlord may transfer its interest in the Premises to a third party
subject to the restrictions which are set forth with more particularity in the
Lease.
6. Counterparts. This Memorandum of Lease may be executed in any number
of counterparts, each of which shall be deemed to be an original and all of
which together shall comprise but a single instrument.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Memorandum
of Lease as of the date and year first written above.
TENANT: OCTEL COMMUNICATIONS
CORPORATION, a Delaware Corporation
By ______________________________
Name ______________________________
Its ______________________________
(Signatures continued on next page)
2
<PAGE> 53
LANDLORD: SUMITOMO BANK LEASING AND
FINANCE, INC., a Delaware corporation
By ________________________________
Name ________________________________
Its ________________________________
3
<PAGE> 54
Schedule 1 to Exhibit D
[to follow]
<PAGE> 55
Exhibit E
LIST OF LITIGATION
Theis Research, Inc.
In April 1992, Tenant filed suit in the United States District Court in
Northern California, against Theis Research, Inc. ("Theis") for declaratory
judgment that Tenant's products do not infringe three patents of Theis and that
those patents are invalid. In November 1992, Theis filed a counterclaim against
Tenant alleging infringement of seven of Theis' patents. Subsequently, Theis
dismissed with prejudice the claims as to all but four of the patents, and its
claims as to one of the remaining four patents were dismissed on summary
judgment. During the first quarter of fiscal 1995, the Tenant engaged in a jury
trial regarding infringement of the three remaining patents and the defense of
patent invalidity. In October 1994, the jury returned a verdict finding, among
other things, that Tenant was correct in its claim that the three patents at
issue were invalid. In August 1995, the Court issued its decision holding that
the patents are unenforceable. The Court entered final judgment in the case in
January 1996, declaring Tenant a "prevailing party" entitled to recover its
substantial costs in connection with the lawsuit. In November 1996 the Court
overturned the jury's verdict that Tenant infringed one of the patents held
invalid by the jury and that a fourth patent that the Court had found Tenant not
to have infringed was also invalid. Theis filed a notice of appeal in December
1996 and Tenant thereafter filed a notice of cross-appeal on certain issues.
Gilbarco, Inc.
In January 1994, Gilbarco, Inc. ("Gilbarco") filed suit in the U.S.
District Court for the District of Colorado against Tenant and one of Tenant's
telephone company customers, U.S. West, alleging infringement of a Gilbarco
patent and seeking unspecified damages. Tenant filed an answer to the complaint
denying any infringement of the patent and raising several affirmative defenses,
including an assertion that the patent is invalid and unenforceable. In
September 1994, the claims asserted against Tenant were transferred to the U.S.
District Court for the Northern District of California and those claims asserted
against U.S. West were stayed and administratively closed pending the outcome of
the California action. Both parties filed motions for summary judgment on a
variety of issues, including a motion by Tenant for summary judgment declaring
the Gilbarco patent unenforceable due to inequitable conduct during the
procurement of the patent. On February 12, 1996, the Court granted Tenant's
motion for summary judgment (and denied Gilbarco's counter-motion) and declared
the patent unenforceable as a matter of law. The Court subsequently entered
judgment in favor of Tenant and against Gilbarco and awarded Tenant its costs in
connection with the lawsuit. Gilbarco's subsequently filed motion for
reconsideration of the Court's ruling was denied and Gilbarco thereafter filed a
notice of appeal. Briefing of the appeal has been completed and oral argument
was held on February 5, 1997.
Tenant believes, based upon information currently available, including
consultations with patent counsel, that Tenant is not infringing any valid
patents of Theis or Gilbarco. Tenant will vigorously defend the patent
infringement claims and any related claims for compensatory damages. While
litigation is inherently uncertain, Tenant believes that the ultimate resolution
of these matters will not have a material adverse effect on Tenant's financial
position.
1
<PAGE> 56
Tenant is currently evaluating several additional claims of third
parties. Based in part on industry practice and in part on discussion with
certain of such third parties, Tenant believes that in most cases any necessary
licenses or rights could be obtained on commercially reasonable terms. However,
no assurance can be given that future licenses will be obtained on acceptable
terms, that costly litigation will not occur or that Tenant will receive a
favorable decision in any litigation that may ensue. The failure to obtain
necessary licenses or other rights, or litigation arising out of such claims,
could have a material adverse affect on Tenant's operations.
2
<PAGE> 57
Exhibit F
LIST OF GOVERNMENTAL APPROVALS
None
<PAGE> 58
Exhibit G
LIST OF ENVIRONMENTAL LAWS
None.
<PAGE> 59
Exhibit H
FORM OF OFFICERS' CERTIFICATE
The undersigned, ____________________ of OCTEL COMMUNICATIONS
CORPORATION, a Delaware corporation hereby certifies that as of the date hereof
the lease dated February , 1997 by and between SUMITOMO BANK LEASING AND
FINANCE, INC., a Delaware corporation, as Landlord and OCTEL COMMUNICATIONS
CORPORATION, a Delaware corporation, as Tenant is in full force and effect, and
Tenant is not in default thereunder.
Date: ____________________ _________________________
<PAGE> 1
EXHIBIT 10.20
WHEN RECORDED, RETURN TO:
Peery/Arrillaga
2560 Mission College Blvd., Suite 101
Santa Clara, CA 95054
WAIVER AND RELEASE AGREEMENT
THIS WAIVER AND RELEASE AGREEMENT ("Agreement") dated as of February
14, 1997 is made and entered into this ____ day of February, 1997, by and among
(i) Octel Communications Corporation, a Delaware corporation (hereinafter
referred to as "Octel"), (ii) Sumitomo Bank Leasing and Finance, Inc., a
Delaware corporation ("SBLF" or "Buyer"), (iii) The Peery Private Investment
Company-WP, L.P., a California limited partnership, as to an undivided 25%
interest, The Peery Public Investment Company-WP, L.P., a California limited
partnership, as to an undivided 25% interest and John Arrillaga, as Trustee, or
Successor Trustee under Trust Agreement dated July 20, 1977 (the Arrillaga
Family Trust) and as amended, as to an undivided 50% interest (hereinafter
collectively referred to as "Peery/Arrillaga"), and (iv) Richard T. Peery,
individually, and John Arrillaga, individually.
<PAGE> 2
R E C I T A L S
This Agreement is made with reference to the following facts and
intentions of the parties:
A. A Purchase and Sale Agreement dated February 14, 1997 has been
entered into on February ____, 1997, by and between Octel and Peery/Arrillaga
for the purchase of certain property located in the City of Milpitas, County of
Santa Clara, State of California known as a portion of APN# 086-01-041 and shown
on the legal description attached hereto as Exhibit I (hereinafter referred to
as the "Property"), the terms and conditions of which are more particularly set
forth in the Purchase and Sale Agreement.
B. As a condition to Buyer's obligations under the Purchase and Sale
Agreement, Buyer has agreed to and is obligated to execute and record this
Agreement at the close of escrow directly following the recording of the grant
deed from Peery/Arrillaga to Buyer and prior to the recording of any other
matters or liens that would effect title in order to set forth the agreement of
the parties herein.
C. Octel has assigned to SBLF its right to buy and acquire title to the
Property pursuant to a written assignment and pursuant to the terms and
conditions of the Purchase and Sale Agreement, and Octel has entered into an
agreement with SBLF giving Octel the right to occupy the Property following
close of escrow (i.e. the date title to the Property is conveyed to SBLF and
this Agreement is recorded). One of the provisions of such assignment is that
2
<PAGE> 3
SBLF is to be bound by the terms and conditions of the Purchase and Sale
Agreement and by this Waiver and Release Agreement which concerns Hazardous
Materials, but excludes SBLF from the indemnification agreement concerning
Hazardous Materials as stated in Paragraph 3 herein.
D. This Agreement is intended to provide a waiver and release and
indemnity (subject to certain restrictions) for the benefit of Peery/Arrillaga,
Richard T. Peery, individually, and John Arrillaga, individually, and the other
Waiver Parties (defined below) concerning Hazardous Materials, etc.
A G R E E M E N T
NOW, THEREFORE, as a material part of the consideration for the
executing of the Purchase and Sale Agreement set forth in Paragraph A above and
for other valuable consideration receipt of which is hereby acknowledged, the
parties agree to the following provisions hereinafter set forth as follows:
14. Waiver and Release. As of the close of escrow, except for the
breach of any express representation in the Purchase and Sale Agreement, each of
Octel and SBLF, on behalf of itself, its employees, agents, contractors,
consultants, representatives, assigns and successors in interest (individually,
a "Waiving Person", and collectively "Waiving Persons") hereby waives any right
to sue the Waiver Party or the Waiver Parties (hereinafter defined) and waives
and releases any and all rights or claims (by
3
<PAGE> 4
way of contribution, indemnity or otherwise) related to or incurred in
connection with any release of Hazardous Materials prior to or after the close
of escrow, or the investigation, clean-up, removal or treatment of Hazardous
Materials in, on or under any and/or all of the parcels of the Property
described in Exhibit I attached hereto, and/or in groundwater which is now or
hereafter present (or which now or hereafter passes) thereunder, which any of
the above named parties may otherwise have against any of the following with
respect to their interest in the Property described Exhibit I: (i)
Peery/Arrillaga, and Peery/Arrillaga's heirs, employees, agents or any other
person acting on or in behalf of Peery/Arrillaga, or Richard T. Peery and/or
John Arrillaga individually; (ii) Roger Fields, as Trustee of the Peery
Charitable Remainder Trust-WP for Private Charities dated December 27, 1996 and
the Peery Charitable Remainder Trust-WP for Private Charities; (iii) Roger
Fields, as Trustee of the Peery Charitable Remainder Trust-WP for Public
Charities dated December 27, 1996 and the Peery Charitable Remainder Trust-WP
for Public Charities; (iv) Richard T. Peery, as Trustee of the Richard T. Peery
Separate Property Trust dated July 20, 1977, as amended and the Richard T. Peery
Separate Property Trust; or (v) any mortgagee, or deed of trust beneficiary of
Peery/Arrillaga in title to or ownership or possession of the Property or any
part thereof (each individually, a "Waiver Party"; collectively, "Waiver
Parties"); provided, however, that nothing set forth in this Waiver or any other
agreement executed in
4
<PAGE> 5
connection with the sale of the Property to SBLF shall waive any claim any
Waiving Person may now or hereafter have against any other person (other than
the Waiver Parties). This waiver and release extends to all claims, whether or
not known or suspected by Octel or SBLF to exist at the time of execution of
this Agreement, which if known by Octel or SBLF would materially affect the
giving of this waiver and release, and is an express waiver of the provisions of
California Civil Code Section 1542 by Octel and SBLF. Such waiver and release
shall apply to all costs, whether such costs are incurred in connection with any
action required to be undertaken by a governmental entity, nongovernmental
entity or by any agreement to which Octel or SBLF is a party, or by any law or
regulation, including the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, Hazardous Materials Transportation Act, Resource
Conservation and Recovery Act and California Health and Safety Code, or whether
such costs are incurred in any other manner.
As a material part of the consideration for the Waiver Party selling
the Property to SBLF, Octel and SBLF hereby agree not to sue or file or assert
any claims against any or all Waiver Parties for recovery of any costs for which
Octel or SBLF has waived its right of recovery under the preceding paragraph.
Within ten (10) business days following any written request by
Peery/Arrillaga or its successors in interest, Octel and/or SBLF shall execute
and deliver to any and all Waiver Party(ies)
5
<PAGE> 6
designated by Peery/Arrillaga or its successors in interest written
confirmation of this waiver and release.
It is the intent of the parties that this Agreement be binding on and
enforceable against each and every one of the assigns or successors in interest
of Octel and SBLF, except as otherwise specifically provided in Paragraph 3
hereof.
15. Buyer's Covenant Not to Sue. The parties hereby acknowledge and
agree that, in consideration of the Purchase and Sale Agreement, Octel and SBLF
each intends and agrees not to involve the Waiver Party or the Waiver Parties in
any legal, arbitration, administrative or other proceedings arising out of or in
connection with Hazardous Materials on, in or under the Property, prior to, or
as of the close of escrow, or thereafter, except for the breach of any express
representation by Peery/Arrillaga in the Purchase and Sale Agreement. Therefore,
subject to the terms and conditions of this Agreement, upon consummation of the
transaction contemplated by the Purchase and Sale Agreement, Octel and SBLF, on
behalf of itself and its assigns and successors in interest, hereby covenant and
agree, with respect to any claim, duty, obligation or cause of action of any
kind, whether presently known or unknown, suspected or unsuspected, arising out
of or incurred in connection with any investigation, clean-up, removal or
treatment of Hazardous Materials in, on or under any and/or all of the Property
("Claim") not to bring any legal, arbitration, administrative or other
proceeding with respect
6
<PAGE> 7
to, or any grievance or complaint before any administrative or governmental body
with jurisdiction over any Claim, except for the breach of any express
representation by Peery/Arrillaga in the Purchase and Sale Agreement against (A)
the Waiver Party or the Waiver Parties, their employees, agents, contractors,
consultants, representatives, directors, officers, employees, assigns and
successors in interest (but not including any other person or other entity who
was a tenant, subtenant or owner in fee prior to the close of escrow or any
other third party or other entity that may have indirectly or directly caused
contamination of, or on, in or under, the Property soil or groundwater); and (B)
any mortgagee or deed of trust beneficiary of any of the foregoing persons with
respect to the Property. The foregoing obligations of Octel and SBLF shall be
applicable upon the close of escrow.
3. Indemnity Agreement. Any owner of record of fee title to the
Property, by acquiring title to the Property, hereby agrees, and is bound, to
indemnify, hold harmless, defend (with counsel reasonably acceptable to the
Waiver Party and/or the Waiver Parties) from and against any and all claims,
demands, losses, damages, liabilities, fines, penalties, charges, administrative
and judicial proceedings, judgments and all costs, related to any Hazardous
Materials related claims, liabilities, demands or requests of any type
whatsoever, related to or associated with the Property from third parties or
governmental agencies that may arise now or at any time in the future.
Notwithstanding the foregoing or
7
<PAGE> 8
anything else contained in this Waiver and Release Agreement or in the Purchase
and Sale Agreement, the following shall restrict and limit the obligations
stated in the first sentence of this Paragraph 3 (which obligations are referred
to herein as the "Indemnity Agreement"):
A. The Indemnity Agreement shall not be binding upon, or
create any liability on the part of, any of the following persons or entities,
who shall not in any way whatsoever be liable for any of the obligations created
by the Indemnity Agreement as stated in Paragraph 3 (the "Exempt Entities").
Notwithstanding anything to the contrary above in Paragraph 3 ("Indemnity
Agreement"), the only parties exempt from indemnifying the Waiver Parties as
stated in said Paragraph 3 are: (i) SBLF, its shareholders (including The
Sumitomo Bank, Limited) and its successors in interest; (ii) any owner of record
title to the Property who concurrently leases the Property to Octel on a basis
that results in substantially the same federal tax and financial accounting
treatment as the relationship between SBLF and Octel immediately following close
of escrow; (iii) any lender who acquires a security interest in the Property by
means of a mortgage or deed of trust; and (iv) any party (and any successor in
interest to such party by purchase or otherwise), excluding Octel or its
successors in interest, who acquires title to the Property as a result of the
foreclosure of a security interest held by any of the parties described in
clause (i), (ii) or (iii) above.
8
<PAGE> 9
B. Each of the Waiver Parties, on behalf of itself, its heirs,
successors, and assigns, hereby agrees not to sue or file or serve any claims
against any Exempt Party with respect to any existing or potential Claim
concerning Hazardous Materials on the Property (as the term "Claim" is defined
in Paragraph 2 hereof); provided, however, that in any action brought by an
Exempt Party against a Waiving Party, a Waiving Party may assert as an
affirmative defense any breach or violation of this Agreement by any Exempt
Party.
4. Attorneys' Fees. In the event any suit or action is
brought to enforce this Agreement, the prevailing party or parties
will be entitled to receive from the losing party or parties all
costs of proceedings and reasonable attorneys' fees in an amount
fixed by the court.
5. Notices. Any notices to be given shall be addressed to
the individuals at the address given below, shall be personally
9
<PAGE> 10
delivered or mailed by certified mail, return receipt requested and shall be
deemed given to said parties upon personal delivery or upon the date for receipt
or refusal set forth in the return receipt.
Octel Communications Corporation
Attn: John Igoe
1001 Murphy Ranch Road
Milpitas, CA 95035
Sumitomo Bank Leasing and Finance, Inc.
Attn: Chief Credit Officer
277 Park Avenue
New York, NY 10172
Richard T. Peery
John Arrillaga
2560 Mission College Blvd., Suite 101
Santa Clara, CA 95054
With copy to:
Richard T. Peery
2200 Cowper Street
Palo Alto, CA 94301
Any change in address shall not be effective until the other party is
notified in writing of such change pursuant to the terms of this Paragraph 5.
6. The provisions of this Agreement shall run with the land described
in Exhibit I attached hereto and shall inure to the benefit of and be binding
upon the respective heirs, successors in interest and assigns of the parties
hereto.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Buyer Peery/Arrillaga
SUMITOMO BANK LEASING
AND FINANCE, INC. THE ARRILLAGA FAMILY TRUST
a Delaware corporation
By___________________________ By__________________________________
John Arrillaga, Trustee
Its__________________________ of the Arrillaga Family
Trust dated 7/20/77, as
amended
Octel PEERY PRIVATE INVESTMENT
COMPANY-WP, L.P., a California
OCTEL COMMUNICATIONS limited partnership
CORPORATION,
a Delaware corporation
By__________________________________
Richard T. Peery, Trustee
By___________________________ of the Richard T. Peery
Separate Property Trust
Its__________________________ dated 7/20/77, as amended,
as its General Partner
PEERY PUBLIC INVESTMENT
COMPANY-WP, L.P., a California
limited partnership
By__________________________________
Richard T. Peery, Trustee
of the Richard T. Peery
Separate Property Trust
dated 7/20/77, as amended,
as its General Partner
*ALL SIGNATURES TO BE NOTARIZED.
11
<PAGE> 12
EXHIBIT I TO WAIVER AND RELEASE AGREEMENT
LEGAL DESCRIPTION
[To be determined; approximately 7.58 acres]
12
<PAGE> 1
EXHIBIT 11
OCTEL COMMUNICATIONS CORPORATION
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ----------------------
March 31, March 31, March 31, March 31,
1997 1996 1997 1996
-------- ---------- --------- ---------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME PER SHARE
Net income ......................... $ 10,628 $ 12,246 $ 31,755 $ 30,577
======== ======== ======== ========
Weighted average shares
outstanding ...................... 51,920 49,565 51,835 48,994
Dilutive effect of outstanding stock
options (as determined by the
application of the treasury stock
method) .......................... 2,059 3,963 3,136 4,036
Other .............................. 176 (14) (150) (18)
-------- -------- -------- --------
54,155 53,514 54,821 53,012
======== ======== ======== ========
Primary net income per share ....... $ 0.20 $ 0.23 $ 0.58 $ 0.58
======== ======== ======== ========
FULLY DILUTED NET INCOME PER SHARE*
Net income ......................... $ 10,628 $ 12,246 $ 31,755 $ 30,577
======== ======== ======== ========
Weighted average shares
outstanding ...................... 51,920 49,565 51,835 48,994
Dilutive effect of outstanding stock
options (as determined by the
application of the treasury stock
method) .......................... 2,059 5,199 3,100 5,519
Other .............................. 176 75 (150) 66
-------- -------- -------- --------
54,155 54,839 54,785 54,579
======== ======== ======== ========
Fully diluted net income per
share ............................ $ 0.20 $ 0.22 $ 0.58 $ 0.56
======== ======== ======== ========
</TABLE>
* This computation is submitted in accordance with Securities Exchange Act of
1934 Release No. 9083 although not required for all periods under APB Opinion
No. 15 because it results in dilution of less than three percent.
2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 42,668
<SECURITIES> 47,658
<RECEIVABLES> 170,832
<ALLOWANCES> 4,198
<INVENTORY> 36,325
<CURRENT-ASSETS> 314,690
<PP&E> 259,705
<DEPRECIATION> 113,086
<TOTAL-ASSETS> 495,846
<CURRENT-LIABILITIES> 95,799
<BONDS> 0
248,564
0
<COMMON> 0
<OTHER-SE> 151,235
<TOTAL-LIABILITY-AND-EQUITY> 495,846
<SALES> 98,224
<TOTAL-REVENUES> 150,185
<CGS> 32,470
<TOTAL-COSTS> 64,186
<OTHER-EXPENSES> 71,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (889)
<INCOME-PRETAX> 15,778
<INCOME-TAX> 5,150
<INCOME-CONTINUING> 10,628
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,628
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
