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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1997
[ ] 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: 0-21432
AUSPEX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-0963760
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5200 Great America Parkway,
Santa Clara, California 95054
(Address of principal executive offices)
Registrant's telephone number, including area code:
(408) 986-2000/Web Site (www.Auspex.com)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
YES [ ] NO [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $223,846,788 as of September 10, 1997, based
upon the closing sale price on The Nasdaq National Market reported for such
date. Shares of Common Stock held by each officer and director and by each
person who owns 5% of more of the outstanding Common Stock have been excluded
because such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily conclusive for other purposes.
The number of shares of Registrant's Common Stock outstanding as of
September 10, 1997 was 25,067,084.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive
proxy statement for the Annual Meeting of Stockholders scheduled to be held on
November 20, 1997.
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TABLE OF CONTENTS
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PART I ....................................................................... 4
ITEM 1. BUSINESS.................................................... 4
The Company................................................. 4
Products.................................................... 5
Markets and Customers....................................... 7
Distribution................................................ 7
Customer Service and Support................................ 8
Manufacturing............................................... 9
Research and Development.................................... 9
Competition................................................. 10
Intellectual Property and Licenses.......................... 11
Employees................................................... 11
Executive Officers of the Company........................... 12
ITEM 2. PROPERTIES.................................................. 13
ITEM 3. LEGAL PROCEEDINGS........................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 14
PART II ...................................................................... 15
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS................................. 15
ITEM 6. SELECTED FINANCIAL DATA..................................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 16
Results of Operations....................................... 16
Revenues.................................................... 17
Gross Margin................................................ 18
Operating Expenses.......................................... 18
Other Income ............................................... 19
Provision for Income Taxes.................................. 19
Quarterly Results of Operations............................. 19
Factors That May Affect Future Results...................... 21
Liquidity and Capital Resources............................. 23
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<TABLE>
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..................... 24
PART III ...................................................................... 25
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 25
ITEM 11. EXECUTIVE COMPENSATION..................................... 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................. 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 25
PART IV ...................................................................... 26
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ....... 26
ON FORM 8-K................................................ 26
(A) 1. FINANCIAL STATEMENTS................................... 26
2. FINANCIAL STATEMENT SCHEDULES.......................... 26
3. EXHIBITS............................................... 27
(B) REPORTS ON FORM 8-K........................................ 29
SIGNATURES...................................................................... 30
POWER OF ATTORNEY............................................................... 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS........................................ F-1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
SUPPLEMENTAL SCHEDULES.......................................................... S-1
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INTRODUCTORY STATEMENT
References made in this Annual Report on Form 10-K to "Auspex," the
"Company" or the "Registrant" refer to Auspex Systems, Inc. and its wholly owned
subsidiaries. AUSPEX, NS 5000, FUNCTIONAL MULTI-PROCESSING, FMP, FMK, FUNCTIONAL
MULTI-PROCESSOR, FUNCTIONAL MULTI-PROCESSOR, and the Auspex logo design are
registered trademarks of the Company. FUNCTIONAL MULTIPROCESSING KERNEL,
FUNCTIONAL MULTIPROCESSING, NETSERVER, NS 7000, NS 6000, NS 5500, NS 3000,
DataGuard, ServerGuard, DriveGuard and FastBackup are trademarks of the Company.
PART I
ITEM 1. BUSINESS
THE COMPANY
Auspex develops, manufactures, distributes and supports a line of UNIX
multi-protocol (NFS(1), FTP(2)) network file/data servers, known as
"NetServers," that enhance the performance of large, multivendor client/server
networks. As client/server computing has become increasingly widespread, the
inherent limitations of data servers based upon general-purpose computer
architectures have come to be recognized as a serious impediment to overall
network performance and availability.
The network performance limitations which the NetServer was designed to
overcome are the direct result of applying traditional, general purpose computer
servers to the ever increasing challenge of storing, managing and delivering
network data. These performance limitations have become more acute as the volume
of network data has increased from the downsizing and offloading of mainframe
data, the consolidation of local area network data and the emergence of network
data-intensive applications such as the Internet. As the amount of data and
users on a network increase, data servers based on conventional workstation or
minicomputer architectures must support considerably more file/data, network and
disk traffic than they were originally designed to handle. The result is a
serious deterioration in network performance. The traditional solution has been
to subdivide the network into multiple subnetworks, each with its own data
server, duplicate data files and associated administrative costs.
In contrast to conventional architectures, the Company's proprietary
Functional Multi-processing ("FMP") architecture, of which key aspects have been
patented by the Company, has been designed specifically to overcome these
limitations by optimizing the tasks which a network data server most commonly
executes - file/data transfer and disk operation. The performance advantages of
Auspex's FMP architecture enable a single NetServer to support large networks at
high data throughput rates. The NetServer's scalability permits customers to add
workstation clients to multiple data servers.
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(1) NFS denotes the Network File System protocol, first promulgated by Sun
Microsystems, Inc. ("Sun Microsystems"), and since widely adopted by the
workstation market as a de facto standard for network file transfers.
(2) FTP (File Transfer Protocol) is a standard protocol commonly used to
retrieve or store files on network file servers. FTP is supported on Unix,
Windows, VMS, Macintosh and other popular desktop computers.
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The Company believes that the importance of these benefits to large-scale
client/server systems is demonstrated by the fact that over 80% of Auspex's
installed base of approximately 2,100 data servers supports networks with 50-400
users.
Auspex's FMP design offers an architectural solution to the network
performance gap through distribution of all performance-limiting Network File
System ("NFS") functions to a specialized input/output ("I/O") subsystem of
dedicated file/data, network and disk processors. By isolating the host central
processing unit ("CPU") and UNIX operating system from the data server's
principal activity, the NetServer bypasses the internal bottleneck which slows
the throughput of general-purpose computer architectures performing similar
tasks. In addition, the isolation of the UNIX operating system and application
software from the data delivery function of the server significantly increases
the reliability of the systems. More processors and disk capacity may be added
to meet increasing user demand as networks expand.
Auspex believes that the benefits of its FMP architecture - high
availability, scalability and performance may be applied to industry standard
protocols such as Hyper Text Transfer Protocol ("HTTP") and Common Internet File
System/Server Message Block ("CIFS/SMB"), opening new market opportunities in
the future.
In fiscal 1997, the Company extended its business focus beyond the
manufacture, sale and support of high-performance, UNIX-based network file
servers to offering its customer base a more comprehensive set of solutions for
network data management. On June 30, 1997, the Company acquired Alphatronix,
Inc. ("Alphatronix") as part of its ongoing strategic initiatives in this area.
The Company's strategy is to develop innovative solutions for enterprise data
management and, specifically, products that will provide customers with
continuous and transparent access to their data. The Alphatronix Inspire(R)
suite of object-oriented software and graphical user interface libraries is
intent to provide the basic enabling technologies required to implement these
new products. Product offerings based on merging the acquired technology are
expected to be introduced by the Company on a rolling basis beginning 12-18
months following the acquisition.
PRODUCTS
The Company develops, markets and supports a line of NFS network data
servers known as NetServers. The Company's newest NetServers, the NS 7000
NetServer Family, were introduced in fiscal 1996. In the second quarter of
fiscal 1997, the Company introduced a new high-end server, the NS 7000/700,
which superseded the model 650. The NS 7000/150 NetServer is designed for small
workgroups of up to 40 workstations; the NS 7000/250 NetServer is designed for
departments supporting 40 to 150 workstations, while the NS 7000/700 NetServer
meets the needs of large enterprise environments with up to 800 workstations.
All members of the NS 7000 Family can simultaneously support applications such
as high-speed, on-line system backup as well as NFS I/O operations without one
activity impairing the performance of the other. NS 5000, NS 5500 and NS 6000
NetServers, predecessors of the NS 7000 Family, can be upgraded on-site to an NS
7000. A significant portion of the Company's revenues is derived from product
upgrades, which consist primarily of additional processors (or upgrades of
existing processors) and memory and disk and tape drives. The Company's strategy
is to introduce new products and offer upgrades to existing products
periodically on an ongoing basis. It is possible that some customers could
cancel orders for existing products or delay orders in anticipation of new
product availability; should this occur, the Company's revenues and operating
results could be adversely affected.
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A base NS 7000 NetServer configuration includes one network processor,
one storage processor and one host processor (CPU), along with I/O cache memory
and a rack for the first seven Small Computer Serial Interface ("SCSI") disk
drives, typically of 4.29 or 9.1 gigabyte capacity each. The NetServer can be
scaled by the addition of function-specific processors, allowing customers to
expand the product to support their future requirements. The basic elements of
the architecture's hardware organization are described below:
Network processor. The network processor performs three
functions. The first is the processing of network protocols up to and
including the Open Network Computing/NFS ("ONC/NFS") level. The second
is the processing of NFS file requests, using a UNIX file system which
has been extracted from the UNIX operating system kernel. In this way,
NFS operations bypass the host processor entirely. In addition, a very
large disk buffer cache (I/O cache memory) is implemented on the
network processor. No processor instructions are stored in or retrieved
from this memory; the entire memory and enhanced backplane bandwith of
110 megabytes per second ("MB/s") is devoted to I/O. Cache memory can
be added to a maximum of 256 MB per network processor. Each network
processor provides up to six 10 BaseT or two 100 BaseT Ethernet
connections, up to two Fibre Distributed Data Interface/MLT3
("FDDI/MLT3") connections or two Asynchronous Transfer Mode ("ATM")
(OC-3) connections.
Storage processor. The NetServer storage processor operates up
to six parallel SCSI I/O channels simultaneously. These are attached to
disk arrays, containing up to 42 9.1 gigabyte disks, for a total
storage of 382 gigabytes. The storage processor is responsible for
virtual partition management on the storage devices, write
acceleration, channel management, disk and tape control and data
transfers to I/O cache memory.
Host processor. The host processor used in the NetServer is
based on the Sun SPARC architecture, which is compliant with the SunOS
UNIX operating system and its application binary interface.
NetServer prices range from approximately $45,000 to more than
$500,000, depending on the configuration. While system price varies considerably
according to the configuration purchased, the average sales price per system in
fiscal year 1997 for North American direct sales was approximately $280,000, and
for distributor and international sales, approximately $131,000. Lower average
sales prices per system for international distributor sales are attributable to
the fact that most servers sold through these channels are sold in smaller
configurations and at higher discounts.
In 1995, Auspex commenced shipment of its first software product,
DataGuard, that allows users to continuously access their data in the event of a
disruption associated with the UNIX host operating system. In March 1996, the
Company began shipping its second software product, ServerGuard. ServerGuard
operates between multiple Auspex servers providing the industry's first local
and wide area network-based fail-over and disaster recovery system for
uninterrupted service. In fiscal 1997, the Company introduced FastBackup, a
software product that enables a customer to achieve DLT-based backup and restore
throughput of up to 100 gigabytes per hour cost-effectively. The Company also
introduced DriveGuard, an embedded RAID 5 solution for high-availability data
protection. DriveGuard provides mission-critical data security, at a
significantly lower cost than that of mirrored configurations. Revenues from
software licenses represented approximately six percent of Company's revenues in
fiscal 1997.
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MARKETS AND CUSTOMERS
The majority of the Company's sales are currently made to customers in
the scientific, technical and engineering fields, in which UNIX workstation and
NFS-based network penetration is the greatest and the need for high-performance
data/file servers is the most critical. In addition to this large and expanding
multivendor, technical computing market, commercial applications for UNIX-based
systems are also increasing (e.g. financial services, and internet service
provider and corporate intranets). The Company believes that its NetServer
architecture is adaptable to commercial computing environments and intends to
pursue opportunities in these markets as they develop. There can be no
assurance, however, that the Company will be able to adapt its NetServers to
commercial computing market, or that it will be able to penetrate such markets.
As of June 30, 1997, approximately 2,100 NetServers have been installed
for over 450 customers worldwide. Reflecting the NetServer's particular
suitability to the performance requirements of large-scale client/server
systems, networks supporting more than 50 users account for more than 80% of
Auspex's installed base. NetServers are used most commonly for the following
types of applications: software development, electronic computer-aided design
("ECAD") and electronic computer aided engineering ("ECAE"), scientific and
academic research, mechanical computer-aided design ("MCAD"), technical
publishing and financial services. Other applications are also increasing, such
as Internet service providers, on-line content providers, seismic and
geophysical modeling, inventory control and multimedia applications. Prior to
fiscal 1994, 1995 and 1996, Auspex focused its marketing efforts primarily on
North America through its direct sales force and on the Pacific Rim through its
relationships with Fuji Xerox Co., Ltd. ("Fuji Xerox") and Nissho Electronics
Corporation ("Nissho"). During fiscal 1994, the Company established direct sales
and support operations in the United Kingdom, France and Germany, and
strengthened its distribution network in selected other European markets.
Sales of products and services to the following customers accounted for
10% or more of total revenues in the periods indicated: fiscal year 1995 - Intel
Corporation ("Intel") (15%); fiscal year 1996 - Intel (10%) and Fuji Xerox
(13%); and fiscal year 1997 - Intel (10%) and America Online ("AOL") (15%). In
addition to direct purchases from the Company, Intel or its affiliates have from
time to time made significant purchases of the Company's products through
indirect channels. Intel, AOL and Fuji Xerox are not obligated to purchase any
minimum level of products from the Company. Accordingly, there can be no
assurance that sales of products and services to these customers will not
decline, either in absolute dollar amounts or as a percentage of total revenues,
in future periods and that any such declines will not have a material adverse
effect on the Company's results of operations.
DISTRIBUTION
The Company employs a multi-tiered distribution strategy which in
fiscal 1997 has focused on product sales to end users in North America through a
direct sales force and to the Pacific Rim (primarily Japan) through a master
value added reseller and a non-exclusive master reseller. The Company has a
direct sales force in the United Kingdom, France and Germany, and employs
distributors in other selected European markets.
Because the success of the Company's direct sales efforts in North
America is dependent in part upon a sophisticated analysis of the customer's
networking requirements, the Company's system engineers work closely with the
Company's sales representatives.
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The Company's Pacific Rim distribution strategy includes original
equipment manufacturer ("OEM") and distribution agreements with Fuji Xerox and
Nissho, respectively, in Japan. In fiscal 1997, the Company realigned its
channel distribution strategy in Japan. The Company signed a Master Value Added
Distributor Agreement ("MVAD") with Fuji Xerox, and redefined its relationship
with Nissho. Under the new MVAD contract, Fuji Xerox, formerly the Company's OEM
partner in Japan will act as a non-exclusive supplier of the Company's products
to resellers in Japan. The Company's line of network file servers and
high-availability software will also be sold under the Auspex name for the first
time by Fuji Xerox. The Company's relationship with Nissho, previously the
exclusive distributor of Auspex labeled products, will continue on a
non-exclusive basis as a master reseller. The purchase prices of products
purchased by Fuji Xerox under the agreement are subject to certain discounts.
While Fuji Xerox is not subject to any minimum purchase requirements, in the
event that it fails to reach the purchase targets mutually agreed upon each
year, Auspex has the right to make additional OEM appointments in Japan. Both
Nissho and Fuji Xerox have the right to sell products of the Company's
competitors.
Auspex believes that the large installed base of UNIX systems in Europe
represents a significant opportunity for future NetServer sales. To address this
opportunity, the Company has direct sales and support facilities in the United
Kingdom, France and Germany. The Company has also entered into agreements with
distributors covering selected other markets in Europe. The Company has
continued to invest in sales and marketing efforts in Europe. The increased
export activity in Europe has resulted in profitable European operations in
fiscal 1997.
CUSTOMER SERVICE AND SUPPORT
Auspex's corporate policies are based on a commitment to customer
satisfaction and product quality. Revenue on system sales to end users is not
recognized until the system has been shipped and installed and the customer has
indicated a level of satisfaction with the product's performance that meets or
exceeds predefined Company standards.
The Company provides customer training and installs, maintains and
supports systems sold directly in North America and Europe. End user customers
purchasing through indirect channels are generally serviced by the Company's
distributors or OEMs. In all cases, however, customers have direct access to
Auspex service and support through a toll-free telephone hotline available to
customers, distributors and service partners. All customer service call
management and software support is handled directly by Auspex through its
technical support centers twenty-four (24) hours a day, three hundred sixty-five
(365) days a year, by highly trained and experienced technical support
engineers.
In addition to the technical support center located in Santa Clara,
California, the Company has established a second U.S. support center in Cary,
North Carolina and European technical support centers in France and the United
Kingdom to handle service calls from its European customers. To supplement
direct service and support and to ensure the highest quality service while
containing costs, Auspex has entered into strategic service agreements with
Digital Equipment Corporation and NCR for on-site hardware support. The
Company's contracts provide end users with a warranty for parts and labor on its
products, generally for ninety (90) days. The Company's warranty policy for
product sales other than to end users depends on the requirements of the
particular distribution channel. The Company offers its customers service
agreements of varying duration. Service revenue is recognized ratably over the
contractual period as service is provided.
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MANUFACTURING
Auspex's manufacturing operations, located in Santa Clara, California,
consist of product assurance, quality control and final product assembly and
test. The Company relies principally on Solectron Corporation, a contract
manufacturer, for subassembly and testing of certain key NetServer components.
Solectron Corporation has continued to operate under the terms of its business
relationship on a month-to-month basis. The Company's manufacturing strategy has
been to develop close relationships with its suppliers, exchanging critical
information and implementing joint quality training programs. This manufacturing
strategy minimizes capital investment and overhead expenditures and creates
flexibility by providing the capacity for rapid expansion. Although the Company
to date has not experienced any production difficulties resulting from its
reliance on Solectron, it is possible that production difficulties, including
capacity constraints and quality control issues, could arise in the future,
which could materially and adversely affect the Company's results of operations.
Although the Company generally uses standard parts and components for
its products, a number of key components used in the Company's NetServer
products are currently available or purchased from sole or single sources. These
components include disk and tape drives, microprocessors, connectors, printed
circuit boards, cable assemblies, power supplies and ASICs. Some of the
suppliers of these components have divisions which compete with the Company. See
"Business--Competition." The Company generally has agreements with its sole
source suppliers with terms ranging from one to five years and believes that
alternative sources of supply and assembly for most of its sole-source
components could be obtained within a commercially practicable period. As a
precaution, the Company carries extra inventory of some of its sole-source
components to provide additional time to develop an alternate supply source or
redesign the component. The lack of sufficient quantities of sole or single
source components, or the inability to develop alternative sources for these
items, could result in delays or reductions in product shipments which would
materially and adversely affect the Company's results of operations.
RESEARCH AND DEVELOPMENT
The market for high-performance network data servers has been
characterized by rapid technological advances in both hardware and software
development. The Company believes that the speed of technological advancement in
its industry requires it to invest significant amounts in research and
development, and that in order to maintain its competitive position, the Company
must continue to enhance and improve its existing products as well as to develop
and successfully introduce new products. During fiscal 1997, the Company
introduced the new NetServer NS7000/700, which is an enterprise-class network
data server that nearly doubles the number of network connections and increases
NFS throughput versus previous models. Additionally, the Company introduced a
major new software release, which includes DriveGuard, a new RAID 5 high
availability solution for protecting and managing disk-based data, NFS v3
protocol support for enhanced network performance, and the integration of
NetBackup and FastBackup software for backup to DLT tape. Also during the year,
the Company introduced an additional high-performance networking offering;
including full duplex 100BaseT. While continuing to introduce major new product
features, the Company believes that it has maintained its leadership position in
network data server reliability. However, there can be no assurance that these
new products will continue to be successful commercially. Furthermore, there can
be no assurance that the Company will be able to develop or introduce other new
products in the future in a timely manner, or that such products will be a
commercial success. The Company intends to
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continue to invest substantially in product development. Current research and
development efforts are directed at additional optional software products and at
extending the NetServer architecture, hardware designs and software designs to
increase functionality, client protocol support, performance, capacity,
scalability and availability.
As of June 30, 1997, 144 employees were engaged in research and
development activities. The Company's research and development expenses during
fiscal years 1995, 1996 and 1997 were approximately $14.6 million, $17.8 million
and $24.4 million, respectively. The Company anticipates that research and
development expenses will increase in absolute amounts and may increase as a
percentage of total revenues from current levels in future periods.
COMPETITION
The data/file server market is intensely competitive. Within the
NFS-compatible, UNIX data server market segment, manufacturers of general
purpose multiprocessor servers represent the Company's primary source of
competition. These manufacturers include Sun Microsystems, Hewlett-Packard
Company, Silicon Graphics, Inc., and IBM. Also, EMC Corporation has recently
introduced proprietary products to provide network attached storage. Sun
Microsystems represents the Company's principal source of competition. All of
these competitors possess substantially greater financial, technical and
marketing resources than Auspex, as well as substantially larger product
installed bases. In addition to existing competitors, certain manufacturers of
PC-based file servers such as Network Appliance, Inc. have introduced products
at the low end of the Company's target markets. While the Company believes that
the price/performance characteristics of its products are competitive, increased
competition could create pricing pressures which could materially and adversely
affect the Company's results of operations.
The Company derives a significant portion of its revenues from sales of
product upgrades to its installed base, including additional processors (or
upgrades to existing processors), memory, disk and tape drives, and software.
Although the Company has to date experienced limited competition in the sale of
upgrades, increased competition against these products may occur in the future
which could materially and adversely affect the Company's revenues and operating
results.
Auspex believes that an important competitive factor is network data
server performance, measured in terms of overall system throughput and expressed
as a function of NFS input/output operations per second. Other important factors
include product reliability, availability, scalability, upgradeability, price,
overall cost of ownership and technical service and support. The Company's
ability to maintain its competitive position will depend, in addition to these
factors, upon its success in anticipating industry trends, investing in product
research and development and effectively managing the introduction of new
products into targeted markets.
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INTELLECTUAL PROPERTY AND LICENSES
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, employee and third-party non-disclosure agreements and other
intellectual property protection methods to protect its proprietary hardware,
software and technological expertise. The Company believes, however, that its
continued success will depend principally on continuing innovation,
technological expertise, product pricing and distribution strength and to a
lesser extent on its ability to protect its proprietary technology. Furthermore,
there can be no assurance that the Company's current or future competitors will
not independently develop technologies that are substantially equivalent or
superior to the Company's technology.
Auspex currently holds four United States patents for certain
fundamental aspects of FMP data server architecture, and two additional related
patents. The Company has also filed additional patent applications for other
proprietary Auspex technologies, one of which has been issued by the patent
office.
The Company's NetServer's host processors and network processors
operate in conjunction with software licensed to the Company by Sun
Microsystems. These licenses are subject to periodic renewal and are coming up
for renewal in September 1998. There can be no assurance that the Company will
be able to enter into such license renewals with Sun Microsystems on favorable
terms, or at all.
EMPLOYEES
As of June 30, 1997, the Company employed 619 people, including 170 in
sales, 27 in marketing, 144 in research and development, 93 in customer
satisfaction, 115 in manufacturing and 70 in finance and administration. The
recruitment of experienced, highly skilled individuals is a top priority in an
exceptionally competitive recruiting environment. Equally important in this
environment is the retention of key talent. The Company has significantly
increased its recruiting activities and is reviewing all employee programs to
ensure the retention and continued development of its employees. The Company has
in the past encountered some difficulties in fulfilling its hiring needs and
retaining key employees in the San Francisco Bay Area employment market, and
there can be no assurance that the Company will be successful in hiring and
retaining qualified employees in the future. None of the Company's employees are
represented by a labor union. The Company believes that its relations with its
employees are good.
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EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with respect to the
executive officers of the Company as of September 15, 1997:
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Name Age Position
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Bruce N. Moore(1) 46 Chief Executive Officer, President and Director
Joseph G. Brown 47 Vice President of Worldwide Field Operations
Paul R. Gifford 45 Vice President of Product Development
Russell M. Lait 35 Vice President of Operations
Kent L. Robertson 56 Vice President of Finance and Chief Financial Officer
R. Stephen Cheheyl(2) 51 Director
W. Frank King(2)(3) 57 Director
David F. Marquardt(3) 48 Director
</TABLE>
(1) Member of the Stock Option Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Mr. Bruce N. Moore joined the Company in June 1995 as President, Chief
Operating Officer and a member of the Board of Directors. In January 1996, Mr.
Moore assumed the additional role of Chief Executive Officer. Mr. Moore joined
Auspex from Diasonics Ultrasound, Inc., a provider of diagnostic ultrasound
equipment, where he held the position of President and Chief Executive Officer.
His eleven-year career at Diasonics included various senior management positions
in marketing and business development. Mr. Moore started his career as a sales
representative in IBM's Data Processing Division in 1976.
Mr. Joseph G. Brown joined the Company in January 1994 as Vice
President of Marketing. He assumed the additional responsibility of Vice
President of International Sales in September 1994. In November 1995, Mr. Brown
was promoted to Vice President of Worldwide Strategic Business Development.
Currently, Mr. Borwn is the Vice President of Worldwide Field Operations.
Previous to joining the Company, Mr. Brown was Vice President of Marketing for
the UNIX Systems Group at Unisys Corporation from February 1992 to January 1994.
Prior to Unisys, Mr. Brown was Managing Director of Marketing at Interactive
Systems Corporation from September 1989 to December 1991.
Mr. Paul R. Gifford joined the Company in October 1996. From March 1996
through September 1996, Mr. Gifford served as Vice President of Engineering for
Tencor Instruments. Prior to joining Tencor, Mr. Gifford was employed by Sequent
Computer Systems from December 1985 through October 1995 and held several key
positions including General Manager, NT Business Unit, Vice President of Product
Development, and Vice President and Chief Systems Architect.
Mr. Russell M. Lait joined the Company in March 1988 as a member of the
Company's first design team. During his nine-year tenure with Auspex, Mr. Lait
has held various positions, including Director of Production and Test. He was
appointed Vice President of Operations in August 1996.
12
<PAGE> 13
Mr. Kent L. Robertson joined the Company in April 1996. From June 1995
through April 1996, he was Executive Vice President, Chief Financial Officer and
Secretary for Genus, Inc. Prior to Genus, he spent two different periods as
Senior Vice President, Chief Financial Officer and Secretary of Pyramid
Technology Corporation. He first joined Pyramid in February 1987 and returned
again in January 1994. From March 1992 through December 1993, he was Executive
Vice President, Chief Financial Officer and Secretary for RasterOps Corporation.
Mr. R. Stephen Cheheyl has served as a Director of the Company since
April 1995. From October 1994 until he retired in December 1995, Mr. Cheheyl
served as an Executive Vice President of Bay Networks, Inc. which was formed
through the merger of Wellfleet Communications, Inc. ("Wellfleet") and Synoptics
Communications Inc. From December 1990 to October 1994, Mr. Cheheyl served as
Senior Vice President of Finance and Administration at Wellfleet. He also serves
as a director of Infinium Software, Inc., ON Technology Corporation and Sapient
Corporation
Dr. W. Frank King has served as a Director of the Company since October
1994. Dr. King has served as President, Chief Executive Officer and a Director
of PSW Technologies, the Software Development and Systems Integration Division
of Pencom Systems Incorporated, a software development, systems integration and
technical recruiting organization, since October 1, 1996. From 1992 to October
1996, Dr. King served as President of PSW. From 1988 to 1992, Dr. King was
Senior Vice President of the Software Business group of Lotus, a software
publishing company. He serves on the Board of Directors of Auspex, State of the
Art, Inc., Excalibur Technologies Corporation, SystemSoft, and Natural
Microsystems, Inc.
Mr. David F. Marquardt has served as a Director of the Company since
April 1989. Since August 1995, Mr. Marquardt has been a general partner at
August Capital which is a private venture capital partnership. Since August
1980, Mr. Marquardt has been a general partner of various Technology Venture
Investors entities which are private venture capital limited partnerships. Mr.
Marquardt is also a Director of Microsoft Corporation, Farallon Computing, Inc.
and Visioneer, Inc.
ITEM 2. PROPERTIES
The Company is headquartered in Santa Clara, California, where it
leases an aggregate of approximately 162,000 square feet of space which houses
administrative, finance, sales and marketing, manufacturing, customer service
and product development activities. The lease for these facilities expires in
March 1998. In January 1997, the Company entered into two lease agreements for
four buildings under construction in Santa Clara, California. The buildings
represent about 269,000 square feet of space and will be the Company's new
headquarters. The leases for these facilities commence in March 1998 and expire
in February 2010. In addition, the lease agreements contain three successive
options to extend the lease terms for sixty months each. The Company leases
additional sales and support offices located in the United States, Canada, the
United Kingdom, France, Germany and Japan. The Company believes that its
facilities are adequate to meet the Company's current business requirements, and
that suitable additional space will be available as needed to accommodate
further physical expansion of corporate operations and for additional sales and
support offices. See also Note 5 of Notes to Consolidated Financial Statements.
13
<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Compnay is involved in legal proceedings
incidental to the conduct of its business. The Company believes that the
litigation, individually or in the aggregate, to which it is currently a party,
is not likely to have a material adverse effect on the Company's results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been approved for quotation on The
Nasdaq National Market under the symbol ASPX since the Company's initial public
offering in May 1993. The following table sets forth, for the periods indicated,
the range of high and low sales prices on the NASDAQ Composite, as reported in
The Wall Street Journal.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fourth Quarter of 1997 $13.125 $7.50
Third Quarter of 1997 $14.75 $10.625
Second Quarter of 1997 $15.50 $10.125
First Quarter of 1997 $17.00 $10.00
Fourth Quarter of 1996 $24.625 $14.75
Third Quarter of 1996 $21.00 $14.00
Second Quarter of 1996 $18.25 $13.375
First Quarter of 1996 $18.25 $11.375
</TABLE>
The Company believes that a number of factors including, but not
limited to, quarterly fluctuations in results of operations may cause the market
price of its common stock to fluctuate significantly. See "Management's
Discussion and Analysis - Factors That May Affect Future Results."
As of September 10, 1997, the approximate number of common stockholders
of record was 698.
The Company has not, to date, paid cash dividends on its capital stock.
The Company currently intends to retain earnings for use within its business and
does not anticipate paying cash dividends in the foreseeable future.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------------
(In thousands, except per share amounts)
June 30, June 30, June 30, June 30, June 25,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues.............................. $202,486 $162,640 $115,625 $83,280 $73,508
Income before income taxes................ 24,362 29,597 15,912 9,786 10,046
Net income ............................... 13,420 19,830 12,411 8,318 8,126
Net income per share...................... 0.52 (1) 0.77 0.51 0.34 0.36
Total assets.............................. 157,152 135,844 106,526 85,433 76,728
Long-term obligations..................... - - 159 399 799
</TABLE>
(1) Includes the costs associated with the acquisition of Alphatronix, Inc. in
the fourth quarter of fiscal 1997. Exclusive of these acquisition costs,
earnings per share for fiscal 1997 would have been $0.81.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the fiscal year ended June 1997 of $202.5 million
increased 24.5% over fiscal year 1996 revenues of $162.6 million. To date,
the Company has shipped approximately 2,100 data servers.
The following table sets forth for the fiscal years indicated the
percentage of total revenues represented by certain line items in the Company's
statement of operations:
<TABLE>
<CAPTION>
Years Ended June 30, 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues .............................. 100% 100% 100%
Costs of Revenues ..................... 46 44 46
--- --- ---
Gross margin ................ 54 56 54
--- --- ---
Operating Expenses:
Sales and marketing ............... 24 23 24
Research and development .......... 12 11 13
General and administrative ........ 4 5 5
In-process research and development 3 - -
--- --- ---
Income from operations ...... 11 17 12
Other Income .......................... 1 1 2
--- --- ---
Income before income taxes .. 12 18 14
Provision for Income Taxes ............ 5 6 3
--- --- ---
Net Income ............................ 7% 12% 11%
=== === ===
</TABLE>
16
<PAGE> 17
REVENUES
Product revenue includes hardware sales of systems and upgrades as well
as software license fees. The Company recognizes revenues from sales of data
servers to end users only when the product has been shipped, installed, and the
customer has indicated a level of satisfaction with the product's performance
that meets or exceeds predefined Company standards. Revenues from sales of data
servers to distributors, integrators and OEMs, as well as product upgrade
revenues, are generally recognized when the product has been shipped. Revenues
earned under software license agreements with end users are generally recognized
when the software has been shipped and there are no significant obligations
remaining. Service revenue includes installation, maintenance and training and
is recognized ratably over the contractual period or as the services are
provided. Beginning with the first quarter of fiscal 1998, the Company will
change its revenue recognition policy such that revenues from systems sales will
generally be recognized when the equipment has been shipped. The reason for this
change is to better conform its policies with industry practices.
The following table sets forth the principal components of the
Company's revenues:
<TABLE>
<CAPTION>
Years Ended June 30, 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Product revenue ......... $182,533 $146,913 $104,102
Service and other revenue 19,953 15,727 11,523
-------- -------- --------
Total revenues .. $202,486 $162,640 $115,625
======== ======== ========
</TABLE>
Product revenue increased $35.6 million or 24% in fiscal 1997 as
compared to fiscal 1996 and $42.8 million, or 41%, in fiscal 1996 as compared to
fiscal 1995. These increases were attributable to higher average system prices
and increased sales of upgrades to the Company's installed base. Revenue from
product upgrades, which primarily consists of additional processors (or upgrades
of existing processors), and memory and disk and tape drives, increased from the
prior year as a percentage of total revenues to 41% in fiscal 1997 from 39% in
fiscal 1996 and decreased to 39% in fiscal 1996 from 44% in fiscal 1995. The
increase in product upgrade revenue as a percentage of total revenues compared
to fiscal 1996 is primarily due to the expansion of the Company's installed
base demand from customers for increased storage capacity and the Company's
periodic product enhancements. There can be no assurance, however, that the
Company's product revenue will continue to increase in absolute dollar amounts
or at the rate at which it has grown in recent fiscal years.
The Company provides ongoing support and maintenance to its end user
customers, distributors and OEMs generally under annual service agreements.
Service revenue as a percentage of total revenues remained constant in fiscal
1997, 1996, and 1995 at 10%.
The following table sets forth the Company's revenue by geographic area
(in thousands):
<TABLE>
<CAPTION>
Years Ended June 30, 1997 1996 1995
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
North America .... $142,536 70% $110,163 68% $ 85,251 74%
Pacific Rim ...... 31,759 16% 36,229 22% 21,390 18%
Europe ........... 28,191 14% 16,248 10% 8,984 8%
-------- -------- -------- -------- -------- --------
$202,486 100% $162,640 100% $115,625 100%
======== ======== ======== ======== ======== ========
</TABLE>
Revenue from North America increased $32.4 million in fiscal 1997
as compared to fiscal 1996 and $24.9 million in fiscal 1996 as compared to
fiscal 1995. Revenue from Pacific Rim decreased $4.5 million in fiscal 1997
as compared to fiscal 1996 and increased $14.8 million in fiscal 1996 as
compared to fiscal 1995. The decrease in Pacific Rim revenue as a percentage of
total revenue and in absolute dollars in fiscal 1997 as compared to fiscal 1996
was primarily due to the reorganization of a major OEM partner, a delay in the
introduction of Auspex's model NS7000/700 NetServer by that partner in Japan and
weakness in the Japanese economy.
17
<PAGE> 18
Sales of products and services to Intel accounted for 10%, 10% and 15%
of total revenues for the fiscal years ended June 30, 1997, 1996 and 1995,
respectively. Sales to AOL accounted for 15% of total revenues for the fiscal
year ended June 30, 1997. Additionally, sales to Fuji Xerox accounted for 13% of
total revenues for the fiscal year ended June 30, 1996. No other customer
accounted for 10% or more of total revenues for any of the three years in the
period ended June 30, 1997. In addition to direct purchases from the Company,
Intel or its affiliates have from time to time made significant purchases of the
Company's products through indirect channels. Intel, AOL and Fuji Xerox are not
obligated to purchase any minimum level of products from the Company.
Accordingly, there can be no assurance that sales of products and services to
Intel, AOL, and Fuji Xerox will not decline, either in absolute dollar amounts
or as a percentage of total revenues, in future periods and that any such
declines will not have a material adverse effect on the Company's results of
operations.
GROSS MARGIN
The Company's gross margin was 54%, 56% and 54% in fiscal 1997, 1996 and
1995, respectively. Costs of revenues include material costs, manufacturing and
service overhead costs, installation and warranty expenses, obsolescence, the
cost of spare parts and other related costs. The decrease in gross margins in
fiscal 1997 as compared to fiscal 1996 was due to pricing on systems sales and
lower margins on service. This was partially offset by a significant increase in
software revenue. The improvement in margin in fiscal 1996 was attributable to
engineering-related cost reductions in successive new product designs, increased
production volumes, and improved manufacturing and service-related efficiencies.
OPERATING EXPENSES
Marketing and sales expenses increased $10.4 million in fiscal 1997 as
compared to fiscal 1996 and $9.6 million in fiscal 1996 as compared to fiscal
1995, and were 24%, 23% and 24% of total revenues in fiscal 1997, 1996 and 1995,
respectively. The increase in absolute dollars is the result of additional
headcount in the North American direct sales operations and the growth of direct
sales operations of the Company's international subsidiaries.
Research and development expenses, net of capitalized software
development costs, increased $6.6 million in fiscal 1997 as compared to fiscal
1996 and $3.2 million in fiscal 1996 as compared to fiscal 1995, and represented
12%, 11% and 13% of total revenues in fiscal 1997, 1996 and 1995, respectively.
The increase in net research and development expenses both in absolute dollars
and as a percentage of total revenues in fiscal 1997 as compared to fiscal 1996
was due to the addition of employees and related project costs to support the
Company's new product development efforts. The decrease in net research and
development as a percent of total revenue in fiscal 1996 as compared to fiscal
1995 relates primarily to the increase in revenues. Software development
expenses have been accounted for in accordance with Statement of Financial
Accounting Standards No. 86, under which the Company is required to capitalize
software development costs after "technological feasibility" is established. In
the fourth quarter of fiscal 1994, the Company initiated several software
development projects which resulted in the capitalization of $0.7 million in
fiscal 1995 and $0.3 million in fiscal 1996. No amounts were capitalized in
fiscal 1997. The amount of capitalized software development costs in any given
period may vary depending on the exact nature of the development performed. The
Company believes that in order to remain competitive, it will need to continue
to make substantial investments in new and enhanced products, and anticipates
that research and development expenses will increase in both absolute amounts
and as a percentage of total revenues from current levels.
General and administrative expenses increased $0.2 million in fiscal
1997 as compared to fiscal 1996 and $1.9 million in fiscal 1996 as compared to
fiscal 1995 and represented 4%, 5% and 5% of total revenues in fiscal 1997, 1996
and 1995, respectively. Although general and administrative expenses remained
generally flat in absolute dollars in fiscal 1997 as compared to fiscal 1996,
the Company anticipates that the cost of expanding infrastructure including new
facilities will increase in fiscal 1998 to support the Company's growth.
On June 30, 1997, the Company acquired all of the outstanding shares of
Alphatronix, Inc. (Alphatronix), a market leader in the development and
marketing of open-systems based storage management solutions for a total
purchase price of $7.7 million. The acquisition was accounted for using the
purchase method of accounting. A portion of the purchase price was allocated to
assets acquired and liabilities assumed based on their estimated fair value. The
fair value of tangible assets acquired and liabilities assumed was $0.3 million
and $0.3 million, respectively. In addition, $7.4 million of the purchase price
was allocated to in-process research and development projects that had not
reached technological feasibility and had no probable alternative future uses,
which the Company expensed at the date of the acquisition as a one-time
non-recurring charge. The remainder of the purchase price, $0.3 million, was
allocated to goodwill and will be amortized over five years on a straight-line
basis. See Note 3 of Notes to the Consolidated Financial Statements.
Alphatronix's in-process R&D projects relate primarily to developing
significant enhancements to the current product offering as well as introducing
advanced new products. The incomplete projects include a new user interface,
enterprise management support, a hierarchical storage management function,
database journalizing, database insertion, differential dataset recovery, and
on-demand restore ability. Given the uniqueness of the tasks and the
technologies involved, alternative future uses for these projects, apart from
the objectives and economies of the projects for which they are intended, do not
exist.
The Company believes that the efforts to complete the acquired
in-process R&D projects will consist of internally-staffed engineering costs
over the next one to two years. These costs are estimated to be approximately
$3,000,000 to complete the R&D. There can be no assurance that the Company will
succeed in making commercially viable products from the Alphatronix research and
development.
18
<PAGE> 19
OTHER INCOME
Other income and expense resulted in income of $2.4 million, $1.8
million and $2.0 million in fiscal 1997, 1996 and 1995, respectively. Other
income and expense includes interest income, interest expense and foreign
exchange gains and losses. Interest income was $2.3 million, $1.8 million and
$1.7 million in fiscal 1997, 1996 and 1995, respectively. The increase in
interest income in fiscal 1997 as compared to fiscal 1996 primarily relates to
an increase in the cash and short-term investments balances.
PROVISION FOR INCOME TAXES
As of June 30, 1997, the Company had gross deferred tax assets of
approximately $5.9 million. Management has determined, based on the Company's
history of prior operating earnings and its expectations for future years, that
the deferred tax asset is realizable. However, no assurances can be given that
sufficient taxable income will be generated in future years for the utilization
of the deferred tax asset.
The provision for income taxes was approximately $10.9 million in fiscal
1997, $9.8 million in fiscal 1996, and $3.5 million in fiscal 1995, representing
effective tax rates of approximately 45%, 33% and 22%, respectively. The
increase in the effective tax rate in fiscal 1997 as compared to fiscal 1996 is
attributable to the fact that the Company will not receive any tax benefits
related to the write-off of in-process research and development expenses of
approximately $7.4 million resulting from the acquisition of Alphatronix.
Excluding the write-off of in-process research and development expenses which
accounts for an increase of 10.5% in the effective tax rate in fiscal 1997, the
Company's effective tax rate was 34.5%.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly financial
information for the Company's last eight quarters. This unaudited information
has been prepared on the same basis as the audited information and in
management's opinion reflects all adjustments (which include only normal
recurring adjustments) necessary for the fair presentation of the information
for the periods presented. Based on the Company's operating history and factors
that may cause fluctuations in the quarterly results, quarter-to-quarter
comparisons should not be relied upon as indicators of future performance.
Although the Company's revenues are not generally seasonal in nature, the
Company has experienced decreases in first quarter revenue versus the preceding
fourth quarter which is believed to result primarily from the capital asset
purchase cycle of the Company's customers.
The level of the Company's operating expenses is partially based on its
expectations of future revenue. The Company's results of operations may be
adversely affected if revenue does not materialize in a period as expected.
Since expense levels are usually committed in advance of revenues and because
only a small portion of expenses vary with revenue, the Company's net income may
be impacted significantly by lower revenue. The Company's revenue increased each
quarter in fiscal 1997 as compared to the equivalent quarter in the prior year.
This increase was due principally to increased sales volume or higher average
selling prices of the Company's products.
19
<PAGE> 20
1997 SUMMARY BY QUARTER
<TABLE>
<CAPTION>
(In thousands, except per share amounts) First Second Third Fourth Year
-------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues $43,012 $49,082 $55,602 $54,790 $202,486
Gross profit 23,912 26,645 30,458 28,463 109,478
Income before taxes 6,620 7,603 10,057 82 24,362
Net income (loss) 4,270 4,904 6,487 (2,241) 13,420
Net income (loss) per share $ 0.17 $ 0.19 $ 0.25 $ (0.09)(1) $ 0.52(1)
</TABLE>
1996 SUMMARY BY QUARTER
<TABLE>
<CAPTION>
(In thousands, except per share amounts) First Second Third Fourth Year
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues $33,536 $38,003 $43,333 $47,768 $162,640
Gross profit 18,294 21,166 24,202 27,012 90,674
Income before taxes 5,276 6,996 8,046 9,279 29,597
Net income 3,535 4,687 5,391 6,217 19,830
Net income per share $ 0.14 $ 0.18 $ 0.21 $ 0.24 $ 0.77
</TABLE>
(1) Includes the costs associated with the acquisition of Alphatronix, Inc. in
the fourth quarter of fiscal 1997. Exclusive of these acquisition costs,
earnings per share for fiscal 1997 would have been $0.81.
20
<PAGE> 21
FACTORS THAT MAY AFFECT FUTURE RESULTS
The last two sentences in the sixth paragraph of the section entitled
"The Company" in Part I, the first sentence in the fourth paragraph of the
section entitled "Distribution" in Part I, the last sentence in the second
paragraph of the section entitled "Operating Expenses" in Part II, the second
sentence of the first paragraph of the section entitled "Provision for Income
Taxes" in Part II, the third sentence of the second paragraph under the section
entitled "Liquidity and Capital Resources" in Part II and the last sentence of
the fourth paragraph under the section entitled "Liquidity and Capital
Resources" in Part II contain forward looking statements as defined in the
Private Securities Litigation Reform Act of 1995. The Company may also make oral
and written forward looking statements from time to time. Actual results may
differ materially from those projected in any such forward looking statements
due to a number of factors, including those set forth below. The Company
undertakes no obligation to update such information.
POTENTIAL SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results may fluctuate significantly from
quarter to quarter due to a combination of factors. These factors include the
timing of orders, the timing of new product introductions by the Company or its
competitors and the mix of distribution channels through which the Company's
products are sold. The Company generally realizes higher gross margins on sales
of systems to end users and on single system sales than on systems sold through
distributors and OEMs and on multiple system sales. In addition, given the
Company's focus on highly configured enterprise class systems, the loss or delay
in a given quarter of a relatively limited number of system sales could
adversely effect the Company's revenues. Historically, the Company has often
recognized a substantial portion of its revenues in the last month of any given
quarter. Because the Company's operating expenses are based on anticipated
revenue levels and because a high percentage of the Company's expenses are
relatively fixed, a small variation in the timing of the recognition of revenues
could cause significant variations in operating results from quarter to quarter.
INTENSELY COMPETITIVE MARKET
The market for the Company's products is intensely competitive. The
Company experiences substantial competition, principally from Sun Microsystems,
Hewlett-Packard Company and Silicon Graphics, Inc. Also, EMC Corporation has
recently introduced proprietary products to provide network attached storage. In
addition, smaller companies such as Network Appliance, Inc. have introduced
products at the low end of the Company's target markets. Most of the Company's
competitors are better known and have substantially greater financial,
technological, production and marketing resources than the Company. While the
Company believes that the price/performance characteristics of its products are
competitive, price competition in the markets for the Company's products is
intense. Any material reduction in the price of the Company's products without
corresponding decreases in manufacturing costs and increases in unit volume
would negatively affect gross margins which could in turn have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company also derives a significant portion of its revenues from
sales of product upgrades to its installed base, including additional
processors, and memory and disk and tape drives. Increased competition for the
Company's products that result in lower product sales could also adversely
impact the Company's upgrade sales. In addition, decisions by customers not to
increase capacity to their current systems could adversely impact the Company's
revenues and results of operations. The Company's ability to maintain its
competitive position will depend, among other factors, upon its success in
anticipating industry trends, investing in product research and development,
developing new products with improved price/performance characteristics and
effectively managing the introduction of new products into targeted markets.
DEPENDENCE ON KEY PERSONNEL
Competition for employees with highly technical, management and other
skills is intense in the computer industry and is particularly intense in the
San Francisco Bay Area. The Company has in the past encountered some
difficulties in fulfilling its hiring needs and retaining key employees in this
employment market, and there can be no
21
<PAGE> 22
assurance that the Company will be successful in hiring and retaining qualified
employees in the future. The Company's failure to retain the services of key
personnel or to attract additional qualified employees could have a material
adverse effect on the Company's business, financial condition and results of
operations.
SOFTWARE PRODUCT RISKS
With the release of its DriveGuard(TM) and FastBackup(TM) software
products along with current software products ServerGuard(TM) and DataGuard(TM),
the Company now markets software products in addition to its line of network
file servers. The Company also expects to release enhancements and new features
for these products from time to time. Although the Company performs extensive
testing prior to releasing software products, such products may contain
undetected errors or bugs when first released. These may not be discovered until
the product has been used by customers in different application environments.
Failure to discover product deficiencies or bugs could delay product
introductions, require design modifications to previously shipped products,
cause unfavorable publicity or negatively impact system shipments, any of which
could result in a material adverse affect on the Company's business, financial
condition and results of operations.
NEW PRODUCTS
New product introductions by the Company or its competitors carry the
risk that customers could delay or cancel orders for existing products pending
shipment of the new products. The Company's strategy is to continue to introduce
new products and upgrades to existing products on an ongoing basis. There can be
no assurance that the Company will not experience difficulties that delay or
prevent the successful development, introduction or marketing of these products
and enhancements or that these new products and enhancements will adequately
address market requirements and achieve market acceptance. Any delays in the
launch or availability of new products could have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON ESTABLISHED STANDARDS
The rapid emergence of new or alternate standards such as NT which
replace or diminish the market acceptance of UNIX operating systems or NFS, on
which the Company's products are currently based, could materially and adversely
affect the Company's results of operations unless the Company is able to
incorporate any such standards in the Company's products in a timely manner.
DEPENDENCE ON CERTAIN CUSTOMERS/DISTRIBUTORS
For fiscal year 1997 and 1996, direct sales of products and services to
Intel represented approximately 10% and 15%, respectively, of the Company's
revenues. In addition to direct purchases from the Company, Intel or its
affiliates have from time to time made significant purchases of the Company's
products through indirect channels. Also in fiscal year 1997, direct sales of
products and services to AOL represented approximately 15% of the Company's
revenues. For fiscal year 1996, sales to Fuji Xerox, the Company's non-exclusive
master value added distributor in Japan, represented approximately 13% of the
Company's revenues. Intel, AOL and Fuji Xerox are not obligated to purchase any
minimum level of products from the Company. A significant reduction in product
sales to Intel, AOL or Fuji Xerox would materially and adversely affect the
Company's business, financial condition and results of operations.
DEPENDENCE ON CERTAIN SUPPLIERS
Certain of the Company's products contain critical components supplied
by a single or a limited number of third parties. While the Company has an
inventory of these critical components, any significant or prolonged shortage of
these components or the failure of the third party suppliers to maintain or
enhance these components could materially adversely affect the Company's results
of operations.
22
<PAGE> 23
RISKS OF INTERNATIONAL SALES; EUROPEAN AND JAPANESE MARKET RISKS
During fiscal year 1997 and 1996, approximately 30% and 32%,
respectively, of the Company's total revenues were derived from markets outside
of North America. The Company expects that sales to the Pacific Rim and Europe
will continue to represent a significant portion of its business. There can be
no assurance that the Company's Pacific Rim or European operations will continue
to be successful. The Company's international business may be affected by
changes in demand resulting from localized economic and market conditions. In
addition, the Company's international business may be affected by fluctuations
in currency exchange rates and currency restrictions as well as by risks such
as trade restrictions, increases in tariff and freight rates and difficulties in
obtaining necessary export licenses and meeting appropriate local regulatory
standards. For example, the Company has had to modify its products in minor
respects in Japan to comply with local electromagnetic emissions standards, and
must also comply with corresponding European Economic Community standards. In
marketing its products to the European Economic Community, the Company also must
face the challenges posed by a fragmented market complicated by local
distribution channels and local cultural considerations. For international
sales, the Company has largely relied on distributors or OEMs, most of who are
entitled to carry products of the Company's competitors.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS; PENDING LITIGATION
The Company currently relies on a combination of patent, copyright,
trademark and trade secret laws and contractual provisions to protect its
proprietary rights in its hardware and software products. The Company currently
holds six United States patents and has filed applications for additional
patents. The Company has also filed applications for counterpart patents in
foreign countries, including Japan. There can be no assurance that the Company's
present or future competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology. Further,
there can be no assurance that the Company's patent applications will result in
issued patents, or that the Company's issued patents will be upheld if
challenged. Additionally, there can be no assurance that third parties will not
assert intellectual property infringement claims against the Company in the
future with respect to current or future projects or that any such assertions
may not require the Company to refrain from the sale of its products, enter into
royalty arrangements or undertake costly litigation.
The Company's adherence to industry standards with respect to its
products limits the Company's opportunities to provide proprietary features
which may be protected. In addition, the laws of various countries in which the
Company's products may be sold may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States.
The Company is a defendant in various lawsuits and is subject to
various claims which arise in the normal course of business. In the opinion of
management, the ultimate dispositions of these claims will not have a material
adverse effect on the financial position, liquidity or results of operations of
the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments
increased $10.4 million as of June 30, 1997, compared to June 30, 1996, and
increased $5.9 million as of June 30, 1996, compared to June 30, 1995. The
Company generated approximately $28.6 million, $16.9 million and $9.4 million in
cash from operating activities in fiscal 1997, 1996 and 1995, respectively. The
increase of cash from operating activities in each year was due primarily to an
increase in net income in each year.
The Company's principal investing activities consisted in the purchase
of property and equipment which were $16.4 million, $15.4 million and $8.1
million in fiscal 1997, 1996 and 1995, respectively. These expenditures were
primarily for leasehold improvements, equipment for research and development,
manufacturing test equipment, office equipment and spare parts to support
customer service contracts. The Company currently anticipates capital
23
<PAGE> 24
expenditures of approximately $35 to $40 million in fiscal year 1998, primarily
for leasehold improvements, engineering, manufacturing and office equipment and
spare parts support. The Company also used cash of $7.5 million, $1.3 million
and $2.9 million for short-term investments in fiscal 1997, 1996 and 1995,
respectively.
The Company's primary financing activities included proceeds from the
sale of common stock pursuant to employee benefit plans of $4.1 million, $5.0
million and $1.7 million in fiscal 1997, 1996 and 1995, respectively. In
addition, the Company made principal payments on capital leases of $0.1 million,
$0.4 million and $0.6 million in fiscal 1997, 1996 and 1995, respectively.
As of June 30, 1997, working capital was $105.4 million as compared
with $90.9 million as of June 30, 1996. The Company anticipates that its current
cash and short-term investment balances and expected cash flow from operations
will be sufficient to meet its working capital and capital expenditure
requirements at least through fiscal 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are incorporated by
reference herein from Part IV Item 14(a)1 and 2. The selected quarterly
supplementary data is included as part of Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
24
<PAGE> 25
PART III
Certain information required by Part III is omitted from this Annual
Report on Form 10-K because the Registrant will file a definitive proxy
statement within one hundred twenty (120) days after the end of its fiscal year
pursuant to Regulation 14A (the "Proxy Statement") for its Annual Meeting of
Stockholders currently scheduled for November 20, 1997, and the information
included in the Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company is incorporated by
reference to the information under the heading "Election of Directors " in the
Registrant's Proxy Statement.
Information regarding the executive officers of the Company is
incorporated by reference to the section of Part I of this Annual Report on Form
10-K entitled "Item 1 - Business - Executive Officers of the Company".
Information regarding compliance with Section 16 of the Securities
Exchange Act of 1934, as amended, is incorporated by reference to the
information under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the compensation of executive officers and
directors of the Company is incorporated by reference to the information under
the heading "Executive Compensation" and "Certain Transactions with Management"
in the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the information under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the
Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the information under the caption "Certain
Transactions with Management" in the Registrant's Proxy Statement.
25
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) The following documents are filed as a part of this Annual Report
on Form 10-K.
1. FINANCIAL STATEMENTS
The following consolidated financial statements of Auspex
Systems, Inc. are filed as part of this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Arthur Andersen LLP, Independent F-1
Public Accountants
Consolidated Statements of Operations for the
years ended June 30, 1997, 1996 and 1995 F-2
Consolidated Balance Sheets as of June 30, 1997 F-3
and 1996
Consolidated Statements of Stockholders' F-4
Equity for the years ended June 30, 1997,
1996 and 1995
Consolidated Statements of Cash Flows for the
years ended June 30, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules for
each of the three years in the period ending June 30, 1997,
1996 and 1995 are submitted herewith:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II - Valuation and Qualifying Accounts S-1
and Reserves
(All other schedules are omitted because they are not
applicable or the required information is shown in the
Financial Statements or notes thereto.)
</TABLE>
26
<PAGE> 27
3. EXHIBITS
The following exhibits are included in this Annual Report on
Form 10-K (numbered in accordance with Item 601 of Regulation
S-K):
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1(1) Certificate of Incorporation of Registrant as
amended and restated to date.
3.21 By-laws of Registrant as amended to date.
10.1(1.2) 1988 Stock Option Plan and forms of Incentive
Stock Option Agreements and Nonstatutory Stock
Option Agreements, as amended to date.
10.2(1.2) 1993 Directors' Stock Option Plan and forms of
Option Agreements.
10.3(1.2) 1993 Employee Stock Purchase Plan and forms of
Agreements.
10.4(1.2) 401(k) Plan, as amended to date.
10.5(1.2) Summary of Executive Bonus Program.
10.6(1.2) Form of Directors' and Officers' Indemnification
Agreement.
10.7(1) Registration and Information Rights Agreement
dated January 31, 1992.
10.8(1) Lease Agreement between the Registrant and The
Prudential Insurance Company of America dated
October 20, 1992.
10.9(1.3) OEM Agreement dated March 9, 1993 between the
Registrant and Fuji Xerox Company, Ltd.
10.10(1.3) Distributor Agreement dated June 6, 1990 between
the Registrant and Nissho Electronics
Corporation.
10.11(1.3) Agreement between the Registrant and Solectron
Corporation dated May 20, 1991, as amended on
November 18, 1992.
10.12(1) U.S. OEM Discount Agreement between the
Registrant and Sun Microsystems, Inc. effective
as of August 18, 1988, as amended by Addendum
dated September 8, 1988 and Addendum dated
September 14, 1989.
10.13(1) Source Code License between the Registrant and
Sun Microsystems, Inc. dated August 31, 1988, as
amended on April 30, 1991, February 11, 1992 and
March 18, 1992.
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.14(1) NFS Software Agreement between the Registrant
and Sun Microsystems, Inc. dated September 29,
1988.
10.15(4.5) Software Agreement between the Registrant and
AT&T Information Systems Inc. dated June 2,
1988, as amended by Supplement Number 1,
Supplement Number 2 dated August 5, 1988 and
Supplement Number 3 dated August 10, 1990, as
amended on June 28, 1993.
10.16(4.5) Sublicensing Agreement between the Registrant
and AT&T Information Systems Inc. dated August
30, 1988, as amended on June 28, 1993.
10.17(1) Software Agreement between the Registrant and
UNIX System Laboratories, Inc. dated April 29,
1992.
10.18(1) License Agreement with the Regents of the
University of California dated June 9, 1988, as
amended by Addendum dated October 21, 1988.
10.19(6.7) Intel Corporation Purchase Agreement between
Intel Corporation and the Registrant dated March
22, 1994.
10.20(8) Warranty and Service Provider Agreement between
the Registrant and AT&T Global Information
Systems dated April 15, 1994.
10.21(8) SunSoft Technology License and Distribution
Agreement between the Registrant and SunSoft,
Inc. dated December 17, 1993.
10.22(9) Preferred Shares Rights Agreement between the
Registrant and The First National Bank of Boston
as Rights Agent dated April 19, 1995.
10.23 Amendment No. 1 to Lease Agreement between the
Registrant and WHC-SIX Real Estate dated June 8,
1995.
10.24 Amendment No. 2 to Lease Agreement between the
Registrant and WHC-SIX Real Estate dated
February 28, 1996.
10.25 Interactive SPARC Software and Sublicensing
Agreement between Auspex Systems, Inc. and
Interactive systems Corporation, dated November
15, 1991.
10.26 Lease Agreement by and Between South Bay/San
Tomas Associates and Auspex Systems, Inc. dated
January 14, 1997.
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.27 Lease Agreement by and Between South Bay/San
Tomas Associates and Auspex Systems, Inc. dated
January 14, 1997.
11.1 Calculation of earning per share.
21.1 Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP, Independent
Public Accountants
25.1 Power of Attorney (See Page 30).
27.1 Financial Data Schedule
</TABLE>
- ----------
(1) Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1, as
amended (File No. 33-60052), which was declared effective on May 11, 1993.
(2) Designates management contract or compensatory plan arrangements required
to be filed as an exhibit of this Annual Report on Form 10-K pursuant to
Item 14(c).
(3) Confidential treatment granted by order effective May 11, 1993.
(4) Incorporated by reference to identically numbered exhibits filed in
connection with Registrant's Form 10-K for the fiscal year ended June 25,
1993 (File No. 33-60052).
(5) Confidential treatment granted by order effective January 14, 1994.
(6) Incorporated by reference to Exhibit 10.1 filed in connection with
Registrant's Form 10-Q for the quarter ended March 31, 1994 (File No.
0-21432), which was filed on May 16, 1994.
(7) Confidential treatment granted by order effective July 7, 1994.
(8) Incorporated by reference to exhibits filed in connection with the
Registrant's Form 10-K for the fiscal year ended June 30, 1994 (File No.
0-21432), which was filed on September 28, 1994 and confidential treatment
granted by order effective December 5, 1994.
(9) Incorporated by reference to Exhibit 1 filed in connection with the
Registrant's Form 8-A which was filed on April 20, 1995.
(B) REPORTS ON FORM 8-K:
No report on Report Form 8-K was filed during the last quarter of the
fiscal year ended June 30, 1997.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AUSPEX SYSTEMS, INC.
Date: September 26 , 1997 By: / s / BRUCE N. MOORE
---------------------- ---------------------
Bruce N. Moore, President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Bruce N. Moore and Kent L. Robertson,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of these
attorneys-in-fact, or his or her substitute or substitutes may do, or cause to
be done, by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/ s / BRUCE N. MOORE President and Chief Executive Officer and September 26, 1997
- ----------------------------------- Director
(Bruce N. Moore)
/ s / KENT L. ROBERTSON Vice President of Finance and September 26, 1997
- ----------------------------------- Chief Financial Officer
(Kent L. Robertson)
/ s / R. STEPHEN CHEHEYL Director September 26, 1997
- ---------------------------
(R. Stephen Cheheyl)
/ s / W. FRANK KING Director September 26, 1997
- -----------------------------------
(W. Frank King)
/ s / DAVID F. MARQUARDT Director September 26, 1997
- ---------------------------
(David F. Marquardt)
</TABLE>
30
<PAGE> 31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Auspex Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Auspex Systems,
Inc. (a Delaware corporation) and subsidiaries as of June 30, 1997 and 1996, and
the related statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Auspex Systems, Inc. and
subsidiaries as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(A) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements, and in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
San Jose, California
July 28, 1997
F-1
<PAGE> 32
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
------------ ------------- -------------
(In thousands, except per share amounts)
Revenues
<S> <C> <C> <C>
Product revenue $ 182,533 $ 146,913 $ 104,102
Service revenue 19,953 15,727 11,523
--------- --------- ---------
Total revenues 202,486 162,640 115,625
--------- --------- ---------
Cost of Revenues
Cost of product revenue 79,062 62,126 46,617
Cost of service revenue 13,946 9,840 6,833
--------- --------- ---------
Total cost of revenues 93,008 71,966 53,450
--------- --------- ---------
Gross profit 109,478 90,674 62,175
--------- --------- ---------
Operating Expenses
Marketing and sales 48,047 37,647 28,069
Research and development 24,449 17,843 14,621
General and administrative 7,672 7,431 5,567
In-process research and development 7,354 - -
--------- --------- ---------
Total operating expenses 87,522 62,921 48,257
--------- --------- ---------
Income from operations 21,956 27,753 13,918
--------- --------- ---------
Other Income
Interest income 2,265 1,813 1,746
Interest expense (20) (81) (55)
Other income 161 112 303
--------- --------- ---------
Total other income 2,406 1,844 1,994
--------- --------- ---------
Income before provision for income taxes 24,362 29,597 15,912
Provision for Income Taxes 10,942 9,767 3,501
--------- --------- ---------
Net Income $ 13,420 $ 19,830 $ 12,411
========= ========= =========
Net Income per Share $ 0.52 $ 0.77 $ 0.51
========= ========= =========
Weighted Average Common Shares and Equivalents 25,658 25,702 24,371
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 33
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
(In thousands, except share and per share amounts)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 25,056 $ 22,169
Short-term investments 35,830 28,349
Trade receivables, net of allowances of $1,193 and $1,535,
respectively 43,130 37,848
Inventories 18,096 16,130
Prepaid expenses and other 12,158 12,447
--------- ---------
Total current assets 134,270 116,943
--------- ---------
Property and Equipment:
Computer and manufacturing equipment 37,893 27,850
System spares 17,465 13,107
Furniture and fixtures 4,624 3,351
Leasehold improvements 3,006 2,573
--------- ---------
62,988 46,881
Less --- accumulated depreciation and amortization (42,952) (31,304)
--------- ---------
Total property and equipment, net 20,036 15,577
--------- ---------
Other Assets 2,846 3,324
--------- ---------
Total assets $ 157,152 $ 135,844
========= =========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Current Liabilities:
Current portion of capital lease obligations $ 95 $ 136
Accounts payable 6,906 6,165
Accrued liabilities 12,280 12,712
Income tax payable 64 440
Deferred revenue 9,491 6,578
--------- ---------
Total current liabilities 28,836 26,031
Stockholders' Equity:
Common stock, $.001 par value --- 50,000,000 shares authorized; 25,004,965
and 24,527,188 shares issued, respectively;
25,004,965 and 24,360,507 shares outstanding, respectively 25 24
Additional paid-in capital 78,435 73,169
Notes receivable from sale of common stock - (49)
Retained earnings 50,261 36,841
Unrealized loss from available for sale securities (5) -
Cumulative translation adjustment (400) (172)
--------- ---------
Total stockholders' equity 128,316 109,813
--------- ---------
Total liabilities and stockholders' equity $ 157,152 $ 135,844
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 34
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
FOR THE THREE YEARS ENDED ----------------------------- PAID-IN NOTES RETAINED
JUNE 30,1997 SHARES AMOUNT CAPITAL RECEIVABLE EARNINGS
- ------------ ------ ------ ------- ---------- --------
(In thousands, except share amounts)
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30,1994 22,897,816 $ 23 $ 62,332 ($334) $ 4,600
Issuance of common stock
to employees 418,883 - 1,601 - -
Repayment of notes receivable - - - 67 -
Repurchase of previously exercised
stock options (15,573) - (4) - -
Translation adjustment - - - - -
Net income - - - - 12,411
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30,1995 23,301,126 23 63,929 (267) 17,011
Issuance of common stock
to employees 1,065,632 1 4,829 - -
Repayment of notes receivable - - - 218 -
Repurchase of previously exercised
stock options (6,251) - (4) - -
Tax benefits related to exercise of
stock options - - 4,415 - -
Translation adjustment - - - - -
Net income - - - - 19,830
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30,1996 24,360,507 24 73,169 (49) 36,841
Issuance of common stock
to employees 652,859 1 4,097 - -
Repayment of notes receivable - - - 49 -
Repurchase of previously exercised
stock options (8,401) - (10) - -
Tax benefits related to exercise of
stock options - - 1,179 - -
Unrealized loss on available for
sale securities - - - - -
Translation adjustment - - - - -
Net income - - - - 13,420
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30,1997 25,004,965 $ 25 $ 78,435 - $ 50,261
=========== =========== =========== =========== ===========
<CAPTION>
UNREALIZED
LOSS ON
AVAILABLE CUMULATIVE
FOR THE THREE YEARS ENDED FOR SALE TRANSLATION
JUNE 30,1997 SECURITIES ADJUSTMENT TOTAL
- ------------ ---------- ---------- -----
(In thousands, except share amounts)
<S> <C> <C> <C>
BALANCE, JUNE 30,1994 - $ 9 $ 66,630
Issuance of common stock
to employees - - 1,601
Repayment of notes receivable - - 67
Repurchase of previously exercised
stock options - - (4)
Translation adjustment - (6) (6)
Net income - - 12,411
----------- ----------- -----------
BALANCE, JUNE 30,1995 - 3 80,699
Issuance of common stock
to employees - - 4,830
Repayment of notes receivable - - 218
Repurchase of previously exercised
stock options - - (4)
Tax benefits related to exercise of
stock options - - 4,415
Translation adjustment - (175) (175)
Net income - - 19,830
----------- ----------- -----------
BALANCE, JUNE 30,1996 $ - (172) 109,813
Issuance of common stock
to employees - - 4,098
Repayment of notes receivable - - 49
Repurchase of previously exercised
stock options - - (10)
Tax benefits related to exercise of
stock options - - 1,179
Unrealized loss on available for
sale securities (5) - (5)
Translation adjustment (228) (228)
Net income - - 13,420
----------- ----------- -----------
BALANCE, JUNE 30,1997 ($5) ($400) $ 128,316
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 35
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 13,420 $ 19,830 $ 12,411
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 12,435 8,885 8,030
In-process research and development 7,354 - -
Changes in assets and liabilities:
Increase in trade receivables (5,282) (10,295) (10,628)
(Increase) decrease in inventories (1,966) 1,014 (4,513)
(Increase) decrease in prepaid expenses and other 289 (8,174) (161)
(Increase) decrease in other assets (1,687) 579 (3,225)
Increase (decrease) in accounts payable 741 (1,248) (874)
Increase (decrease) in accrued liabilities (432) 5,343 1,576
Increase (decrease) in income tax payable 803 (354) 5,185
Increase in deferred revenue 2,913 1,285 1,647
-------- -------- --------
Net cash provided by operating activities 28,588 16,865 9,448
-------- -------- --------
Cash Flows from Investing Activities:
Purchases of held-to-maturity short-term investments - (37,818) (44,228)
Purchases of available-for-sale short-erm investments (38,220) - -
Proceeds from maturities of held-to-maturity short-term investments - 30,858 41,348
Proceeds from sales of held-to-maturity short-term investments - 4,591 -
Proceeds from sales/maturities of available-for-sales short-term investments 30,734 1,048 -
Payment for Alphatronix, Inc. acquisition, net of cash acquired (5,600) - -
Purchases of property and equipment (16,385) (15,405) (8,052)
-------- -------- --------
Net cash used in investing activities (29,471) (16,726) (10,932)
-------- -------- --------
Cash Flows from Financing Activities:
Principal payments on capital lease obligations (139) (407) (571)
Proceeds from sale of common stock, net 4,147 5,048 1,668
Repurchases of common stock (10) (4) (4)
-------- -------- --------
Net cash provided by financing activities 3,998 4,637 1,093
-------- -------- --------
Effect of Exchange Rate Changes on Cash (228) (175) (6)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 2,887 4,601 (397)
Cash and Cash Equivalents, Beginning of Year 22,169 17,568 17,965
-------- -------- --------
Cash and Cash Equivalents, End of Year $ 25,056 $ 22,169 $ 17,568
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 36
AUSPEX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
Auspex Systems, Inc. (the "Company") was incorporated in 1987 in California and
reincorporated in Delaware in 1991 to develop, manufacture, market, sell and
support a line of high-performance UNIX multi-protocol network file/data servers
for the technical workstation market. The Company's markets are principally in
North America, Pacific Rim and Europe and include customers in the technical and
commercial computing market. See Note 9 for information on revenues by
geographic area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries after elimination of
intercompany accounts and transactions.
ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures 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.
FOREIGN CURRENCY TRANSLATIONS The functional currency of the Company's foreign
subsidiaries is the local currency. Accordingly, gains and losses resulting from
the translation of the subsidiaries' financial statements are reported as a
separate component of stockholders' equity.
REVENUE RECOGNITION Product revenue includes hardware sales and software license
fees. Revenues from system sales to end users are generally recognized when the
equipment has been shipped, installed and accepted by the end user. Revenues
from system sales to distributors, integrators and OEMs, as well as product
upgrades, are generally recognized when the equipment has been shipped. Revenues
earned under software license agreements with end users are generally recognized
when the software has been shipped and there are no significant obligations
remaining. Service revenue includes installation, maintenance, and training and
is recognized ratably over the contractual period or as the services are
provided. Beginning with the first quarter of fiscal 1998, the Company will
change its revenue recognition policy such that revenues from systems sales will
generally be recognized when the equipment has been shipped. The reason for this
change is to better conform its policies with industry practices.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Substantially all cash
equivalents consist of investments in certificates of deposits, money market
deposits, and municipal bonds with original maturities of three months or less.
Substantially all short-term investments consist of municipal bonds which the
Company intends to hold between three and twelve months.
The Company classifies its investments in debt and equity securities as
available-for-sale in accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Securities classified as available-for-sale are reported at fair
market value with the related unrealized gains and losses, net of tax, reported
as a separate component of stockholders' equity. Realized gains and losses and
declines in value judged to be other than temporary are included in other
income.
F-6
<PAGE> 37
At June 30, 1997, the Company's available-for-sale securities had contractual
maturities that expire at various dates through August 1998. The fair value of
available-for-sale securities was determined based on quoted market prices at
the reporting date for those securities. At June 30, 1997 and 1996, the
amortized cost basis, aggregate fair value and gross unrealized holding gains
(losses) by major security type are as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED
JUNE 30, 1997 COST FAIR VALUE GAINS (LOSSES)
- ------------- --------- ---------- --------------
<S> <C> <C> <C>
Available-for-Sale Securities:
Municipal bonds....................... $ 48,653 $48,648 $ (5)
======== ======= =====
June 30, 1996
Available-for-Sale Securities:
Municipal bonds....................... $ 35,137 $35,098 $ (39)
Certificate of deposit................ 61 61 --
-------- ------- -----
Total investments in securities $ 35,198 $35,159 $(39)
======== ======= ====
</TABLE>
In fiscal year 1997, there were no significant gains or losses realized on the
Company's cash equivalents or short-term investments. One available-for-sale
security was sold in fiscal year 1996 with proceeds of $1,048,000, providing a
realized gain of $1,000 (the realized gain was calculated using the `specific
identification' method).
In the fourth quarter of fiscal 1996, upon the Company's re-evaluation of its
investment portfolio, all of the Company's securities were re-classified from
held-to-maturity to available-for-sale for SFAS No. 115 purposes. During fiscal
1996, the Company sold, prior to maturity, securities previously classified as
held-to-maturity with an amortized cost aggregating $4,362,000. Total proceeds
from these sales were $4,591,000, with total interest and realized gain of
$229,000.
SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURES The Company acquired certain
equipment under capital lease obligations at a cost of approximately $61,000 in
fiscal 1995. No equipment was acquired during fiscal 1997 and 1996 under capital
lease obligations. Cash paid for interest during fiscal 1997, 1996 and 1995 was
approximately $20,000, $81,000 and $55,000, respectively. Cash paid for income
taxes during fiscal 1997, 1996 and 1995 was approximately $6,052,000,
$15,256,000 and $1,073,000, respectively. In fiscal 1997 and 1996, non-cash
activity consisted of $1,179,000 and $4,415,000, respectively from tax benefits
related to exercise of stock options.
CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash
investments and accounts receivables. The Company's cash investment policy
limits the amount of credit exposure to any one issuer and restricts purchase of
these investments to issuers evaluated as creditworthy. Concentrations of credit
risk in trade receivables is limited as a result of the large number of
customers comprising the Company's customer base and their dispersion across
many different industries and geographies.
F-7
<PAGE> 38
INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or
market, and include material, labor and manufacturing overhead. Inventories
consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Purchased materials........... $ 6,382 $ 4,366
Systems in process............ 7,885 7,082
Finished goods................ 3,829 4,682
------- -------
$18,096 $16,130
======= =======
</TABLE>
Inventories contained components and assemblies in excess of the Company's
current estimated requirements and were fully reserved at June 30, 1997 and
1996. Due to competitive pressures, it is reasonably possible that these
estimates could change in the near term.
Certain of the Company's products contain critical components supplied by a
single or a limited number of third parties. The Company has an inventory of
these critical components so as to ensure an available supply of products for
its customers. Any significant shortage of these components or the failure of
the third party suppliers to maintain or enhance these components could
materially adversely affect the Company's results of operations.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation
and amortization are computed using the straight-line method over the following
estimated useful lives:
Computer and manufacturing equipment 1.5 to 2 years
System spares 2 to 3 years
Furniture and fixtures 3 years
Leasehold improvements Shorter of the lease
term or estimated useful life
SOFTWARE DEVELOPMENT COSTS The Company capitalizes software development costs in
compliance with SFAS No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed." Capitalization of software development
costs begins upon the determination of technological feasibility. The
determination of technological feasibility and the ongoing assessment of the
recoverability of these costs require considerable judgment by management with
respect to certain external factors including anticipated future gross product
revenues, estimated economic life and changes in hardware and software
technology. Software development costs capitalized during fiscal 1996 and 1995
amounted to $274,000 and $729,000, respectively. No amounts were capitalized in
fiscal 1997.
Amortization of capitalized software development costs begins when the products
are available for general release to customers and is computed on an individual
product basis and is the greater of the amount computed on a units-sold basis or
straight-line basis over the estimated economic life of the product.
Amortization of software development costs amounted to $411,000, $220,000, and
$28,000 for the years ended June 30, 1997, 1996 and 1995, respectively.
ACCRUED LIABILITIES Accrued liabilities consisted of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Payroll, bonus and vacation ....... $ 5,439 $ 6,066
Other.......................................... 6,841 6,646
-------- --------
$ 12,280 $ 12,712
======== ========
</TABLE>
F-8
<PAGE> 39
NET INCOME PER SHARE Net income per share is computed using the weighted average
number of shares of common stock, and dilutive common equivalent shares from
stock options using the treasury stock method. Fully diluted net income per
share is substantially the same as primary net income per share.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share," which is required to be adopted by the Company in its
second quarter of fiscal 1998. At that time, the Company will be required to
change the method currently used to compute net income per share and to restate
all prior periods presented. Under the new requirements for calculating net
income per share, primary net income per share will be replaced with basic net
income per share and fully diluted net income per share will be replaced with
diluted net income per share. Under basic net income per share, the dilutive
effect of stock options will be excluded. The calculation of basic net income
per share for the years ended June 30, 1997, 1996, and 1995 results in $0.54,
$0.84, and $0.54 per share, respectively. Diluted net income per share is
substantially the same as the reported primary net income per share.
EMPLOYEE STOCK PLANS Effective, July, 1, 1996, the Company adopted Statement of
SFAS No. 123, "Accounting for Stock-Based Compensation." In accordance with the
provisions of SFAS No. 123, the Company applies APB Opinion No. 25 and related
interpretations to account for its employee stock option and stock purchase
plans, and accordingly, does not recognize compensation expense. Note 7 of the
Consolidated Financial Statements contains a summary of the pro forma effects to
reported net income and earnings per share for 1997 and 1996 as if the Company
had elected to recognize compensation expense based on the fair value of the
options granted at grant date as prescribed by SFAS No. 123.
NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for disclosure and financial statement display for reporting total
comprehensive income and its individual components. Comprehensive income as
defined, includes all changes in equity during a period from nonowner sources.
The Company is required to adopt SFAS No. 130 in its first quarter of fiscal
1999. At that time, reclassification of financial statements for earlier periods
for comparative purposes is required. The Company does not expect the adoption
of SFAS No. 130 to have a material effect on the consolidated financial
statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas,
and major customers. The Company is required to adopt SFAS No. 131 in fiscal
1999 and does not expect such adoption to have a material effect on the
consolidated financial statements.
3. ACQUISITION:
On June 30, 1997, the Company acquired all of the outstanding shares of
Alphatronix, Inc. (Alphatronix), a market leader in the development and
marketing of open-systems based storage management solutions for a total
purchase price of $7.7 million. The acquisition was accounted for using the
purchase method of accounting. A portion of the purchase price was allocated to
assets acquired and liabilities assumed based on their estimated fair value. The
fair value of tangible assets acquired and liabilities assumed was $0.3 million
and $0.3 million, respectively. In addition, $7.4 million of the purchase price
was allocated to in-process research and development projects that had not
reached technological feasibility and had no probable alternative future uses,
which the Company expensed at the date of the acquisition as a one-time
non-recurring charge. The remainder of the purchase price, $0.3 million, was
allocated to goodwill and will be amortized over five years on a straight-line
basis. Comparative proforma information has not been presented, as the results
of operations for Alphatronix are not material to the Company's financial
statements.
F-9
<PAGE> 40
4. LINE OF CREDIT:
In November 1996, the Company entered into a revolving line of credit agreement
with a bank under which it can borrow up to $15,000,000. The line of credit
bears interest at LIBOR plus 1.5% (7.3% at June 30, 1997) for increments in
excess of $250,000 and at the bank's reference rate on all other borrowings
(8.5% at June 30, 1997) and expires on October 31, 1997. At June 30, 1997 there
were no borrowings outstanding under the line of credit agreement. The line of
credit agreement contains certain financial covenants determined on a quarterly
basis.
5. COMMITMENTS AND CONTIGENCIES:
Facilities and equipment are leased under various capital and operating leases.
Rent expense was approximately $3,197,000, $2,564,000 and $1,823,000, for fiscal
1997, 1996 and 1995, respectively. The Company did not enter into any new
capital leases in fiscal 1997 and 1996. Also during 1997, the Company entered
into lease agreements for four buildings under construction in Santa Clara,
California. The leases for these facilities commence in March 1998 and expire in
February 2010. In addition, the lease agreements contain three successive
options to extend the lease terms for sixty months each.
As of June 30, 1997, future minimum lease payments under non-cancelable leases
were as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING JUNE 30, LEASES LEASES
------ ------
<S> <C> <C>
1998 ...................................................... $ 50 $ 4,091
1999 ...................................................... 46 5,431
2000....................................................... -- 5,263
2001....................................................... -- 5,119
2002....................................................... -- 4,941
Thereafter................................................. -- 40,959
--- --------
Total minimum lease payments............................................ 96 $ 65,804
========
Less: Amount representing interest (8%)................................ (1)
----
Present value of lease payments......................................... $ 95
====
</TABLE>
As of both June 30, 1997 and 1996, the cost of leased equipment was
approximately $1,401,000 with accumulated amortization of $1,401,000 and
$1,391,000, respectively.
The Company is a defendant in various lawsuits and is subject to
various claims which arise in the normal course of business. In the opinion of
management, the ultimate dispositions of these claims will not have a material
adverse effect on the financial position, liquidity or results of operations of
the Company.
6. CAPITAL STOCK:
During 1994, the Company repurchased approximately 600,000 shares of common
stock for approximately $3.8 million. As of June 30, 1997, the Company has
reserved the following shares of authorized but unissued common stock:
<TABLE>
<S> <C>
Stock option plan............................. 5,830,352
Directors' stock option plan.................. 159,000
Employee stock purchase plan.................. 147,997
---------
6,137,349
=========
</TABLE>
F-10
<PAGE> 41
7. STOCK OPTION AND STOCK PURCHASE PLANS:
The Company has two stock option plans, the 1988 Employee Stock Option Plan
(1988 Plan) and the Directors' Stock Option Plan (Directors' Plan), and an
employee stock purchase plan (The 1993 Employee Stock Purchase Plan). The
Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized.
Had compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the following pro forma amounts (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C> <C>
Net income: As Reported $13,420 $19,830
Pro Forma $6,165 $16,904
Earnings per share: As Reported $0.52 $0.77
Pro Forma $0.24 $0.66
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: risk-free interest
rates of 6.0 and 5.8; expected volatility of 69 and 66 percent; no expected
dividends, and an expected life of 0.4 years beyond the vest date for each
year's vesting increment of an option.
Since the SFAS No. 123 method of accounting has not been applied to options
granted prior to July 1, 1995, the resulting pro forma compensation cost may not
be representative of that to be expected in future years.
In fiscal 1997, the Company offered its employees the option of exchanging and
canceling stock options acquired from June 1995 through October 1996 for new
options priced as of November 1, 1996. As a result, the Company canceled
1,933,592 options at prices ranging from $10.75 to $23.125 per share and
reissued the same number of options at the then current fair market value of
$10.25 per share. Employees who submitted their option grants for repricing had
their vesting schedules amended by moving their vesting back three months or
restarting the vesting as of the new grant date, depending on the date of the
grant.
The Company may sell up to 800,000 shares of stock to its full-time employees
under the 1993 Employee Stock Purchase Plan. The Company has sold 218,684,
146,175, and 222,646 shares in 1997, 1996 and 1995, respectively, and has sold
652,003 shares through June 30, 1997. The Company sells shares at 85% of the
lower of the stock's closing market price on the first or last day of the six
month offering period. The weighted average fair value of shares sold in 1997
and 1996, respectively, was $9.00 and $11.70.
The Company may grant up to 10,000,000 shares under the 1988 Plan. The Company
has granted options on 8,178,225 shares (net of lapsed and terminated options)
through June 30, 1997. The option exercise price is not less than 100% of the
fair value of the shares on the date of grant, except that non-statutory options
may be granted at 85% of such fair value. The 1988 Plan options are fully vested
after five years and expire after ten years.
The Company may grant options for up to 175,000 shares under the Directors'
Plan. The Company granted options on 152,000 shares through June 30, 1997. The
options' exercise price equals the closing price of the stock on the day of the
grant. The options are fully vested after four years and expire after ten years.
A summary of the status of the Company's two stock option plans at June 30,
1997, 1996 and 1995 incorporating changes during the years then ended is
presented in the table and narrative below (share amounts in thousands):
F-11
<PAGE> 42
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 4,088 $10.56 3,914 $ 5.86 3,011 $ 4.11
Granted 3,574 $10.86 1,679 $16.83 1,572 $ 8.63
Exercised (434) $ 4.85 (918) $ 3.28 (196) $ 2.35
Cancelled (3,148) $13.66 (587) $ 8.47 (473) $ 5.26
------- ------ -----
Outstanding at end of year 4,080 $ 9.07 4,088 $10.56 3,914 $ 5.86
===== ===== =====
Exercisable end of year 1,145 $ 7.21 1,101 $ 5.31 1,531 $ 2.80
===== ===== =====
Weighted fair value per option granted $ 3.50 $ 8.46
====== ======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE PRICES NUMBER YEARS EXERCISE PRICE NUMBER EXERCISE PRICE
- --------------- ------ ----- -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
$.25 - $7.06 817 6.30 $ 4.85 576 $ 4.35
$7.13 - $9.88 561 8.49 $ 8.19 119 $ 8.58
$10.25 - $10.25 1,844 9.35 $10.25 254 $10.25
$10.38- $12.75 830 8.66 $11.00 193 $10.77
$12.93 - $20.38 28 8.90 $14.66 3 $15.05
-------- --------
$.25 - $20.38 4,080 8.48 $ 9.07 1,145 $ 7.21
</TABLE>
NOTES RECEIVABLE FROM EMPLOYEES The Company had received as consideration from
certain officers of the Company promissory notes in connection with the exercise
of stock options. These notes bore interest at rates between 5.57% and 6.69% and
matured at various dates through April 1998. As of June 30, 1997, all
outstanding notes were repaid.
STOCKHOLDER RIGHTS PLAN During 1995, the Company established a stock purchase
rights plan (the Rights Plan), under which stockholders may be entitled to
purchase stock in the Company, or in an acquirer of the Company at a discounted
price in the event of certain efforts to acquire control of the Company. The
rights expire on the earliest of (a) April 19, 2005, (b) exchange or redemption
of the rights pursuant to the Rights Plan, or (c) consummation of a merger or
consolidation.
F-12
<PAGE> 43
8. INCOME TAXES:
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30, 1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal $8,371 $10,319 $4,972
State 1,297 1,739 1,365
------- ------ ------
9,668 12,058 6,337
----- ------ -----
Deferred (Prepaid):
Federal 1,083 (2,039) (2,281)
State 191 (252) (555)
------- ------ ------
1,274 (2,291) (2,836)
------- ----- ------
Net tax provision $ 10,942 $9,767 $3,501
======= ===== =====
</TABLE>
The provision for income taxes is reconciled with the Federal statutory rate as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30, 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Provision computed at federal statutory rate $ 8,526 $ 10,359 $ 5,569
State taxes, net of federal tax benefit ..... 1,078 1,487 1,059
Change in valuation allowance ............... -- -- (2,261)
Research and development and other credits .. (650) (700) (655)
In-process research and development write-off 2,180 -- --
FSC commission .............................. (746) (871) (381)
Foreign taxes and other ..................... 554 (508) 170
-------- -------- --------
Net tax provision ........................... $ 10,942 $ 9,767 $ 3,501
======== ======== ========
Net effective tax rate ...................... 45% 33% 22%
======== ======== ========
</TABLE>
The components of the net deferred income tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Depreciation and asset basis differences ...................... $ 1,739 $ 2,030
Accrued vacation .............................................. 728 629
Inventory reserve ............................................. 1,806 2,041
Other reserves and accruals, not currently deductible for tax
purposes ................................................. 1,559 2,092
State taxes, not currently deductible for Federal tax purposes 409 386
Other ......................................................... (337) 7
------- -------
Net deferred income tax asset ................................. $ 5,904 $ 7,185
======= =======
</TABLE>
F-13
<PAGE> 44
9. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION:
The Company operates in a single industry segment, the design and manufacture of
high-performance UNIX multi-protocol network file/data servers for the technical
workstation market.
Export revenues consisted of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30, 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Pacific Rim ........................ $31,759 $36,229 $21,390
Europe ............................. 28,191 16,248 8,984
Canada ............................. 6,790 5,986 3,201
------- ------- -------
Total export revenues ...... $66,740 $58,463 $33,575
======= ======= =======
Percentage of total revenues 33% 36% 29%
======= ======= =======
</TABLE>
One customer accounted for 10%, 10% and 15% of total revenues in fiscal 1997,
1996 and 1995, respectively. One other customer accounted for 15% of total
revenues in fiscal 1997. Another customer accounted for 13% of total revenues in
fiscal 1996. No other customers accounted for 10% or more of total revenues in
these years.
F-14
<PAGE> 45
SCHEDULE II
AUSPEX SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED CHARGED BALANCE AT
BEGINNING TO AGAINST END
DESCRIPTION OF PERIOD EXPENSE REVENUES DEDUCTIONS OF PERIOD
----------- --------- ------- -------- ---------- ---------
Accounts Receivable Allowances:
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1995 $ 438 $ 30 $ 318 $ -- $ 786
Year ended June 30, 1996 786 89 1,300 (640) 1,535
Year ended June 30, 1997 1,535 109 582 (1,033) 1,193
</TABLE>
S-1
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
<S> <C>
3.1(1) Certificate of Incorporation of Registrant as
amended and restated to date.
3.21 By-laws of Registrant as amended to date.
10.1(1.2) 1988 Stock Option Plan and forms of Incentive
Stock Option Agreements and Nonstatutory Stock
Option Agreements, as amended to date.
10.2(1.2) 1993 Directors' Stock Option Plan and forms of
Option Agreements.
10.3(1.2) 1993 Employee Stock Purchase Plan and forms of
Agreements.
10.4(1.2) 401(k) Plan, as amended to date.
10.5(1.2) Summary of Executive Bonus Program.
10.6(1.2) Form of Directors' and Officers' Indemnification
Agreement.
10.7(1) Registration and Information Rights Agreement
dated January 31, 1992.
10.8(1) Lease Agreement between the Registrant and The
Prudential Insurance Company of America dated
October 20, 1992.
10.9(1.3) OEM Agreement dated March 9, 1993 between the
Registrant and Fuji Xerox Company, Ltd.
10.10(1.3) Distributor Agreement dated June 6, 1990 between
the Registrant and Nissho Electronics
Corporation.
10.11(1.3) Agreement between the Registrant and Solectron
Corporation dated May 20, 1991, as amended on
November 18, 1992.
10.12(1) U.S. OEM Discount Agreement between the
Registrant and Sun Microsystems, Inc. effective
as of August 18, 1988, as amended by Addendum
dated September 8, 1988 and Addendum dated
September 14, 1989.
10.13(1) Source Code License between the Registrant and
Sun Microsystems, Inc. dated August 31, 1988, as
amended on April 30, 1991, February 11, 1992 and
March 18, 1992.
</TABLE>
27
<PAGE> 47
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.14(1) NFS Software Agreement between the Registrant
and Sun Microsystems, Inc. dated September 29,
1988.
10.15(4.5) Software Agreement between the Registrant and
AT&T Information Systems Inc. dated June 2,
1988, as amended by Supplement Number 1,
Supplement Number 2 dated August 5, 1988 and
Supplement Number 3 dated August 10, 1990, as
amended on June 28, 1993.
10.16(4.5) Sublicensing Agreement between the Registrant
and AT&T Information Systems Inc. dated August
30, 1988, as amended on June 28, 1993.
10.17(1) Software Agreement between the Registrant and
UNIX System Laboratories, Inc. dated April 29,
1992.
10.18(1) License Agreement with the Regents of the
University of California dated June 9, 1988, as
amended by Addendum dated October 21, 1988.
10.19(6.7) Intel Corporation Purchase Agreement between
Intel Corporation and the Registrant dated March
22, 1994.
10.20(8) Warranty and Service Provider Agreement between
the Registrant and AT&T Global Information
Systems dated April 15, 1994.
10.21(8) SunSoft Technology License and Distribution
Agreement between the Registrant and SunSoft,
Inc. dated December 17, 1993.
10.22(9) Preferred Shares Rights Agreement between the
Registrant and The First National Bank of Boston
as Rights Agent dated April 19, 1995.
10.23(8) Amendment No. 1 to Lease Agreement between the
Registrant and WHC-SIX Real Estate dated June 8,
1995.
10.24(8) Amendment No. 2 to Lease Agreement between the
Registrant and WHC-SIX Real Estate dated
February 28, 1996.
10.25(8) Interactive SPARC Software and Sublicensing
Agreement between Auspex Systems, Inc. and
Interactive systems Corporation, dated November
15, 1991.
10.26 Lease Agreement by and Between South Bay/San
Tomas Associates and Auspex Systems, Inc. dated
January 14, 1997.
</TABLE>
28
<PAGE> 48
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.27 Lease Agreement by and Between South Bay/San
Tomas Associates and Auspex Systems, Inc. dated
January 14, 1997.
11.1 Calculation of earning per share.
21.1 Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP, Independent
Public Accountants
25.1 Power of Attorney (See Page 30).
27.1 Financial Data Schedule
</TABLE>
- ----------
(1) Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1, as
amended (File No. 33-60052), which was declared effective on May 11, 1993.
(2) Designates management contract or compensatory plan arrangements required
to be filed as an exhibit of this Annual Report on Form 10-K pursuant to
Item 14(c).
(3) Confidential treatment granted by order effective May 11, 1993.
(4) Incorporated by reference to identically numbered exhibits filed in
connection with Registrant's Form 10-K for the fiscal year ended June 25,
1993 (File No. 33-60052).
(5) Confidential treatment granted by order effective January 14, 1994.
(6) Incorporated by reference to Exhibit 10.1 filed in connection with
Registrant's Form 10-Q for the quarter ended March 31, 1994 (File No.
0-21432), which was filed on May 16, 1994.
(7) Confidential treatment granted by order effective July 7, 1994.
(8) Incorporated by reference to exhibits filed in connection with the
Registrant's Form 10-K for the fiscal year ended June 30, 1994 (File No.
0-21432), which was filed on September 28, 1994 and confidential treatment
granted by order effective December 5, 1994.
(9) Incorporated by reference to Exhibit 1 filed in connection with the
Registrant's Form 8-A which was filed on April 20, 1995.
29
<PAGE> 1
LEASE AGREEMENT
BY AND BETWEEN
SOUTH BAY/SAN TOMAS ASSOCIATES
AND
AUSPEX SYSTEMS, INC.
DATED AS OF JANUARY , 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Parties................................................................. 1
2. Demise of Premises...................................................... 1
3. Lease Term.............................................................. 1
A. Lease Term..................................................... 1
B. Commencement Date.............................................. 1
C. Commencement Date Memorandum................................... 2
D. Delay in Completion of Buildings............................... 2
E. Options to Extend.............................................. 2
F. Early Entry.................................................... 3
4. Rent.................................................................... 3
A. Time of Payment................................................ 3
B. Monthly Installment............................................ 4
C. Tenant Improvement Allowance................................... 6
D. Late Charge.................................................... 6
E. Additional Rent................................................ 7
F. Place of Payment............................................... 7
G. Advance Payment................................................ 7
5. Security Deposit........................................................ 7
6. Use of Premises......................................................... 8
A. Restrictions on Use............................................ 8
B. Initial Occupancy.............................................. 8
7. Taxes and Assessments................................................... 8
A. Tenant's Property.............................................. 8
B. Property Taxes................................................. 8
C. Property Taxes Defined......................................... 9
D. Other Taxes.................................................... 9
E. Tenant's Right to Contest...................................... 9
8. Insurance............................................................... 10
A. Indemnity...................................................... 10
B. Liability Insurance............................................ 10
C. Property Insurance............................................. 11
D. Tenant's Property Insurance.................................... 11
E. Mutual Waiver of Subrogation................................... 11
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
9. Utilities............................................................... 12
10. Repairs and Maintenance................................................. 12
A. Landlord's Repairs............................................. 12
B. Tenant's Repairs............................................... 13
11. Alterations............................................................. 15
A. Limitations.................................................... 15
B. Tenant's Rights................................................ 15
C. Alterations Required by Law.................................... 16
12. Acceptance of the Premises.............................................. 16
13. Default................................................................. 16
A. Events of Default.............................................. 16
B. Remedies....................................................... 17
C. Waivers........................................................ 19
14. Destruction............................................................. 19
A. Landlord's Duty to Restore..................................... 19
B. Landlord's Right to Terminate.................................. 20
C. Tenant's Right to Terminate.................................... 21
D. Abatement of Rent.............................................. 21
15. Condemnation............................................................ 22
A. Definition of Terms............................................ 22
B. Rights......................................................... 22
C. Total Taking................................................... 22
D. Partial Taking................................................. 22
16. Mechanics' Lien......................................................... 23
17. Inspection of the Premises.............................................. 23
18. Compliance with Laws.................................................... 23
19. Subordination........................................................... 23
A. Priority....................................................... 24
B. Subsequent Security Instruments................................ 24
C. Documents...................................................... 24
D. Tenant's Attornment............................................ 24
20. Holding Over............................................................ 24
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
21. Notices................................................................. 25
22. Attorneys' Fees......................................................... 25
23. Subleasing and Assignment............................................... 26
A. Landlord's Consent Required.................................... 26
B. Transferee Information Required................................ 26
C. Landlord's Rights.............................................. 26
D. Permitted Transfers............................................ 27
24. Successors.............................................................. 28
25. Mortgagee Protection.................................................... 28
26. Estoppel Certificate.................................................... 28
27. Surrender of Lease Not Merger........................................... 29
28. Waiver.................................................................. 29
29. General................................................................. 29
A. Captions....................................................... 29
B. Definition of Landlord......................................... 29
C. Time of Essence................................................ 29
D. Severability................................................... 29
E. Quiet Enjoyment................................................ 30
F. Law............................................................ 30
G. Agent.......................................................... 30
H. Lender......................................................... 30
I. Force Majeure.................................................. 30
30. Sign.................................................................... 30
31. Interest on Past Due Obligations........................................ 31
32. Surrender of the Premises............................................... 31
33. Authority............................................................... 31
34. CC&Rs................................................................... 31
35. Brokers................................................................. 32
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
36. Limitation on Landlord's Liability...................................... 32
37. Hazardous Material...................................................... 33
A. Definitions.................................................... 33
B. Landlord's Obligation.......................................... 33
C. Permitted Use.................................................. 33
D. Hazardous Materials Management Plan............................ 34
E. Use Restriction................................................ 35
F. Tenant Indemnity............................................... 35
G. Compliance..................................................... 35
H. Assignment and Subletting...................................... 36
I. Surrender...................................................... 36
J. Right to Appoint Consultant.................................... 36
K. Holding Over................................................... 37
L. Existing Environmental Reports................................. 37
M. Provisions Survive Termination................................. 37
N. Controlling Provisions......................................... 37
38. Landlord's Default...................................................... 37
39. Condition to Effectiveness.............................................. 38
</TABLE>
iv
<PAGE> 6
LIST OF EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit "A" - Legal Description of Parcel...........................................39
Exhibit "B" - Site Plan.............................................................40
Exhibit "C" - Improvement Agreement.................................................41
Exhibit "D" - Commencement Date Memorandum..........................................57
Exhibit "E" - List of Hazardous Materials Tenant Will Use on The Premises...........58
Exhibit "F" - Description of Existing Environmental Reports.........................59
Exhibit "G" - Preliminary Title Report..............................................63
Exhibit "H" - CCR's and Excluded Obligations........................................64
</TABLE>
v
<PAGE> 7
LEASE AGREEMENT
1. Parties. This Lease, dated for reference purposes as of January ,
1997, is made by and between South Bay/San Tomas Associates, a California
general partnership ("LANDLORD"), and Auspex Systems, Inc., a Delaware
corporation ("TENANT").
2. Demise of Premises. Landlord hereby leases to Tenant and Tenant
hereby leases from Landlord, upon the terms and conditions hereinafter set
forth, those certain premises (the "PREMISES") situated in the City of Santa
Clara, County of Santa Clara, State of California, described as follows:
A. That Parcel of real property more particularly described in
Exhibit "A" attached hereto (the "PARCEL");
B. Three (3) buildings two (2) stories high to be constructed
by Landlord and located on the Parcel as shown on the site plan attached hereto
as Exhibit "B" containing approximately one hundred seventy one thousand three
hundred eighty two (171,382) square feet (collectively, the "BUILDINGS" and
individually, "BUILDING").
C. The shells and the associated site improvements for all
Buildings (the "BUILDING SHELLS") to be constructed by Landlord in accordance
with the provisions of the Improvement Agreement attached hereto as Exhibit "C"
(the "IMPROVEMENT AGREEMENT").
D. The improvements (the "TENANT IMPROVEMENTS") to be
constructed by Landlord in and about the Buildings in accordance with the
provisions of the Improvement Agreement. The Building Shells and the Tenant
Improvements are collectively referred to in this Lease as the "IMPROVEMENTS".
3. Lease Term
A. Lease Term. The term of this Lease (the "INITIAL LEASE
TERM") shall be for twelve (12) years commencing on the Commencement Date (as
defined below) and ending twelve (12) years thereafter unless sooner terminated
pursuant to any provision hereof.
B. Commencement Date. As used in this Lease, the term
"COMMENCEMENT DATE" shall mean the later of March 1, 1998, or the date when all
of the following have occurred with respect to the Improvements:
(i) The construction of all of the Improvements has
been substantially completed in accordance with the provisions of the
Improvement Agreement attached hereto and the Final Plans therefor (except for
minor punchlist items which do not substantially interfere with Tenant's use of
the Premises), and all utilities are connected and available for Tenant's use;
(ii) A certificate of occupancy or its equivalent
(including a final
1
<PAGE> 8
building inspection) with respect to the Improvements has been issued by the
City of Santa Clara; and
(iii) Landlord has given Tenant written notice that
the events described in (i) and (ii) above have occurred.
C. Commencement Date Memorandum. Within thirty (30) days
following the Commencement Date, Tenant shall execute and deliver to Landlord a
Commencement Date Memorandum in the form attached hereto as Exhibit "D"
acknowledging the actual Commencement Date, the Expiration Date and the initial
Monthly Installment (as defined in Subparagraph 4.A. hereof) of rent.
D. Delay in Completion of Buildings. Notwithstanding the
Commencement Date set forth in Subparagraph 3.B. above, if the construction of
the Improvements to the Buildings have not been substantially completed in
accordance with the provisions of the Improvement Agreement attached hereto and
the Final Plans therefor (except for minor punchlist items which do not
substantially interfere with Tenant's use of the Premises) by the later of (i)
January 31, 1998, or (ii) eleven (11) months following the issuance of all
required building permits for the construction of the Improvements to the
Building (provided such time periods in (i) and (ii) shall be extended by force
majeure delays and Tenant Delays as defined in Exhibit "C" hereto) (the
"BUILDING COMPLETION DATE"), Tenant shall have the option to terminate this
Lease (which shall be Tenant's sole remedy for such an event), which option may
be exercised only by delivery to Landlord of a written notice of election to
terminate within fifteen (15) days after the Building Completion Date and prior
to substantial completion of the Improvements to the Buildings.
E. Options to Extend
(i) Tenant shall have three (3) successive options
(the "OPTIONS") to extend the Initial Lease Term for successive terms of sixty
(60) months each (collectively, the "EXTENDED TERMS" and individually, the
"FIRST EXTENDED TERM", the "SECOND EXTENDED TERM" and the "THIRD EXTENDED
TERM"). The Initial Term as may be extended by Tenant shall be referred to
herein as the "LEASE TERM."
(ii) Tenant shall exercise each Option, if at all, by
giving Landlord notice of Tenant's intention to do so at least two hundred
seventy (270) days prior to the expiration of the then existing Lease Term. In
no event shall any purported exercise of the Option by Tenant be effective if
(a) an Event of Default (as defined in Subparagraph 13.A. hereof) exists at the
time of such exercise or at the time such Extended Term would otherwise have
commenced, or (b) Tenant had not timely exercised each previous Option(s) to
extend the Lease. The Extended Terms shall be upon all of the terms and
conditions hereof, except that the Monthly Installment and method of rental
adjustment for each Extended Term shall be determined as set forth in
Subparagraph 4.B.(iii) hereof. Unless expressly mentioned and approved in the
written consent of Landlord referred to in Paragraph 23 hereof, the option
rights
2
<PAGE> 9
of Tenant under this paragraph are granted for Tenant's personal benefit and may
not be assigned or transferred by Tenant.
F. Early Entry. Tenant may enter the Premises
prior to the Commencement Date to install fixtures and equipment therein,
provided Tenant first obtains the prior written approval of Landlord for such
entry, which approval shall not be unreasonably withheld but which Landlord may
withhold if Landlord determines in its reasonable discretion that such entry
will delay completion of construction of the Improvements which Landlord is
required to construct pursuant to Exhibit "C". If Landlord permits Tenant to so
enter upon the Premises, such entry shall be subject to all of the terms and
conditions of this Lease, excepting only the obligation to pay the Monthly
Installment of rent or Additional Rent (as defined in Subparagraph 4.E. below),
and the duty to pay utility consumption costs and insurance. Tenant shall
coordinate its entry onto the Premises with Landlord and the contractors and
other personnel employed by Landlord. At all times during Tenant's right of
entry, Landlord and Tenant shall reasonably cooperate to refrain from
interfering with the construction activities of the other party's personnel;
provided, Landlord shall not be required to cooperate with Tenant if such
cooperation results in a delay in completing the Improvements. In any case,
Tenant shall repair any damage to the Improvements constructed by Landlord
resulting from the entry upon the Premises by Tenant or Tenant's Agents (as that
term is defined in Subparagraph 29.G.) prior to the Commencement Date or caused
by the installation of fixtures and equipment by Tenant or Tenant's Agents. If
the entry by Tenant or Tenant's Agents upon the Premises prior to the
Commencement Date interferes with Landlord's construction activities, then
Landlord shall give Tenant written notice requesting that Tenant cease such
interference. If Tenant does not immediately comply with such notice from
Landlord requesting that Tenant cease interference with Landlord's construction
activities, and if such failure to comply causes a delay in completing the
construction of the Improvements, then the Commencement Date shall be deemed to
have occurred on the date the Improvements would have been completed had there
been no such delay caused by Tenant or its Agents.
4. Rent.
A. Time of PaymentA. Time of Payment. Tenant shall pay to
Landlord as rent for the Premises the respective sums specified in Subparagraph
4.B. below (the "MONTHLY INSTALLMENT") each month in advance on the first day of
each calendar month, without deduction or offset, prior notice or demand,
commencing on the Commencement Date and continuing through the Lease Term,
together with such additional rents as are payable by Tenant to Landlord under
the terms of this Lease. The Monthly Installment for any period during the Lease
Term which is less than one (1) full month shall be a pro rata portion of the
Monthly Installment based upon a thirty (30) day month.
B. Monthly Installment
(i) The Monthly Installment of rent for the first
thirty (30) months following the Commencement Date shall be Two Hundred Sixty
Five Thousand Six Hundred
3
<PAGE> 10
Forty Two and 10/100 Dollars ($265,642.10).
(ii) Rental Adjustment. The Monthly Installment shall
be adjusted at the beginning of the thirty-first (31st) month following the
Commencement Date and every thirty (30) months thereafter during the Initial
Lease Term (the "RENTAL ADJUSTMENT DATES"), to reflect any increase in the cost
of living. The adjustment or adjustments, if any, shall be calculated upon the
basis of the United States Department of Labor, Bureau of Labor Statistics
Consumer Price Index for All-Urban Consumers, for San Francisco-Oakland-San Jose
(1982 - 1984 = 100), hereafter referred to as the "INDEX." The last published
Index in effect on the Commencement Date shall be considered the "BASE". On each
Rental Adjustment Date, the Monthly Installment then in effect shall be
increased to an amount equal to the Monthly Installment in effect as of the
first full month of the Lease Term multiplied by a fraction, the numerator of
which is the Index as of such Rental Adjustment Date, and the denominator of
which is the "Base"; provided, the Monthly Installment shall not increase by
less than three percent (3%) per annum compounded annually or greater than seven
percent (7%) per annum compounded annually on each Rental Adjustment Date. When
the adjusted Monthly Installment is determined upon each Rental Adjustment Date,
Landlord shall give Tenant written notice to that effect indicating how the new
Monthly Installment figure was computed in accordance with this Subparagraph
4.B.(ii). If the Index does not exist on any Rental Adjustment Date in the same
format as referred to in this paragraph, Landlord shall substitute (using
conversion factors, as appropriate) in lieu thereof the index most nearly
comparable to the Index then published by the Bureau of Labor Statistics, or
successor or similar governmental agency, or if no governmental agency then
publishes an index, Landlord shall substitute therefor the most nearly
comparable index then published by a reputable private organization.
(iii) Extended Term Rent.
(a) As of the commencement of each Extended
Term, the Monthly Installment and the method of rental adjustment (including the
timing of adjustments and the basis for calculating the adjustments) for each
Extended Term shall be the fair market rental, as of the commencement date of
the Extended Term, for the Premises, as improved, and a method and timing of
rental adjustments consistent with rental adjustment practices then prevailing
in the marketplace for comparably sized projects designed for similar uses
within a three (3) mile radius of the Premises. In the event the parties fail to
agree upon the amount of the Monthly Installment and the method of rental
adjustment for any of the Extended Terms within thirty (30) days after
Landlord's receipt of Tenant's notice exercising the Option for such Extended
Term, the Monthly Installment and the method of rental adjustment for such
Extended Term shall be determined by appraisal in the manner hereafter set
forth.
(b) In the event it becomes necessary under
this Subparagraph 4.B.(iii)(b) to determine the fair market rent to be used as
the Monthly Installment and the method and timing of rental adjustments of the
Premises by appraisal, Landlord and Tenant each shall appoint a real estate
appraiser who shall be a member of The Appraisal Institute ("TAI") and who shall
have a minimum of five (5) years of commercial appraisal experience in Santa
4
<PAGE> 11
Clara County and such appraisers shall each determine the fair market rent for
the Premises, and the method and timing of rental adjustments taking into
account the value of the Premises (excluding Tenant's Property (as defined
below) which Tenant shall be allowed to remove upon the expiration of this
Lease), the amenities provided and prevailing comparable rentals and rental
adjustment practices then prevailing in the marketplace for comparably sized
projects designed for similar uses within a three (3) mile radius of the
Premises. Such appraisers shall, within twenty (20) business days after their
appointment, complete their appraisals and submit their appraisal reports to
Landlord and Tenant. If the fair market rent of the Premises established in the
two (2) appraisals varies by five percent (5%) or less of the higher rental, the
average of the two shall be controlling. If said fair market rent varies by more
than five percent (5%) of the higher rental, said appraisers, within ten (10)
days after submission of the last appraisal, shall appoint a third appraiser who
shall be a member of TAI and who shall have a minimum of five (5) years of
commercial appraisal experience in Santa Clara County. Such third appraiser
shall, within twenty (20) business days after his appointment, determine by
appraisal the fair market rent of the Premises, taking into account the same
factors referred to above, and submit his appraisal report to Landlord and
Tenant. The fair market rent determined by the third appraiser for the Premises
shall be averaged with the fair market rent determined by the one of the initial
two appraisers that is closest to that of the third appraiser, unless the third
appraiser's determination of the rent is less than that set forth in the lower
appraisal previously obtained, in which case the value set forth in said lower
appraisal shall be controlling, or unless it is greater than that set forth in
the higher appraisal previously obtained, in which case the rental set forth in
said higher appraisal shall be controlling. The method of adjusting rental
periodically, including the manner and timing of such adjustments, shall be as
determined by the initial two appraisers, if they agree on a single method;
otherwise, it shall be as determined by the third appraiser. If either Landlord
or Tenant fails to appoint an appraiser, or if an appraiser appointed by either
of them fails, after his appointment, to submit his appraisal within the
required period in accordance with the foregoing, the appraisal submitted by the
appraiser properly appointed and timely submitting his appraisal shall be
controlling. If the two appraisers appointed by Landlord and Tenant are unable
to agree upon a third appraiser within the required period in accordance with
the foregoing, application shall be made within twenty (20) days thereafter by
either Landlord or Tenant to TAI, which shall appoint a member of said institute
willing to serve as appraiser. Each party shall bear the cost of their own
appraiser and the cost of the third appraiser under this Subparagraph shall be
borne equally by Landlord and Tenant.
C. Tenant Improvement Allowance
(i) Landlord shall make available for the payment of
all TI Costs (as defined in the Improvement Agreement) an amount equal to Four
Million Two Hundred Eighty Four Thousand Five Hundred Fifty Dollars ($4,284,550)
(the "TI ALLOWANCE"). To the extent that TI Costs exceed the total TI Allowance,
Tenant shall pay the amount of such excess (with such excess referred to herein
as "TENANT'S TI CONTRIBUTION"). After Landlord has expended the total TI
Allowance, Tenant's TI Contribution shall be paid by Tenant to Landlord in
installments as and when needed by Landlord to pay TI Costs that have been
incurred by Landlord for the Buildings, with each installment to be paid within
five (5) days after Landlord
5
<PAGE> 12
notifies Tenant that a progress payment toward TI Costs is to be made and
supplies to Tenant an appropriate accounting of all TI Costs incurred by
Landlord and such other documentation as a construction lender might reasonably
request. Such progress payments shall not be requested any more frequently than
every thirty (30) days.
(ii) Prior to the commencement of construction of the
Tenant Improvements, Tenant shall, if requested to do so by Landlord, provide
reasonable assurances to Landlord's Lender (as that term is defined in
Subparagraph 29.H.) that the funds necessary to pay Tenant's TI Contribution
will be immediately available to Landlord as and when needed to pay all TI Costs
after Landlord has expended the TI Allowance, which assurances shall be
reasonably satisfactory to Landlord and Landlord's Lender.
D. Late Charge. Tenant acknowledges that late payment by
Tenant to Landlord of rent and other sums due hereunder will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any mortgage or deed of trust covering the Premises.
Accordingly, if any Monthly Installment, Additional Rent or any other sum due
from Tenant shall not be received by Landlord within ten (10) days after
Landlord's delivery to Tenant of written notice stating that such amount has not
been paid when due, then Tenant shall pay to Landlord, as additional rent, a
late charge equal to six percent (6%) of such overdue amount. The parties hereby
agree that such late charge represents a fair and reasonable estimate of the
costs Landlord will incur by reason of late payment by Tenant. Acceptance of
such late charge by Landlord without payment of the overdue amount shall in no
event constitute a waiver of Tenant's default with respect to such overdue
amount, nor prevent Landlord from exercising any of its other rights and
remedies granted hereunder.
E. Additional RentE. Additional Rent. All taxes, insurance
premiums, late charges, costs, expenses and other sums which Tenant is required
to pay under this Lease, together with all interest and penalties that may
accrue thereon in the event of Tenant's failure to pay such amounts, and all
reasonable damages, costs, and attorneys' fees and expenses which Landlord may
incur by reason of any default of Tenant or failure on Tenant's part to comply
with the terms of this Lease, shall be deemed to be additional rent ("ADDITIONAL
RENT") and shall be paid in addition to the Monthly Installment of rent, and, in
the event of nonpayment by Tenant, Landlord shall have all of the rights and
remedies with respect thereto as Landlord has for the nonpayment of the Monthly
Installment of rent. All items of Additional Rent, but excluding such taxes and
assessment, utilities and insurance costs which are to be paid directly by
Tenant or reimbursed by Tenant to Landlord, shall include an additional two
percent (2%) of the actual expenditure or amount due in order to compensate
Landlord for accounting, management and processing services.
F. Place of Payment. Rent shall be payable in lawful money of
the United States of America to Landlord at 511 Division Street, Campbell,
California 95008 or to such other person(s) or at such other place(s) as
Landlord may designate in writing.
6
<PAGE> 13
G. Advance Payment. Concurrently with the execution of this
Lease, Tenant shall pay to Landlord the sum of Two Hundred Sixty Five Thousand
Six Hundred Forty Two and 10/100 Dollars ($265,642.10) to be applied to the
Monthly Installment of rent first accruing under this Lease.
5. Security Deposit. Concurrently with the execution of this Lease,
Tenant shall pay to Landlord the sum of Two Hundred Sixty Five Thousand Six
Hundred Forty Two and 10/100 Dollars ($265,642.10) (the "SECURITY DEPOSIT") to
secure the faithful performance by Tenant of each term, covenant and condition
of this Lease. If Tenant shall at any time fail to make any payment or fail to
keep or perform any term, covenant or condition on its part to be made or
performed or kept under this Lease, Landlord may, but shall not be obligated to
and without waiving or releasing Tenant from any obligation under this Lease,
use, apply or retain the whole or any part of the Security Deposit (A) to the
extent of any sum due to Landlord; (B) to make any required payment on Tenant's
behalf; or (C) to compensate Landlord for any loss, damages, attorneys' fees or
expense sustained by Landlord due to Tenant's default. In such event, Tenant
shall, within five (5) days of written demand by Landlord, remit to Landlord
sufficient funds to restore the Security Deposit to its original sum. No
interest shall accrue on the Security Deposit. Landlord shall not be required to
keep the Security Deposit separate from its general funds. The Security Deposit,
less any sums owing to Landlord or which Landlord is otherwise entitled to
retain, shall be returned to Tenant within thirty (30) days after the
termination of this Lease and vacancy of the Premises by Tenant.
6. Use of Premises.
A. Restrictions on Use. Tenant shall use the Premises only in
conformance with applicable governmental laws, for general office, engineering,
research and development, light assembly, testing, warehousing and related
lawful uses, and for no other purpose without the consent of Landlord. Tenant
shall indemnify, defend and hold Landlord harmless against any loss, expense,
damage, attorneys' fees or liabilities to the extent the foregoing arises out of
the failure of Tenant to comply with any Law (as defined in Subparagraph 29.F.)
applicable to Tenant's use and occupancy of the Premises. Tenant shall not
commit or suffer to be committed, any waste upon the Premises, or any nuisance,
or other acts or things which may disturb the quiet enjoyment of any other
occupant of buildings adjacent to the Premises, or allow any sale by auction
upon the Premises, or allow the Premises to be used for any unlawful purpose, or
place any loads upon the floor, walls or ceiling which would endanger the
structure, or place any harmful liquids in the drainage system of the Premises.
No waste materials or refuse shall be dumped upon or permitted to remain upon
any part of the Premises outside of the Buildings, except in trash containers
placed inside exterior enclosures designated for that purpose by Landlord and
except in compliance with all applicable Law. No materials, supplies, equipment,
finished products or semifinished products, raw materials or articles of any
nature shall be stored upon or permitted to remain on any portion of the Parcel
outside of the Buildings. Tenant shall strictly comply with the provisions of
Paragraph 37 below.
7
<PAGE> 14
B. Initial Occupancy. Tenant shall be obligated to take
possession and enter into occupancy of two (2) of the three (3) Buildings of the
Premises within thirty (30) days following the Commencement Date.
7. Taxes and Assessments
A. Tenant's Property. Tenant shall pay before delinquency any
and all taxes and assessments, license fees and public charges levied, assessed
or imposed upon or against Tenant's fixtures, equipment, furnishings, furniture,
appliances and personal property installed or located on or within the Premises
("Tenant's Property"). Tenant shall use its best efforts to cause all Tenant's
Property to be assessed and billed separately from the real property of
Landlord. If any of Tenant's Property shall be assessed with the Premises,
Tenant shall pay Landlord the taxes attributable to Tenant within ten (10) days
after receipt of a written statement from Landlord setting forth the taxes
applicable to Tenant's Property.
B. Property Taxes. Tenant shall pay, as Additional Rent, one
hundred percent (100%) of all property taxes (as defined in Subparagraph 7.C.
below) levied or assessed with respect to the Premises which are attributable to
the Lease Term. Tenant shall pay such Property Taxes to Landlord not later than
(i) ten (10) days prior to the delinquency date of such Property Taxes, or (ii)
twenty (20) days after receipt of billing, whichever is later. If Tenant fails
to do so, Tenant shall reimburse Landlord, on demand, for all interest, late
fees and penalties that the taxing authority charges Landlord. In the event
Landlord's Lender requires an impound for Property Taxes, then on the first day
of each month during the Lease Term, Tenant shall pay Landlord one twelfth
(1/12) of the annual Property Taxes. Tenant's liability hereunder shall be
prorated to reflect the commencement and termination dates of this Lease.
C. Property Taxes Defined. For the purpose of this Lease,
"PROPERTY TAXES" means and includes all taxes, assessments (including, but not
limited to, assessments for public improvements or benefits), taxes based on
vehicles utilizing parking areas, taxes based or measured by the rent paid,
payable or received under this Lease, taxes on the value, use, or occupancy of
the Premises, the Buildings and/or the Parcel, and all other governmental
impositions and charges of every kind and nature whatsoever, whether or not
customary or within the contemplation of the parties hereto and regardless of
whether the same shall be extraordinary or ordinary, general or special,
unforeseen or foreseen, or similar or dissimilar to any of the foregoing which,
at any time during the Lease Term, shall be applicable to the Premises, the
Buildings and/or the Parcel or assessed, levied or imposed upon the Premises,
the Buildings and/or the Parcel, or become due and payable and a lien or charge
upon the Premises, the Buildings and/or the Parcel, or any part thereof, under
or by virtue of any present or future laws, statutes, ordinances, regulations or
other requirements of any govern mental authority whatsoever. The term "Property
Taxes" shall not include any federal, state or local net income, documentary
transfer (unrelated to any transfer made of Tenant's interest under this Lease),
franchise (unrelated to Tenant's operations), estate, gift or inheritance tax
imposed on Landlord (the "PROPERTY TAX EXCLUSIONS").
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D. Other Taxes. Tenant shall, as Additional Rent, pay or
reimburse Landlord for any tax based upon, allocable to, or measured by the area
of the Premises or the Buildings or the Parcel; or by the rent paid, payable or
received under this Lease; any tax upon or with respect to the possession,
leasing, operation, management, maintenance, alteration, repair, use or
occupancy of the Premises or any portion thereof; any privilege tax, excise tax,
business and occupation tax, gross receipts tax, sales and/or use tax, water
tax, sewer tax, employee tax, occupational license tax imposed upon Landlord or
Tenant with respect to the Premises; any tax upon this transaction or any
document to which Tenant is a party creating or transferring any of Tenant's
interest or estate in the Premises; provided, however that nothing in this
Subparagraph shall require Tenant to pay any Property Tax Exclusions.
E. Tenant's Right to Contest. Tenant shall have the right, by
appropriate proceedings, to protest or contest any assessment, reassessment or
allocation of Property Taxes or any change therein. In the contest or
proceedings, Tenant may act in its own name and/or the name of Landlord and
Landlord will, at Tenant's request and expense, cooperate with Tenant in any way
Tenant may reasonably require in connection with such contest. Tenant must pay
all Property Taxes as and when required by Subparagraph 7.B., even those which
are the subject of such protest or contest, but Tenant may sue to recover
overpayments or Property Taxes as part of any such contest. With respect to any
contest of Property Taxes, Tenant shall indemnify and hold Landlord and the
Premises harmless from any liens or damage arising out of such protest or
contest and shall pay any judgment that may be rendered for which Tenant would
otherwise be liable under this Lease without such contest or protest. Any
contest conducted by Tenant under this paragraph shall be at Tenant's expense
and if interest or late charges become payable as a result of such contest or
protest, Tenant shall pay the same. Any tax assessments reimbursed to Landlord
as a consequence of such contest shall be reimbursed to Tenant, to the extent
originally paid by Tenant under the terms of this Lease.
8. Insurance.
A. Indemnity. Tenant agrees to indemnify, protect and defend
Landlord against and hold Landlord harmless from any and all claims, causes of
action, judgments, obligations or liabilities, and all reasonable expenses
incurred in investigating or resisting the same (including reasonable attorneys'
fees), to the extent they arise out of, the opera tion, maintenance, use or
occupancy of the Premises by Tenant and/or its Agents (except to the extent they
arise from the negligence or willful misconduct of Landlord or its Agents). This
Lease is made on the express understanding that Landlord shall not be liable
for, or suffer loss by reason of, injury to person or property, from whatever
cause (except to the extent it arises from the negligence or willful misconduct
of Landlord or its Agents), which in any way may be connected with the
operation, maintenance, use or occupancy of the Premises by Tenant and/or its
Agents specifically including, without limitation, any liability for injury to
the person or property of Tenant or its Agents.
B. Liability Insurance. Tenant shall, at Tenant's expense,
obtain and keep in force during the term of this Lease a policy of commercial
general liability insurance insuring
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Landlord and Tenant against claims and liabilities arising out of the operation,
maintenance, use, or occupancy of the Premises. Such insurance shall provide
combined single limit coverage of not less than Five Million Dollars
($5,000,000.00) per occurrence. Landlord shall have the right to require Tenant
to increase the amount of coverage of such public liability insurance to the
extent reasonably necessary to bring such insurance coverage into conformity
with the level of coverage commonly carried by similar businesses in California
leasing comparable buildings in the vicinity of the Premises, which right
Landlord may exercise no more frequently than once every two (2) years during
the Lease Term. The insurance shall be provided by companies (i) admitted to
issue insurance in California and (ii) having a general policyholders' rating of
at least "A" and a financial rating of at least "VIII" as set forth in the most
current issue of Best's Insurance Guide. Tenant shall deliver to Landlord, prior
to possession, and at least thirty (30) days prior to the expiration of any
insurance policy required hereby, a certificate of insurance evidencing the
existence of such policy and the certificate shall certify that the policy (1)
names Landlord as an additional insured, (2) shall not be canceled or altered
without thirty (30) days prior written notice to Landlord, (3) insures
performance of the indemnity set forth in Subparagraph 8.A. above, (4) the
coverage is primary and any coverage by Landlord is in excess thereto and (5)
contains a cross-liability endorsement.
Landlord may maintain a policy or policies of commercial general
liability insurance insuring Landlord (and such others as are designated by
Landlord), against liability for personal injury, bodily injury, death and
damage to property occurring or resulting from an occurrence in, on or about the
Premises, with such limits of coverage as Landlord may from time to time
determine are reasonably necessary for its protection. Tenant shall, as
Additional Rent, reimburse Landlord for the cost of any such insurance policy
within ten (10) days after receipt of billing.
C. Property Insurance. Landlord shall, at Tenant's expense,
obtain and keep in force during the Lease Term a policy of insurance covering
loss or damage to the Improvements, in the amount of the full replacement value
thereof with an Agreed Amount Endorsement, providing protection against those
perils included within the classification of "special form" insurance, plus a
policy of rental income insurance in the amount of one hundred percent (100%) of
twelve (12) months' rent (including, without limitation, sums payable as
Additional Rent), together with such additional coverages (such as earthquake
and/or flood insurance) which Landlord may elect to maintain from time to time
or which may be required from time to time by Landlord's Lender or by Tenant.
Tenant shall have no interest in nor any right to the proceeds of any insurance
procured by Landlord on the Buildings and Tenant Improvements. Tenant shall pay
to Landlord, as Additional Rent, the cost of such insurance procured and
maintained by Landlord on an annual basis within ten (10) days after receipt of
demand therefore from Landlord. Tenant's liability for the cost of such
insurance shall be prorated as of the commencement and termination of the Lease
Term. Tenant acknowledges that such insurance procured by Landlord shall contain
a deductible which reduces Tenant's cost for such insurance and, in the event of
loss or damage, Tenant shall be required to pay to Landlord the amount of such
deductible; provided, Tenant's liability for such deductible shall not exceed
Twenty Five Thousand Dollars ($25,000), except Tenant's liability for the
deductible on
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Landlord's earthquake insurance shall not exceed ten percent (10%) of the policy
amount.
D. Tenant's Property Insurance. Tenant acknowledges that the
insurance to be maintained Landlord on the Premises pursuant to Paragraph 8.C.
above will not insure any of Tenant's Property. Accordingly, Tenant, at Tenant's
own expense, shall maintain in full force and effect on all of Tenant's Property
in the Premises, a policy of "special form" coverage insurance to the extent of
at least ninety percent (90%) of insurable value of such property.
E. Mutual Waiver of Subrogation. Notwithstanding anything to
the contrary contained in this Lease, Tenant and Landlord hereby mutually waive
their respective rights of recovery against each other of any loss of or damage
to the property of either party, to the extent such loss or damage is insured by
either party at the time of such loss or damage or required to be insured
pursuant to this Lease by the party having the right of recovery against the
other party for such loss or damage. Each party shall obtain any special
endorsements, if required by the insurer, whereby the insurer waives its right
of subrogation against the other party hereto. The provisions of this
Subparagraph 8.E. shall not apply in those instances in which the waiver of
subrogation would cause either party's insurance coverage to be voided or
otherwise made uncollectible; provided, such party has afforded the other party
at least thirty (30) days prior written notice of such fact and a period of at
least thirty (30) days has elapsed after delivery of such notice without
identification of alternative, reasonably equivalent insurance that can be
obtained without a voiding provision based on this waiver of subrogation.
9. Utilities. Tenant shall pay for all water, gas, light, heat, power,
electricity, telephone, trash pick-up, sewer charges, and all other services
supplied to or consumed on the Premises, and all taxes and surcharges thereon.
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10. Repairs and Maintenance.
A. Landlord's Repairs. Subject to the provisions of Paragraphs
14 and 15 and the Improvement Agreement, Landlord, at its expense, shall keep
and maintain the exterior walls and the structural elements of the Buildings in
good order and repair. Landlord shall not, however, be required to maintain,
repair or replace the interior surface of exterior walls, nor shall Landlord be
required to maintain, repair or replace windows, doors, skylights or plate
glass. Landlord shall not be in default because it fails to make repairs under
this Subparagraph 10.A. until a reasonable time after receipt of written notice
from Tenant of the need for such repairs. Notwithstanding the foregoing but
subject to Subparagraph 8.E., Tenant shall reimburse Landlord, as Additional
Rent, within fifteen (15) days after receipt of billing, for the cost of
maintenance and repairs of the exterior walls and structural elements of the
Buildings to the extent such maintenance or repair is required because of the
negligence or willful misconduct of Tenant or its Agents, except as otherwise
provided in Subparagraph 8.E. As used herein, the term "STRUCTURAL ELEMENTS OF
THE BUILDINGS" shall mean and be limited to the foundations, footings, floor
slab (but not flooring), roof structure (but not roofing or roof membrane), load
bearing walls and structural portion of any second floor. If (a) repairs are
required to be made by Landlord pursuant to this Subparagraph 10.A., (b) the
failure to immediately make such repairs poses a threat of imminent danger to
people or property, and (c) after Landlord's receipt of notice from Tenant for
the need to make such repairs, Landlord does not immediately make such repairs,
then Tenant shall be allowed to make such repairs and Landlord shall reimburse
Tenant for the reasonable third party costs incurred by Tenant upon receipt of
written invoices for such repairs, lien releases from the third party making
such repairs and inspection of the repairs made by Tenant.
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B. Tenant's Repairs.
(i) Except as expressly provided in Subparagraphs
8.E. and 10.A. above, Paragraphs 14 and 15 below and the Improvement Agreement,
Tenant shall, at its sole cost, keep and maintain the entire Premises and every
part thereof, including without limitation, the windows, window frames, plate
glass, glazing, skylights, truck doors, doors and all door hardware, the
interior walls and partitions, interior surfaces of exterior walls, carpets,
flooring, roofing, roof membrane, gutters, down spouts, the electrical,
plumbing, lighting, heating, ventilating and air conditioning systems and
equipment, and all areas outside the Buildings (including all landscaping,
irrigation systems, paving, driveways, parking areas, sidewalks, fences, signs
and exterior lighting) in good order, condition and repair. The term "repair"
shall include replacements, restorations and/or renewals when necessary as well
as painting. Except as expressly provided in Subparagraphs 8.E. and 10.A. above,
Paragraphs 14 and 15 below and the Improvement Agreement, Tenant's obligation
shall extend to all alterations, additions and improvements to the Premises, and
all fixtures and appurtenances therein and thereto. Tenant shall, at all times
during the Lease Term, have in effect a service contract for the maintenance of
the heating, ventilating and air conditioning ("HVAC") equipment with an HVAC
repair and maintenance contractor reasonably approved by Landlord. The HVAC
service contract shall provide for periodic inspection and servicing at least
once every three (3) months during the Lease Term, and Tenant shall provide
Landlord with a copy of such contract and all periodic service reports. Landlord
shall assign to Tenant for the Lease Term the benefit of all warranties
available to Landlord which would reduce the cost of performing the obligations
of Tenant to make repairs under this Subparagraph 10.B. Landlord shall cooperate
with Tenant in the enforcement of such warranties. Notwithstanding anything to
the contrary in this Lease, Tenant shall have no responsibility to perform or
construct, any repair, maintenance or improvement that Landlord is required to
perform pursuant to any other term of this Lease or the Improvement Agreement.
(ii) Should Tenant fail to commence to make repairs
required of Tenant hereunder within ten (10) days after written notice from
Landlord or should Tenant fail thereafter to diligently complete the repairs,
Landlord, in addition to all other remedies available hereunder or by Law and
without waiving any alternative remedies, may make the same, and in that event,
Tenant shall reimburse Landlord as Additional Rent for the cost of such
maintenance or repairs within ten (10) days of written demand by Landlord.
(iii) Notwithstanding anything to the contrary in
this Lease, any capital replacements to the Premises which are otherwise found
to be the obligation of Tenant under this Lease, whether or not required by law,
which are required by generally accepted accounting principles ("GAAP") to be
capitalized ("CAPITAL REPLACEMENTS") shall be made by and paid for by the
parties in accordance with the following:
(a) Tenant shall promptly undertake and
diligently complete, and Tenant shall be solely responsible for the cost of, all
Capital Replacements that have a cost
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less than Three Hundred Thousand Dollars ($300,000).
(b) Upon Tenant's written notice to Landlord
for the need of any Capital Replacement which Landlord is required to make
pursuant to this Subparagraph 10.B.(iii)(b), Landlord shall promptly undertake
and diligently complete all Capital Replacements having a cost in excess of
Three Hundred Thousand Dollars ($300,000) ("LANDLORD'S CAPITAL REPLACEMENTS").
The cost of Landlord's Capital Replacements shall be borne by the parties as
follows:
(1) Tenant shall reimburse Landlord
for Tenant's Share of the Cost of Landlord's Capital Replacement within ten (10)
days following delivery to Tenant of reasonable documentation of the amount
owing by Tenant for completed work, which payments may be demanded by Landlord
of Tenant on a monthly basis as the work progresses. The "TENANT'S SHARE OF THE
COST OF LANDLORD'S CAPITAL REPLACEMENT," shall be equal to the total cost
reasonably incurred by Landlord to construct, permit and/or plan a Landlord's
Capital Replacement (the "CAPITAL COST") times a fraction, the numerator of
which is equal to the number of unexpired months in the then existing Lease Term
(without any consideration of Extended Terms that have not commenced), and the
denominator of which is equal to the useful life (expressed in months) of such
Landlord's Capital Replacement. The remainder of such cost shall be borne by
Landlord, subject to Subparagraphs 10.B.(iii)(b)(2) and 10.B.(iii)(b)(3), below.
(2) If the Lease Term is extended
by Tenant as herein permitted, then as a condition to each such extension and
within ten (10) days following Landlord's written demand therefor, Tenant shall
make an additional reimbursement of the Capital Cost of Landlord's Capital
Replacement in an amount equal to the Capital Cost times a fraction, the
numerator of which is equal to the lesser of (A) the useful life (expressed in
months) of such Landlord's Capital Replacement not subject to reimbursement
under Subparagraph 10.B.(iii)(b)(1) above and not subject to reimbursement under
this Subparagraph 10.B.(iii)(b)(2) with respect to a prior extension of the
Lease Term, or (B) the number of months in the extension period, and the
denominator of which is equal to the total useful life (expressed in months) of
such Landlord's Capital Replacement.
(3) If Landlord terminates this
Lease on account of an Event of Default by Tenant, as permitted by Section
13.B.(ii) below, then in addition to Landlord's other remedies, Tenant shall pay
to Landlord upon demand so much of the Capital Cost of Landlord's Capital
Replacement, which has not been theretofore reimbursed by Tenant to Landlord.
(iv) Landlord shall have no maintenance or repair
obligations whatsoever with respect to the Premises except as expressly provided
in this Lease and the Improvement Agreement. Tenant hereby expressly waives the
provisions of Subsection 1 of Section 1932 and Sections 1941 and 1942 of the
Civil Code of California and all rights to make repairs at the expense of
Landlord as provided in Section 1942 of said Civil Code; provided, Tenant shall
have the right to cure Landlord's defaults pursuant to the terms and conditions
of
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Paragraph 38 hereof.
11. Alterations.
A. Limitations. Tenant shall not make, or suffer to be made,
any alterations, improvements or additions in, on, about or to the Premises or
any part thereof, without the prior written consent of Landlord (which consent
shall not be unreasonably withheld) and without a valid building permit issued
by the appropriate governmental authority; provided, however, Landlord's consent
shall not be required for interior non-structural alterations which (i) cost
less than Twenty Thousand Dollars ($20,000.00) per work of improvement and (ii)
cost less than Seventy Five Thousand Dollars ($75,000.00) for all alterations
made in any twelve (12) month period. As a condition to, and concurrently with,
the giving of such consent Landlord may require that Tenant agree to remove any
such alterations, improvements or additions at the termination of this Lease,
and to restore the Premises to their prior condition. Unless Landlord requires
that Tenant remove any such alteration, improvement or addition at the time that
Landlord provides its consent thereto, any alteration, addition or improvement
to the Premises, except movable furniture and trade fixtures not affixed to the
Premises, shall become the property of Landlord upon termination of the Lease
and shall remain upon and be surrendered with the Premises at the termination of
this Lease. Without limiting the generality of the foregoing, all heating,
lighting, electrical (including all wiring, conduit, outlets, drops, buss ducts,
main and subpanels), air conditioning, partitioning, drapery, and carpet
installations made by Tenant regardless of how affixed to the Premises, together
with all other additions, alterations and improvements that have become an
integral part of any of the Buildings, shall be and become the property of the
Landlord upon termination of the Lease, and shall not be deemed trade fixtures,
and shall remain upon and be surrendered with the Premises at the termination of
this Lease.
B. Tenant's Rights. All trade fixtures, movable furniture and
personal property installed in the Premises at Tenant's expense (collectively,
"TENANT'S PROPERTY") shall at all times remain Tenant's property and Tenant
shall be entitled to all depreciation, amortization and other tax benefits with
respect thereto, except for Tenant's Property which cannot be removed without
structural injury to the Premises. At any time during the Lease Term, Tenant may
remove Tenant's Property from the Premises, provided Tenant repairs all damage
caused by such removal. Landlord shall have no lien or other interest whatsoever
in any item of Tenant's Property or any portion thereof or interest therein,
located in the Premises or elsewhere, and Landlord hereby waives all such liens
and interests. Within ten (10) days following Tenant's written request, Landlord
shall execute documents in form reasonably acceptable to Tenant and Landlord to
evidence Landlord's waiver of any right, title, lien or interest in Tenant's
Property located in the Premises.
C. Alterations Required by Law. If, during the Lease Term, any
alteration, addition or change of any sort to all or any portion of the Premises
is required by Law, Tenant shall promptly make the same at its sole cost and
expense; provided, Tenant shall only be obligated to make alterations, additions
or changes required by Law to the "structural elements of
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the Buildings" (as defined in Subparagraph 10.A. above), if such requirement is
triggered by (i) Tenant's particular use of the Premises, or (ii) Tenant's
alterations, improvements or additions in, on, about or to the Premises or any
part thereof; and if Landlord has performed its obligations under this Lease
with respect to the structural elements of the Buildings.
12. Acceptance of the Premises. By entry and taking possession of the
Premises pursuant to this Lease, Tenant accepts the Premises as being in good
and sanitary order, condition and repair and accepts the Premises in their
condition existing as of the date of such entry and Tenant further accepts the
Tenant Improvements to be constructed by Landlord, if any, as being completed in
accordance with the plans and specifications for such Tenant Improvements,
except for punch list items, and any express warranties by and obligations of
Landlord set forth in this Lease. Tenant acknowledges that neither the Landlord
nor Landlord's agents has made any representation or warranty as to the
suitability of the Premises to the conduct of Tenant's business. Any agreements,
warranties or representations not expressly contained herein shall in no way
bind either Landlord or Tenant, and Landlord and Tenant expressly waive all
claims for damages by reason of any statement, representation, warranty, promise
or agreement not contained in this Lease. This Lease constitutes the entire
understanding between the parties hereto and no addition to, or modification of,
any term or provision of this Lease shall be effective until set forth in a
writing signed by both Landlord and Tenant.
13. Default.
A. Events of Default. A breach of this Lease by Tenant shall
exist if any of the following events (hereinafter referred to as "EVENT OF
DEFAULT") shall occur:
(i) Default in the payment when due of any
installment of rent or other payment required to be made by Tenant hereunder,
where such default shall not have been cured within five (5) days after written
notice of such default is given to Tenant;
(ii) Tenant's failure to perform any other term,
covenant or condition contained in this Lease where such failure shall have
continued for twenty (20) days after written notice of such failure is given to
Tenant; provided, however, Tenant shall not be deemed in default if Tenant
commences to cure such failure within said twenty (20) day period and thereafter
diligently prosecutes such cure to completion;
(iii) Tenant vacates the Premises for sixty (60)
consecutive days and upon the expiration of such sixty (60) day period, Tenant
has failed to perform any term, covenant or condition contained in this Lease
(under such circumstances Tenant shall have no right to cure the default and
Landlord shall have no requirement to notify Tenant of the default except as
required by law);
(iv) Tenant's assignment of its assets for the
benefit of its creditors;
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(v) The sequestration of, attachment of, or execution
on, any substantial part of the property of Tenant or on any property essential
to the conduct of Tenant's business, shall have occurred and Tenant shall have
failed to obtain a return or release of such property within thirty (30) days
thereafter, or prior to sale pursuant to such sequestration, attach ment or
levy, whichever is earlier;
(vi) Tenant or any guarantor of Tenant's obligations
hereunder shall commence any case, proceeding or other action seeking
reorganization, arrangement, adjustment, liquidation, dissolution or composition
of it or its debts under any Law relating to bankruptcy, insolvency,
reorganization or relief of debtors, or seek appointment of a receiver, trustee,
custodian, or other similar official for it or for all or any substantial part
of its property; or
(vii) Any case, proceeding or other action against
Tenant or any guarantor of Tenant's obligations hereunder shall be commenced
seeking to have an order for relief entered against it as debtor, or seeking
reorganization, arrangement, adjustment, liquidation, dissolution or composition
of it or its debts under any Law relating to bankruptcy, insolvency,
reorganization or relief of debtors, or seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or any
substantial part of its property, and such case, proceeding or other action (i)
results in the entry of an order for relief against it which is not fully stayed
within seven (7) business days after the entry thereof or (ii) remains
undismissed for a period of sixty (60) days.
Any notice given by Landlord in order to satisfy the requirements of
this Subparagraph 13.B. shall also satisfy the notice requirements of California
Code of Civil Procedure Section 1161 and all similar statutes regarding unlawful
detainer proceedings.
B. Remedies. Upon any Event of Default, Landlord shall have
the following remedies, in addition to all other rights and remedies provided by
law, to which Landlord may resort cumulatively, or in the alternative:
(i) Recovery of Rent. Landlord shall be entitled to
keep this Lease in full force and effect (whether or not Tenant shall have
abandoned the Premises) and to enforce all of its rights and remedies under this
Lease, including the right to recover rent and other sums as they become due,
plus interest at the Permitted Rate (as defined in Paragraph 31 below) as
therein provided.
(ii) Termination. Landlord may terminate this Lease
by giving Tenant written notice of termination in accordance with applicable
law. On the giving of the notice all of Tenant's rights in the Premises shall
terminate. Upon the giving of the notice of termination, Tenant shall surrender
and vacate the Premises in the condition required by Paragraph 32, and Landlord
may re-enter and take possession of the Premises and all the remaining
improvements or property and eject Tenant or any of Tenant's subtenants,
assignees or other person or persons claiming any right under or through Tenant
or eject some and not others or eject none. This Lease may also be terminated by
a judgment specifically providing for termination. Any
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termination under this paragraph shall not release Tenant from the payment of
any sum then due Landlord or from any claim for damages or rent previously
accrued or then accruing against Tenant. In no event shall any one or more of
the following actions by Landlord constitute a termination of this Lease:
(a) maintenance and preservation of the
Premises;
(b) efforts to relet the Premises;
(c) appointment of a receiver in order to
protect Landlord's interest hereunder;
(d) consent to any subletting of the
Premises or assignment of this Lease by Tenant, whether pursuant to provisions
hereof concerning subletting and assignment or otherwise; or
(e) any other action by Landlord or
Landlord's agents intended to mitigate the adverse effects from any breach of
this Lease by Tenant.
(iii) Damages. In the event this Lease is terminated
pursuant to Subparagraph 13.B.(ii) above, or otherwise, Landlord shall be
entitled to damages in the following sums:
(a) the worth at the time of award of the
unpaid rent which has been earned at the time of termination; plus
(b) the worth at the time of award of the
amount by which the unpaid rent which would have been earned after termination
until the time of award exceeds the amount of such rental loss that Tenant
proves could have been reasonably avoided; plus
(c) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that Tenant proves could be
reasonably avoided; and
(d) any other amount necessary to compensate
Landlord for all detriment proximately caused by Tenant's failure to perform
Tenant's obligations under this Lease, or which in the ordinary course of things
would be likely to result therefrom including, without limitation, the
following: (i) reasonable expenses for cleaning, repairing or restoring the
Premises to surrender condition; (ii) real estate broker's fees, advertising
costs and other expenses of reletting the Premises which are reasonably incurred
by Landlord and applicable to the period after termination of this Lease; (iii)
reasonable costs of carrying the Premises such as taxes and insurance premiums
thereon, utilities and security precautions not otherwise included in Additional
Rent; (iv) expenses in retaking possession of the Premises; and (v) reasonable
attorneys' fees and court costs.
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(e) The "worth at the time of award" of the
amounts referred to in Subparagraphs (a) and (b) of this Subparagraph
13.B.(iii), is computed by allowing interest at the Permitted Rate. The "worth
at the time of award" of the amounts referred to in Subparagraph (c) of this
Subparagraph 13.B.(iii) is computed by discounting such amount at the discount
rate of the Federal Reserve Board of San Francisco at the time of award plus one
percent (1%). The term "rent" as used in this Paragraph 13 shall include all
sums required to be paid by Tenant to Landlord pursuant to the terms of this
Lease.
C. Waivers. Tenant hereby waives any right of redemption or
relief from forfeiture under the laws of the State of California, or under any
other present or future law, including the provisions of Sections 1174 and 1179
of the California Code of Civil Procedure.
14. Destruction.
A. Landlord's Duty to Restore. If the Improvements are damaged
by any peril after the Commencement Date of this Lease, Landlord shall restore
the Premises unless the Lease is terminated by Landlord pursuant to Subparagraph
14.B. or by Tenant pursuant to Subparagraph 14.C. All insurance proceeds
available from the property damage insurance carried by Landlord pursuant to
Subparagraph 8.C. shall be paid to and become the property of Landlord and shall
be used for the restoration of the Premises, unless this Lease is terminated
pursuant to Subparagraphs 14.B. or 14.C. or as otherwise required by Landlord's
Lender. If this Lease is terminated pursuant to either Subparagraphs 14.B. or
14.C., then all insurance proceeds available from the insurance required to be
carried by Tenant which covers loss to property that is Landlord's property or
would become Landlord's property on the termination of this Lease shall be paid
to and become the property of Landlord. If this Lease is not so terminated, then
Landlord shall be entitled to all such insurance proceeds and upon receipt of
such insurance proceeds (if the loss is covered by insurance) and the issuance
of all necessary governmental permits, Landlord shall commence and diligently
prosecute to completion the restoration of the Premises, to the extent then
allowed by Law, to substantially the same condition in which the Premises were
immediately prior to such damage. Landlord's obligation to restore shall be
limited to the Buildings and Tenant Improvements constructed by Landlord as they
existed as of the Commencement Date and to the extent Landlord receives
insurance proceeds, any Tenant Improvements as they existed as of the
Commencement Date which were paid for by Tenant, excluding any Tenant's Property
or Tenant Improvements paid for by Tenant to the extent Landlord does not
receive insurance proceeds for such Tenant Improvements.
B. Landlord's Right to Terminate. Landlord shall have the
option to terminate this Lease in the event any of the following occurs, which
option may be exercised only by delivery to Tenant of a written notice of
election to termi nate within thirty (30) days after the date of such damage:
(i) The Improvements are damaged by any peril either
(i) covered by the type of insurance Landlord is required to carry pursuant to
Subparagraph 8.C. or (ii) covered
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by valid and collectible insurance actually carried by Landlord and in force at
the time of such damage or destruction, to such an extent that the estimated
restoration cost exceeds fifty percent (50%) of the then actual replacement cost
thereof.
(ii) The Improvements are damaged by any peril both
(i) not covered by the type of insurance Landlord is required to carry pursuant
to Subparagraph 8.C. and (ii) not covered by valid and collectible insurance
actually carried by Landlord and in force at the time of such damage or
destruction, to such an extent that the estimated restoration cost exceeds five
percent (5%) of the then actual replacement cost of the Improvements; provided,
however, that Landlord may not terminate this Lease pursuant to this
Subparagraph 14.B.(ii) if Tenant agrees in writing to pay the amount by which
the restoration cost exceed five percent (5%) of the replacement cost of the
Improvements and deposits with Landlord or provides other reasonable assurances
of payment (which assurances must be approved by Landlord's Lender) of an amount
equal to the estimated amount of such excess within thirty (30) days after
Landlord has notified Tenant with its election to terminate this Lease pursuant
to this Subparagraph 14.B.(ii).
(iii) The Improvements are damaged by any peril
during the last twelve (12) months of the Lease Term to such an extent that the
estimated cost to restore equals or exceeds an amount equal to six (6) times the
Monthly Installment of rent then due; provided, however, that Landlord may not
terminate this Lease pursuant to this Subparagraph 14.B.(iii) if Tenant, at the
time of such damage, has an express written option to further extend the term of
this Lease and Tenant exercises such option to so further extend the Lease Term
within fifteen (15) days following notice of Landlord's termination of this
Lease.
(iv) The Improvements are damaged by any peril and,
because of the Laws then in force, may not be restored at a cost less than or
equal to the available insurance proceeds and any amounts Tenant is required by
this Lease to pay or Tenant otherwise elects to pay, to substantially the same
condition in which it was prior to such damage.
C. Tenant's Right to Terminate. If the Improvements are
damaged by any peril and Landlord does not elect to terminate this Lease or is
not entitled to terminate this Lease pursuant to Subparagraph 14.B., then as
soon as reasonably practicable, Landlord shall furnish Tenant with the written
opinion of Landlord's architect or construction consultant as to when the
restoration work required of Tenant may be completed and the permits required
for such work can be obtained. Tenant shall have the option to terminate this
Lease in whole or in part as specified below in the event any of the following
occurs, which option may be exercised only by delivery to Landlord of a written
notice of election to terminate within fifteen (15) days after Tenant receives
from Landlord the estimate of the time needed to complete such restoration:
(i) If any Building is damaged by any peril and, in
the reasonable opinion of Landlord's architect or construction consultant, the
restoration of such Building cannot be substantially completed within two
hundred seventy (270) days after the date of the damage, then Tenant may
terminate the Lease as to such damaged Building only.
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(ii) If any Building is damaged by any peril and all
permits required for the commencement of restoration are not obtained within
sixty (60) days beyond the time estimated by Landlord's architect or
construction consultant, or if following receipt of such permits the restoration
is not completed within sixty (60) days beyond the time estimated by Landlord's
architect or construction consultant as the required restoration time (provided
such time periods shall be extended by force majeure delays), then Tenant may
terminate this Lease with respect only to such damaged Building for which
permits are not timely obtained or which are not timely restored.
(iii) If any Building is damaged by any peril within
twelve (12) months of the last day of the Lease Term, and, in the reasonable
opinion of Landlord's architect or construction consultant, the restoration of
the Premises cannot be substantially completed within ninety (90) days after the
date of such damage, then Tenant may terminate this Lease with respect only to
such damaged Building.
(iv) If two (2) of the three (3) Buildings are
damaged by any peril and, in the reasonable opinion of Landlord's architect or
construction consultant, the restoration of all Buildings cannot be
substantially completed within two hundred seventy (270) days after the date of
the damage, Tenant may terminate the entire Lease.
D. Abatement of Rent. In the event of damage to the Premises
which does not result in the termination of this Lease, the Monthly Installment
of rent and Additional Rent shall be temporarily abated from the date of
inception of the loss until the damaged Building(s) are restored, in proportion
to the degree to which Tenant's use of the Premises is impaired by such damage.
Tenant shall not be entitled to any compensation from Landlord for loss of
Tenant's property or loss to Tenant's business caused by such damage or
restoration. Tenant hereby waives the provisions of Section 1932, Subdivision 2,
and Section 1933, Subdivision 4, of the California Civil Code, and the
provisions of any similar law, hereinafter enacted.
15. Condemnation.
A. Definition of Terms. For the purposes of this Lease, the
term (1) "TAKING" means a taking of the Premises or damage to the Premises
related to the exercise of the power of eminent domain and includes a voluntary
conveyance, in lieu of court proceedings, to any agency, authority, public
utility, person or corporate entity empowered to condemn property; (2) "TOTAL
TAKING" means the taking of the entire Premises or so much of the Premises as to
prevent or substantially impair the use thereof by Tenant for the uses herein
specified; (3) "PARTIAL TAKING" means a Taking which does not constitute a Total
Taking; (4) "DATE OF TAKING" means the date upon which the title to the
Premises, or a portion thereof, passes to and vests in the condemnor or the
effective date of any order for possession if issued prior to the date title
vests in the condemnor; and (5) "AWARD" means the amount of any award made,
consideration paid, or damages ordered as a result of a Taking.
B. Rights. The parties agree that in the event of a Taking all
rights (as
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between them) in and to an Award shall be as set forth herein and Tenant shall
have no right to any Award except as set forth herein; provided, however, that
Tenant shall be entitled to any award for the taking of Tenant's Property.
C. Total Taking. In the event of a Total Taking during the
Lease Term (1) the rights of Tenant under the Lease and the leasehold estate of
Tenant in and to the Premises shall cease and terminate as of the Date of
Taking; (2) Landlord shall refund to Tenant any prepaid rent and any unapplied
security deposit; (3) Tenant shall pay Landlord any unpaid rent or charges due
Landlord under the Lease, each prorated as of the Date of Taking; (4) Tenant
shall receive from the Award those portions of the Award attributable to
Tenant's Property and for moving expenses of Tenant; and (5) the remainder of
the Award shall be paid to and be the property of Landlord.
D. Partial Taking. In the event of a Partial Taking during the
Lease Term (1) the rights of Tenant under the Lease and the leasehold estate of
Tenant in and to the portion of the Premises taken shall cease and terminate as
of the Date of Taking; (2) Landlord shall refund to Tenant any prepaid rent and
any unapplied security deposit relating to the portion of the Premises taken
based on a square footage basis; (3) Tenant shall pay Landlord any unpaid rent
or charges due Landlord under the Lease for the portion of the Premises taken,
each prorated as of the Date of Taking; (4) from and after the Date of Taking
the Monthly Installment of rent shall be an amount equal to the product obtained
by multiplying the Monthly Installment of rent immediately prior to the Taking
by a fraction, the numerator of which is the number of square feet contained in
the Building after the Taking and the denominator of which is the number of
square feet contained in the Building prior to the Taking; (5) Tenant shall
receive from the Award those portions of the Award attributable to Tenant's
Property and for moving expenses of Tenant; and (6) the remainder of the Award
shall be paid to and be the property of Landlord.
16. Mechanics' Lien. Tenant shall (A) pay for all labor and services
performed for, materials used by or furnished to, Tenant or any contractor
employed by Tenant with respect to the Premises; (B) indemnify, defend, protect
and hold Landlord and the Premises harmless and free from any liens, claims,
liabilities, demands, encumbrances, or judgments created or suffered by reason
of any labor or services performed for, materials used by or furnished to,
Tenant or any contractor employed by Tenant with respect to the Premises; (C)
give notice to Landlord in writing five (5) days prior to employing any laborer
or contractor to perform services related to, or receiving materials for use
upon the Premises; and (D) permit Landlord to post a notice of nonresponsibility
in accordance with the statutory requirements of California Civil Code Section
3094 or any amendment thereof. In the event Tenant is required to post an
improvement bond with a public agency in connection with the above, Tenant
agrees to include Landlord as an additional obligee.
17. Inspection of the Premises. Tenant shall permit Landlord and its
agents to enter the Premises at any reasonable time for the purpose of
inspecting the same, performing Landlord's maintenance and repair
responsibilities (upon 24 hour prior notice except in an emergency), posting a
notice of non-responsibility for alterations, additions or repairs and at any
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time within two hundred seventy (270) days prior to expiration of this Lease, to
place upon the Premises, ordinary "For Lease" or "For Sale" signs.
18. Compliance with Laws. Tenant shall, at its own cost, comply with
all of the requirements of all municipal, county, state and federal authorities
now in force, or which may hereafter be in force, pertaining to Tenant's use and
occupancy of the Premises, and shall faithfully observe all municipal, county,
state and federal law, statutes or ordinances now in force or which may
hereafter be in force pertaining to Tenant's use and occupancy of the Premises.
The judgment of any court of competent jurisdiction or the admission of Tenant
in any action or proceeding against Tenant, whether Landlord be a party thereto
or not, that Tenant has violated any such ordinance or statute in the use and
occupancy of the Premises shall be conclusive of the fact that such violation by
Tenant has occurred. Tenant shall indemnify, protect, defend, and hold Landlord
harmless against any loss, expense, damage, attorneys' fees or liability to the
extent arising out of the failure of Tenant to comply with any applicable law,
except to the extent such failure of Tenant to comply with any applicable law is
caused by the negligence or willful misconduct of Landlord or its Agents.
19. Subordination. The following provisions shall govern the
relationship of this Lease to any underlying lease, mortgage or deed of trust
which now or hereafter affects the Premises or Landlord's interest or estate
therein and any renewal, modification, consolidation, replacement, or extension
thereof (a "SECURITY INSTRUMENT").
A. Priority. This Lease is subject and subordinate to all
Security Instruments existing as of the Commencement Date. However, if any
Lender so requires, this Lease shall become prior and superior to any such
Security Instrument. Landlord, as a condition to Tenant's obligations under this
Lease, shall obtain a recognition and non-disturbance agreement from all
existing lienholders in form reasonably acceptable to Tenant and Landlord's
Lender.
B. Subsequent Security Instruments. At Landlord's election,
this Lease shall become subject and subordinate to any Security Instrument
created after the Commencement Date, provided that the Lender holding such
Security Agreement agrees that in the event of foreclosure of the Security
Instrument in question, such Lender shall recognize the tenancy of Tenant on the
terms and conditions contained in this Lease so long as no Event of Default (as
defined in Paragraph 13.A. hereof) exists on the date such person acquires the
Premises. Notwithstanding such subordination, Tenant's right to quiet possession
of the Premises shall not be disturbed so long as no Event of Default exists on
the date such person acquires the Premises, unless this Lease is otherwise
terminated pursuant to its terms.
C. Documents. Tenant shall execute any reasonable document or
instrument required by Landlord or any Lender to make this Lease either prior or
subordinate to a Security Instrument, which may include such other matters as
the Lender customarily and reasonably requires in connection with such
agreements, including provisions that the Lender not be liable for (1) the
return of the Security Deposit unless the Lender receives it from Landlord, and
(2) any defaults on the part of Landlord occurring prior to the time that the
Lender takes possession of
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the Premises in connection with the enforcement of its Security Instrument.
Tenant's failure to execute any such document or instrument within ten (10) days
after written demand therefor shall constitute a default by Tenant. Tenant's
obligation to execute and deliver any subordination agreement to any future
Lender shall be conditioned upon such Lender agreeing that in the event of
foreclosure of the mortgage or termination of the ground lease in question, such
Lender shall recognize the tenancy of Tenant on the terms and conditions
contained in this Lease as long as no Event of Default exists on the date such
person acquires the Premises.
D. Tenant's Attornment. Subject to the recognition obligations
under Subparagraphs 19.B. and 19.C. above, Tenant shall attorn (1) to any
purchaser of the Premises at any foreclosure sale or private sale conducted
pursuant to any Security Instrument encumbering the Premises; (2) to any grantee
or transferee designated in any deed given in lieu of foreclosure; or (3) to the
lessor under any underlying ground lease should such ground lease be terminated.
20. Holding Over. This Lease shall terminate without further notice at
the expiration of the Lease Term. Any holding over by Tenant after expiration
shall not constitute a renewal or extension or give Tenant any rights in or to
the Premises except as expressly provided in this Lease. Any holding over after
the expiration without the consent of Landlord shall be construed to be a
tenancy from month to month, at one hundred fifty percent (150%) of the monthly
rent for the last month of the Lease Term, and shall otherwise be on the terms
and conditions herein specified insofar as applicable.
21. Notices. Any notice required or desired to be given under this
Lease shall be in writing with copies directed as indicated below and shall be
personally served or given by facsimile (with receipt confirmed by telephone),
personal delivery, mail or by prepaid next-business day courier. Personal
delivery, mail and facsimile transmittal shall be effective when received or
delivery is refused by the party. Any notice given by courier shall be deemed to
have been given on the next business day after the time such notice was sent,
addressed to the party to be served with a copy as indicated herein at the last
address given by that party to the other party under the provisions of this
paragraph. At the date of execution of this Lease, the address of Landlord is:
South Bay Development Company, Inc.
511 Division Street
Campbell, California 95008
Attn: Mr. Scott Trobbe
With a copy to:
South Bay/San Tomas Associates
c/o AEW Real Estate Advisors, Inc.
399 Boylston Street
Boston, Massachusetts 02116
Attn: Mr. Christopher Kazantis
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and the address of Tenant is:
Auspex Systems, Inc.
5200 Great America Parkway
Santa Clara, California 95054
Attn: General Counsel
After the Commencement Date, the address of Tenant will be at the Premises.
22. Attorneys' Fees. In the event either party shall bring any action
or legal proceeding for damages for any alleged breach of any provision of this
Lease, to recover rent or possession of the Premises, to terminate this Lease,
or to enforce, protect or establish any term or covenant of this Lease or right
or remedy of either party, the prevailing party shall be entitled to recover as
a part of such action or proceeding, reasonable attorneys' fees and court costs,
including attorneys' fees and costs for appeal, as may be fixed by the court or
jury. The term "prevailing party" shall mean the party who received
substantially the relief requested, whether by settlement, dismissal, summary
judgment, judgment, or otherwise.
23. Subleasing and Assignment.
A. Landlord's Consent Required. Tenant's interest in this
Lease is not assignable, by operation of Law or otherwise, nor shall Tenant have
the right to sublet the Premises, transfer any interest of Tenant therein or
permit any use of the Premises by another party, without the prior written
consent of Landlord to each such assignment, subletting, transfer or use, which
consent Landlord agrees not to withhold unreasonably subject to the provisions
of Subparagraph 23.C. below. A consent to one assign ment, subletting, occupancy
or use by another party shall not be deemed to be a consent to any subsequent
assignment, subletting, occupancy or use by another party. Any assignment or
subletting without such consent shall be void and shall, at the option of
Landlord, terminate this Lease. Landlord's waiver or consent to any assignment
or subletting hereunder shall not relieve Tenant from any obligation under this
Lease unless the consent shall so provide.
B. Transferee Information Required. If Tenant desires to
assign its interest in this Lease or sublet the Premises, or transfer any
interest of Tenant therein, or permit the use of the Premises by another party
(hereinafter collectively referred to as a "TRANSFER"), Tenant shall give
Landlord at least twenty (20) business days prior written notice of the proposed
Transfer and of the terms of such proposed Transfer, including, but not limited
to, the name and legal composition of the proposed transferee, a financial
statement of the proposed transferee, the nature of the proposed transferee's
business to be carried on in the Premises (including a list of the type and
quantities of all Hazardous Materials to be used by the transferee on the
Premises), the payment to be made or other consideration to be given to Tenant
on account of the Transfer, and such other pertinent information as may be
reasonably requested by Landlord, all in sufficient detail to enable Landlord to
evaluate the proposed Transfer and the prospective
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transferee.
C. Landlord's Rights. It is the intent of the parties hereto
that this Lease shall confer upon Tenant only the right to use and occupy the
Premises, and to exercise such other rights as are conferred upon Tenant by this
Lease. The parties agree that this Lease is not intended to have a bonus value
nor to serve as a vehicle whereby Tenant may profit by a future Transfer of this
Lease or the right to use or occupy the Premises as a result of any favorable
terms contained herein, or future changes in the market for leased space. It is
the intent of the parties that any such bonus value that may attach to this
Lease shall be and remain the exclusive property of Landlord, except as provided
in Subparagraph 23.C.(ii) below. In the event Tenant seeks to Transfer its
interest in this Lease or the Premises, Landlord shall have the following
options, which shall be exercised by Landlord, within twenty (20) business days
of Landlord receiving all of the information regarding the Transfer that is
required under Subparagraph 23.B., at Landlord's sole choice without limiting
Landlord in the exercise of any other right or remedy which Landlord may have by
reason of such proposed Transfer:
(i) In the event of a Transfer constituting either an
assignment of the entire Lease or a sublease of substantially all of the
Premises for all or substantially all of the balance of the Lease Term, Landlord
may elect to terminate this Lease effective as of the proposed effective date of
the proposed Transfer and release Tenant from any further liability hereunder
accruing after such termination date by giving Tenant written notice of such
termination within fifteen (15) days after receipt by Landlord of Tenant's
notice of intent to Transfer as provided above. If Landlord makes such election
to terminate this Lease, Tenant shall surrender the Premises, in accordance with
Paragraph 32, on or before the effective termination date; or
(ii) Landlord may consent to the proposed Transfer on
the condition that Tenant agrees to pay to Landlord, as additional rent, fifty
percent (50%) of any and all rents or other consideration (including key money)
received by Tenant from the transferee by reason of such Transfer in excess of
the rent payable by Tenant to Landlord under this Lease (after reimbursement to
Tenant of any brokerage commissions, attorneys' fees and advertising expenses
incurred by Tenant in connection with the Transfer, and any tenant improvement
costs related to such Transfer that are incurred by Tenant). Tenant expressly
agrees that the foregoing is a reasonable condition for obtaining Landlord's
consent to any Transfer;
(iii) Landlord may consent to the proposed Transfer
on the condition that if such Transfer is an assignment that Landlord in its
sole and absolute discretion shall determine whether such Transfer shall include
the right to exercise the Options to extend the Lease Term;
(iv) Landlord may withhold its consent in its sole
and absolute discretion to the proposed Transfer if the Transfer is a sublease
and the term of the such sublease extends beyond the then existing Lease Term
(the "then existing Lease Term" shall not include any unexercised options to
extend the Lease Term); or
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(v) Landlord may reasonably withhold its consent to
the proposed Transfer.
If Landlord agrees to consent to the proposed Transfer pursuant to Subparagraphs
23.C.(ii) or 23.C.(iii), Landlord shall provide such consent on Landlord's form
within ten (10) business days of Landlord electing such option and receiving the
final version of the document evidencing the Transfer.
D. Permitted Transfers. Notwithstanding the foregoing, Tenant
may, without Landlord's prior written consent and without providing to Landlord
the option described in Subparagraph 23.C.(i) above, assign its interest in the
Lease or sublet the Premises or a portion thereof to (i) a subsidiary,
affiliate, division or corporation controlled by or under common control with
Tenant; (ii) a successor corporation related to Tenant by merger, consolidation,
non-bankruptcy reorganization or government action; or (iii) a purchaser of
substantially all of the Tenant's assets; provided that, in each instance
described above, (a) each assignee assumes the obligations of Tenant under this
Lease and each sublessee agrees to abide by this Lease in a written instrument
delivered to Landlord; (b) Tenant as transferor remains liable as a primary
obligor for the obligations of the tenant under this Lease; and (c) the
financial strength of the transferee tenant is no less than Tenant's financial
strength as of the Commencement Date or the date of such Transfer, whichever is
greater. Additionally, Tenant may, without Landlord's prior written consent,
sublease one (1) of the Buildings prior to taking occupancy thereof, provided
that (x) the sublessee agrees to abide by the obligations of Tenant under this
Lease in a written instrument delivered to Landlord; (y) Tenant as transferor
remains liable as a primary obligor for the obligations of the tenant under this
Lease; and (z) the term of the sublease does not exceed thirty-six (36) months
from the Commencement Date.
24. Successors. The covenants and agreements contained in this Lease
shall be binding on and inure to the benefit of the parties hereto and on their
respective heirs, successors and assigns (to the extent the Lease is
assignable).
25. Mortgagee Protection. In the event of any default on the part of
Landlord, Tenant will give notice by registered or certified mail to any
beneficiary of a deed of trust or mortgagee of a mortgage encumbering the
Premises, whose address shall have been previously furnished to Tenant in
writing by Landlord. Such beneficiary or mortgagee shall have the right to cure
Landlord's default and so long as such beneficiary or mortgagee is making
reasonable efforts to cure Landlord's default, including, but not limited to,
obtaining possession of the Premises by power of sale or judicial foreclosure,
if such should prove necessary to effect a cure, Tenant shall not have the right
to terminate this Lease.
26. Estoppel Certificate. Tenant and Landlord agree within ten (10)
days following request by the other party to (A) execute and deliver to other
party any documents, including estoppel certificates presented to a party by the
other party, (1) certifying that this Lease is unmodified, or if modified,
indicating the modifications, and in full force and effect and the date
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to which the rent and other charges are paid in advance, if any, and (2)
acknowledging that there are not, to such party's knowledge, any uncured
defaults on the part of other party hereunder, or specifying the defaults, if
any, and (3) evidencing the status of the Lease as may be reasonably required
either by a lender making a loan to Landlord or to Tenant to be secured by a
deed of trust or mortgage covering the Premises or a purchaser of the Premises
from Landlord, and (B) Tenant agrees to deliver to Landlord the financial
statement of Tenant with an opinion of a certified public accountant, including
a balance sheet and profit and loss statement, for the last completed fiscal
year all prepared in accordance with generally accepted accounting principles
consistently applied. Tenant's failure to deliver an estoppel certificate within
ten (10) days following a request by Landlord shall be an Event of Default under
this Lease. Landlord's failure to deliver an estoppel certificate within ten
(10) days following a request by Tenant shall be an event of default under this
Lease.
27. Surrender of Lease Not Merger. The voluntary or other surrender of
this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger
and shall, at the option of Landlord, terminate all or any existing subleases or
subtenants, or operate as an assignment to Landlord of any or all such subleases
or subtenants.
28. Waiver. The waiver by Landlord or Tenant of any breach of any term,
covenant or condition herein contained shall not be deemed to be a waiver of
such term, covenant or condition or any subsequent breach of the same or any
other term, covenant or condition herein contained. Any waiver shall be in
writing and signed by both Landlord and Tenant.
29. General.
A. Captions. The captions and paragraph headings used in this
Lease are for the purposes of convenience only. They shall not be construed to
limit or extend the meaning of any part of this Lease, or be used to interpret
specific sections. The word(s) enclosed in quotation marks shall be construed as
defined terms for purposes of this Lease. As used in this Lease, the masculine,
feminine and neuter and the singular or plural number shall each be deemed to
include the other whenever the context so requires.
B. Definition of Landlord. The term Landlord as used in this
Lease, so far as the covenants or obligations on the part of Landlord are
concerned, shall be limited to mean and include only the owner at the time in
question of the fee title of the Premises, and in the event of any transfer or
transfers of the title of such fee, the Landlord herein named (and in case of
any subsequent transfers or conveyances, the then grantor) shall be
automatically freed and relieved of all liability with respect to performance of
any covenants or obligations on the part of Landlord contained in this Lease to
be performed after the date of such transfer or conveyance which are assumed in
writing by the transferee; provided that any funds in the hands of Landlord or
the then grantor at the time of such transfer, in which Tenant has an interest,
shall be turned over to the grantee. It is intended that the covenants and
obligations contained in this Lease on the part of Landlord shall, subject as
aforesaid, be binding upon each Landlord, its heirs, personal representatives,
successors and assigns only with respect to the obligations of Landlord arising
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during its respective period of ownership.
C. Time of Essence. Time is of the essence for the performance
of each term, covenant and condition of this Lease.
D. Severability. In case any one or more of the provisions
contained herein, except for the payment of rent, shall for any reason be held
to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Lease, but this Lease shall be construed as if such invalid, illegal or
unenforceable provision had not been contained herein. This Lease shall be
construed and enforced in accordance with the laws of the State of California.
E. Quiet Enjoyment. Upon Tenant paying the rent for the
Premises and observing and performing all of the covenants, conditions and
provisions on Tenant's part to be observed and performed hereunder, Tenant shall
have quiet possession of the Premises for the entire term hereof subject to all
of the provisions of this Lease.
F. Law. As used in this Lease, the term "LAW" or "LAWS" shall
mean any judicial decision, statute, constitution, ordinance, resolution,
regulation, rule, administrative order, or other requirement of any government
agency or authority having jurisdiction over the parties to this Lease or the
Premises or both, in effect at the Commencement Date of this Lease or any time
during the Lease Term, including, without limitation, any regulation, order, or
policy of any quasi-official entity or body (e.g., board of fire examiners,
public utility or special district).
G. Agent. As used in this Lease, the term "AGENT" shall mean,
with respect to either Landlord or Tenant, its respective agents, employees,
contractors (and their subcontractors), and invitees (and in the case of Tenant,
its subtenants).
H. Lender. As used in this Lease, the term "LENDER" shall mean
any beneficiary, mortgagee, secured party or other holder of any deed of trust,
mortgage or other written security device or agreement affecting Landlord's
interest in the Premises.
I. Force Majeure. Any prevention, delay or stoppage due to
strikes, lock-outs, inclement weather, labor disputes, inability to obtain
labor, materials, fuels or reasonable substitutes therefor, governmental
restrictions, regulations, controls, action or inaction, civil commotion, fire
or other acts of God, and other causes beyond the reasonable control of the
party obligated to perform (except financial inability) shall excuse the
performance, for a period equal to the period of any said prevention, delay or
stoppage, or any obligation hereunder except the obligation of Tenant to pay
rent or any other sums due hereunder.
30. Sign. Tenant shall not place or permit to be placed any sign or
decoration on the Parcel or the exterior of any of the Buildings without the
prior written consent of Landlord, which consent shall not be unreasonably
withheld or delayed. Tenant, upon written notice by
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Landlord, shall immediately remove any sign or decoration that Tenant has placed
or permitted to be placed on the Parcel or the exterior of any of the Buildings
without the prior written consent of Landlord, and if Tenant fails to so remove
such sign or decoration within five (5) days after Landlord's written notice,
Landlord may enter upon the Premises and remove said sign or decoration and
Tenant agrees to pay Landlord, as additional rent upon demand, the cost of such
removal. At the termination of this Lease, Tenant shall remove any sign which it
has placed on the Parcel or any of the Buildings and shall repair any damage
caused by the installation or removal of such sign.
31. Interest on Past Due Obligations. Any Monthly Installment of rent
due from Tenant, or any other sum due under this Lease from Tenant, which is
received by Landlord after the date ten (10) days following the date written
notice is given by Landlord to Tenant that such sum has not been paid when due,
shall bear interest from said due date until paid, at an annual rate equal to
the lower of (the "PERMITTED RATE"): (1) twelve percent (12%); or (2) five
percent (5%) plus the rate established by the Federal Reserve Bank of San
Francisco, as of the twenty-fifth (25th) day of the month immediately preceding
the due date, on advances to member banks under Sections 13 and 13(a) of the
Federal Reserve Act, as now in effect or hereafter from time to time amended.
Payment of such interest shall not excuse or cure any default by Tenant. In
addition, Tenant shall pay all costs and attorneys' fees reasonably incurred by
Landlord in collection of such amounts.
32. Surrender of the Premises. On the last day of the term hereof, or
on the sooner termination of this Lease, Tenant shall surrender the Premises to
Landlord in their condition existing as of the Commencement Date of this Lease,
except for (A) ordinary wear and tear; (B) acts of God; (C) condemnation; (D)
Hazardous Materials which Tenant is not responsible for pursuant to this Lease;
and (E) all alterations, improvements or additions which Tenant is not required
to remove pursuant to this Lease. Tenant shall surrender the Premises with all
originally painted interior walls washed, and other interior walls cleaned, and
repaired or replaced, the air conditioning and heating equipment serviced and
repaired by a reputable and licensed service firm as required by Paragraph 10.B.
hereof, all floors cleaned and waxed, all to the reasonable satisfaction of
Landlord. Tenant shall remove all of Tenant's Property from the Premises, and
all property not so removed shall be deemed abandoned by Tenant. Tenant, at its
sole cost, shall repair any damage to the Premises caused by the removal of
Tenant's Property, which repair shall include, without limitation, the patching
and filling of holes and repair of structural damage. If the Premises are not so
surrendered at the termination of this Lease, Tenant shall indemnify, defend,
protect and hold Landlord harmless from and against loss or liability resulting
from delay by Tenant in so surrendering the Premises including without
limitation, any claims made by any succeeding tenant or losses to Landlord due
to lost opportunities to lease to succeeding tenants.
33. Authority. The undersigned parties hereby warrant that they have
proper authority and are empowered to execute this Lease on behalf of Landlord
and Tenant, respectively.
34. CC&Rs. This Lease is made subject to all matters of public record
affecting title to the property of which the Premises are a part as described in
the Preliminary Title Report
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dated October 2, 1996, prepared by Santa Clara Land Title Company, Order No.
00121233, a copy of which is attached hereto as Exhibit "G" (the "TITLE
REPORT"). Tenant shall abide by and comply with all private conditions,
covenants and restrictions of public record now or hereafter affecting the
Premises as described on Exhibit "H" with reference to the Title Report
("CC&RS"), except as may be otherwise provided in Exhibit "H". Landlord
represents and warrants that to its actual knowledge no violation of the CC&Rs
exists as of the date of this Lease. During the Lease Term, Landlord shall
promptly notify Tenant of any modification to the CC&Rs.
35. Brokers. The parties represent and warrant to each other that they
have not dealt with any broker respecting this transaction other than
Cooper/Brady Corporate Real Estate Services (the "BROKER") and hereby agree to
indemnify and hold each other harmless from and against any brokerage commission
or fee, obligation, claim or damage (including attorneys' fees) paid or incurred
respecting any broker claiming through the other party or with which/whom the
other party has dealt. Landlord shall pay commission owing to the Broker
pursuant to a separate agreement between Landlord and the Broker.
36. Limitation on Landlord's Liability36. Limitation on Landlord's
Liability. Tenant, for itself and its successors and assigns (to the extent this
Lease is assignable), hereby agrees that in the event of any actual, or alleged,
breach or default by Landlord under this Lease that:
A. Tenant's sole and exclusive remedy and recourse against
Landlord shall be as against Landlord's interest in the Premises and this Lease;
B. No partner of Landlord shall be sued or named as a party in
a suit or action (except as may be necessary to secure jurisdiction of the
partnership) for the breach of any obligation of Landlord or the act or omission
of Landlord or its Agents;
C. No service of process shall be made against any partner of
Landlord with respect to any claim arising under or out of this Lease (except as
may be necessary to secure jurisdiction of the partnership);
D. No partner of Landlord shall be required to answer or
otherwise plead to any service of process with respect to any claim arising
under or out of this Lease (except as may be necessary to secure jurisdiction of
the partnership);
E. No judgment will be taken against any partner of Landlord
for the breach of any obligation of Landlord or the act or omission of Landlord
or its Agents;
F. Any such judgment taken against any partner of Landlord may
be vacated and set aside at any time nunc pro tunc;
G. No writ of execution will ever be levied against the assets
of any partner of Landlord for a judgment based on any breach of a Landlord's
obligations under this Lease or any
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act or omission of Landlord; and
H. The covenants and agreements of Tenant set forth in this
Paragraph 36 shall be enforceable by Landlord and any partner of Landlord.
37. Hazardous Material.
A. Definitions. As used herein, the term "HAZARDOUS MATERIAL"
shall mean any substance: (i) the presence of which requires investigation or
remediation under any federal, state or local statute, regulation, ordinance,
order, action, policy or common law; (ii) which is or becomes defined as a
"hazardous waste," "hazardous substance," pollutant or contaminant under any
federal, state or local statute, regulation, rule or ordinance or amendments
thereto including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) and/or the
Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.); (iii)
which is toxic, explosive, corrosive, flammable, infectious, radioactive,
carcinogenic, mutagenic, or otherwise hazardous and is or becomes regulated by
any governmental authority, agency, department, commission, board, agency or
instrumentality of the United States, the State of California or any political
subdivision thereof; (iv) the presence of which on the Premises causes or
threatens to cause a nuisance upon the Premises or to adjacent properties or
poses or threatens to pose a hazard to the health or safety of persons on or
about the Premises; (v) the presence of which on adjacent properties could
constitute a trespass by Landlord or Tenant; (vi) without limitation which
contains gasoline, diesel fuel or other petroleum hydrocarbons; (vii) without
limitation which contains polychlorinated biphenyls (PCBs), asbestos or urea
formaldehyde foam insulation; or (viii) without limitation radon gas.
B. Landlord's Obligation. Except for the Existing
Environmental Condition (as defined in Subparagraph 37.L. hereof), Landlord has
no actual knowledge, without any duty to make investigation, of any Hazardous
Materials present in the soil or groundwater of the Parcel. Landlord, at its
sole cost, shall comply with all Laws which impose liability or responsibility
upon either Landlord or Tenant to investigate, remediate or otherwise take any
action with respect to the Existing Environmental Condition; provided, however,
that this covenant shall not require Landlord to perform any obligation Tenant
has under this Paragraph 37. Subject to Subparagraph 8.E., Landlord shall
indemnify, defend, protect and hold Tenant harmless from and against all
liabilities, claims, penalties, fines, response costs and other expenses
(including reasonable attorneys' fees) which result from Landlord's failure to
timely perform the obligation stated in the immediate preceding sentence.
C. Permitted Use. Subject to the compliance by Tenant with the
provisions of Subparagraphs D, E, F, G, I, J and K below, Tenant shall be
permitted to use and store on the Premises those Hazardous Materials listed in
Exhibit "E" attached hereto, in the quantities set forth in Exhibit "E" and such
other Hazardous Materials approved by Landlord in writing.
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D. Hazardous Materials Management Plan.
(i) Prior to Tenant or its subtenant using, handling,
transporting or storing any Hazardous Material at or about the Premises
(including, without limitation, those listed in Exhibit "E" other than customary
quantities of janitorial and office supplies), Tenant shall submit to Landlord a
Hazardous Materials Management Plan ("HMMP") for Landlord's review and approval,
which approval shall not be unreasonably withheld. The HMMP shall describe: (aa)
the quantities of each material to be used, (bb) the purpose for which each
material is to be used, (cc) the method of storage of each material, (dd) the
method of transporting each material to and from the Premises and within the
Premises, (ee) the methods Tenant will employ to monitor the use of the material
and to detect any leaks or potential hazards, and (ff) any other information any
department of any governmental entity (city, state or federal) requires prior to
the issuance of any required permit for the Premises or during Tenant's
occupancy of the Premises. Landlord may, but shall have no obligation to review
and approve the foregoing information and HMMP, and such review and approval or
failure to review and approve shall not act as an estoppel or otherwise waive
Landlord's rights under this Lease or relieve Tenant of its obligations under
this Lease; provided that a failure to review and approve within a reasonable
time shall not be deemed a disapproval. If Landlord determines in good faith by
inspection of the Premises or review of the HMMP that the methods in use or
described by Tenant are not adequate in Landlord's good faith judgment to
prevent or eliminate the existence of environmental hazards, then Tenant shall
not use, handle, transport, or store such Hazardous Materials at or about the
Premises unless and until such methods are approved by Landlord in good faith
and added to an approved HMMP. Once approved by Landlord, Tenant shall strictly
comply with the HMMP and shall not change its use, operations or procedures with
respect to Hazardous Materials without submitting an amended HMMP for Landlord's
review and approval as provided above.
(ii) Tenant shall pay to Landlord when Tenant submits
an HMMP (or amended HMMP) the amount reasonably determined by Landlord to cover
all Landlord's costs and expenses reasonably incurred in connection with
Landlord's review of the HMMP which costs and expenses shall include, among
other things, all reasonable out-of-pocket fees of attorneys, architects, or
other consultants incurred by Landlord in connection with Landlord's review of
the HMMP. Landlord shall have no obligation to consider a request for consent to
a proposed HMMP unless and until Tenant has paid to Landlord its reasonable
estimate of all such costs and expenses to Landlord, and Tenant shall pay all
such costs and expenses to Landlord irrespective of whether Landlord consents to
such proposed HMMP. Tenant shall pay to Landlord on demand the excess, if any,
of such costs and expenses actually incurred by Landlord over the amount of such
costs and expenses actually paid by Tenant, and Landlord shall promptly refund
to Tenant the excess, if any, of such costs and expenses actually paid by Tenant
over the amount of such costs and expenses actually incurred by Landlord.
E. Use Restriction. Except as specifically allowed in
Subparagraph C above, Tenant shall not cause or permit any Hazardous Material to
be used, stored, generated, discharged, transported to or from, or disposed of
in or about the Premises, or any other land or
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improvements in the vicinity of the Premises. Without limiting the generality of
the foregoing, Tenant, at its sole cost, shall comply with all Laws relating to
the storage, use, generation, transport, discharge and disposal by Tenant or its
Agents of any Hazardous Material. If the presence of any Hazardous Material on
the Premises (other than an Existing Environmental Condition) caused or
permitted by Tenant or its Agents results in contamination of the Premises or
any soil, air, ground or surface waters under, through, over, on, in or about
the Premises, Tenant, at its expense, shall promptly take all actions necessary
to return the Premises and/or the surrounding real property to the condition
existing prior to the appearance of such Hazardous Material to the extent
feasible and in all events, to a condition which complies with applicable
Environmental Law. In the event there is a release, discharge or disposal of or
contamination of the Premises by a Hazardous Material which is of the type that
has been stored, handled, transported or otherwise used or permitted by Tenant
or its Agents on or about the Premises (other than an Existing Environmental
Condition), Tenant shall have the burden of proving that such release,
discharge, disposal or contamination is not the result of the acts or omissions
of Tenant or its Agents.
F. Tenant Indemnity. Tenant shall defend, protect, hold
harmless and indemnify Landlord and its Agents and Lenders with respect to all
actions, claims, losses (including, diminution in value of the Premises), fines,
penalties, fees (including, but not limited to, attorneys' and consultants'
fees) costs, damages, liabilities, remediation costs, investigation costs,
response costs and other expenses arising out of, resulting from, or caused by
(i) any Hazardous Material used, generated, discharged, transported to or from,
stored, or disposed of by Tenant or its Agents in, on, under, over, through or
about the Premises and/or the surrounding real property or (ii) any disposal or
release of any Hazardous Material on the surface of the Premises occurring after
the Commencement Date and prior to the termination of this Lease that is not the
result of the negligent acts or wilful misconduct of Landlord or its Agents;
provided that in no event shall the foregoing create any liability in Tenant for
an Existing Environmental Condition. Tenant shall not suffer any lien to be
recorded against the Premises as a consequence of the disposal of any Hazardous
Material on the Premises by Tenant or its Agents, including any so called state,
federal or local "super fund" lien related to the "clean up" of any such
Hazardous Material in, over, on, under, through, or about the Premises.
G. Compliance. Tenant shall immediately notify Landlord, and
Landlord shall notify Tenant, of any inquiry, test, investigation, enforcement
proceeding by or against Tenant or the Premises concerning contamination of the
Premises caused by any Hazardous Material. Any remediation plan prepared by or
on behalf of Tenant must be submitted to Landlord prior to conducting any work
pursuant to such plan and prior to submittal to any applicable government
authority and shall be subject to Landlord's consent which consent shall not be
unreasonably withheld or delayed. Tenant acknowledges that Landlord, as the
owner of the Property, at its election, shall have the sole right to negotiate,
defend, approve and appeal any action taken or order issued with regard to any
Hazardous Material by any applicable governmental authority.
H. Assignment and Subletting. It shall not be unreasonable for
Landlord to
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withhold its consent to any proposed assignment or subletting if (i) the
proposed assignee's or subtenant's anticipated use of the Premises involves the
storage, generation, discharge, transport, use or disposal of any Hazardous
Material (other than reasonable quantities of office supplies, warehouse
supplies and janitorial supplies that may contain Hazardous Materials) in a
manner which represents a risk to the health and safety of persons on or about
the Premises, and in Landlord's opinion, that risk is a material risk; (ii) if
the proposed assignee or subtenant has been required by any prior landlord,
lender or governmental authority to "clean up" or remediate any Hazardous
Material resulting from the negligence or affirmative actions of the proposed
assignee or subtenant within the last five (5) years; (iii) if the proposed
assignee or subtenant is subject to investigation or enforcement order or
proceeding by any governmental authority in connection with the use, generation,
discharge, transport, disposal or storage of any Hazardous Material resulting
from the negligence or affirmative actions of the proposed assignee or subtenant
within the last five (5) years.
I. Surrender. Upon the expiration or earlier termination of
the Lease, Tenant, at its sole cost, shall remove all Hazardous Materials from
the Premises that Tenant or its Agents introduced to the Premises. If Tenant
fails to so surrender the Premises, Tenant shall indemnify, protect, defend and
hold Landlord harmless from and against all damages to the extent resulting from
Tenant's failure to surrender the Premises as required by this Paragraph,
including, without limitation, any actions, claims, losses, liabilities, fees
(including, but not limited to, attorneys' and consultants' fees), fines, costs,
penalties, or damages in connection with the condition of the Premises
including, without limitation, damages occasioned by the inability to relet the
Premises or a reduction in the fair market and/or rental value of the Premises
by reason of the existence of any Hazardous Material that Tenant or its Agents
introduced in, on, over, under, through or around the Premises.
J. Right to Appoint Consultant. If Tenant or its Agents have
used Hazardous Materials (other than customary quantities of janitorial or
office supplies), Landlord shall have the right to appoint a consultant, at
Tenant's expense, to conduct an investigation to determine whether any Hazardous
Material is being used, generated, discharged, transported to or from, stored or
disposed of in, on, over, through, or about the Premises, in an inappropriate or
unlawful manner. If Tenant has violated any Law or covenant in this Lease
regarding the use, storage or disposal of Hazardous Materials on or about the
Premises, Tenant shall reimburse Landlord for the cost of such investigation.
Tenant, at its expense, shall comply with all reasonable recommendations of the
consultant or take other steps approved by Landlord required to conform Tenant's
use, storage or disposal of Hazardous Materials to the requirements of
applicable Law or to fulfill the obligations of Tenant hereunder.
K. Holding Over. If during the Lease Term, Tenant or any of
its Agents is required to take any action of any kind required or requested to
be taken by any governmental authority to clean-up, remove, remediate or monitor
any Hazardous Material (the presence of which is the result of the acts or
omissions of Tenant or its Agents and other than an Existing Environmental
Condition) and such action is not completed prior to the expiration or earlier
termination of the Lease, Tenant shall be deemed to have impermissibly held over
until such time
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as such required action is completed, and Landlord shall be entitled to all
damages directly or indirectly incurred in connection with such holding over,
including without limitation, damages occasioned by the inability to re-let the
Premises or a reduction of the fair market and/or rental value of the Premises.
L. Existing Environmental Reports. Tenant hereby acknowledges
that it has received, read and reviewed the reports and test results described
in Exhibit "F" attached hereto and made a part hereof (the "EXISTING
ENVIRONMENTAL REPORTS"). The Hazardous Materials currently present in, on or
under the Premises or the soil, groundwater, surface water or air thereof, or
in, on, or under any property in the vicinity of the Premises, or the soil,
groundwater, surface water or air thereof, as described in the Existing
Environmental Reports are referred to herein as the "EXISTING ENVIRONMENTAL
CONDITION". Tenant shall keep the Existing Environmental Reports and all
information contained therein confidential, except Tenant shall be allowed to
disclose such information to Tenant's consultants and attorneys provided such
parties agree to keep the information confidential.
M. Provisions Survive Termination. The provisions of this
Paragraph 37 shall survive the expiration or termination of this Lease.
N. Controlling Provisions. The provisions of this Paragraph 37
are intended to govern the rights and liabilities of the Landlord and Tenant
under this Lease respecting Hazardous Materials to the exclusion of any other
provisions in this Lease that might otherwise be deemed applicable. The
provisions of this Paragraph 37 shall be controlling with respect to any
provisions in this Lease that are inconsistent with this Paragraph 37.
38. Landlord's Default.
A. If Tenant believes Landlord has failed to perform or
provide any service or pay any sum which Tenant in good faith believes Landlord
is obligated to provide, perform or pay under this Lease, Tenant shall provide
Landlord with written notice thereof. If Landlord does not perform or provide
the required service or make such required payment within thirty (30) days after
receipt of Tenant's notice (or if such failure cannot be cured within such
thirty (30) day period, if Landlord does not promptly commence to provide or
cure the same and diligently pursue the same to completion), Tenant shall have
the right to provide, perform or pay the same. If Tenant, after such notice,
provides and performs such service or makes such payment and sends to Landlord a
written statement reflecting the reasonable costs for providing the same or the
amount paid and Landlord fails to pay the same within twenty (20) days after
receipt of such notice, Tenant shall have the right to seek and obtain damages
from Landlord.
B. In the event of any default by Landlord, Tenant's exclusive
remedies shall be an action for specific performance or an action for damages.
Tenant hereby waives the benefit of any laws granting it the right to terminate
this Lease or withhold rent on account of any Landlord default. Tenant waives
the provisions of Sections 1932(l), 1941 and 1942 of the California Civil Code
and any similar or successor law regarding Tenant's right to terminate this
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Lease or to make repairs and deduct the expenses of such repairs from the rent
due under this Lease.
39. Condition to Effectiveness. The effectiveness of this Lease is
conditioned upon Landlord obtaining architectural approval by April 1, 1997 from
the City of Santa Clara for the construction of the ninety eight thousand four
hundred thirty (98,430) square foot building described in the Lease Agreement
between Landlord and Tenant dated concurrently with this Lease. This condition
is for the benefit of Tenant and Tenant may waive this condition by written
notice to Landlord on or before April 1, 1997. If on or before April 1, 1997
this condition is neither fulfilled nor waived by Tenant, then this Lease shall
automatically terminate, Landlord shall return the Security Deposit to Tenant
and the parties shall have no further rights or obligations hereunder. If this
condition is fulfilled or waived by Tenant on or before April 1, 1997, then this
Lease shall continue in full force and effect. Landlord shall use good faith and
all reasonable efforts to obtain the architectural approval by April 1, 1997.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the
dates set forth below.
LANDLORD TENANT
South Bay/San Tomas Associates, Auspex Systems, Inc.,
a California general partnership a Delaware corporation
By: CIIF Associates II Limited
partnership, a Delaware limited By:
partnership, its general partner --------------------------------
Its:
By: AEW Advisors, Inc., -------------------------------
a Massachusetts corporation,
its managing general partner
By:
-------------------------
Its:
------------------------
38-b
<PAGE> 45
EXHIBIT "A"
Legal Description of Parcel
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EXHIBIT "B"
Site Plan
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EXHIBIT "C"
Improvement Agreement
THIS IMPROVEMENT AGREEMENT by and between SOUTH BAY/SAN TOMAS
ASSOCIATES ("Landlord") and AUSPEX SYSTEMS, INC. ("Tenant"), dated January ,
1997, is made part of that Lease (the "Lease"), between Landlord and Tenant,
dated concurrently herewith. Landlord and Tenant agree that the following terms
are part of the lease:
1. Definitions: Except as defined below, capitalized terms in this
Improvement Agreement shall have the meanings given those terms in the Lease.
(a) Architect shall collectively mean all architects,
structural engineers, mechanical engineers, and other design professionals
retained by Landlord and needed to design the Tenant Improvements.
(b) Applicable Laws and Restrictions shall mean all laws
(including without limitation the Americans With Disabilities Act), building
codes, ordinances, regulations, title covenants, conditions and restrictions.
(c) Approved Plans shall mean the Final Tenant Improvement
Plans, as the same may be modified by a Change Order issued in accordance with
this Improvement Agreement.
(d) Building shall mean each Building Shell and the Tenant
Improvements therein.
(e) Buildings shall mean all of the Building Shells and all of
the Tenant Improvements.
(f) Building Shell shall mean each (concrete or two story
tilt-up R&D building), having the general specifications described on attached
Exhibit 1, which shall be constructed by Landlord for Tenant generally in the
location and configuration shown on Exhibit B to the Lease.
(g) Construction Documents shall mean the Final Tenant
Improvement Plans, and any and all bid packages, contracts with Contractors and
agreement with the Architect.
(h) Contractor(s) shall mean South Bay Construction and
Development Company and all other contractors, design-build contractors,
subcontractors, and material supplies who provide labor and material for
construction of the Tenant Improvements. To the extent required by Applicable
Laws and Restrictions, each Contractor shall be duly licensed by the State of
California.
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(i) Construction Schedule shall mean the schedule for the
commencement, prosecution and Substantial Completion of the Tenant Improvements,
which shall be in substantially the form of attached Exhibit 2, and which shall
be approved by the parties pursuant to this Improvement Agreement and, when
agreed upon attached hereto in replacement of Exhibit 2 and incorporated herein
by this reference.
(j) Final Tenant Improvement Plans shall mean those plans,
specifications and working drawings for the Tenant Improvements, which shall be
prepared, approved and identified in Exhibit 3 when approved in writing by
Landlord and Tenant, and thereafter incorporated herein by this reference.
(k) Force Majeure shall mean any prevention, delay or stoppage
due to strikes, lock-outs, inclement weather, labor disputes, inability to
obtain labor, materials, fuels or reasonable substitutes therefor, governmental
restrictions, regulations, controls, action or inaction, civil commotion, fire
or other acts of God, and other causes beyond the reasonable control of the
party obligated to perform (except financial inability) shall excuse the
performance, for a period equal to the period of any said prevention, delay or
stoppage, or any obligation hereunder except the obligation of Tenant to pay any
sums due hereunder.
(l) Landlord's Representative shall mean Scott Trobbe, whose
telephone number is (408) 379-0400, whose facsimile number is (408) 379-3229,
and whose address for delivered notice is South Bay Development Company, Inc.,
511 Division Street, Campbell, California 95008, or such other person as
Landlord shall designate in writing to Tenant as its authorized representative
for the proposes of administering this Improvement Agreement. Landlord's
Representative may change its numbers and address by deliver of three (3)
business days notice to Tenant's Representative.
(m) Planning Schedule shall mean the schedule for the
preparation, approval and permitting of the Approved Plans for the Tenant
Improvements attached hereto as Exhibit 4, and incorporated herein by this
reference.
(n) Permits shall mean all of the permits, inspections,
approvals and consents of governmental authorities.
(o) Substantial Completion shall mean that (i) the Tenant
Improvements have been completed in accordance with the provisions of this
Improvement Agreement and the Final Tenant Improvement Plans therefor (except
for minor punchlist items which do not substantially interfere with Tenant's use
of the Premises), (ii) all utilities are connected and available for Tenant's
use, and (iii) all necessary governmental approvals for occupancy of the
Buildings have been obtained (including, if applicable, a certificate of
occupancy); provided, however that, to the extent that Substantial Completion of
the Buildings is delayed because of a Tenant Delay, the Substantial Completion
Date shall be deemed to be the date the Buildings would have otherwise been
Substantially Completed, absent the Tenant Delay.
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(p) Tenant Delay shall mean any delay in the Substantial
Completion of the Tenant Improvements as a consequence of (i) Tenant's failure
to promptly review and approve or properly disapprove plans for the Tenant
Improvements in accordance with this Improvement Agreement and within the time
permitted by the Planning Schedule; (ii) Tenant's request for special materials,
finishes, or installations which are not readily available, provided the length
of Tenant Delay due to such unavailability shall not exceed the amount of delay
approved by Tenant when such materials, components, finish, or improvements were
requested by Tenant; (iii) Change Orders requested by Tenant and approved by
Landlord, provided that the amount of Tenant Delay as a consequence of any
Change Order may not exceed the amount of delay specified in the Change Order;
(iv) Tenant's failure to complete any of its own improvement work identified in
the Construction Schedule as being necessary for the Substantial Completion of
the Tenant Improvements by the date specified in the Construction Schedule for
completion of such work; (v) interference with Landlord's work caused by Tenant
or Tenant's contractors or subcontractors.
(q) Tenant Improvements shall mean those improvements that
Landlord is obligated to construct in the Premises pursuant to Final Tenant
Improvement Plans.
(r) TI Allowance shall mean an amount equal to Four Million
Two Hundred Eighty Four Thousand Five Hundred Fifty Dollars ($4,284,550), which
allowance is already reflected in the Monthly Installment amount set forth in
Subparagraph 4.B. of the Lease.
(s) TI Costs shall mean all sums (i) paid to Contractors for
labor and materials furnished in connection with construction of the Tenant
Improvements; (ii) all costs, expenses, payments, fees, and charges whatsoever
paid or incurred by Landlord to or at the direction of any city, county, or
other governmental authority or agency which are required to be paid by Landlord
in order to obtain all necessary governmental permits, licenses, inspections and
approvals relating to the construction of the Tenant Improvements and the use
and occupancy of the Premises, including without limitation all in lieu fees and
utility fees; (iii) engineering and architectural fees for services required in
connection with the design and construction of the Tenant Improvements; and (iv)
premiums, if any, for course of construction insurance and for payment and
completion bonds relating only to construction of the Tenant Improvements. In no
event shall TI Costs include any of the following, all of which shall be the
sole obligation of Landlord: (a) any cost attributable to the Building Shell,
including without limitation the cost to design, permit, or construct the
Building Shell improvements described on Exhibit 1 to this Exhibit "C", (b)
charges and expenses for changes to the Construction Documents which have not
been approved in writing by Tenant, except for those changes to the Construction
Documents required by governmental authority, (c) wages, labor and overhead for
overtime and premium time, unless approved in writing by Tenant; (d) additional
costs and expenses incurred by Landlord on account of any Contractors' or
Architects' default or construction defects in the Improvements; (e) interest
and fees for construction financing; (f) labor and overhead costs for Landlord's
employees and office; and (g) bond premiums.
(t) TI Cost Estimate shall mean the total estimated cost of
constructing the
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<PAGE> 50
Tenant Improvements prepared and approved by Landlord and Tenant in accordance
with this Improvement Agreement, as modified by change orders issued in
accordance with this Improvement Agreement.
2. Designation of Representative. Landlord and Tenant hereby
respectively appoint Landlord's Representative and Tenant's Representative as
its sole representative for the purposes of this Improvement Agreement. Until
replaced by written notice, Landlord's Representative and Tenant's
Representative shall have the full authority and responsibility to act on behalf
of Landlord and Tenant, respectively, as required in this Improvement Agreement.
3. Preparation and Approval of Plans.
(a) Retention of Architect(s). Tenant shall retain the
Architect(s) to prepare the plans and specifications for the Tenant
Improvements, subject to Landlord's reasonable approval.
(b) Tenant Improvement Plans.
(i) To facilitate timely commencement and Substantial
Completion of the Tenant Improvements, within the time specified in the Planning
Schedule, Tenant shall prepare and submit to Landlord for Landlord's approval
the Tenant's design requirements for the Tenant Improvements. At such time as
Landlord has approved the Tenant's design requirements and within the time
provided in the Planning Schedule, Landlord shall cause the Architect to proceed
with the preparation of preliminary plans and specifications, and a preliminary
cost estimate for the Tenant Improvements and shall notify Tenant of any
revisions that may need to be made to the previously approved construction
schedule. Tenant shall review and approve or disapprove of such items and any
changes in the Construction Schedule within the time permitted by the Planning
Schedule. If Tenant does not approve any preliminary plan or specification, the
preliminary cost estimate, or a construction schedule change, Tenant and
Landlord shall work with the Architect and negotiate in good faith to reach
agreement on all such items within the time permitted by the Planning Schedule.
(ii) When the preliminary space plans, elevations,
preliminary cost estimate and any Construction Schedule changes have been
approved by Tenant, Landlord shall cause the Architect to prepare and deliver to
Tenant by the date specified in the Planning Schedule (i) proposed final plans,
specifications and working drawings for the Tenant Improvements, (ii) a proposed
final TI Cost Estimate, and (iii) a proposed final Construction Schedule for the
Improvements substantially in the form of attached Exhibit 2, all of which shall
be consistent with, and logical evolutions of the preliminary plans and
elevations approved by Tenant pursuant to the foregoing, the terms of this
Improvement Agreement and the Construction Schedule and the changes thereto
previously approved by the parties. Tenant shall review and approve the proposed
final plans, specifications, and working drawings for the Tenant Improvements,
the proposed TI Cost Estimate, or the proposed final Construction Schedule
within the time permitted by the Planning Schedule. If Tenant reasonably
disapproves of the
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<PAGE> 51
plans, specifications or working drawings for the Tenant Improvements (which
disapproval can only be based upon whether such plans, specification or working
drawings are consistent with the preliminary plans), the proposed TI Cost
Estimate, and/or the proposed final Construction Schedule, then Landlord and
Tenant shall negotiate in good faith, using all reasonable efforts to reach
agreement on such items within the time specified in the Planning Schedule;
provided, however, that Landlord shall not unreasonably withhold its approval of
such change requested by Tenant to the Tenant Improvements which does not
materially delay the Scheduled Completion Date for the Tenant Improvements nor
materially increase the cost that will be incurred by Landlord in constructing
the Tenant Improvements. If Tenant believes that the cost estimate is incorrect,
it may require that all or any portion of the work be submitted for competitive
bids, in which case the amount for the rebid work included in the TI Cost
Estimate shall not exceed the lowest responsible bid(s) from responsible
Contractor(s) and Supplier(s) for such work. The plans, specifications, and
working drawings for the Tenant Improvements, the final TI Cost Estimate, and
the Construction Schedule approved by Tenant and Landlord pursuant to this
Section, shall be the "Final Tenant Improvement Plans," "TI Cost Estimate" and
"Construction Schedule" for the purposes of this Improvement Agreement.
(c) Disapprovals and Failures to Respond. Any disapproval by
Tenant of a preliminary plan, space plan, elevation final plan, specification,
cost estimate, or construction schedule item submitted for its approval shall be
communicated only by a writing, which is delivered to Landlord within the time
permitted by the Planning Schedule and which specifies the disapproved item(s),
the reason(s) for the disapproval, and the changes required to make the item
acceptable to Tenant. If Tenant's disapproval of any item requiring its approval
under this Construction Agreement is not delivered in accordance with the
procedures and time limits specified in this Improvement Agreement, then Tenant
shall be deemed to have given its approval to such item.
(d) Changes to Plans, Cost Estimate and Construction Schedule.
When the Final Tenant Improvement Plans, the TI Cost Estimate and Construction
Schedule have been approved by Landlord and Tenant as provided above, the
description of said plans and the Construction Schedule shall be initialed by
the parties and attached to this Agreement as Exhibits 2 and 3, respectively.
Once the Final Tenant Improvement Plans, the TI Cost Estimate, and the
Construction Schedule (including, without limitation, the Scheduled Completion
Date specified therein) are approved by Landlord and Tenant as provided above,
neither party shall thereafter have the right to order extra work or change
orders, nor will the Construction Schedule or the TI Cost Estimate be modified,
except by a written "Change Order" approved by Landlord and Tenant, which
approval shall not be unreasonably withheld, except as expressly stated to the
contrary below. The Change Order shall clearly describe (i) the change, (ii) the
party required to perform the change, (iii) any modification of the Approved
Plans, (iv) the amount of delay or the time saved resulting therefrom and any
revision of the Construction Schedule and Scheduled Completion Date occasioned
by the change, (v) any added or reduced TI Cost resulting from the Change, (vi)
any other cost, and the manner of payment of such costs which Tenant may be
required to pay with respect to a Change requested by Tenant, or Landlord may be
required to reimburse to Tenant as a consequence of a change requested by
Landlord.
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<PAGE> 52
(e) Application for Permits. As soon as the Final Tenant
Improvement Plans are approved by Landlord and Tenant, Landlord shall submit
said plans to all appropriate governmental agencies and private parties from
whom Permits are required for the construction and use of the Tenant
Improvements. Landlord shall notify Tenant of any changes required by any
governmental agencies, and Tenant shall have seven (7) days thereafter to
indicate its approval thereof. All such changes required by governmental
agencies shall be deemed acceptable to Tenant unless Tenant's use of the
Premises is materially impaired thereby. The final plans, specifications and
working drawings as approved, and all change orders specifically permitted
pursuant to Subparagraph (c) below, shall be referred to herein as the "Approved
Plans."
4. Construction.
(a) General Contractor. South Bay Development and Construction
Company shall serve as the general Contractor. Contractor's fee as general
Contractor for the Tenant Improvements shall be calculated as follows and shall
be included in the TI Cost Estimate: five percent (5%) of the TI Costs not
including such Contractor's fee.
(b) Subcontracts and Materials. Prior to issuance of any
subcontract relating to Tenant Improvements, Landlord shall submit for Tenant's
approval (which approval shall not be unreasonably withheld) a list of the
Contractors and Suppliers for the Tenant Improvement work. At Tenant's request,
all labor and materials for the Tenant Improvements shall be competitively bid
by at least two (2) Contractors or Suppliers. Landlord may also bid on such
work. If Tenant so desires, Tenant may also select a Contractor or Supplier,
reasonably acceptable to Landlord, to bid the work. All bids shall be opened
simultaneously. Landlord shall have the right to select the Contractor or
Supplier to perform the work. Notwithstanding Tenant's right to approve the
Contractors and Suppliers, the Contractors and Suppliers are a contractor only
for Landlord, and Tenant shall have no liability to any Contractor or Supplier
under any Construction Document or otherwise with respect to the Tenant
Improvements; provided, Tenant shall be required to reimburse Landlord for its
portion of the TI Costs pursuant to this Improvement Agreement.
(c) Commencement and Completion of Improvements. As soon as
(i) the Approved Plans have been developed as provided above, and (ii) all
necessary Permits for commencement of construction of the Tenant Improvements
have been obtained, Landlord shall cause its Contractor(s) to commence and to
thereafter diligently prosecute to completion the construction of the Tenant
Improvements in accordance with the Approved Plans by the Scheduled Completion
Dates therefor contained in the Construction Schedule; provided, however,
Landlord shall not be liable for delay in the Substantial Completion Date for
any Building to the extent reasonably attributable to a Force Majeure Delay,
except as specifically provided in this Lease.
(d) Standard of Construction. Landlord shall cause all work to
be constructed
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<PAGE> 53
in a good and workmanlike manner, free from material design and workmanship
defects in accordance with the Approved Plans, the other Construction Documents,
the Permits, and Applicable Law and Restrictions. Notwithstanding anything to
the contrary in the Lease or this Improvement Agreement, Tenant's acceptance of
the Landlord's Work shall not waive the foregoing warranty and Landlord shall
promptly remedy all violations of the warranty at its sole cost and expense
which occur during the first twelve (12) months of the Lease Term. Such warranty
shall expire and be of no further force or effect on the date which is twelve
(12) months after the Commencement Date. Tenant shall promptly notify Landlord
in writing during the warranty period of any defect in construction or in the
operation of equipment discovered during such period, and promptly thereafter
Landlord shall commence the cure of such defect and complete such cure with
diligence at Landlord's sole cost. After said twelve (12) month period, Tenant
shall conclusively be deemed to have approved the construction of the Tenant
Improvements and accepted them "as is", subject only to defects claimed as
provided above. With respect to defects discovered after the expiration of said
one (1) year period, the parties hereto acknowledge that it is their intention
that Tenant have the benefit of any construction or equipment warranties
existing in favor of Landlord that would assist Tenant in correcting such
construction defects and in discharging its obligations regarding the repair and
maintenance of the Premises. Upon request by Tenant following the expiration of
such twelve (12) month period, Landlord shall inform Tenant of all written
construction and equipment warranties existing in favor of Landlord which affect
the Tenant Improvements. Landlord shall assign such warranties to Tenant upon
request in order that Tenant may enforce the same.
(e) Tenant Fixturing. Landlord shall use all reasonable
efforts to complete construction of Tenant Improvements of each Building to a
point permitting Tenant's entry for installation of its fixtures and equipment
on or before the date specified in the Construction Schedule. When the
construction of each Building has proceeded to the point where Tenant's
installation of its fixtures and equipment in the Building can be commenced in
accordance with good construction practice, the Landlord shall notify Tenant to
that effect and shall permit Tenant and its authorized representatives and
contractors to have access to the Building for a period of not less than thirty
(30) days for the purpose of installing Tenant's trade fixtures, equipment and
other Tenant's Property in the Building. Landlord and Tenant shall cooperate in
good faith to schedule and coordinate Tenant's fixturing with the Landlord's
construction in a manner which will assure Substantial Completion of the
Improvements by the Scheduled Completion Dates, will reduce each party's cost,
and ensure labor harmony. While performing fixturing, Tenant shall comply, and
shall cause its employees, contractors and suppliers to comply, with the
reasonable work rules observed by Landlord's Contractors and Suppliers.
(f) Inspection & Punchlist. Tenant's Representative and
Tenant's architect, designers and consultants shall have the right to enter on
the Premises at all reasonable times and upon notice to Landlord's
Representative for the purpose of inspecting the progress of the work. Tenant's
Representative, Landlord's Representative and the Architect(s), and such
advisers as they shall desire, shall inspect each Building upon its Substantial
Completion using their best efforts to discover all uncompleted or defective
construction. After such inspection has been completed, a list of "punchlist"
items shall be prepared by Landlord which the parties agree are to
47
<PAGE> 54
be corrected by Landlord. Landlord shall use its best efforts to complete and/or
repair such "punchlist" items within thirty (30) days. Tenant's taking
possession of the Premises shall be deemed to be an acceptance by Tenant of the
Premises as complete and in accordance with the terms of this Lease, subject to
completion of the punchlist items within said period.
5. Payment of Construction Costs. Landlord and Tenant shall each bear
their own cost for performance of their respective obligations under this
Improvement Agreement, except that Tenant shall reimburse Landlord for the
amount, if any, by which the TI Cost exceeds the TI Allowance in the following
manner: Landlord shall submit receipted bills and/or lien releases evidencing
Landlord's payment of TI Costs in such amounts and at such times as bills are
submitted to Landlord for the TI Costs by Contractors and Suppliers for Tenant
Improvement work in place prior to the date of the bill (a "TI Progress Cost").
On or before the twenty-fifth (25th) day following receipt of the request,
Tenant shall pay to Landlord a sum equal to (i) the TI Progress Cost times a
fraction, the numerator of which shall be equal to the TI Cost Estimate minus
the TI Allowance and the denominator of which shall be equal to the TI Cost
Estimate, minus (ii) the sums previously reimbursed by Tenant to Landlord;
provided, however that in no event shall Tenant be required to reimburse
Landlord (1) for more than 90% of the difference between the TI Cost Estimate
and the TI Allowance prior to the Substantial Completion Date, (2) so long as
Landlord has failed to use the reimbursements previously paid by Tenant to
discharge the obligation of the Landlord to the Contractors and Suppliers, or
(3) so long as Landlord is in default of its obligations under this Improvement
Agreement in any material respect.
6. Delay In Completion Caused By Tenant. The parties hereto acknowledge
that the date on which Tenant's obligation to pay the Monthly Installment would
otherwise commence could be delayed because of Tenant Delays. It is the intent
of the parties hereto that Tenant's obligation to pay the Monthly Installments
of rent not be delayed by any of such causes or by any other act of Tenant, and
in the event it is so delayed, then Tenant's obligation to pay the Monthly
Installments shall commence as of the date it would otherwise have commenced
absent said Tenant Delay. Tenant Delays in excess of thirty (30) days for any of
the above-mentioned reasons may affect Landlord's financing of construction of
the Premises, and Tenant agrees to pay any reasonable additional financing
costs, including loan fees, incurred by Landlord as a result thereof.
7. Notices. The notices to be delivered to the parties pursuant to this
Improvement Agreement shall be given by personal delivery or by facsimile (with
receipt confirmed) to the Tenant's Representative and the Landlord's
Representative at the following address and facsimile number.
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<PAGE> 55
Tenant's Representative: [FOLLOWING EXECUTION OF THIS LEASE, TENANT
SHALL PROMPTLY PROVIDE LANDLORD WITH THE NAME, ADDRESS AND FACSIMILE
NUMBER FOR TENANT'S REPRESENTATIVE.]
Address:
---------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Facsimile:
-------------------------------------------------------------
Landlord's Representative:
Address: South Bay Development Company, Inc.
511 Division Street
Campbell, California 95008
Attn: Mr. Scott Trobbe
Facsimile: (408) 379-3229
8. Miscellaneous. Except as otherwise expressly provided in this
Improvement Agreement, whenever either party's consent, approval, designation,
or advice is required by the other party, such consent, approval, designation,
or advice shall not be unreasonably withheld or delayed. This Improvement
Agreement and the Lease contain the entire agreement between the parties with
respect to the construction of the Tenant Improvements and, in the event of any
conflict between the terms of this Improvement Agreement and the Lease, this
Improvement Agreement shall prevail. This Improvement Agreement may be amended
and the provisions hereof may be waived only by a writing signed by Landlord and
Tenant and the provisions hereof shall be binding upon the successors and
assigns of the parties to the Lease. If any legal action, arbitration or other
proceeding is commenced to interpret or enforce this Improvement Agreement, the
prevailing party in such action, arbitration or proceeding shall be entitled to
recover its reasonable attorneys' fees and costs.
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<PAGE> 56
IN WITNESS WHEREOF, the parties have executed this Agreement on the
dates set forth below.
LANDLORD TENANT
South Bay/San Tomas Associates, Auspex Systems, Inc.,
a California general partnership a Delaware corporation
By: CIIF Associates II Limited
partnership, a Delaware limited By:
partnership, its general partner ------------------------------
Its:
By: AEW Advisors, Inc., ------------------------------
a Massachusetts corporation,
its managing general partner
By:
---------------------------
Its:
--------------------------
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<PAGE> 57
EXHIBIT 1 TO EXHIBIT C
DEFINITION OF BUILDING SHELLS
The components and systems below shall be included in the design of the new
buildings. All code requirements should be considered minimum beginning
requirements and not the highest level of design. Landlord's cost shall include
all "hard and soft" costs related to the construction of the site and shell,
including architectural and engineering services, permits, utility fees for
connections and meters, etc.
1. BUILDINGS STRUCTURE
(a) All foundations to include footings, piers, caissons, pilings,
grade beams, foundation walls or other building foundation
components required to support the entire building structure.
(b) Columns shall be steel box or pipe columns.
(c) All columns, beams, joists, purlins, headers, or other framing
members to support the roof and roofing membrane.
(d) Five inch (5") thick concrete slab on grade with welded wire
mesh and any other reinforcing or structural connections that
may be necessary or required.
(e) Exterior walls that enclose the perimeter of the building with
steel reinforcing and structural connections that may be
necessary or required.
(f) All exterior glass and glazing with anodized aluminum frames.
Glass to be tinted as appropriate to the aesthetic design of
the building. All exterior doors, door closer and locking
devices necessary for proper functioning.
(g) Wood panel roof system to support roofing membrane.
(h) Three (3) ply built up roofing with cap sheet and all
flashings by Owens-Corning, John Manville, or equal.
(i) Exterior painting of all concrete with Tex-Coat or Kel-Tex
textural paint. All caulking of exterior concrete joints in
preparation for painting.
(j) The multi-story buildings are to be designed for a minimum of
one
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<PAGE> 58
elevator per building, the elevator shafts to be a part of
Landlord's shell costs.
(k) The foundation and structural framing should be designed to
support a minimum live load of 100 psf in all areas.
(l) The floor-to-floor height of the buildings shall allow a
minimum of 10'- 0" interior drop ceiling height.
2. PLUMBING
(a) Underground sanitary sewer laterals connected to the city
sewer main in the street and piped into each building and
under the concrete slab on grade for the length of the
buildings. Main waste lines under the slabs will be in as
close proximity as possible to the building rest room
locations.
(b) Domestic water mains connected to the city water main in the
street and stubbed to the buildings. Water mains to each
building shall not be less than 2.5" in size.
(c) Roof drain leaders piped and connected to the site storm
drainage systems.
(d) Gas lines connected to the city public utility mains and gas
meters adjacent to, and in close proximity to each building.
Meters supplied by utility company.
3. ELECTRICAL
(a) All primary electrical service to each building that is
complete including underground conduit and wire feeders from
transformer pads into the building's main switchgear
electrical room. The electrical characteristics of the
secondary side of transformers shall be 277/480 Volt. 3 Phase
and the rated capacity of the transformers shall be 2,000 amps
for each building. All electrical panels and breakers will
have isolated grounds and surge protectors.
(b) Underground pull section, meter, and panel(s), for site
lighting and landscaping.
(c) Underground conduit from the street to the building for
telephone trunk line service by Pacific Telephone. Conduit to
each building shall not be less than 4".
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<PAGE> 59
(d) An electrically operated landscape irrigation controller that
is a complete and functioning system.
(e) Underground conduit from the building to the main fire
protection system, shut off valve (PIV) for installation of
security alarm wiring.
(f) All parking lot and landscaping lighting to include fixtures,
underground conduit, wire, distribution panel and controller.
All exterior lighting shall be a complete and functioning
system.
4. FIRE PROTECTION (SPRINKLERS)
(a) A complete and fully functional overhead system distributed
throughout the building. The systems shall be classified
ordinary hazard group II and be distributed throughout the
building.
(b) System shall include all sprinkler heads that may be required
by building codes above the ceiling, when ceilings are
installed.
(c) Site sprinkler main to be sized adequately to support Tenant's
uses within each building.
5. SITEWORK
(a) All work outside the building perimeter walls shall be
considered site work for the building shell and shall include
grading, asphalt concrete, paving, landscaping (hard and
soft), landscape irrigation, storm drainage, utility service
laterals, including conduit for voice and data connecting the
buildings, curbs, gutters, sidewalks, specialty paving (if
required), retaining walls, fencing and gates, trash
enclosures, planters, sign monuments, parking lot and
landscape lighting and other exterior lighting per code.
(b) Paving sections for automobile and truck access shall be
according to the Geological Soils Report.
(c) All parking lot striping to include handicap signage and
spaces (parking ratio: no less than 1 space per 295 gross
square feet).
(d) Underground site storm drainage system shall be connected to
the city storm system main.
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<PAGE> 60
EXHIBIT 2 TO EXHIBIT C
CONSTRUCTION SCHEDULE
[TO BE DETERMINED]
54
<PAGE> 61
EXHIBIT 3 TO EXHIBIT C
FINAL TENANT IMPROVEMENT PLANS
[TO BE DETERMINED]
55
<PAGE> 62
EXHIBIT 4 TO EXHIBIT C
PLANNING SCHEDULE
[TO BE DETERMINED]
<TABLE>
<CAPTION>
Required Action Last Date for Completion
- ---------------------------------------------------------------------------------------------------------
Tenant Improvements Plans and Specifications
- ---------------------------------------------------------------------------------------------------------
<S> <C>
1. Tenant delivers its design , 199
----------------------------
requirements to .
----------------------------
2. Landlord causes the Architect to days after Task 1 is satisfied
--------------
deliver preliminary plans, and a preliminary cost
estimate for the Tenant Improvements and a list of any
expected construction schedule changes to Tenant for
its review.
3. Tenant approves or disapproves the days after Task 2 is completed
--------------
items delivered pursuant to Task 8.
4. Landlord and Tenant agree upon , 199
----------------------------
preliminary plans, a cost estimate and any construction
schedule changes for Tenant Improvements.
5. Landlord delivers proposed plans, days after Task 4 is completed
--------------
specifications and working drawings, a proposed final TI Cost Estimate for the
Tenant Improvements, and a final Construction Schedule to Tenant for its review.
6. Tenant approves or disapproves the days after Task 5 is completed
--------------
items delivered pursuant to Task 1.
7. Landlord and Tenant agree upon , 199
----------------------------
Final Tenant Improvement Plans, a final TI Cost Estimate, and a final
Construction Schedule.
Permitting & Governmental Approvals
- ---------------------------------------------------------------------------------------------------------
8. Landlord submits the Final Tenant days after Task 7 is completed
--------------
Improvement Plans to all applicable governmental
authorities for Permits.
9. All governmental permits and , 199
---------------------------
approvals necessary for the construction of the
Improvements for the Permitted Uses are obtained.
</TABLE>
56
<PAGE> 63
EXHIBIT "D"
Commencement Date Memorandum
With respect to that certain Lease Agreement ("Lease"), dated January
____, 1997, by and between South Bay/San Tomas Associates, a California general
partnership ("LANDLORD"), and Auspex Systems, Inc., a Delaware corporation
("TENANT"), whereby Landlord leased to Tenant and Tenant leased from Landlord
the Premises (as defined in the Lease). All terms not defined herein shall have
the same meaning as set forth for such terms in the Lease. Tenant hereby
acknowledges and certifies to Landlord as follows:
(1) The Lease commenced on ___________________, 19___ ("Commencement
Date");
(2) The Initial Term of the Lease shall expire on ____________________,
______ (the "Expiration Date");
(3) The initial Monthly Installment of Rent for the Premises is
____________ _______________________________ Dollars ($_________________); and
(4) Tenant has accepted [and is currently in possession of] the
Premises.
IN WITNESS WHEREOF, this Commencement Date Memorandum is executed this
______ day of __________________, 199____.
"Tenant"
Auspex Systems, Inc., a
Delaware corporation
By:
-------------------------------
Its:
------------------------------
57
<PAGE> 64
EXHIBIT "E"
List of Hazardous Materials
Tenant Will Use on The Premises
58
<PAGE> 65
EXHIBIT "F"
Description of Existing Environmental Reports
Environmental Reports & Correspondence
The Former Unisys Site
1. Environmental Baseline Report - Revised October 1989
A. Including the following tables, figures and appendices (359 pages)
Tables
1. Tanks and Chemical Storage
2. Previous Tank Storage Summary
3. Groundwater Monitoring Data 10/88
Figures
1. Map
2. Site Map
3. Tank Locations
4. Previous Tank Storage Sites
5. Monitoring Well Locations
Appendices
PCB Information
Asbestos Information
Tank Pull 1/84
Well Destruction Investigation
Hydrogeological Investigation 10/87
Unisys for SFRWQCB; Environmental Baseline
Investigation (Appx 60 pages)
Hydrogeological Investigation 11/88
Soil Gas Survey 5/89
Semi-Annual Sampling 5/89
Clarifier Removal 10/89
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<PAGE> 66
2. Tank Removal - Completed 2/6/90 - Santa Clara Fire Department Permit
3. Internal Memo 3/2/90 Regional Water Quality Control Board/2 pages
4. Letter: 3/5/90 to Unisys from Pacific Environmental Group, Inc./4 pages
5. Table 1: Summary of Current Groundwater Laboratory Results/4 pages.
6. Letter: 6/11/90 to E2C, Inc. from Chips Environmental Consultants/16
pages
7. Letter: 6/28/90 to South Bay Construction and Development Company from
E2C, Inc./3 pages
8. Report: 6/29/90 Level II Environmental Site Assessment prepared by E2C,
Inc. previously forwarded to ASK 3/17/92
9. Television inspection location sheet dated 7/16/90-VCR tape available/2
pages
10. Letter: 7/19/90 to City of Santa Clara from E2C, Inc./1 page
11. Progress report sanitary sewer line video and groundwater analysis
dated 8/7/90 prepared by E2C, Inc./44 pages
12. Letter: 8/31/90 to South Bay Construction and Development Company from
E2C, Inc./3 pages
13. Television inspection location sheet dated 8/31/90-VCR tape available/2
pages
14. Letter: 10/19/90 to Prevention Bureau, Santa clara Fire Department from
Pacific Environmental Group, Inc./22 pages
15. Letter; 10/23/90 to South Bay Construction and Development Company from
Unisys/9 pages
16. Letter: 11/1/90 to South Bay Construction and Development Company from
Unisys/9 pages
17. Letter: 11/1/90 to Prevention Bureau, Santa Clara Fire Department from
Pacific Environmental Group, Inc./8 pages
18. Letter: 11/21/90 to South Bay Construction and Development Company from
E2C, Inc./6 pages
19. Letter: 1/3/91 to South Bay/San Thomas Associates from Unisys/2 pages
20. Memo: 1/29 91 to Unisys Corporation from Pacific Environmental group,
Inc./41 pages
21. Fax: 2/11/91 to Unisys from E2C, Inc./7 pages
22. Final submittals-Unisys Corporation-Asbestos/25 pages
23. Letter: 3/15/91 to Pacific Environmental Group from Clayton
Environmental Consultants/26 pages
24. Letter: 3/19/91 to E2C, Inc., from Pacific Environmental Group, Inc./16
pages
25. Letter: 3/21/91 to South Bay/San Tomas Associates from Unisys/16 pages
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<PAGE> 67
26. Letter: 3/21/91 to Unisys from Pacific Environmental Group, Inc./12
pages
27. Letter: 3/22/91 to South Bay Development Company from Unisys/2 pages
28. Fax: 4/4/91 to Pacific Environmental Group/1 page
29. Fax: 4/4/91 to Pacific Environmental Group/1 page
30. Fax: 4/8/91 from Pacific Environmental Group-Organic Analysis Data
Sheets/8 pages
31. Fax: 4/10/91 from Pacific Environmental Group-Permits Santa Clara Fire
Department/5 pages
32. Letter: 4/12/91 to San Francisco Regional Water Quality Control Board
from Unisys/81 pages
33. Letter: 4/23/91 to South Bay Development Company from Unisys/1 page
34. Letter: 5/21/91 to South Bay Development Company from Unisys/7 pages
35. Uniform Hazardous Waste Manifests 5/22/91/44 pages
36. Letter: 6/5/91 to Unisys from California Regional Water Quality Control
Board/2 pages
37. Report of Abatement Observation and Air Monitoring June 6, 1991
prepared by Law Associates/66 pages
38. Letter. 6/20/91 to Unisys from Pacific Environmental Group, Inc./18
pages
39. Soil & Groundwater Assessment dated July 11, 1991, prepared by E2C,
Inc.
40. Fax: 8/28/91 to SBC&D Co., from E2C, Inc./7 pages
41. Letter: 1/14/92 to California Regional Water Quality Control Board from
Unisys/8 pages
42. Letter: 1/14/92 to Unisys from Pacific Environmental Group, Inc./4
pages
43. Report: 1/20/92 Second and Third Quarter Split Sampling prepared by
E2C, Inc./121 pages
44. Letter: 2/3/92 from Unisys from California Regional Water Quality
Control Board/2 pages
45. Letter: 3/24/92 to South Bay Construction and Development from E2C,
Inc./8 pages
46. Letter: 3/25/92 to Regional Water Quality Control Board from Unisys/12
pages
47. Report: 4/2/92 Installation of B-Zone Well prepared by E2C, Inc./53
pages
48. Report: 8/25/92 Phase I Environmental Assessments Building 14 prepared
for the ASK Companies by Environ Corporation
49. Letter: 11/10/92 to South Bay Development Company from Unisys/9 pages;
Justification for Removal
50. Letter: 12/11/92 to South Bay Construction and Development company from
E2C, Inc./3 pages
61
<PAGE> 68
51. Letter 12/11/92 to South Bay Construction and Development Company from
E2C, Inc./4 pages
52. Letter: 12/11/92 to Regional Water Quality Control Board from Unisys/8
pages; Table-Unisys Monitoring Well Removal Notification
53. Letter: 12/14/92 to Regional Water Quality Control Board from E2C,
Inc./4 pages
54. Letter: 12/21/92 to E2C, Inc. from California Regional Water Quality
Control Board/1 page
55. Letter: 12/28/92 to The ASK Companies from South Bay Construction and
Development Company/1 page
56. Letter: 1/22/93 to Regional Water Quality Control Board from Unisys/1
page
57. Fax: 3/29/93 to South Bay Construction and Development Company from
E2C, Inc./2 pages
58. Letter: 4/1/93 to South Bay/San Tomas from E2C, Inc./1 page
59. Letter: 4/8/93 to South Bay Construction and Development Company from
E2C, Inc./8 pages; Well Destruction Report
60. Letter: 6/15/93 to Regional Water Quality Control Board from Unisys/15
pages; Well Abandonment Report
61. Site Investigation Summary by Unisys Corporate Environmental Affairs
dated March 6, 1995 containing Report, Figures, Tables and Appendices A
through D
62. Letter: 6/22/95 to Regional Water Quality Control Board from Unisys/21
pages
63. Letter: 9/11/95 to Regional Water Quality Control Board from Unisys/8
pages
64. Letter: 12/19/95 to South Bay Construction and Development Company from
Unisys/14 pages
65. Letter: 1/26/96 to California Regional Water Quality Control Board from
Unisys/21 pages
66. Fax: 4/10/96 to Larry Patterson from Asbestos Control Center/13 pages
67. Report: 7/19/96 System Installation and Additional Investigation
prepared by Unisys Corporate Environmental Affairs
62
<PAGE> 69
EXHIBIT "G"
Preliminary Title Report
63
<PAGE> 70
EXHIBIT "H"
CC&R's and Excluded Obligations
Under CC&R's Described in the Title Report
The documents referred to in the following specially enumerated
exceptions in the Title Report attached as Exhibit "G" to this Lease constitute
the "CC&R's" referred to in Paragraph 34 of the Lease. Pursuant to Paragraph 34
of the Lease, except as otherwise stated below as being obligations of Landlord,
Tenant shall abide by and comply during the Lease Term with the obligations
stated below with respect to the documents listed below to the extent the
obligations arise from the ownership or occupancy of the Premises (and to the
extent they arise from Landlord's ownership of the Premises together with
Landlord's ownership of other property, then to the extent such obligations are
reasonably allocable to the Premises).
Exception No. 4 pertains to an Agreement Regarding Separation of
Certain Utilities between the City of Santa Clara and Unisys Corporation. Tenant
shall not be responsible for any obligations thereunder, with any obligations
affecting the Premises to be borne by Landlord.
Exception No. 5 pertains to a Grant Deed with Grant and Reservation of
Easements from Unisys Corporation to Landlord. Tenant shall be responsible for
the obligations embodied therein as relate to the use by Tenant of the easements
which are reflected therein as appurtenances to the Premises.
Exception No. 7 pertains to a Declaration of Covenants, Conditions,
Restrictions and Easements between Landlord and Unisys Corporation. Tenant shall
be responsible for the obligations thereunder pertaining to maintaining ingress
and egress easement areas located within the boundaries of the Premises in the
manner required by that Declaration and for the obligations not to unreasonably
interfere with the surface water drainage easement in favor of Unisys over the
Premises.
Exception No. 5 pertains to a Grant Deed with Reservation of Easement
from Unisys Corporation to Landlord, which grants Unisys Corporation certain
rights of access over the Premises associated with the operation of groundwater
monitoring wells on the Property. Paragraph 2(b) of this document indicates that
the rights and obligations of the parties thereunder are set forth in and are
subject to certain terms and conditions in the Agreement of Purchase and Sale
and Escrow Instructions between Landlord and Unisys Corporation. Tenant's only
obligation with regard to the easements reserved in this Grant Deed is not to
unreasonably interfere with the access of Unisys to any monitoring wells that
may be hereafter placed upon the Property. Landlord shall be responsible under
this Lease to ensure that if any monitoring wells are to be installed on the
Premises by Unisys, that they shall be installed in a manner which will not
unreasonably interfere with Tenant's use of the Premises and that Unisys
exercises its rights under this Grant Deed in manner not to unreasonably
interfere with Tenant's use of the Premises.
Exception No. 9 pertains to a Declaration of Covenants, Conditions,
Restrictions and Easements executed by Landlord. Tenant shall have the
obligations for maintenance of such easements and utilities as are located
within the boundaries of the Premises as referred to in this Declaration, and
the obligation to contribute the share of expenses (as provided therein) which
is allocable to the Premises associated with the costs of maintenance of the
easement areas on other parcels for the benefit of the Premises. As relates to
easements over, under or across the Premises for the benefit of other parcels,
Tenant shall have the right to obtain reimbursement from the owners of other
parcels for the cost of maintenance of the easements in accordance with the
terms of this Declaration, including recovery from Landlord to the extent it is
at such time the owner of any other parcel which is obligated to share in such
costs under this Declaration. Landlord shall cooperate with Tenant in any
collection efforts from other owners.
64
<PAGE> 1
LEASE AGREEMENT
BY AND BETWEEN
SOUTH BAY/SAN TOMAS ASSOCIATES
AND
AUSPEX SYSTEMS, INC.
DATED AS OF JANUARY , 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. Parties................................................................. 1
2. Demise of Premises...................................................... 1
3. Lease Term.............................................................. 1
A. Lease Term..................................................... 1
B. Commencement Date.............................................. 1
C. Commencement Date Memorandum................................... 2
D. Delay in Completion of Building................................ 2
E. Options to Extend.............................................. 2
F. Early Entry.................................................... 3
4. Rent.................................................................... 3
A. Time of Payment................................................ 3
B. Monthly Installment............................................ 4
C. Tenant Improvement Allowance................................... 6
D. Late Charge.................................................... 6
E. Additional Rent................................................ 7
F. Place of Payment............................................... 7
G. Advance Payment................................................ 7
5. Security Deposit........................................................ 7
6. Use of Premises......................................................... 8
A. Restrictions on Use............................................ 8
B. Initial Occupancy.............................................. 8
7. Taxes and Assessments................................................... 8
A. Tenant's Property.............................................. 8
B. Property Taxes................................................. 8
C. Property Taxes Defined......................................... 9
D. Other Taxes.................................................... 9
E. Tenant's Right to Contest...................................... 9
8. Insurance............................................................... 10
A. Indemnity...................................................... 10
B. Liability Insurance............................................ 10
C. Property Insurance............................................. 11
D. Tenant's Property Insurance.................................... 11
E. Mutual Waiver of Subrogation................................... 11
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
<S> <C> <C>
9. Utilities............................................................... 12
10. Repairs and Maintenance................................................. 12
A. Landlord's Repairs............................................. 12
B. Tenant's Repairs............................................... 13
11. Alterations............................................................. 15
A. Limitations.................................................... 15
B. Tenant's Rights................................................ 15
C. Alterations Required by Law.................................... 16
12. Acceptance of the Premises.............................................. 16
13. Default................................................................. 16
A. Events of Default.............................................. 16
B. Remedies....................................................... 17
C. Waivers........................................................ 19
14. Destruction............................................................. 19
A. Landlord's Duty to Restore..................................... 19
B. Landlord's Right to Terminate.................................. 20
C. Tenant's Right to Terminate.................................... 21
D. Abatement of Rent.............................................. 21
15. Condemnation............................................................ 22
A. Definition of Terms............................................ 22
B. Rights......................................................... 22
C. Total Taking................................................... 22
D. Partial Taking................................................. 22
16. Mechanics' Lien......................................................... 23
17. Inspection of the Premises.............................................. 23
18. Compliance with Laws.................................................... 23
19. Subordination........................................................... 23
A. Priority....................................................... 23
B. Subsequent Security Instruments................................ 24
C. Documents...................................................... 24
D. Tenant's Attornment............................................ 24
20. Holding Over............................................................ 24
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Page
<S> <C> <C>
21. Notices................................................................. 25
22. Attorneys' Fees......................................................... 25
23. Subleasing and Assignment............................................... 26
A. Landlord's Consent Required.................................... 26
B. Transferee Information Required................................ 26
C. Landlord's Rights.............................................. 26
D. Permitted Transfers............................................ 27
24. Successors.............................................................. 28
25. Mortgagee Protection.................................................... 28
26. Estoppel Certificate.................................................... 28
27. Surrender of Lease Not Merger........................................... 28
28. Waiver.................................................................. 29
29. General................................................................. 29
A. Captions....................................................... 29
B. Definition of Landlord......................................... 29
C. Time of Essence................................................ 29
D. Severability................................................... 29
E. Quiet Enjoyment................................................ 29
F. Law............................................................ 30
G. Agent.......................................................... 30
H. Lender......................................................... 30
I. Force Majeure.................................................. 30
30. Sign.................................................................... 30
31. Interest on Past Due Obligations........................................ 30
32. Surrender of the Premises............................................... 31
33. Authority............................................................... 31
34. CC&Rs................................................................... 31
35. Brokers................................................................. 32
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
Page
<S> <C> <C>
36. Limitation on Landlord's Liability...................................... 32
37. Hazardous Material...................................................... 33
A. Definitions.................................................... 33
B. Landlord's Obligation.......................................... 33
C. Permitted Use.................................................. 33
D. Hazardous Materials Management Plan............................ 34
E. Use Restriction................................................ 35
F. Tenant Indemnity............................................... 35
G. Compliance..................................................... 35
H. Assignment and Subletting...................................... 36
I. Surrender...................................................... 36
J. Right to Appoint Consultant.................................... 36
K. Holding Over................................................... 37
L. Existing Environmental Reports................................. 37
M. Provisions Survive Termination................................. 37
N. Controlling Provisions......................................... 37
38. Landlord's Default...................................................... 37
39. Condition to Effectiveness.............................................. 38
</TABLE>
<PAGE> 6
LIST OF EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit "A" - Legal Description of Parcel.........................................37
Exhibit "B" - Site Plan...........................................................38
Exhibit "C" - Improvement Agreement...............................................39
Exhibit "D" - Commencement Date Memorandum........................................54
Exhibit "E" - List of Hazardous Materials Tenant Will Use on The Premises.........55
Exhibit "F" - Description of Existing Environmental Reports.......................56
Exhibit "G" - Preliminary Title Report............................................60
Exhibit "H" - CCR's and Excluded Obligations......................................61
</TABLE>
<PAGE> 7
LEASE AGREEMENT
1. Parties. This Lease, dated for reference purposes as of January ,
1997, is made by and between South Bay/San Tomas Associates, a California
general partnership ("LANDLORD"), and Auspex Systems, Inc., a Delaware
corporation ("TENANT").
2. Demise of Premises. Landlord hereby leases to Tenant and Tenant
hereby leases from Landlord, upon the terms and conditions hereinafter set
forth, those certain premises (the "PREMISES") situated in the City of Santa
Clara, County of Santa Clara, State of California, described as follows:
A. That Parcel of real property more particularly described in
Exhibit "A" attached hereto (the "PARCEL");
B. One (1) single story building to be constructed by Landlord
and located on the Parcel as shown on the site plan attached hereto as Exhibit
"B" containing approximately ninety eight thousand four hundred thirty (98,430)
square feet (the "BUILDING").
C. The shell and the associated site improvements for the
Building (the "BUILDING SHELL") are to be constructed by Landlord in accordance
with the provisions of the Improvement Agreement attached hereto as Exhibit "C"
(the "IMPROVEMENT AGREEMENT").
D. The improvements (the "TENANT IMPROVEMENTS") to be
constructed by Landlord in and about the Building in accordance with the
provisions of the Improvement Agreement. The Building Shell and the Tenant
Improvements are collectively referred to in this Lease as the "IMPROVEMENTS".
3. Lease Term.
A. Lease Term. The term of this Lease (the "INITIAL LEASE
TERM") shall be for twelve (12) years commencing on the Commencement Date (as
defined below) and ending twelve (12) years thereafter unless sooner terminated
pursuant to any provision hereof.
B. Commencement Date. As used in this Lease, the term
"COMMENCEMENT DATE" shall mean the later of March 1, 1998, or the date when all
of the following have occurred with respect to the Improvements:
(i) The construction of all of the Improvements has
been substantially completed in accordance with the provisions of the
Improvement Agreement attached hereto and the Final Plans therefor (except for
minor punchlist items which do not substantially interfere with Tenant's use of
the Premises), and all utilities are connected and available for Tenant's use;
(ii) A certificate of occupancy or its equivalent
(including a final building inspection) with respect to the Improvements has
been issued by the City of Santa
<PAGE> 8
Clara; and
(iii) Landlord has given Tenant written notice that
the events described in (i) and (ii) above have occurred.
C. Commencement Date Memorandum. Within thirty (30) days
following the Commencement Date, Tenant shall execute and deliver to Landlord a
Commencement Date Memorandum in the form attached hereto as Exhibit "D"
acknowledging the actual Commencement Date, the Expiration Date and the initial
Monthly Installment (as defined in Subparagraph 4.A. hereof) of rent.
D. Delay in Completion of Building. Notwithstanding the
Commencement Date set forth in Subparagraph 3.B. above, if the construction of
the Improvements to the Building have not been substantially completed in
accordance with the provisions of the Improvement Agreement attached hereto and
the Final Plans therefor (except for minor punchlist items which do not
substantially interfere with Tenant's use of the Premises) by the later of (i)
December 31, 1997, or (ii) six (6) months following the issuance of all required
building permits for the construction of the Improvements to the Building
(provided such time periods in (i) and (ii) shall be extended by force majeure
delays and Tenant Delays as defined in Exhibit "C" hereto) (the "BUILDING
COMPLETION DATE"), Tenant shall have the option to terminate this Lease (which
shall be Tenant's sole remedy for such an event), which option may be exercised
only by delivery to Landlord of a written notice of election to terminate within
fifteen (15) days after the Building Completion Date and prior to substantial
completion of the Improvements to the Building.
E. Options to Extend.
(i) Tenant shall have three (3) successive options
(the "OPTIONS") to extend the Initial Lease Term for successive terms of sixty
(60) months each (collectively, the "EXTENDED TERMS" and individually, the
"FIRST EXTENDED TERM", the "SECOND EXTENDED TERM" and the "THIRD EXTENDED
TERM"). The Initial Term as may be extended by Tenant shall be referred to
herein as the "LEASE TERM."
(ii) Tenant shall exercise each Option, if at all, by
giving Landlord notice of Tenant's intention to do so at least two hundred
seventy (270) days prior to the expiration of the then existing Lease Term. In
no event shall any purported exercise of the Option by Tenant be effective if
(a) an Event of Default (as defined in Subparagraph 13.A. hereof) exists at the
time of such exercise or at the time such Extended Term would otherwise have
commenced, or (b) Tenant had not timely exercised each previous Option(s) to
extend the Lease. The Extended Terms shall be upon all of the terms and
conditions hereof, except that the Monthly Installment and method of rental
adjustment for each Extended Term shall be determined as set forth in
Subparagraph 4.B.(iii) hereof. Unless expressly mentioned and approved in the
written consent of Landlord referred to in Paragraph 23 hereof, the option
rights of Tenant under this paragraph are granted for Tenant's personal benefit
and may not be assigned
<PAGE> 9
or transferred by Tenant.
F. Early Entry. Tenant may enter the Premises prior to the
Commencement Date to install fixtures and equipment therein, provided Tenant
first obtains the prior written approval of Landlord for such entry, which
approval shall not be unreasonably withheld but which Landlord may withhold if
Landlord determines in its reasonable discretion that such entry will delay
completion of construction of the Improvements which Landlord is required to
construct pursuant to Exhibit "C". If Landlord permits Tenant to so enter upon
the Premises, such entry shall be subject to all of the terms and conditions of
this Lease, excepting only the obligation to pay the Monthly Installment of rent
or Additional Rent (as defined in Subparagraph 4.E. below), and the duty to pay
utility consumption costs and insurance. Tenant shall coordinate its entry onto
the Premises with Landlord and the contractors and other personnel employed by
Landlord. At all times during Tenant's right of entry, Landlord and Tenant shall
reasonably cooperate to refrain from interfering with the construction
activities of the other party's personnel; provided, Landlord shall not be
required to cooperate with Tenant if such cooperation results in a delay in
completing the Improvements. In any case, Tenant shall repair any damage to the
Improvements constructed by Landlord resulting from the entry upon the Premises
by Tenant or Tenant's Agents (as that term is defined in Subparagraph 29.G.)
prior to the Commencement Date or caused by the installation of fixtures and
equipment by Tenant or Tenant's Agents. If the entry by Tenant or Tenant's
Agents upon the Premises prior to the Commencement Date interferes with
Landlord's construction activities, then Landlord shall give Tenant written
notice requesting that Tenant cease such interference. If Tenant does not
immediately comply with such notice from Landlord requesting that Tenant cease
interference with Landlord's construction activities, and if such failure to
comply causes a delay in completing the construction of the Improvements, then
the Commencement Date shall be deemed to have occurred on the date the
Improvements would have been completed had there been no such delay caused by
Tenant or its Agents.
4. Rent.
A. Time of Payment. Tenant shall pay to Landlord as rent for
the Premises the respective sums specified in Subparagraph 4.B. below (the
"MONTHLY INSTALLMENT") each month in advance on the first day of each calendar
month, without deduction or offset, prior notice or demand, commencing on the
Commencement Date and continuing through the Lease Term, together with such
additional rents as are payable by Tenant to Landlord under the terms of this
Lease. The Monthly Installment for any period during the Lease Term which is
less than one (1) full month shall be a pro rata portion of the Monthly
Installment based upon a thirty (30) day month.
B. Monthly Installment.
(i) The Monthly Installment of rent for the first
thirty (30) months following the Commencement Date shall be One Hundred Twenty
Three Thousand Thirty Seven and 50/100 Dollars ($123,037.50).
<PAGE> 10
(ii) Rental Adjustment. The Monthly Installment shall
be adjusted at the beginning of the thirty-first (31st) month following the
Commencement Date and every thirty (30) months thereafter during the Initial
Lease Term (the "RENTAL ADJUSTMENT DATES"), to reflect any increase in the cost
of living. The adjustment or adjustments, if any, shall be calculated upon the
basis of the United States Department of Labor, Bureau of Labor Statistics
Consumer Price Index for All-Urban Consumers, for San Francisco-Oakland-San Jose
(1982 - 1984 = 100), hereafter referred to as the "INDEX." The last published
Index in effect on the Commencement Date shall be considered the "BASE". On each
Rental Adjustment Date, the Monthly Installment then in effect shall be
increased to an amount equal to the Monthly Installment in effect as of the
first full month of the Lease Term multiplied by a fraction, the numerator of
which is the Index as of such Rental Adjustment Date, and the denominator of
which is the "Base"; provided, the Monthly Installment shall not increase by
less than three percent (3%) per annum compounded annually or greater than seven
percent (7%) per annum compounded annually on each Rental Adjustment Date. When
the adjusted Monthly Installment is determined upon each Rental Adjustment Date,
Landlord shall give Tenant written notice to that effect indicating how the new
Monthly Installment figure was computed in accordance with this Subparagraph
4.B.(ii). If the Index does not exist on any Rental Adjustment Date in the same
format as referred to in this paragraph, Landlord shall substitute (using
conversion factors, as appropriate) in lieu thereof the index most nearly
comparable to the Index then published by the Bureau of Labor Statistics, or
successor or similar governmental agency, or if no governmental agency then
publishes an index, Landlord shall substitute therefor the most nearly
comparable index then published by a reputable private organization.
(iii) Extended Term Rent.
(a) As of the commencement of each Extended
Term, the Monthly Installment and the method of rental adjustment (including the
timing of adjustments and the basis for calculating the adjustments) for each
Extended Term shall be the fair market rental, as of the commencement date of
the Extended Term, for the Premises, as improved, and a method and timing of
rental adjustments consistent with rental adjustment practices then prevailing
in the marketplace for comparably sized projects designed for similar uses
within a three (3) mile radius of the Premises. In the event the parties fail to
agree upon the amount of the Monthly Installment and the method of rental
adjustment for any of the Extended Terms within thirty (30) days after
Landlord's receipt of Tenant's notice exercising the Option for such Extended
Term, the Monthly Installment and the method of rental adjustment for such
Extended Term shall be determined by appraisal in the manner hereafter set
forth.
(b) In the event it becomes necessary under
this Subparagraph 4.B.(iii)(b) to determine the fair market rent to be used as
the Monthly Installment and the method and timing of rental adjustments of the
Premises by appraisal, Landlord and Tenant each shall appoint a real estate
appraiser who shall be a member of The Appraisal Institute ("TAI") and who shall
have a minimum of five (5) years of commercial appraisal experience in Santa
Clara County and such appraisers shall each determine the fair market rent for
the Premises, and
<PAGE> 11
the method and timing of rental adjustments taking into account the value of the
Premises (excluding Tenant's Property (as defined below) which Tenant shall be
allowed to remove upon the expiration of this Lease), the amenities provided and
prevailing comparable rentals and rental adjustment practices then prevailing in
the marketplace for comparably sized projects designed for similar uses within a
three (3) mile radius of the Premises. Such appraisers shall, within twenty (20)
business days after their appointment, complete their appraisals and submit
their appraisal reports to Landlord and Tenant. If the fair market rent of the
Premises established in the two (2) appraisals varies by five percent (5%) or
less of the higher rental, the average of the two shall be controlling. If said
fair market rent varies by more than five percent (5%) of the higher rental,
said appraisers, within ten (10) days after submission of the last appraisal,
shall appoint a third appraiser who shall be a member of TAI and who shall have
a minimum of five (5) years of commercial appraisal experience in Santa Clara
County. Such third appraiser shall, within twenty (20) business days after his
appointment, determine by appraisal the fair market rent of the Premises, taking
into account the same factors referred to above, and submit his appraisal report
to Landlord and Tenant. The fair market rent determined by the third appraiser
for the Premises shall be averaged with the fair market rent determined by the
one of the initial two appraisers that is closest to that of the third
appraiser, unless the third appraiser's determination of the rent is less than
that set forth in the lower appraisal previously obtained, in which case the
value set forth in said lower appraisal shall be controlling, or unless it is
greater than that set forth in the higher appraisal previously obtained, in
which case the rental set forth in said higher appraisal shall be controlling.
The method of adjusting rental periodically, including the manner and timing of
such adjustments, shall be as determined by the initial two appraisers, if they
agree on a single method; otherwise, it shall be as determined by the third
appraiser. If either Landlord or Tenant fails to appoint an appraiser, or if an
appraiser appointed by either of them fails, after his appointment, to submit
his appraisal within the required period in accordance with the foregoing, the
appraisal submitted by the appraiser properly appointed and timely submitting
his appraisal shall be controlling. If the two appraisers appointed by Landlord
and Tenant are unable to agree upon a third appraiser within the required period
in accordance with the foregoing, application shall be made within twenty (20)
days thereafter by either Landlord or Tenant to TAI, which shall appoint a
member of said institute willing to serve as appraiser. Each party shall bear
the cost of their own appraiser and the cost of the third appraiser under this
Subparagraph shall be borne equally by Landlord and Tenant.
C. Tenant Improvement Allowance.
(i) Landlord shall make available for the payment of
all TI Costs (as defined in the Improvement Agreement) an amount equal to One
Million Nine Hundred Sixty Eight Thousand Six Hundred Dollars ($1,968,000) (the
"TI ALLOWANCE"). To the extent that TI Costs exceed the total TI Allowance,
Tenant shall pay the amount of such excess (with such excess referred to herein
as "TENANT'S TI CONTRIBUTION"). After Landlord has expended the total TI
Allowance, Tenant's TI Contribution shall be paid by Tenant to Landlord in
installments as and when needed by Landlord to pay TI Costs that have been
incurred by Landlord for the Building, with each installment to be paid within
five (5) days after Landlord notifies Tenant that a progress payment toward TI
Costs is to be made and supplies to Tenant an appropriate
<PAGE> 12
accounting of all TI Costs incurred by Landlord and such other documentation as
a construction lender might reasonably request. Such progress payments shall not
be requested any more frequently than every thirty (30) days.
(ii) Prior to the commencement of construction of the
Tenant Improvements, Tenant shall, if requested to do so by Landlord, provide
reasonable assurances to Landlord's Lender (as that term is defined in
Subparagraph 29.H.) that the funds necessary to pay Tenant's TI Contribution
will be immediately available to Landlord as and when needed to pay all TI Costs
after Landlord has expended the TI Allowance, which assurances shall be
reasonably satisfactory to Landlord and Landlord's Lender.
D. Late Charge. Tenant acknowledges that late payment by
Tenant to Landlord of rent and other sums due hereunder will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any mortgage or deed of trust covering the Premises.
Accordingly, if any Monthly Installment, Additional Rent or any other sum due
from Tenant shall not be received by Landlord within ten (10) days after
Landlord's delivery to Tenant of written notice stating that such amount has not
been paid when due, then Tenant shall pay to Landlord, as additional rent, a
late charge equal to six percent (6%) of such overdue amount. The parties hereby
agree that such late charge represents a fair and reasonable estimate of the
costs Landlord will incur by reason of late payment by Tenant. Acceptance of
such late charge by Landlord without payment of the overdue amount shall in no
event constitute a waiver of Tenant's default with respect to such overdue
amount, nor prevent Landlord from exercising any of its other rights and
remedies granted hereunder.
E. Additional Rent. All taxes, insurance premiums, late
charges, costs, expenses and other sums which Tenant is required to pay under
this Lease, together with all interest and penalties that may accrue thereon in
the event of Tenant's failure to pay such amounts, and all reasonable damages,
costs, and attorneys' fees and expenses which Landlord may incur by reason of
any default of Tenant or failure on Tenant's part to comply with the terms of
this Lease, shall be deemed to be additional rent ("ADDITIONAL RENT") and shall
be paid in addition to the Monthly Installment of rent, and, in the event of
nonpayment by Tenant, Landlord shall have all of the rights and remedies with
respect thereto as Landlord has for the nonpayment of the Monthly Installment of
rent. All items of Additional Rent, but excluding such taxes and assessment,
utilities and insurance costs which are to be paid directly by Tenant or
reimbursed by Tenant to Landlord, shall include an additional two percent (2%)
of the actual expenditure or amount due in order to compensate Landlord for
accounting, management and processing services.
F. Place of Payment. Rent shall be payable in lawful
money of the United States of America to Landlord at 511 Division Street,
Campbell, California 95008 or to such other person(s) or at such other place(s)
as Landlord may designate in writing.
<PAGE> 13
G. Advance Payment. Concurrently with the execution of this
Lease, Tenant shall pay to Landlord the sum of One Hundred Twenty Three Thousand
Thirty Seven and 50/100 Dollars ($123,037.50) to be applied to the Monthly
Installment of rent first accruing under this Lease.
5. Security Deposit. Concurrently with the execution of this Lease,
Tenant shall pay to Landlord the sum of One Hundred Twenty Three Thousand Thirty
Seven and 50/100 Dollars ($123,037.50) (the "SECURITY DEPOSIT") to secure the
faithful performance by Tenant of each term, covenant and condition of this
Lease. If Tenant shall at any time fail to make any payment or fail to keep or
perform any term, covenant or condition on its part to be made or performed or
kept under this Lease, Landlord may, but shall not be obligated to and without
waiving or releasing Tenant from any obligation under this Lease, use, apply or
retain the whole or any part of the Security Deposit (A) to the extent of any
sum due to Landlord; (B) to make any required payment on Tenant's behalf; or (C)
to compensate Landlord for any loss, damages, attorneys' fees or expense
sustained by Landlord due to Tenant's default. In such event, Tenant shall,
within five (5) days of written demand by Landlord, remit to Landlord sufficient
funds to restore the Security Deposit to its original sum. No interest shall
accrue on the Security Deposit. Landlord shall not be required to keep the
Security Deposit separate from its general funds. The Security Deposit, less any
sums owing to Landlord or which Landlord is otherwise entitled to retain, shall
be returned to Tenant within thirty (30) days after the termination of this
Lease and vacancy of the Premises by Tenant.
6. Use of Premises.
A. Restrictions on Use. Tenant shall use the Premises only in
conformance with applicable governmental laws, for general office, engineering,
research and development, light assembly, testing, warehousing and related
lawful uses, and for no other purpose without the consent of Landlord. Tenant
shall indemnify, defend and hold Landlord harmless against any loss, expense,
damage, attorneys' fees or liabilities to the extent the foregoing arises out of
the failure of Tenant to comply with any Law (as defined in Subparagraph 29.F.)
applicable to Tenant's use and occupancy of the Premises. Tenant shall not
commit or suffer to be committed, any waste upon the Premises, or any nuisance,
or other acts or things which may disturb the quiet enjoyment of any other
occupant of buildings adjacent to the Premises, or allow any sale by auction
upon the Premises, or allow the Premises to be used for any unlawful purpose, or
place any loads upon the floor, walls or ceiling which would endanger the
structure, or place any harmful liquids in the drainage system of the Premises.
No waste materials or refuse shall be dumped upon or permitted to remain upon
any part of the Premises outside of the Building, except in trash containers
placed inside exterior enclosures designated for that purpose by Landlord and
except in compliance with all applicable Law. No materials, supplies, equipment,
finished products or semifinished products, raw materials or articles of any
nature shall be stored upon or permitted to remain on any portion of the Parcel
outside of the Building. Tenant shall strictly comply with the provisions of
Paragraph 37 below.
B. Initial Occupancy. Tenant shall be obligated to take
possession and enter
<PAGE> 14
into occupancy of the Premises within thirty (30) days following the
Commencement Date.
7. Taxes and Assessments.
A. Tenant's Property. Tenant shall pay before delinquency any
and all taxes and assessments, license fees and public charges levied, assessed
or imposed upon or against Tenant's fixtures, equipment, furnishings, furniture,
appliances and personal property installed or located on or within the Premises
("Tenant's Property"). Tenant shall use its best efforts to cause all Tenant's
Property to be assessed and billed separately from the real property of
Landlord. If any of Tenant's Property shall be assessed with the Premises,
Tenant shall pay Landlord the taxes attributable to Tenant within ten (10) days
after receipt of a written statement from Landlord setting forth the taxes
applicable to Tenant's Property.
B. Property Taxes. Tenant shall pay, as Additional Rent, one
hundred percent (100%) of all property taxes (as defined in Subparagraph 7.C.
below) levied or assessed with respect to the Premises which are attributable to
the Lease Term. Tenant shall pay such Property Taxes to Landlord not later than
(i) ten (10) days prior to the delinquency date of such Property Taxes, or (ii)
twenty (20) days after receipt of billing, whichever is later. If Tenant fails
to do so, Tenant shall reimburse Landlord, on demand, for all interest, late
fees and penalties that the taxing authority charges Landlord. In the event
Landlord's Lender requires an impound for Property Taxes, then on the first day
of each month during the Lease Term, Tenant shall pay Landlord one twelfth
(1/12) of the annual Property Taxes. Tenant's liability hereunder shall be
prorated to reflect the commencement and termination dates of this Lease.
C. Property Taxes Defined. For the purpose of this Lease,
"PROPERTY TAXES" means and includes all taxes, assessments (including, but not
limited to, assessments for public improvements or benefits), taxes based on
vehicles utilizing parking areas, taxes based or measured by the rent paid,
payable or received under this Lease, taxes on the value, use, or occupancy of
the Premises, the Building and/or the Parcel, and all other governmental
impositions and charges of every kind and nature whatsoever, whether or not
customary or within the contemplation of the parties hereto and regardless of
whether the same shall be extraordinary or ordinary, general or special,
unforeseen or foreseen, or similar or dissimilar to any of the foregoing which,
at any time during the Lease Term, shall be applicable to the Premises, the
Building and/or the Parcel or assessed, levied or imposed upon the Premises, the
Building and/or the Parcel, or become due and payable and a lien or charge upon
the Premises, the Building and/or the Parcel, or any part thereof, under or by
virtue of any present or future laws, statutes, ordinances, regulations or other
requirements of any governmental authority whatsoever. The term "Property Taxes"
shall not include any federal, state or local net income, documentary transfer
(unrelated to any transfer made of Tenant's interest under this Lease),
franchise (unrelated to Tenant's operations), estate, gift or inheritance tax
imposed on Landlord (the "PROPERTY TAX EXCLUSIONS").
D. Other Taxes. Tenant shall, as Additional Rent, pay or
reimburse Landlord for any tax based upon, allocable to, or measured by the area
of the Premises or the Building or
<PAGE> 15
the Parcel; or by the rent paid, payable or received under this Lease; any tax
upon or with respect to the possession, leasing, operation, management,
maintenance, alteration, repair, use or occupancy of the Premises or any portion
thereof; any privilege tax, excise tax, business and occupation tax, gross
receipts tax, sales and/or use tax, water tax, sewer tax, employee tax,
occupational license tax imposed upon Landlord or Tenant with respect to the
Premises; any tax upon this transaction or any document to which Tenant is a
party creating or transferring any of Tenant's interest or estate in the
Premises; provided, however that nothing in this Subparagraph shall require
Tenant to pay any Property Tax Exclusions.
E. Tenant's Right to Contest. Tenant shall have the right, by
appropriate proceedings, to protest or contest any assessment, reassessment or
allocation of Property Taxes or any change therein. In the contest or
proceedings, Tenant may act in its own name and/or the name of Landlord and
Landlord will, at Tenant's request and expense, cooperate with Tenant in any way
Tenant may reasonably require in connection with such contest. Tenant must pay
all Property Taxes as and when required by Subparagraph 7.B., even those which
are the subject of such protest or contest, but Tenant may sue to recover
overpayments or Property Taxes as part of any such contest. With respect to any
contest of Property Taxes, Tenant shall indemnify and hold Landlord and the
Premises harmless from any liens or damage arising out of such protest or
contest and shall pay any judgment that may be rendered for which Tenant would
otherwise be liable under this Lease without such contest or protest. Any
contest conducted by Tenant under this paragraph shall be at Tenant's expense
and if interest or late charges become payable as a result of such contest or
protest, Tenant shall pay the same. Any tax assessments reimbursed to Landlord
as a consequence of such contest shall be reimbursed to Tenant, to the extent
originally paid by Tenant under the terms of this Lease.
8. Insurance.
A. Indemnity. Tenant agrees to indemnify, protect and defend
Landlord against and hold Landlord harmless from any and all claims, causes of
action, judgments, obligations or liabilities, and all reasonable expenses
incurred in investigating or resisting the same (including reasonable attorneys'
fees), to the extent they arise out of, the operation, maintenance, use or
occupancy of the Premises by Tenant and/or its Agents (except to the extent they
arise from the negligence or willful misconduct of Landlord or its Agents). This
Lease is made on the express understanding that Landlord shall not be liable
for, or suffer loss by reason of, injury to person or property, from whatever
cause (except to the extent it arises from the negligence or willful misconduct
of Landlord or its Agents), which in any way may be connected with the
operation, maintenance, use or occupancy of the Premises by Tenant and/or its
Agents specifically including, without limitation, any liability for injury to
the person or property of Tenant or its Agents.
B. Liability Insurance. Tenant shall, at Tenant's expense,
obtain and keep in force during the term of this Lease a policy of commercial
general liability insurance insuring Landlord and Tenant against claims and
liabilities arising out of the operation, maintenance, use, or occupancy of the
Premises. Such insurance shall provide combined single limit coverage of
<PAGE> 16
not less than Five Million Dollars ($5,000,000.00) per occurrence. Landlord
shall have the right to require Tenant to increase the amount of coverage of
such public liability insurance to the extent reasonably necessary to bring such
insurance coverage into conformity with the level of coverage commonly carried
by similar businesses in California leasing comparable buildings in the vicinity
of the Premises, which right Landlord may exercise no more frequently than once
every two (2) years during the Lease Term. The insurance shall be provided by
companies (i) admitted to issue insurance in California and (ii) having a
general policyholders' rating of at least "A" and a financial rating of at least
"VIII" as set forth in the most current issue of Best's Insurance Guide. Tenant
shall deliver to Landlord, prior to possession, and at least thirty (30) days
prior to the expiration of any insurance policy required hereby, a certificate
of insurance evidencing the existence of such policy and the certificate shall
certify that the policy (1) names Landlord as an additional insured, (2) shall
not be canceled or altered without thirty (30) days prior written notice to
Landlord, (3) insures performance of the indemnity set forth in Subparagraph
8.A. above, (4) the coverage is primary and any coverage by Landlord is in
excess thereto and (5) contains a cross-liability endorsement.
Landlord may maintain a policy or policies of commercial general
liability insurance insuring Landlord (and such others as are designated by
Landlord), against liability for personal injury, bodily injury, death and
damage to property occurring or resulting from an occurrence in, on or about the
Premises, with such limits of coverage as Landlord may from time to time
determine are reasonably necessary for its protection. Tenant shall, as
Additional Rent, reimburse Landlord for the cost of any such insurance policy
within ten (10) days after receipt of billing.
C. Property Insurance. Landlord shall, at Tenant's expense,
obtain and keep in force during the Lease Term a policy of insurance covering
loss or damage to the Improvements, in the amount of the full replacement value
thereof with an Agreed Amount Endorsement, providing protection against those
perils included within the classification of "special form" insurance, plus a
policy of rental income insurance in the amount of one hundred percent (100%) of
twelve (12) months' rent (including, without limitation, sums payable as
Additional Rent), together with such additional coverages (such as earthquake
and/or flood insurance) which Landlord may elect to maintain from time to time
or which may be required from time to time by Landlord's Lender or by Tenant.
Tenant shall have no interest in nor any right to the proceeds of any insurance
procured by Landlord on the Building and Tenant Improvements. Tenant shall pay
to Landlord, as Additional Rent, the cost of such insurance procured and
maintained by Landlord on an annual basis within ten (10) days after receipt of
demand therefore from Landlord. Tenant's liability for the cost of such
insurance shall be prorated as of the commencement and termination of the Lease
Term. Tenant acknowledges that such insurance procured by Landlord shall contain
a deductible which reduces Tenant's cost for such insurance and, in the event of
loss or damage, Tenant shall be required to pay to Landlord the amount of such
deductible; provided, Tenant's liability for such deductible shall not exceed
Twenty Five Thousand Dollars ($25,000), except Tenant's liability for the
deductible on Landlord's earthquake insurance shall not exceed ten percent (10%)
of the policy amount.
<PAGE> 17
D. Tenant's Property Insurance. Tenant acknowledges that the
insurance to be maintained Landlord on the Premises pursuant to Paragraph 8.C.
above will not insure any of Tenant's Property. Accordingly, Tenant, at Tenant's
own expense, shall maintain in full force and effect on all of Tenant's Property
in the Premises, a policy of "special form" coverage insurance to the extent of
at least ninety percent (90%) of insurable value of such property.
E. Mutual Waiver of Subrogation. Notwithstanding anything to
the contrary contained in this Lease, Tenant and Landlord hereby mutually waive
their respective rights of recovery against each other of any loss of or damage
to the property of either party, to the extent such loss or damage is insured by
either party at the time of such loss or damage or required to be insured
pursuant to this Lease by the party having the right of recovery against the
other party for such loss or damage. Each party shall obtain any special
endorsements, if required by the insurer, whereby the insurer waives its right
of subrogation against the other party hereto. The provisions of this
Subparagraph 8.E. shall not apply in those instances in which the waiver of
subrogation would cause either party's insurance coverage to be voided or
otherwise made uncollectible; provided, such party has afforded the other party
at least thirty (30) days prior written notice of such fact and a period of at
least thirty (30) days has elapsed after delivery of such notice without
identification of alternative, reasonably equivalent insurance that can be
obtained without a voiding provision based on this waiver of subrogation.
9. Utilities. Tenant shall pay for all water, gas, light, heat, power,
electricity, telephone, trash pick-up, sewer charges, and all other services
supplied to or consumed on the Premises, and all taxes and surcharges thereon.
<PAGE> 18
10. Repairs and Maintenance.
A. Landlord's Repairs. Subject to the provisions of Paragraphs
14 and 15 and the Improvement Agreement, Landlord, at its expense, shall keep
and maintain the exterior walls and the structural elements of the Building in
good order and repair. Landlord shall not, however, be required to maintain,
repair or replace the interior surface of exterior walls, nor shall Landlord be
required to maintain, repair or replace windows, doors, skylights or plate
glass. Landlord shall not be in default because it fails to make repairs under
this Subparagraph 10.A. until a reasonable time after receipt of written notice
from Tenant of the need for such repairs. Notwithstanding the foregoing but
subject to Subparagraph 8.E., Tenant shall reimburse Landlord, as Additional
Rent, within fifteen (15) days after receipt of billing, for the cost of
maintenance and repairs of the exterior walls and structural elements of the
Building to the extent such maintenance or repair is required because of the
negligence or willful misconduct of Tenant or its Agents, except as otherwise
provided in Subparagraph 8.E. As used herein, the term "STRUCTURAL ELEMENTS OF
THE BUILDING" shall mean and be limited to the foundations, footings, floor slab
(but not flooring), roof structure (but not roofing or roof membrane), load
bearing walls and structural portion of any second floor. If (a) repairs are
required to be made by Landlord pursuant to this Subparagraph 10.A., (b) the
failure to immediately make such repairs poses a threat of imminent danger to
people or property, and (c) after Landlord's receipt of notice from Tenant for
the need to make such repairs, Landlord does not immediately make such repairs,
then Tenant shall be allowed to make such repairs and Landlord shall reimburse
Tenant for the reasonable third party costs incurred by Tenant upon receipt of
written invoices for such repairs, lien releases from the third party making
such repairs and inspection of the repairs made by Tenant.
<PAGE> 19
B. Tenant's Repairs.
(i) Except as expressly provided in Subparagraphs
8.E. and 10.A. above, Paragraphs 14 and 15 below and the Improvement Agreement,
Tenant shall, at its sole cost, keep and maintain the entire Premises and every
part thereof, including without limitation, the windows, window frames, plate
glass, glazing, skylights, truck doors, doors and all door hardware, the
interior walls and partitions, interior surfaces of exterior walls, carpets,
flooring, roofing, roof membrane, gutters, down spouts, the electrical,
plumbing, lighting, heating, ventilating and air conditioning systems and
equipment, and all areas outside the Building (including all landscaping,
irrigation systems, paving, driveways, parking areas, sidewalks, fences, signs
and exterior lighting) in good order, condition and repair. The term "repair"
shall include replacements, restorations and/or renewals when necessary as well
as painting. Except as expressly provided in Subparagraphs 8.E. and 10.A. above,
Paragraphs 14 and 15 below and the Improvement Agreement, Tenant's obligation
shall extend to all alterations, additions and improvements to the Premises, and
all fixtures and appurtenances therein and thereto. Tenant shall, at all times
during the Lease Term, have in effect a service contract for the maintenance of
the heating, ventilating and air conditioning ("HVAC") equipment with an HVAC
repair and maintenance contractor reasonably approved by Landlord. The HVAC
service contract shall provide for periodic inspection and servicing at least
once every three (3) months during the Lease Term, and Tenant shall provide
Landlord with a copy of such contract and all periodic service reports. Landlord
shall assign to Tenant for the Lease Term the benefit of all warranties
available to Landlord which would reduce the cost of performing the obligations
of Tenant to make repairs under this Subparagraph 10.B. Landlord shall cooperate
with Tenant in the enforcement of such warranties. Notwithstanding anything to
the contrary in this Lease, Tenant shall have no responsibility to perform or
construct, any repair, maintenance or improvement that Landlord is required to
perform pursuant to any other term of this Lease or the Improvement Agreement.
(ii) Should Tenant fail to commence to make repairs
required of Tenant hereunder within ten (10) days after written notice from
Landlord or should Tenant fail thereafter to diligently complete the repairs,
Landlord, in addition to all other remedies available hereunder or by Law and
without waiving any alternative remedies, may make the same, and in that event,
Tenant shall reimburse Landlord as Additional Rent for the cost of such
maintenance or repairs within ten (10) days of written demand by Landlord.
(iii) Notwithstanding anything to the contrary in
this Lease, any capital replacements to the Premises which are otherwise found
to be the obligation of Tenant under this Lease, whether or not required by law,
which are required by generally accepted accounting principles ("GAAP") to be
capitalized ("CAPITAL REPLACEMENTS") shall be made by and paid for by the
parties in accordance with the following:
(a) Tenant shall promptly undertake and diligently
complete, and Tenant shall be solely responsible for the cost of, all Capital
Replacements that have a cost
<PAGE> 20
less than One Hundred Twenty Thousand Dollars ($120,000).
(b) Upon Tenant's written notice to Landlord for the
need of any Capital Replacement which Landlord is required to make pursuant to
this Subparagraph 10.B.(iii)(b), Landlord shall promptly undertake and
diligently complete all Capital Replacements having a cost in excess of One
Hundred Twenty Thousand Dollars ($120,000) ("LANDLORD'S CAPITAL REPLACEMENTS").
The cost of Landlord's Capital Replacements shall be borne by the parties as
follows:
(1) Tenant shall reimburse Landlord for
Tenant's Share of the Cost of Landlord's Capital Replacement within ten (10)
days following delivery to Tenant of reasonable documentation of the amount
owing by Tenant for completed work, which payments may be demanded by Landlord
of Tenant on a monthly basis as the work progresses. The "TENANT'S SHARE OF THE
COST OF LANDLORD'S CAPITAL REPLACEMENT," shall be equal to the total cost
reasonably incurred by Landlord to construct, permit and/or plan a Landlord's
Capital Replacement (the "CAPITAL COST") times a fraction, the numerator of
which is equal to the number of unexpired months in the then existing Lease Term
(without any consideration of Extended Terms that have not commenced), and the
denominator of which is equal to the useful life (expressed in months) of such
Landlord's Capital Replacement. The remainder of such cost shall be borne by
Landlord, subject to Subparagraphs 10.B.(iii)(b)(2) and 10.B.(iii)(b)(3), below.
(2) If the Lease Term is extended by Tenant
as herein permitted, then as a condition to each such extension and within ten
(10) days following Landlord's written demand therefor, Tenant shall make an
additional reimbursement of the Capital Cost of Landlord's Capital Replacement
in an amount equal to the Capital Cost times a fraction, the numerator of which
is equal to the lesser of (A) the useful life (expressed in months) of such
Landlord's Capital Replacement not subject to reimbursement under Subparagraph
10.B.(iii)(b)(1) above and not subject to reimbursement under this Subparagraph
10.B.(iii)(b)(2) with respect to a prior extension of the Lease Term, or (B) the
number of months in the extension period, and the denominator of which is equal
to the total useful life (expressed in months) of such Landlord's Capital
Replacement.
(3) If Landlord terminates this Lease on
account of an Event of Default by Tenant, as permitted by Section 13.B.(ii)
below, then in addition to Landlord's other remedies, Tenant shall pay to
Landlord upon demand so much of the Capital Cost of Landlord's Capital
Replacement, which has not been theretofore reimbursed by Tenant to Landlord.
(iv) Landlord shall have no maintenance or repair
obligations whatsoever with respect to the Premises except as expressly provided
in this Lease and the Improvement Agreement. Tenant hereby expressly waives the
provisions of Subsection 1 of Section 1932 and Sections 1941 and 1942 of the
Civil Code of California and all rights to make repairs at the expense of
Landlord as provided in Section 1942 of said Civil Code; provided, Tenant shall
have the right to cure Landlord's defaults pursuant to the terms and conditions
of
<PAGE> 21
Paragraph 38 hereof.
11. Alterations.
A. Limitations. Tenant shall not make, or suffer to be made,
any alterations, improvements or additions in, on, about or to the Premises or
any part thereof, without the prior written consent of Landlord (which consent
shall not be unreasonably withheld) and without a valid building permit issued
by the appropriate governmental authority; provided, however, Landlord's consent
shall not be required for interior non-structural alterations which (i) cost
less than Twenty Thousand Dollars ($20,000.00) per work of improvement and (ii)
cost less than Seventy Five Thousand Dollars ($75,000.00) for all alterations
made in any twelve (12) month period. As a condition to, and concurrently with,
the giving of such consent Landlord may require that Tenant agree to remove any
such alterations, improvements or additions at the termination of this Lease,
and to restore the Premises to their prior condition. Unless Landlord requires
that Tenant remove any such alteration, improvement or addition at the time that
Landlord provides its consent thereto, any alteration, addition or improvement
to the Premises, except movable furniture and trade fixtures not affixed to the
Premises, shall become the property of Landlord upon termination of the Lease
and shall remain upon and be surrendered with the Premises at the termination of
this Lease. Without limiting the generality of the foregoing, all heating,
lighting, electrical (including all wiring, conduit, outlets, drops, buss ducts,
main and subpanels), air conditioning, partitioning, drapery, and carpet
installations made by Tenant regardless of how affixed to the Premises, together
with all other additions, alterations and improvements that have become an
integral part of the Building, shall be and become the property of the Landlord
upon termination of the Lease, and shall not be deemed trade fixtures, and shall
remain upon and be surrendered with the Premises at the termination of this
Lease.
B. Tenant's Rights. All trade fixtures, movable furniture and
personal property installed in the Premises at Tenant's expense (collectively,
"TENANT'S PROPERTY") shall at all times remain Tenant's property and Tenant
shall be entitled to all depreciation, amortization and other tax benefits with
respect thereto, except for Tenant's Property which cannot be removed without
structural injury to the Premises. At any time during the Lease Term, Tenant may
remove Tenant's Property from the Premises, provided Tenant repairs all damage
caused by such removal. Landlord shall have no lien or other interest whatsoever
in any item of Tenant's Property or any portion thereof or interest therein,
located in the Premises or elsewhere, and Landlord hereby waives all such liens
and interests. Within ten (10) days following Tenant's written request, Landlord
shall execute documents in form reasonably acceptable to Tenant and Landlord to
evidence Landlord's waiver of any right, title, lien or interest in Tenant's
Property located in the Premises.
C. Alterations Required by Law. If, during the Lease Term, any
alteration, addition or change of any sort to all or any portion of the Premises
is required by Law, Tenant shall promptly make the same at its sole cost and
expense; provided, Tenant shall only be obligated to make alterations, additions
or changes required by Law to the "structural elements of the Building" (as
defined in Subparagraph 10.A. above), if such requirement is triggered by (i)
<PAGE> 22
Tenant's particular use of the Premises, or (ii) Tenant's alterations,
improvements or additions in, on, about or to the Premises or any part thereof;
and if Landlord has performed its obligations under this Lease with respect to
the structural elements of the Building.
12. Acceptance of the Premises. By entry and taking possession of the
Premises pursuant to this Lease, Tenant accepts the Premises as being in good
and sanitary order, condition and repair and accepts the Premises in their
condition existing as of the date of such entry and Tenant further accepts the
Tenant Improvements to be constructed by Landlord, if any, as being completed in
accordance with the plans and specifications for such Tenant Improvements,
except for punch list items, and any express warranties by and obligations of
Landlord set forth in this Lease. Tenant acknowledges that neither the Landlord
nor Landlord's agents has made any representation or warranty as to the
suitability of the Premises to the conduct of Tenant's business. Any agreements,
warranties or representations not expressly contained herein shall in no way
bind either Landlord or Tenant, and Landlord and Tenant expressly waive all
claims for damages by reason of any statement, representation, warranty, promise
or agreement not contained in this Lease. This Lease constitutes the entire
understanding between the parties hereto and no addition to, or modification of,
any term or provision of this Lease shall be effective until set forth in a
writing signed by both Landlord and Tenant.
13. Default.
A. Events of Default. A breach of this Lease by Tenant shall
exist if any of the following events (hereinafter referred to as "EVENT OF
DEFAULT") shall occur:
(i) Default in the payment when due of any
installment of rent or other payment required to be made by Tenant hereunder,
where such default shall not have been cured within five (5) days after written
notice of such default is given to Tenant;
(ii) Tenant's failure to perform any other term,
covenant or condition contained in this Lease where such failure shall have
continued for twenty (20) days after written notice of such failure is given to
Tenant; provided, however, Tenant shall not be deemed in default if Tenant
commences to cure such failure within said twenty (20) day period and thereafter
diligently prosecutes such cure to completion;
(iii) Tenant vacates the Premises for sixty (60)
consecutive days and upon the expiration of such sixty (60) day period, Tenant
has failed to perform any term, covenant or condition contained in this Lease
(under such circumstances Tenant shall have no right to cure the default and
Landlord shall have no requirement to notify Tenant of the default except as
required by law);
(iv) Tenant's assignment of its assets for the
benefit of its creditors;
(v) The sequestration of, attachment of, or execution
on, any
<PAGE> 23
substantial part of the property of Tenant or on any property essential to the
conduct of Tenant's business, shall have occurred and Tenant shall have failed
to obtain a return or release of such property within thirty (30) days
thereafter, or prior to sale pursuant to such sequestration, attachment or levy,
whichever is earlier;
(vi) Tenant or any guarantor of Tenant's obligations
hereunder shall commence any case, proceeding or other action seeking
reorganization, arrangement, adjustment, liquidation, dissolution or composition
of it or its debts under any Law relating to bankruptcy, insolvency,
reorganization or relief of debtors, or seek appointment of a receiver, trustee,
custodian, or other similar official for it or for all or any substantial part
of its property; or
(vii) Any case, proceeding or other action against
Tenant or any guarantor of Tenant's obligations hereunder shall be commenced
seeking to have an order for relief entered against it as debtor, or seeking
reorganization, arrangement, adjustment, liquidation, dissolution or composition
of it or its debts under any Law relating to bankruptcy, insolvency,
reorganization or relief of debtors, or seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or any
substantial part of its property, and such case, proceeding or other action (i)
results in the entry of an order for relief against it which is not fully stayed
within seven (7) business days after the entry thereof or (ii) remains
undismissed for a period of sixty (60) days.
Any notice given by Landlord in order to satisfy the requirements of
this Subparagraph 13.B. shall also satisfy the notice requirements of California
Code of Civil Procedure Section 1161 and all similar statutes regarding unlawful
detainer proceedings.
B. Remedies. Upon any Event of Default, Landlord shall have
the following remedies, in addition to all other rights and remedies provided by
law, to which Landlord may resort cumulatively, or in the alternative:
(i) Recovery of Rent. Landlord shall be entitled to
keep this Lease in full force and effect (whether or not Tenant shall have
abandoned the Premises) and to enforce all of its rights and remedies under this
Lease, including the right to recover rent and other sums as they become due,
plus interest at the Permitted Rate (as defined in Paragraph 31 below) as
therein provided.
(ii) Termination. Landlord may terminate this Lease
by giving Tenant written notice of termination in accordance with applicable
law. On the giving of the notice all of Tenant's rights in the Premises shall
terminate. Upon the giving of the notice of termination, Tenant shall surrender
and vacate the Premises in the condition required by Paragraph 32, and Landlord
may re-enter and take possession of the Premises and all the remaining
improvements or property and eject Tenant or any of Tenant's subtenants,
assignees or other person or persons claiming any right under or through Tenant
or eject some and not others or eject none. This Lease may also be terminated by
a judgment specifically providing for termination. Any termination under this
paragraph shall not release Tenant from the payment of any sum then due
<PAGE> 24
Landlord or from any claim for damages or rent previously accrued or then
accruing against Tenant. In no event shall any one or more of the following
actions by Landlord constitute a termination of this Lease:
(a) maintenance and preservation of the
Premises;
(b) efforts to relet the Premises;
(c) appointment of a receiver in order to
protect Landlord's interest hereunder;
(d) consent to any subletting of the
Premises or assignment of this Lease by Tenant, whether pursuant to provisions
hereof concerning subletting and assignment or otherwise; or
(e) any other action by Landlord or
Landlord's agents intended to mitigate the adverse effects from any breach of
this Lease by Tenant.
(iii) Damages. In the event this Lease is terminated
pursuant to Subparagraph 13.B.(ii) above, or otherwise, Landlord shall be
entitled to damages in the following sums:
(a) the worth at the time of award of the
unpaid rent which has been earned at the time of termination; plus
(b) the worth at the time of award of the
amount by which the unpaid rent which would have been earned after termination
until the time of award exceeds the amount of such rental loss that Tenant
proves could have been reasonably avoided; plus
(c) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that Tenant proves could be
reasonably avoided; and
(d) any other amount necessary to compensate
Landlord for all detriment proximately caused by Tenant's failure to perform
Tenant's obligations under this Lease, or which in the ordinary course of things
would be likely to result therefrom including, without limitation, the
following: (i) reasonable expenses for cleaning, repairing or restoring the
Premises to surrender condition; (ii) real estate broker's fees, advertising
costs and other expenses of reletting the Premises which are reasonably incurred
by Landlord and applicable to the period after termination of this Lease; (iii)
reasonable costs of carrying the Premises such as taxes and insurance premiums
thereon, utilities and security precautions not otherwise included in Additional
Rent; (iv) expenses in retaking possession of the Premises; and (v) reasonable
attorneys' fees and court costs.
<PAGE> 25
(e) The "worth at the time of award" of the
amounts referred to in Subparagraphs (a) and (b) of this Subparagraph
13.B.(iii), is computed by allowing interest at the Permitted Rate. The "worth
at the time of award" of the amounts referred to in Subparagraph (c) of this
Subparagraph 13.B.(iii) is computed by discounting such amount at the discount
rate of the Federal Reserve Board of San Francisco at the time of award plus one
percent (1%). The term "rent" as used in this Paragraph 13 shall include all
sums required to be paid by Tenant to Landlord pursuant to the terms of this
Lease.
C. Waivers. Tenant hereby waives any right of redemption or
relief from forfeiture under the laws of the State of California, or under any
other present or future law, including the provisions of Sections 1174 and 1179
of the California Code of Civil Procedure.
14. Destruction.
A. Landlord's Duty to Restore. If the Improvements are damaged
by any peril after the Commencement Date of this Lease, Landlord shall restore
the Premises unless the Lease is terminated by Landlord pursuant to Subparagraph
14.B. or by Tenant pursuant to Subparagraph 14.C. All insurance proceeds
available from the property damage insurance carried by Landlord pursuant to
Subparagraph 8.C. shall be paid to and become the property of Landlord and shall
be used for the restoration of the Premises, unless this Lease is terminated
pursuant to Subparagraphs 14.B. or 14.C. or as otherwise required by Landlord's
Lender. If this Lease is terminated pursuant to either Subparagraphs 14.B. or
14.C., then all insurance proceeds available from the insurance required to be
carried by Tenant which covers loss to property that is Landlord's property or
would become Landlord's property on the termination of this Lease shall be paid
to and become the property of Landlord. If this Lease is not so terminated, then
Landlord shall be entitled to all such insurance proceeds and upon receipt of
such insurance proceeds (if the loss is covered by insurance) and the issuance
of all necessary governmental permits, Landlord shall commence and diligently
prosecute to completion the restoration of the Premises, to the extent then
allowed by Law, to substantially the same condition in which the Premises were
immediately prior to such damage. Landlord's obligation to restore shall be
limited to the Building and Tenant Improvements constructed by Landlord as they
existed as of the Commencement Date and to the extent Landlord receives
insurance proceeds, any Tenant Improvements as they existed as of the
Commencement Date which were paid for by Tenant, excluding any Tenant's Property
or Tenant Improvements paid for by Tenant to the extent Landlord does not
receive insurance proceeds for such Tenant Improvements.
B. Landlord's Right to Terminate. Landlord shall have the
option to terminate this Lease in the event any of the following occurs, which
option may be exercised only by delivery to Tenant of a written notice of
election to terminate within thirty (30) days after the date of such damage:
(i) The Improvements are damaged by any peril either (i)
covered by the type of insurance Landlord is required to carry pursuant to
Subparagraph 8.C. or (ii) covered by valid and collectible insurance actually
carried by Landlord and in force at the time of such
<PAGE> 26
damage or destruction, to such an extent that the estimated restoration cost
exceeds fifty percent (50%) of the then actual replacement cost thereof.
(ii) The Improvements are damaged by any peril both
(i) not covered by the type of insurance Landlord is required to carry pursuant
to Subparagraph 8.C. and (ii) not covered by valid and collectible insurance
actually carried by Landlord and in force at the time of such damage or
destruction, to such an extent that the estimated restoration cost exceeds five
percent (5%) of the then actual replacement cost of the Improvements; provided,
however, that Landlord may not terminate this Lease pursuant to this
Subparagraph 14.B.(ii) if Tenant agrees in writing to pay the amount by which
the restoration cost exceed five percent (5%) of the replacement cost of the
Improvements and deposits with Landlord or provides other reasonable assurances
of payment (which assurances must be approved by Landlord's Lender) of an amount
equal to the estimated amount of such excess within thirty (30) days after
Landlord has notified Tenant with its election to terminate this Lease pursuant
to this Subparagraph 14.B.(ii).
(iii) The Improvements are damaged by any peril
during the last twelve (12) months of the Lease Term to such an extent that the
estimated cost to restore equals or exceeds an amount equal to six (6) times the
Monthly Installment of rent then due; provided, however, that Landlord may not
terminate this Lease pursuant to this Subparagraph 14.B.(iii) if Tenant, at the
time of such damage, has an express written option to further extend the term of
this Lease and Tenant exercises such option to so further extend the Lease Term
within fifteen (15) days following notice of Landlord's termination of this
Lease.
(iv) The Improvements are damaged by any peril and,
because of the Laws then in force, may not be restored at a cost less than or
equal to the available insurance proceeds and any amounts Tenant is required by
this Lease to pay or Tenant otherwise elects to pay, to substantially the same
condition in which it was prior to such damage.
C. Tenant's Right to Terminate. If the Improvements are
damaged by any peril and Landlord does not elect to terminate this Lease or is
not entitled to terminate this Lease pursuant to Subparagraph 14.B., then as
soon as reasonably practicable, Landlord shall furnish Tenant with the written
opinion of Landlord's architect or construction consultant as to when the
restoration work required of Tenant may be completed and the permits required
for such work can be obtained. Tenant shall have the option to terminate this
Lease in whole or in part as specified below in the event any of the following
occurs, which option may be exercised only by delivery to Landlord of a written
notice of election to terminate within fifteen (15) days after Tenant receives
from Landlord the estimate of the time needed to complete such restoration:
(i) If the Building is damaged by any peril and, in
the reasonable opinion of Landlord's architect or construction consultant, the
restoration of the Building cannot be substantially completed within two hundred
seventy (270) days after the date of the damage, then Tenant may terminate this
Lease.
(ii) If the Building is damaged by any peril and all
permits required for
<PAGE> 27
the commencement of restoration are not obtained within sixty (60) days beyond
the time estimated by Landlord's architect or construction consultant, or if
following receipt of such permits the restoration is not completed within sixty
(60) days beyond the time estimated by Landlord's architect or construction
consultant as the required restoration time (provided such time periods shall be
extended by force majeure delays), then Tenant may terminate this Lease.
(iii) If the Building is damaged by any peril within
twelve (12) months of the last day of the Lease Term, and, in the reasonable
opinion of Landlord's architect or construction consultant, the restoration of
the Premises cannot be substantially completed within ninety (90) days after the
date of such damage, then Tenant may terminate this Lease.
D. Abatement of Rent. In the event of damage to the Premises
which does not result in the termination of this Lease, the Monthly Installment
of rent and Additional Rent shall be temporarily abated from the date of
inception of the loss until the damaged Building is restored, in proportion to
the degree to which Tenant's use of the Premises is impaired by such damage.
Tenant shall not be entitled to any compensation from Landlord for loss of
Tenant's property or loss to Tenant's business caused by such damage or
restoration. Tenant hereby waives the provisions of Section 1932, Subdivision 2,
and Section 1933, Subdivision 4, of the California Civil Code, and the
provisions of any similar law, hereinafter enacted.
15. Condemnation.
A. Definition of Terms. For the purposes of this Lease, the
term (1) "TAKING" means a taking of the Premises or damage to the Premises
related to the exercise of the power of eminent domain and includes a voluntary
conveyance, in lieu of court proceedings, to any agency, authority, public
utility, person or corporate entity empowered to condemn property; (2) "TOTAL
TAKING" means the taking of the entire Premises or so much of the Premises as to
prevent or substantially impair the use thereof by Tenant for the uses herein
specified; (3) "PARTIAL TAKING" means a Taking which does not constitute a Total
Taking; (4) "DATE OF TAKING" means the date upon which the title to the
Premises, or a portion thereof, passes to and vests in the condemnor or the
effective date of any order for possession if issued prior to the date title
vests in the condemnor; and (5) "AWARD" means the amount of any award made,
consideration paid, or damages ordered as a result of a Taking.
B. Rights. The parties agree that in the event of a Taking all
rights (as between them) in and to an Award shall be as set forth herein and
Tenant shall have no right to any Award except as set forth herein; provided,
however, that Tenant shall be entitled to any award for the taking of Tenant's
Property.
C. Total Taking. In the event of a Total Taking during the
Lease Term (1) the rights of Tenant under the Lease and the leasehold estate of
Tenant in and to the Premises shall cease and terminate as of the Date of
Taking; (2) Landlord shall refund to Tenant any prepaid rent and any unapplied
security deposit; (3) Tenant shall pay Landlord any unpaid rent or charges due
Landlord under the Lease, each prorated as of the Date of Taking; (4) Tenant
shall
<PAGE> 28
receive from the Award those portions of the Award attributable to Tenant's
Property and for moving expenses of Tenant; and (5) the remainder of the Award
shall be paid to and be the property of Landlord.
D. Partial Taking. In the event of a Partial Taking during the
Lease Term (1) the rights of Tenant under the Lease and the leasehold estate of
Tenant in and to the portion of the Premises taken shall cease and terminate as
of the Date of Taking; (2) Landlord shall refund to Tenant any prepaid rent and
any unapplied security deposit relating to the portion of the Premises taken
based on a square footage basis; (3) Tenant shall pay Landlord any unpaid rent
or charges due Landlord under the Lease for the portion of the Premises taken,
each prorated as of the Date of Taking; (4) from and after the Date of Taking
the Monthly Installment of rent shall be an amount equal to the product obtained
by multiplying the Monthly Installment of rent immediately prior to the Taking
by a fraction, the numerator of which is the number of square feet contained in
the Building after the Taking and the denominator of which is the number of
square feet contained in the Building prior to the Taking; (5) Tenant shall
receive from the Award those portions of the Award attributable to Tenant's
Property and for moving expenses of Tenant; and (6) the remainder of the Award
shall be paid to and be the property of Landlord.
16. Mechanics' Lien. Tenant shall (A) pay for all labor and services
performed for, materials used by or furnished to, Tenant or any contractor
employed by Tenant with respect to the Premises; (B) indemnify, defend, protect
and hold Landlord and the Premises harmless and free from any liens, claims,
liabilities, demands, encumbrances, or judgments created or suffered by reason
of any labor or services performed for, materials used by or furnished to,
Tenant or any contractor employed by Tenant with respect to the Premises; (C)
give notice to Landlord in writing five (5) days prior to employing any laborer
or contractor to perform services related to, or receiving materials for use
upon the Premises; and (D) permit Landlord to post a notice of nonresponsibility
in accordance with the statutory requirements of California Civil Code Section
3094 or any amendment thereof. In the event Tenant is required to post an
improvement bond with a public agency in connection with the above, Tenant
agrees to include Landlord as an additional obligee.
17. Inspection of the Premises. Tenant shall permit Landlord and its
agents to enter the Premises at any reasonable time for the purpose of
inspecting the same, performing Landlord's maintenance and repair
responsibilities (upon 24 hour prior notice except in an emergency), posting a
notice of non-responsibility for alterations, additions or repairs and at any
time within two hundred seventy (270) days prior to expiration of this Lease, to
place upon the Premises, ordinary "For Lease" or "For Sale" signs.
18. Compliance with Laws. Tenant shall, at its own cost, comply with
all of the requirements of all municipal, county, state and federal authorities
now in force, or which may hereafter be in force, pertaining to Tenant's use and
occupancy of the Premises, and shall faithfully observe all municipal, county,
state and federal law, statutes or ordinances now in force or which may
hereafter be in force pertaining to Tenant's use and occupancy of the Premises.
The judgment of any court of competent jurisdiction or the admission of Tenant
in any action or
<PAGE> 29
proceeding against Tenant, whether Landlord be a party thereto
or not, that Tenant has violated any such ordinance or statute in the use and
occupancy of the Premises shall be conclusive of the fact that such violation by
Tenant has occurred. Tenant shall indemnify, protect, defend, and hold Landlord
harmless against any loss, expense, damage, attorneys' fees or liability to the
extent arising out of the failure of Tenant to comply with any applicable law,
except to the extent such failure of Tenant to comply with any applicable law is
caused by the negligence or willful misconduct of Landlord or its Agents.
19. Subordination. The following provisions shall govern the
relationship of this Lease to any underlying lease, mortgage or deed of trust
which now or hereafter affects the Premises or Landlord's interest or estate
therein and any renewal, modification, consolidation, replacement, or extension
thereof (a "SECURITY INSTRUMENT").
A. Priority. This Lease is subject and subordinate to all
Security Instruments existing as of the Commencement Date. However, if any
Lender so requires, this Lease shall become prior and superior to any such
Security Instrument. Landlord, as a condition to Tenant's obligations under this
Lease, shall obtain a recognition and non-disturbance agreement from all
existing lienholders in form reasonably acceptable to Tenant and Landlord's
Lender.
B. Subsequent Security Instruments. At Landlord's election,
this Lease shall become subject and subordinate to any Security Instrument
created after the Commencement Date, provided that the Lender holding such
Security Agreement agrees that in the event of foreclosure of the Security
Instrument in question, such Lender shall recognize the tenancy of Tenant on the
terms and conditions contained in this Lease so long as no Event of Default (as
defined in Paragraph 13.A. hereof) exists on the date such person acquires the
Premises. Notwithstanding such subordination, Tenant's right to quiet possession
of the Premises shall not be disturbed so long as no Event of Default exists on
the date such person acquires the Premises, unless this Lease is otherwise
terminated pursuant to its terms.
C. Documents. Tenant shall execute any reasonable document or
instrument required by Landlord or any Lender to make this Lease either prior or
subordinate to a Security Instrument, which may include such other matters as
the Lender customarily and reasonably requires in connection with such
agreements, including provisions that the Lender not be liable for (1) the
return of the Security Deposit unless the Lender receives it from Landlord, and
(2) any defaults on the part of Landlord occurring prior to the time that the
Lender takes possession of the Premises in connection with the enforcement of
its Security Instrument. Tenant's failure to execute any such document or
instrument within ten (10) days after written demand therefor shall constitute a
default by Tenant. Tenant's obligation to execute and deliver any subordination
agreement to any future Lender shall be conditioned upon such Lender agreeing
that in the event of foreclosure of the mortgage or termination of the ground
lease in question, such Lender shall recognize the tenancy of Tenant on the
terms and conditions contained in this Lease as long as no Event of Default
exists on the date such person acquires the Premises.
D. Tenant's Attornment. Subject to the recognition obligations
under
<PAGE> 30
Subparagraphs 19.B. and 19.C. above, Tenant shall attorn (1) to any purchaser of
the Premises at any foreclosure sale or private sale conducted pursuant to any
Security Instrument encumbering the Premises; (2) to any grantee or transferee
designated in any deed given in lieu of foreclosure; or (3) to the lessor under
any underlying ground lease should such ground lease be terminated.
20. Holding Over. This Lease shall terminate without further notice at
the expiration of the Lease Term. Any holding over by Tenant after expiration
shall not constitute a renewal or extension or give Tenant any rights in or to
the Premises except as expressly provided in this Lease. Any holding over after
the expiration without the consent of Landlord shall be construed to be a
tenancy from month to month, at one hundred fifty percent (150%) of the monthly
rent for the last month of the Lease Term, and shall otherwise be on the terms
and conditions herein specified insofar as applicable.
21. Notices. Any notice required or desired to be given under this
Lease shall be in writing with copies directed as indicated below and shall be
personally served or given by facsimile (with receipt confirmed by telephone),
personal delivery, mail or by prepaid next-business day courier. Personal
delivery, mail and facsimile transmittal shall be effective when received or
delivery is refused by the party. Any notice given by courier shall be deemed to
have been given on the next business day after the time such notice was sent,
addressed to the party to be served with a copy as indicated herein at the last
address given by that party to the other party under the provisions of this
paragraph. At the date of execution of this Lease, the address of Landlord is:
South Bay Development Company, Inc.
511 Division Street
Campbell, California 95008
Attn: Mr. Scott Trobbe
With a copy to:
South Bay/San Tomas Associates
c/o AEW Real Estate Advisors, Inc.
399 Boylston Street
Boston, Massachusetts 02116
Attn: Mr. Christopher Kazantis
and the address of Tenant is:
Auspex Systems, Inc.
5200 Great America Parkway
Santa Clara, California 95054
Attn: General Counsel
After the Commencement Date, the address of Tenant will be at the Premises.
<PAGE> 31
22. Attorneys' Fees. In the event either party shall bring any action
or legal proceeding for damages for any alleged breach of any provision of this
Lease, to recover rent or possession of the Premises, to terminate this Lease,
or to enforce, protect or establish any term or covenant of this Lease or right
or remedy of either party, the prevailing party shall be entitled to recover as
a part of such action or proceeding, reasonable attorneys' fees and court costs,
including attorneys' fees and costs for appeal, as may be fixed by the court or
jury. The term "prevailing party" shall mean the party who received
substantially the relief requested, whether by settlement, dismissal, summary
judgment, judgment, or otherwise.
23. Subleasing and Assignment.
A. Landlord's Consent Required. Tenant's interest in this
Lease is not assignable, by operation of Law or otherwise, nor shall Tenant have
the right to sublet the Premises, transfer any interest of Tenant therein or
permit any use of the Premises by another party, without the prior written
consent of Landlord to each such assignment, subletting, transfer or use, which
consent Landlord agrees not to withhold unreasonably subject to the provisions
of Subparagraph 23.C. below. A consent to one assignment, subletting, occupancy
or use by another party shall not be deemed to be a consent to any subsequent
assignment, subletting, occupancy or use by another party. Any assignment or
subletting without such consent shall be void and shall, at the option of
Landlord, terminate this Lease. Landlord's waiver or consent to any assignment
or subletting hereunder shall not relieve Tenant from any obligation under this
Lease unless the consent shall so provide.
B. Transferee Information Required. If Tenant desires to
assign its interest in this Lease or sublet the Premises, or transfer any
interest of Tenant therein, or permit the use of the Premises by another party
(hereinafter collectively referred to as a "TRANSFER"), Tenant shall give
Landlord at least twenty (20) business days prior written notice of the proposed
Transfer and of the terms of such proposed Transfer, including, but not limited
to, the name and legal composition of the proposed transferee, a financial
statement of the proposed transferee, the nature of the proposed transferee's
business to be carried on in the Premises (including a list of the type and
quantities of all Hazardous Materials to be used by the transferee on the
Premises), the payment to be made or other consideration to be given to Tenant
on account of the Transfer, and such other pertinent information as may be
reasonably requested by Landlord, all in sufficient detail to enable Landlord to
evaluate the proposed Transfer and the prospective transferee.
C. Landlord's Rights. It is the intent of the parties hereto
that this Lease shall confer upon Tenant only the right to use and occupy the
Premises, and to exercise such other rights as are conferred upon Tenant by this
Lease. The parties agree that this Lease is not intended to have a bonus value
nor to serve as a vehicle whereby Tenant may profit by a future Transfer of this
Lease or the right to use or occupy the Premises as a result of any favorable
terms contained herein, or future changes in the market for leased space. It is
the intent of the parties that any such bonus value that may attach to this
Lease shall be and remain the exclusive
<PAGE> 32
property of Landlord, except as provided in Subparagraph 23.C.(ii) below. In the
event Tenant seeks to Transfer its interest in this Lease or the Premises,
Landlord shall have the following options, which shall be exercised by Landlord,
within twenty (20) business days of Landlord receiving all of the information
regarding the Transfer that is required under Subparagraph 23.B., at Landlord's
sole choice without limiting Landlord in the exercise of any other right or
remedy which Landlord may have by reason of such proposed Transfer:
(i) In the event of a Transfer constituting either an
assignment of the entire Lease or a sublease of substantially all of the
Premises for all or substantially all of the balance of the Lease Term, Landlord
may elect to terminate this Lease effective as of the proposed effective date of
the proposed Transfer and release Tenant from any further liability hereunder
accruing after such termination date by giving Tenant written notice of such
termination within fifteen (15) days after receipt by Landlord of Tenant's
notice of intent to Transfer as provided above. If Landlord makes such election
to terminate this Lease, Tenant shall surrender the Premises, in accordance with
Paragraph 32, on or before the effective termination date; or
(ii) Landlord may consent to the proposed Transfer on
the condition that Tenant agrees to pay to Landlord, as additional rent, fifty
percent (50%) of any and all rents or other consideration (including key money)
received by Tenant from the transferee by reason of such Transfer in excess of
the rent payable by Tenant to Landlord under this Lease (after reimbursement to
Tenant of any brokerage commissions, attorneys' fees and advertising expenses
incurred by Tenant in connection with the Transfer, and any tenant improvement
costs related to such Transfer that are incurred by Tenant). Tenant expressly
agrees that the foregoing is a reasonable condition for obtaining Landlord's
consent to any Transfer;
(iii) Landlord may consent to the proposed Transfer
on the condition that if such Transfer is an assignment that Landlord in its
sole and absolute discretion shall determine whether such Transfer shall include
the right to exercise the Options to extend the Lease Term;
(iv) Landlord may withhold its consent in its sole
and absolute discretion to the proposed Transfer if the Transfer is a sublease
and the term of the such sublease extends beyond the then existing Lease Term
(the "then existing Lease Term" shall not include any unexercised options to
extend the Lease Term); or
(v) Landlord may reasonably withhold its consent to
the proposed Transfer.
If Landlord agrees to consent to the proposed Transfer pursuant to Subparagraphs
23.C.(ii) or 23.C.(iii), Landlord shall provide such consent on Landlord's form
within ten (10) business days of Landlord electing such option and receiving the
final version of the document evidencing the Transfer.
<PAGE> 33
D. Permitted Transfers. Notwithstanding the foregoing,
Tenant may, without Landlord's prior written consent and without providing to
Landlord the option described in Subparagraph 23.C.(i) above, assign its
interest in the Lease or sublet the Premises or a portion thereof to (i) a
subsidiary, affiliate, division or corporation controlled by or under common
control with Tenant; (ii) a successor corporation related to Tenant by merger,
consolidation, non-bankruptcy reorganization or government action; or (iii) a
purchaser of substantially all of the Tenant's assets; provided that, in each
instance described above, (a) each assignee assumes the obligations of Tenant
under this Lease and each sublessee agrees to abide by this Lease in a written
instrument delivered to Landlord; (b) Tenant as transferor remains liable as a
primary obligor for the obligations of the tenant under this Lease; and (c) the
financial strength of the transferee tenant is no less than Tenant's financial
strength as of the Commencement Date or the date of such Transfer, whichever is
greater.
24. Successors. The covenants and agreements contained in this Lease
shall be binding on and inure to the benefit of the parties hereto and on their
respective heirs, successors and assigns (to the extent the Lease is
assignable).
25. Mortgagee Protection. In the event of any default on the part of
Landlord, Tenant will give notice by registered or certified mail to any
beneficiary of a deed of trust or mortgagee of a mortgage encumbering the
Premises, whose address shall have been previously furnished to Tenant in
writing by Landlord. Such beneficiary or mortgagee shall have the right to cure
Landlord's default and so long as such beneficiary or mortgagee is making
reasonable efforts to cure Landlord's default, including, but not limited to,
obtaining possession of the Premises by power of sale or judicial foreclosure,
if such should prove necessary to effect a cure, Tenant shall not have the right
to terminate this Lease.
26. Estoppel Certificate. Tenant and Landlord agree within ten (10)
days following request by the other party to (A) execute and deliver to other
party any documents, including estoppel certificates presented to a party by the
other party, (1) certifying that this Lease is unmodified, or if modified,
indicating the modifications, and in full force and effect and the date to which
the rent and other charges are paid in advance, if any, and (2) acknowledging
that there are not, to such party's knowledge, any uncured defaults on the part
of other party hereunder, or specifying the defaults, if any, and (3) evidencing
the status of the Lease as may be reasonably required either by a lender making
a loan to Landlord or to Tenant to be secured by a deed of trust or mortgage
covering the Premises or a purchaser of the Premises from Landlord, and (B)
Tenant agrees to deliver to Landlord the financial statement of Tenant with an
opinion of a certified public accountant, including a balance sheet and profit
and loss statement, for the last completed fiscal year all prepared in
accordance with generally accepted accounting principles consistently applied.
Tenant's failure to deliver an estoppel certificate within ten (10) days
following a request by Landlord shall be an Event of Default under this Lease.
Landlord's failure to deliver an estoppel certificate within ten (10) days
following a request by Tenant shall be an event of default under this Lease.
27. Surrender of Lease Not Merger. The voluntary or other surrender of
this Lease by
<PAGE> 34
Tenant, or a mutual cancellation thereof, shall not work a merger and shall, at
the option of Landlord, terminate all or any existing subleases or subtenants,
or operate as an assignment to Landlord of any or all such subleases or
subtenants.
28. Waiver. The waiver by Landlord or Tenant of any breach of any term,
covenant or condition herein contained shall not be deemed to be a waiver of
such term, covenant or condition or any subsequent breach of the same or any
other term, covenant or condition herein contained. Any waiver shall be in
writing and signed by both Landlord and Tenant.
29. General.
A. Captions. The captions and paragraph headings used in
this Lease are for the purposes of convenience only. They shall not be construed
to limit or extend the meaning of any part of this Lease, or be used to
interpret specific sections. The word(s) enclosed in quotation marks shall be
construed as defined terms for purposes of this Lease. As used in this Lease,
the masculine, feminine and neuter and the singular or plural number shall each
be deemed to include the other whenever the context so requires.
B. Definition of Landlord. The term Landlord as used in
this Lease, so far as the covenants or obligations on the part of Landlord are
concerned, shall be limited to mean and include only the owner at the time in
question of the fee title of the Premises, and in the event of any transfer or
transfers of the title of such fee, the Landlord herein named (and in case of
any subsequent transfers or conveyances, the then grantor) shall be
automatically freed and relieved of all liability with respect to performance of
any covenants or obligations on the part of Landlord contained in this Lease to
be performed after the date of such transfer or conveyance which are assumed in
writing by the transferee; provided that any funds in the hands of Landlord or
the then grantor at the time of such transfer, in which Tenant has an interest,
shall be turned over to the grantee. It is intended that the covenants and
obligations contained in this Lease on the part of Landlord shall, subject as
aforesaid, be binding upon each Landlord, its heirs, personal representatives,
successors and assigns only with respect to the obligations of Landlord arising
during its respective period of ownership.
C. Time of Essence. Time is of the essence for the performance
of each term, covenant and condition of this Lease.
D. Severability. In case any one or more of the
provisions contained herein, except for the payment of rent, shall for any
reason be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Lease, but this Lease shall be construed as if such invalid, illegal or
unenforceable provision had not been contained herein. This Lease shall be
construed and enforced in accordance with the laws of the State of California.
E. Quiet Enjoyment. Upon Tenant paying the rent for the
Premises and observing and performing all of the covenants, conditions and
provisions on Tenant's part to be
<PAGE> 35
observed and performed hereunder, Tenant shall have quiet possession of the
Premises for the entire term hereof subject to all of the provisions of this
Lease.
F. Law. As used in this Lease, the term "LAW" or "LAWS"
shall mean any judicial decision, statute, constitution, ordinance, resolution,
regulation, rule, administrative order, or other requirement of any government
agency or authority having jurisdiction over the parties to this Lease or the
Premises or both, in effect at the Commencement Date of this Lease or any time
during the Lease Term, including, without limitation, any regulation, order, or
policy of any quasi-official entity or body (e.g., board of fire examiners,
public utility or special district).
G. Agent. As used in this Lease, the term "AGENT" shall
mean, with respect to either Landlord or Tenant, its respective agents,
employees, contractors (and their subcontractors), and invitees (and in the case
of Tenant, its subtenants).
H. Lender. As used in this Lease, the term "LENDER"
shall mean any beneficiary, mortgagee, secured party or other holder of any deed
of trust, mortgage or other written security device or agreement affecting
Landlord's interest in the Premises.
I. Force Majeure. Any prevention, delay or stoppage due
to strikes, lock-outs, inclement weather, labor disputes, inability to obtain
labor, materials, fuels or reasonable substitutes therefor, governmental
restrictions, regulations, controls, action or inaction, civil commotion, fire
or other acts of God, and other causes beyond the reasonable control of the
party obligated to perform (except financial inability) shall excuse the
performance, for a period equal to the period of any said prevention, delay or
stoppage, or any obligation hereunder except the obligation of Tenant to pay
rent or any other sums due hereunder.
30. Sign. Tenant shall not place or permit to be placed any sign or
decoration on the Parcel or the exterior of the Building without the prior
written consent of Landlord, which consent shall not be unreasonably withheld or
delayed. Tenant, upon written notice by Landlord, shall immediately remove any
sign or decoration that Tenant has placed or permitted to be placed on the
Parcel or the exterior of the Building without the prior written consent of
Landlord, and if Tenant fails to so remove such sign or decoration within five
(5) days after Landlord's written notice, Landlord may enter upon the Premises
and remove said sign or decoration and Tenant agrees to pay Landlord, as
additional rent upon demand, the cost of such removal. At the termination of
this Lease, Tenant shall remove any sign which it has placed on the Parcel or
Building and shall repair any damage caused by the installation or removal of
such sign.
31. Interest on Past Due Obligations. Any Monthly Installment of rent
due from Tenant, or any other sum due under this Lease from Tenant, which is
received by Landlord after the date ten (10) days following the date written
notice is given by Landlord to Tenant that such sum has not been paid when due,
shall bear interest from said due date until paid, at an annual rate equal to
the lower of (the "PERMITTED RATE"): (1) twelve percent (12%); or (2) five
percent (5%) plus the rate established by the Federal Reserve Bank of San
Francisco, as of the twenty-
<PAGE> 36
fifth (25th) day of the month immediately preceding the due date, on advances to
member banks under Sections 13 and 13(a) of the Federal Reserve Act, as now in
effect or hereafter from time to time amended. Payment of such interest shall
not excuse or cure any default by Tenant. In addition, Tenant shall pay all
costs and attorneys' fees reasonably incurred by Landlord in collection of such
amounts.
32. Surrender of the Premises. On the last day of the term hereof, or
on the sooner termination of this Lease, Tenant shall surrender the Premises to
Landlord in their condition existing as of the Commencement Date of this Lease,
except for (A) ordinary wear and tear; (B) acts of God; (C) condemnation; (D)
Hazardous Materials which Tenant is not responsible for pursuant to this Lease;
and (E) all alterations, improvements or additions which Tenant is not required
to remove pursuant to this Lease. Tenant shall surrender the Premises with all
originally painted interior walls washed, and other interior walls cleaned, and
repaired or replaced, the air conditioning and heating equipment serviced and
repaired by a reputable and licensed service firm as required by Paragraph 10.B.
hereof, all floors cleaned and waxed, all to the reasonable satisfaction of
Landlord. Tenant shall remove all of Tenant's Property from the Premises, and
all property not so removed shall be deemed abandoned by Tenant. Tenant, at its
sole cost, shall repair any damage to the Premises caused by the removal of
Tenant's Property, which repair shall include, without limitation, the patching
and filling of holes and repair of structural damage. If the Premises are not so
surrendered at the termination of this Lease, Tenant shall indemnify, defend,
protect and hold Landlord harmless from and against loss or liability resulting
from delay by Tenant in so surrendering the Premises including without
limitation, any claims made by any succeeding tenant or losses to Landlord due
to lost opportunities to lease to succeeding tenants.
33. Authority. The undersigned parties hereby warrant that they have
proper authority and are empowered to execute this Lease on behalf of Landlord
and Tenant, respectively.
34. CC&Rs. This Lease is made subject to all matters of public record
affecting title to the property of which the Premises are a part as described in
the Preliminary Title Report dated October 2, 1996, prepared by Santa Clara Land
Title Company, Order No. 00121234, a copy of which is attached hereto as Exhibit
"G" (the "TITLE REPORT"). Tenant shall abide by and comply with all private
conditions, covenants and restrictions of public record now or hereafter
affecting the Premises as described on Exhibit "H" with reference to the Title
Report ("CC&RS"), except as may be otherwise provided in Exhibit "H". Landlord
represents and warrants that to its actual knowledge no violation of the CC&Rs
exists as of the date of this Lease. During the Lease Term, Landlord shall
promptly notify Tenant of any modification to the CC&Rs.
35. Brokers. The parties represent and warrant to each other that they
have not dealt with any broker respecting this transaction other than
Cooper/Brady Corporate Real Estate Services (the "BROKER") and hereby agree to
indemnify and hold each other harmless from and against any brokerage commission
or fee, obligation, claim or damage (including attorneys' fees) paid or incurred
respecting any broker claiming through the other party or with which/whom the
<PAGE> 37
other party has dealt. Landlord shall pay commission owing to the Broker
pursuant to a separate agreement between Landlord and the Broker.
36. Limitation on Landlord's Liability. Tenant, for itself and its
successors and assigns (to the extent this Lease is assignable), hereby agrees
that in the event of any actual, or alleged, breach or default by Landlord under
this Lease that:
A. Tenant's sole and exclusive remedy and recourse
against Landlord shall be as against Landlord's interest in the Premises and
this Lease;
B. No partner of Landlord shall be sued or named as a
party in a suit or action (except as may be necessary to secure jurisdiction of
the partnership) for the breach of any obligation of Landlord or the act or
omission of Landlord or its Agents;
C. No service of process shall be made against any
partner of Landlord with respect to any claim arising under or out of this Lease
(except as may be necessary to secure jurisdiction of the partnership);
D. No partner of Landlord shall be required to answer or
otherwise plead to any service of process with respect to any claim arising
under or out of this Lease (except as may be necessary to secure jurisdiction of
the partnership);
E. No judgment will be taken against any partner of
Landlord for the breach of any obligation of Landlord or the act or omission of
Landlord or its Agents;
F. Any such judgment taken against any partner of
Landlord may be vacated and set aside at any time nunc pro tunc;
G. No writ of execution will ever be levied against the
assets of any partner of Landlord for a judgment based on any breach of a
Landlord's obligations under this Lease or any act or omission of Landlord; and
H. The covenants and agreements of Tenant set forth in
this Paragraph 36 shall be enforceable by Landlord and any partner of Landlord.
<PAGE> 38
37. Hazardous Material.
A. Definitions. As used herein, the term "HAZARDOUS
MATERIAL" shall mean any substance: (i) the presence of which requires
investigation or remediation under any federal, state or local statute,
regulation, ordinance, order, action, policy or common law; (ii) which is or
becomes defined as a "hazardous waste," "hazardous substance," pollutant or
contaminant under any federal, state or local statute, regulation, rule or
ordinance or amendments thereto including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601
et seq.) and/or the Resource Conservation and Recovery Act (42 U.S.C. Section
6901 et seq.); (iii) which is toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is
or becomes regulated by any governmental authority, agency, department,
commission, board, agency or instrumentality of the United States, the State of
California or any political subdivision thereof; (iv) the presence of which on
the Premises causes or threatens to cause a nuisance upon the Premises or to
adjacent properties or poses or threatens to pose a hazard to the health or
safety of persons on or about the Premises; (v) the presence of which on
adjacent properties could constitute a trespass by Landlord or Tenant; (vi)
without limitation which contains gasoline, diesel fuel or other petroleum
hydrocarbons; (vii) without limitation which contains polychlorinated biphenyls
(PCBs), asbestos or urea formaldehyde foam insulation; or (viii) without
limitation radon gas.
B. Landlord's Obligation. Except for the Existing
Environmental Condition (as defined in Subparagraph 37.L. hereof), Landlord has
no actual knowledge, without any duty to make investigation, of any Hazardous
Materials present in the soil or groundwater of the Parcel. Landlord, at its
sole cost, shall comply with all Laws which impose liability or responsibility
upon either Landlord or Tenant to investigate, remediate or otherwise take any
action with respect to the Existing Environmental Condition; provided, however,
that this covenant shall not require Landlord to perform any obligation Tenant
has under this Paragraph 37. Subject to Subparagraph 8.E., Landlord shall
indemnify, defend, protect and hold Tenant harmless from and against all
liabilities, claims, penalties, fines, response costs and other expenses
(including reasonable attorneys' fees) which result from Landlord's failure to
timely perform the obligation stated in the immediate preceding sentence.
C. Permitted Use. Subject to the compliance by Tenant
with the provisions of Subparagraphs D, E, F, G, I, J and K below, Tenant shall
be permitted to use and store on the Premises those Hazardous Materials listed
in Exhibit "E" attached hereto, in the quantities set forth in Exhibit "E" and
such other Hazardous Materials approved by Landlord in writing.
D. Hazardous Materials Management Plan.
(i) Prior to Tenant or its subtenant using, handling,
transporting or storing any Hazardous Material at or about the Premises
(including, without limitation, those listed in Exhibit "E" other than customary
quantities of janitorial and office supplies), Tenant shall submit to Landlord a
Hazardous Materials Management Plan ("HMMP") for Landlord's review and approval,
which approval shall not be unreasonably withheld. The HMMP shall
<PAGE> 39
describe: (aa) the quantities of each material to be used, (bb) the purpose for
which each material is to be used, (cc) the method of storage of each material,
(dd) the method of transporting each material to and from the Premises and
within the Premises, (ee) the methods Tenant will employ to monitor the use of
the material and to detect any leaks or potential hazards, and (ff) any other
information any department of any governmental entity (city, state or federal)
requires prior to the issuance of any required permit for the Premises or during
Tenant's occupancy of the Premises. Landlord may, but shall have no obligation
to review and approve the foregoing information and HMMP, and such review and
approval or failure to review and approve shall not act as an estoppel or
otherwise waive Landlord's rights under this Lease or relieve Tenant of its
obligations under this Lease; provided that a failure to review and approve
within a reasonable time shall not be deemed a disapproval. If Landlord
determines in good faith by inspection of the Premises or review of the HMMP
that the methods in use or described by Tenant are not adequate in Landlord's
good faith judgment to prevent or eliminate the existence of environmental
hazards, then Tenant shall not use, handle, transport, or store such Hazardous
Materials at or about the Premises unless and until such methods are approved by
Landlord in good faith and added to an approved HMMP. Once approved by Landlord,
Tenant shall strictly comply with the HMMP and shall not change its use,
operations or procedures with respect to Hazardous Materials without submitting
an amended HMMP for Landlord's review and approval as provided above.
(ii) Tenant shall pay to Landlord when Tenant submits
an HMMP (or amended HMMP) the amount reasonably determined by Landlord to cover
all Landlord's costs and expenses reasonably incurred in connection with
Landlord's review of the HMMP which costs and expenses shall include, among
other things, all reasonable out-of-pocket fees of attorneys, architects, or
other consultants incurred by Landlord in connection with Landlord's review of
the HMMP. Landlord shall have no obligation to consider a request for consent to
a proposed HMMP unless and until Tenant has paid to Landlord its reasonable
estimate of all such costs and expenses to Landlord, and Tenant shall pay all
such costs and expenses to Landlord irrespective of whether Landlord consents to
such proposed HMMP. Tenant shall pay to Landlord on demand the excess, if any,
of such costs and expenses actually incurred by Landlord over the amount of such
costs and expenses actually paid by Tenant, and Landlord shall promptly refund
to Tenant the excess, if any, of such costs and expenses actually paid by Tenant
over the amount of such costs and expenses actually incurred by Landlord.
E. Use Restriction. Except as specifically allowed in
Subparagraph C above, Tenant shall not cause or permit any Hazardous Material to
be used, stored, generated, discharged, transported to or from, or disposed of
in or about the Premises, or any other land or improvements in the vicinity of
the Premises. Without limiting the generality of the foregoing, Tenant, at its
sole cost, shall comply with all Laws relating to the storage, use, generation,
transport, discharge and disposal by Tenant or its Agents of any Hazardous
Material. If the presence of any Hazardous Material on the Premises (other than
an Existing Environmental Condition) caused or permitted by Tenant or its Agents
results in contamination of the Premises or any soil, air, ground or surface
waters under, through, over, on, in or about the Premises, Tenant, at its
expense, shall promptly take all actions necessary to return the Premises and/or
the
<PAGE> 40
surrounding real property to the condition existing prior to the appearance of
such Hazardous Material to the extent feasible and in all events, to a condition
which complies with applicable Environmental Law. In the event there is a
release, discharge or disposal of or contamination of the Premises by a
Hazardous Material which is of the type that has been stored, handled,
transported or otherwise used or permitted by Tenant or its Agents on or about
the Premises (other than an Existing Environmental Condition), Tenant shall have
the burden of proving that such release, discharge, disposal or contamination is
not the result of the acts or omissions of Tenant or its Agents.
F. Tenant Indemnity. Tenant shall defend, protect, hold
harmless and indemnify Landlord and its Agents and Lenders with respect to all
actions, claims, losses (including, diminution in value of the Premises), fines,
penalties, fees (including, but not limited to, attorneys' and consultants'
fees) costs, damages, liabilities, remediation costs, investigation costs,
response costs and other expenses arising out of, resulting from, or caused by
(i) any Hazardous Material used, generated, discharged, transported to or from,
stored, or disposed of by Tenant or its Agents in, on, under, over, through or
about the Premises and/or the surrounding real property or (ii) any disposal or
release of any Hazardous Material on the surface of the Premises occurring after
the Commencement Date and prior to the termination of this Lease that is not the
result of the negligent acts or wilful misconduct of Landlord or its Agents;
provided that in no event shall the foregoing create any liability in Tenant for
an Existing Environmental Condition. Tenant shall not suffer any lien to be
recorded against the Premises as a consequence of the disposal of any Hazardous
Material on the Premises by Tenant or its Agents, including any so called state,
federal or local "super fund" lien related to the "clean up" of any such
Hazardous Material in, over, on, under, through, or about the Premises.
G. Compliance. Tenant shall immediately notify Landlord,
and Landlord shall notify Tenant, of any inquiry, test, investigation,
enforcement proceeding by or against Tenant or the Premises concerning
contamination of the Premises caused by any Hazardous Material. Any remediation
plan prepared by or on behalf of Tenant must be submitted to Landlord prior to
conducting any work pursuant to such plan and prior to submittal to any
applicable government authority and shall be subject to Landlord's consent which
consent shall not be unreasonably withheld or delayed. Tenant acknowledges that
Landlord, as the owner of the Property, at its election, shall have the sole
right to negotiate, defend, approve and appeal any action taken or order issued
with regard to any Hazardous Material by any applicable governmental authority.
H. Assignment and Subletting. It shall not be
unreasonable for Landlord to withhold its consent to any proposed assignment or
subletting if (i) the proposed assignee's or subtenant's anticipated use of the
Premises involves the storage, generation, discharge, transport, use or disposal
of any Hazardous Material (other than reasonable quantities of office supplies,
warehouse supplies and janitorial supplies that may contain Hazardous Materials)
in a manner which represents a risk to the health and safety of persons on or
about the Premises, and in Landlord's opinion, that risk is a material risk;
(ii) if the proposed assignee or subtenant has been required by any prior
landlord, lender or governmental authority to "clean up" or remediate any
<PAGE> 41
Hazardous Material resulting from the negligence or affirmative actions of the
proposed assignee or subtenant within the last five (5) years; (iii) if the
proposed assignee or subtenant is subject to investigation or enforcement order
or proceeding by any governmental authority in connection with the use,
generation, discharge, transport, disposal or storage of any Hazardous Material
resulting from the negligence or affirmative actions of the proposed assignee or
subtenant within the last five (5) years.
I. Surrender. Upon the expiration or earlier termination
of the Lease, Tenant, at its sole cost, shall remove all Hazardous Materials
from the Premises that Tenant or its Agents introduced to the Premises. If
Tenant fails to so surrender the Premises, Tenant shall indemnify, protect,
defend and hold Landlord harmless from and against all damages to the extent
resulting from Tenant's failure to surrender the Premises as required by this
Paragraph, including, without limitation, any actions, claims, losses,
liabilities, fees (including, but not limited to, attorneys' and consultants'
fees), fines, costs, penalties, or damages in connection with the condition of
the Premises including, without limitation, damages occasioned by the inability
to relet the Premises or a reduction in the fair market and/or rental value of
the Premises by reason of the existence of any Hazardous Material that Tenant or
its Agents introduced in, on, over, under, through or around the Premises.
J. Right to Appoint Consultant. If Tenant or its Agents
have used Hazardous Materials (other than customary quantities of janitorial or
office supplies), Landlord shall have the right to appoint a consultant, at
Tenant's expense, to conduct an investigation to determine whether any Hazardous
Material is being used, generated, discharged, transported to or from, stored or
disposed of in, on, over, through, or about the Premises, in an inappropriate or
unlawful manner. If Tenant has violated any Law or covenant in this Lease
regarding the use, storage or disposal of Hazardous Materials on or about the
Premises, Tenant shall reimburse Landlord for the cost of such investigation.
Tenant, at its expense, shall comply with all reasonable recommendations of the
consultant or take other steps approved by Landlord required to conform Tenant's
use, storage or disposal of Hazardous Materials to the requirements of
applicable Law or to fulfill the obligations of Tenant hereunder.
K. Holding Over. If during the Lease Term, Tenant or any
of its Agents is required to take any action of any kind required or requested
to be taken by any governmental authority to clean-up, remove, remediate or
monitor any Hazardous Material (the presence of which is the result of the acts
or omissions of Tenant or its Agents and other than an Existing Environmental
Condition) and such action is not completed prior to the expiration or earlier
termination of the Lease, Tenant shall be deemed to have impermissibly held over
until such time as such required action is completed, and Landlord shall be
entitled to all damages directly or indirectly incurred in connection with such
holding over, including without limitation, damages occasioned by the inability
to re-let the Premises or a reduction of the fair market and/or rental value of
the Premises.
L. Existing Environmental Reports. Tenant hereby
acknowledges that it has received, read and reviewed the reports and test
results described in Exhibit "F" attached hereto
<PAGE> 42
and made a part hereof (the "EXISTING ENVIRONMENTAL REPORTS"). The Hazardous
Materials currently present in, on or under the Premises or the soil,
groundwater, surface water or air thereof, or in, on, or under any property in
the vicinity of the Premises, or the soil, groundwater, surface water or air
thereof, as described in the Existing Environmental Reports are referred to
herein as the "EXISTING ENVIRONMENTAL CONDITION". Tenant shall keep the Existing
Environmental Reports and all information contained therein confidential, except
Tenant shall be allowed to disclose such information to Tenant's consultants and
attorneys provided such parties agree to keep the information confidential.
M. Provisions Survive Termination. The provisions of this
Paragraph 37 shall survive the expiration or termination of this Lease.
N. Controlling Provisions. The provisions of this
Paragraph 37 are intended to govern the rights and liabilities of the Landlord
and Tenant under this Lease respecting Hazardous Materials to the exclusion of
any other provisions in this Lease that might otherwise be deemed applicable.
The provisions of this Paragraph 37 shall be controlling with respect to any
provisions in this Lease that are inconsistent with this Paragraph 37.
38. Landlord's Default.
A. If Tenant believes Landlord has failed to perform or
provide any service or pay any sum which Tenant in good faith believes Landlord
is obligated to provide, perform or pay under this Lease, Tenant shall provide
Landlord with written notice thereof. If Landlord does not perform or provide
the required service or make such required payment within thirty (30) days after
receipt of Tenant's notice (or if such failure cannot be cured within such
thirty (30) day period, if Landlord does not promptly commence to provide or
cure the same and diligently pursue the same to completion), Tenant shall have
the right to provide, perform or pay the same. If Tenant, after such notice,
provides and performs such service or makes such payment and sends to Landlord a
written statement reflecting the reasonable costs for providing the same or the
amount paid and Landlord fails to pay the same within twenty (20) days after
receipt of such notice, Tenant shall have the right to seek and obtain damages
from Landlord.
B. In the event of any default by Landlord, Tenant's
exclusive remedies shall be an action for specific performance or an action for
damages. Tenant hereby waives the benefit of any laws granting it the right to
terminate this Lease or withhold rent on account of any Landlord default. Tenant
waives the provisions of Sections 1932(l), 1941 and 1942 of the California Civil
Code and any similar or successor law regarding Tenant's right to terminate this
Lease or to make repairs and deduct the expenses of such repairs from the rent
due under this Lease.
39. Condition to Effectiveness. The effectiveness of this Lease is
conditioned upon Landlord obtaining architectural approval by April 1, 1997 from
the City of Santa Clara for the construction of the Building. This condition is
for the benefit of Tenant and Tenant may waive this condition by written notice
to Landlord on or before April 1,
<PAGE> 43
1997. If on or before April 1, 1997 this condition is neither fulfilled nor
waived by Tenant, then this Lease shall automatically terminate, Landlord shall
return the Security Deposit to Tenant and the parties shall have no further
rights or obligations hereunder. If this condition is fulfilled or waived by
Tenant on or before April 1, 1997, then this Lease shall continue in full force
and effect. Landlord shall use good faith and all reasonable efforts to obtain
the architectural approval by April 1, 1997.
<PAGE> 44
IN WITNESS WHEREOF, the parties have executed this Agreement on the
dates set forth below.
LANDLORD TENANT
South Bay/San Tomas Associates, Auspex Systems, Inc.,
a California general partnership a Delaware corporation
By: CIIF Associates II Limited
partnership, a Delaware limited
partnership, its general partner By:
--------------------------------
By:AEW Advisors, Inc., Its:
a Massachusetts corporation, its -------------------------------
managing general partner
By:
-----------------------------
Its:
----------------------------
<PAGE> 45
EXHIBIT "A"
Legal Description of Parcel
<PAGE> 46
EXHIBIT "B"
Site Plan
<PAGE> 47
EXHIBIT "C"
Improvement Agreement
THIS IMPROVEMENT AGREEMENT by and between SOUTH BAY/SAN TOMAS
ASSOCIATES ("Landlord") and AUSPEX SYSTEMS, INC. ("Tenant"), dated January ,
1997, is made part of that Lease (the "Lease"), between Landlord and Tenant,
dated concurrently herewith. Landlord and Tenant agree that the following terms
are part of the lease:
1. Definitions: Except as defined below, capitalized terms in this
Improvement Agreement shall have the meanings given those terms in the Lease.
(a) Architect shall collectively mean all architects, structural
engineers, mechanical engineers, and other design professionals retained by
Landlord and needed to design the Tenant Improvements.
(b) Applicable Laws and Restrictions shall mean all laws (including
without limitation the Americans With Disabilities Act), building codes,
ordinances, regulations, title covenants, conditions and restrictions.
(c) Approved Plans shall mean the Final Tenant Improvement Plans, as
the same may be modified by a Change Order issued in accordance with this
Improvement Agreement.
(d) Building shall mean the Building Shell and all of the Tenant
Improvements therein.
(e) Building Shell shall mean (concrete or one story tilt-up
building), having the general specifications described on attached Exhibit 1,
which shall be constructed by Landlord for Tenant generally in the location and
configuration shown on Exhibit B to the Lease.
(f) Construction Documents shall mean the Final Tenant Improvement
Plans, and any and all bid packages, contracts with Contractors and agreement
with the Architect.
(g) Contractor(s) shall mean South Bay Construction and Development
Company and all other contractors, design-build contractors, subcontractors, and
material supplies who provide labor and material for construction of the Tenant
Improvements. To the extent required by Applicable Laws and Restrictions, each
Contractor shall be duly licensed by the State of California.
(h) Construction Schedule shall mean the schedule for the
commencement, prosecution and Substantial Completion of the Tenant Improvements,
which shall be in substantially the form of attached Exhibit 2, and which shall
be approved by the parties pursuant to this Improvement Agreement and, when
agreed upon attached hereto in replacement of
<PAGE> 48
Exhibit 2 and incorporated herein by this reference.
(i) Final Tenant Improvement Plans shall mean those plans,
specifications and working drawings for the Tenant Improvements, which shall be
prepared, approved and identified in Exhibit 3 when approved in writing by
Landlord and Tenant, and thereafter incorporated herein by this reference.
(j) Force Majeure shall mean any prevention, delay or stoppage due
to strikes, lock-outs, inclement weather, labor disputes, inability to obtain
labor, materials, fuels or reasonable substitutes therefor, governmental
restrictions, regulations, controls, action or inaction, civil commotion, fire
or other acts of God, and other causes beyond the reasonable control of the
party obligated to perform (except financial inability) shall excuse the
performance, for a period equal to the period of any said prevention, delay or
stoppage, or any obligation hereunder except the obligation of Tenant to pay any
sums due hereunder.
(k) Landlord's Representative shall mean Scott Trobbe, whose
telephone number is (408) 379-0400, whose facsimile number is (408) 379-3229,
and whose address for delivered notice is South Bay Development Company, Inc.,
511 Division Street, Campbell, California 95008, or such other person as
Landlord shall designate in writing to Tenant as its authorized representative
for the proposes of administering this Improvement Agreement. Landlord's
Representative may change its numbers and address by deliver of three (3)
business days notice to Tenant's Representative.
(l) Planning Schedule shall mean the schedule for the preparation,
approval and permitting of the Approved Plans for the Tenant Improvements
attached hereto as Exhibit 4, and incorporated herein by this reference.
(m) Permits shall mean all of the permits, inspections, approvals
and consents of governmental authorities.
(n) Substantial Completion shall mean that (i) the Tenant
Improvements have been completed in accordance with the provisions of this
Improvement Agreement and the Final Tenant Improvement Plans therefor (except
for minor punchlist items which do not substantially interfere with Tenant's use
of the Premises), (ii) all utilities are connected and available for Tenant's
use, and (iii) all necessary governmental approvals for occupancy of the
Building have been obtained (including, if applicable, a certificate of
occupancy); provided, however that, to the extent that Substantial Completion of
the Building is delayed because of a Tenant Delay, the Substantial Completion
Date shall be deemed to be the date the Building would have otherwise been
Substantially Completed, absent the Tenant Delay.
(o) Tenant Delay shall mean any delay in the Substantial Completion
of the Tenant Improvements as a consequence of (i) Tenant's failure to promptly
review and approve or properly disapprove plans for the Tenant Improvements in
accordance with this Improvement Agreement and within the time permitted by the
Planning Schedule; (ii) Tenant's request for
<PAGE> 49
special materials, finishes, or installations which are not readily available,
provided the length of Tenant Delay due to such unavailability shall not exceed
the amount of delay approved by Tenant when such materials, components, finish,
or improvements were requested by Tenant; (iii) Change Orders requested by
Tenant and approved by Landlord, provided that the amount of Tenant Delay as a
consequence of any Change Order may not exceed the amount of delay specified in
the Change Order; (iv) Tenant's failure to complete any of its own improvement
work identified in the Construction Schedule as being necessary for the
Substantial Completion of the Tenant Improvements by the date specified in the
Construction Schedule for completion of such work; (v) interference with
Landlord's work caused by Tenant or Tenant's contractors or subcontractors.
(p) Tenant Improvements shall mean those improvements that Landlord
is obligated to construct in the Premises pursuant to Final Tenant Improvement
Plans.
(q) TI Allowance shall mean an amount equal to One Million Nine
Hundred Sixty Eight Thousand Six Hundred Dollars ($1,968,000), which allowance
is already reflected in the Monthly Installment amount set forth in Subparagraph
4.B. of the Lease.
(r) TI Costs shall mean all sums (i) paid to Contractors for labor
and materials furnished in connection with construction of the Tenant
Improvements; (ii) all costs, expenses, payments, fees, and charges whatsoever
paid or incurred by Landlord to or at the direction of any city, county, or
other governmental authority or agency which are required to be paid by Landlord
in order to obtain all necessary governmental permits, licenses, inspections and
approvals relating to the construction of the Tenant Improvements and the use
and occupancy of the Premises, including without limitation all in lieu fees and
utility fees; (iii) engineering and architectural fees for services required in
connection with the design and construction of the Tenant Improvements; and (iv)
premiums, if any, for course of construction insurance and for payment and
completion bonds relating only to construction of the Tenant Improvements. In no
event shall TI Costs include any of the following, all of which shall be the
sole obligation of Landlord: (a) any cost attributable to the Building Shell,
including without limitation the cost to design, permit, or construct the
Building Shell improvements described on Exhibit 1 to this Exhibit "C", (b)
charges and expenses for changes to the Construction Documents which have not
been approved in writing by Tenant, except for those changes to the Construction
Documents required by governmental authority, (c) wages, labor and overhead for
overtime and premium time, unless approved in writing by Tenant; (d) additional
costs and expenses incurred by Landlord on account of any Contractors' or
Architects' default or construction defects in the Improvements; (e) interest
and fees for construction financing; (f) labor and overhead costs for Landlord's
employees and office; and (g) bond premiums.
(s) TI Cost Estimate shall mean the total estimated cost of
constructing the Tenant Improvements prepared and approved by Landlord and
Tenant in accordance with this Improvement Agreement, as modified by change
orders issued in accordance with this Improvement Agreement.
<PAGE> 50
2. Designation of Representative. Landlord and Tenant hereby
respectively appoint Landlord's Representative and Tenant's Representative as
its sole representative for the purposes of this Improvement Agreement. Until
replaced by written notice, Landlord's Representative and Tenant's
Representative shall have the full authority and responsibility to act on behalf
of Landlord and Tenant, respectively, as required in this Improvement Agreement.
3. Preparation and Approval of Plans.
(a) Retention of Architect(s). Tenant shall retain the Architect(s)
to prepare the plans and specifications for the Tenant Improvements, subject to
Landlord's reasonable approval.
(b) Tenant Improvement Plans.
(i) To facilitate timely commencement and Substantial
Completion of the Tenant Improvements, within the time specified in the Planning
Schedule, Tenant shall prepare and submit to Landlord for Landlord's approval
the Tenant's design requirements for the Tenant Improvements. At such time as
Landlord has approved the Tenant's design requirements and within the time
provided in the Planning Schedule, Landlord shall cause the Architect to proceed
with the preparation of preliminary plans and specifications, and a preliminary
cost estimate for the Tenant Improvements and shall notify Tenant of any
revisions that may need to be made to the previously approved construction
schedule. Tenant shall review and approve or disapprove of such items and any
changes in the Construction Schedule within the time permitted by the Planning
Schedule. If Tenant does not approve any preliminary plan or specification, the
preliminary cost estimate, or a construction schedule change, Tenant and
Landlord shall work with the Architect and negotiate in good faith to reach
agreement on all such items within the time permitted by the Planning Schedule.
(ii) When the preliminary space plans, elevations, preliminary
cost estimate and any Construction Schedule changes have been approved by
Tenant, Landlord shall cause the Architect to prepare and deliver to Tenant by
the date specified in the Planning Schedule (i) proposed final plans,
specifications and working drawings for the Tenant Improvements, (ii) a proposed
final TI Cost Estimate, and (iii) a proposed final Construction Schedule for the
Improvements substantially in the form of attached Exhibit 2, all of which shall
be consistent with, and logical evolutions of the preliminary plans and
elevations approved by Tenant pursuant to the foregoing, the terms of this
Improvement Agreement and the Construction Schedule and the changes thereto
previously approved by the parties. Tenant shall review and approve the proposed
final plans, specifications, and working drawings for the Tenant Improvements,
the proposed TI Cost Estimate, or the proposed final Construction Schedule
within the time permitted by the Planning Schedule. If Tenant reasonably
disapproves of the plans, specifications or working drawings for the Tenant
Improvements (which disapproval can only be based upon whether such plans,
specification or working drawings are consistent with the preliminary plans),
the proposed TI Cost Estimate, and/or the proposed final Construction Schedule,
then Landlord and Tenant shall negotiate in good faith, using all reasonable
efforts to
<PAGE> 51
reach agreement on such items within the time specified in the Planning
Schedule; provided, however, that Landlord shall not unreasonably withhold its
approval of such change requested by Tenant to the Tenant Improvements which
does not materially delay the Scheduled Completion Date for the Tenant
Improvements nor materially increase the cost that will be incurred by Landlord
in constructing the Tenant Improvements. If Tenant believes that the cost
estimate is incorrect, it may require that all or any portion of the work be
submitted for competitive bids, in which case the amount for the rebid work
included in the TI Cost Estimate shall not exceed the lowest responsible bid(s)
from responsible Contractor(s) and Supplier(s) for such work. The plans,
specifications, and working drawings for the Tenant Improvements, the final TI
Cost Estimate, and the Construction Schedule approved by Tenant and Landlord
pursuant to this Section, shall be the "Final Tenant Improvement Plans," "TI
Cost Estimate" and "Construction Schedule" for the purposes of this Improvement
Agreement.
(c) Disapprovals and Failures to Respond. Any disapproval by Tenant
of a preliminary plan, space plan, elevation final plan, specification, cost
estimate, or construction schedule item submitted for its approval shall be
communicated only by a writing, which is delivered to Landlord within the time
permitted by the Planning Schedule and which specifies the disapproved item(s),
the reason(s) for the disapproval, and the changes required to make the item
acceptable to Tenant. If Tenant's disapproval of any item requiring its approval
under this Construction Agreement is not delivered in accordance with the
procedures and time limits specified in this Improvement Agreement, then Tenant
shall be deemed to have given its approval to such item.
(d) Changes to Plans, Cost Estimate and Construction Schedule. When
the Final Tenant Improvement Plans, the TI Cost Estimate and Construction
Schedule have been approved by Landlord and Tenant as provided above, the
description of said plans and the Construction Schedule shall be initialed by
the parties and attached to this Agreement as Exhibits 2 and 3, respectively.
Once the Final Tenant Improvement Plans, the TI Cost Estimate, and the
Construction Schedule (including, without limitation, the Scheduled Completion
Date specified therein) are approved by Landlord and Tenant as provided above,
neither party shall thereafter have the right to order extra work or change
orders, nor will the Construction Schedule or the TI Cost Estimate be modified,
except by a written "Change Order" approved by Landlord and Tenant, which
approval shall not be unreasonably withheld, except as expressly stated to the
contrary below. The Change Order shall clearly describe (i) the change, (ii) the
party required to perform the change, (iii) any modification of the Approved
Plans, (iv) the amount of delay or the time saved resulting therefrom and any
revision of the Construction Schedule and Scheduled Completion Date occasioned
by the change, (v) any added or reduced TI Cost resulting from the Change, (vi)
any other cost, and the manner of payment of such costs which Tenant may be
required to pay with respect to a Change requested by Tenant, or Landlord may be
required to reimburse to Tenant as a consequence of a change requested by
Landlord.
(e) Application for Permits. As soon as the Final Tenant Improvement
Plans are approved by Landlord and Tenant, Landlord shall submit said plans to
all appropriate governmental agencies and private parties from whom Permits are
required for the construction
<PAGE> 52
and use of the Tenant Improvements. Landlord shall notify Tenant of any changes
required by any governmental agencies, and Tenant shall have seven (7) days
thereafter to indicate its approval thereof. All such changes required by
governmental agencies shall be deemed acceptable to Tenant unless Tenant's use
of the Premises is materially impaired thereby. The final plans, specifications
and working drawings as approved, and all change orders specifically permitted
pursuant to Subparagraph (c) below, shall be referred to herein as the "Approved
Plans."
4. Construction.
(a) General Contractor. South Bay Development and Construction
Company shall serve as the general Contractor. Contractor's fee as general
Contractor for the Tenant Improvements shall be calculated as follows and shall
be included in the TI Cost Estimate: five percent (5%) of the TI Costs not
including such Contractor's fee.
(b) Subcontracts and Materials. Prior to issuance of any subcontract
relating to Tenant Improvements, Landlord shall submit for Tenant's approval
(which approval shall not be unreasonably withheld) a list of the Contractors
and Suppliers for the Tenant Improvement work. At Tenant's request, all labor
and materials for the Tenant Improvements shall be competitively bid by at least
two (2) Contractors or Suppliers. Landlord may also bid on such work. If Tenant
so desires, Tenant may also select a Contractor or Supplier, reasonably
acceptable to Landlord, to bid the work. All bids shall be opened
simultaneously. Landlord shall have the right to select the Contractor or
Supplier to perform the work. Notwithstanding Tenant's right to approve the
Contractors and Suppliers, the Contractors and Suppliers are a contractor only
for Landlord, and Tenant shall have no liability to any Contractor or Supplier
under any Construction Document or otherwise with respect to the Tenant
Improvements; provided, Tenant shall be required to reimburse Landlord for its
portion of the TI Costs pursuant to this Improvement Agreement.
(c) Commencement and Completion of Improvements. As soon as (i) the
Approved Plans have been developed as provided above, and (ii) all necessary
Permits for commencement of construction of the Tenant Improvements have been
obtained, Landlord shall cause its Contractor(s) to commence and to thereafter
diligently prosecute to completion the construction of the Tenant Improvements
in accordance with the Approved Plans by the Scheduled Completion Dates therefor
contained in the Construction Schedule; provided, however, Landlord shall not be
liable for delay in the Substantial Completion Date for the Building to the
extent reasonably attributable to a Force Majeure Delay, except as specifically
provided in this Lease.
(d) Standard of Construction. Landlord shall cause all work to be
constructed in a good and workmanlike manner, free from material design and
workmanship defects in accordance with the Approved Plans, the other
Construction Documents, the Permits, and Applicable Law and Restrictions.
Notwithstanding anything to the contrary in the Lease or this Improvement
Agreement, Tenant's acceptance of the Landlord's Work shall not waive the
<PAGE> 53
foregoing warranty and Landlord shall promptly remedy all violations of the
warranty at its sole cost and expense which occur during the first twelve (12)
months of the Lease Term. Such warranty shall expire and be of no further force
or effect on the date which is twelve (12) months after the Commencement Date.
Tenant shall promptly notify Landlord in writing during the warranty period of
any defect in construction or in the operation of equipment discovered during
such period, and promptly thereafter Landlord shall commence the cure of such
defect and complete such cure with diligence at Landlord's sole cost. After said
twelve (12) month period, Tenant shall conclusively be deemed to have approved
the construction of the Tenant Improvements and accepted them "as is", subject
only to defects claimed as provided above. With respect to defects discovered
after the expiration of said one (1) year period, the parties hereto acknowledge
that it is their intention that Tenant have the benefit of any construction or
equipment warranties existing in favor of Landlord that would assist Tenant in
correcting such construction defects and in discharging its obligations
regarding the repair and maintenance of the Premises. Upon request by Tenant
following the expiration of such twelve (12) month period, Landlord shall inform
Tenant of all written construction and equipment warranties existing in favor of
Landlord which affect the Tenant Improvements. Landlord shall assign such
warranties to Tenant upon request in order that Tenant may enforce the same.
(e) Tenant Fixturing. Landlord shall use all reasonable efforts to
complete construction of Tenant Improvements of the Building to a point
permitting Tenant's entry for installation of its fixtures and equipment on or
before the date specified in the Construction Schedule. When the construction of
the Building has proceeded to the point where Tenant's installation of its
fixtures and equipment in the Building can be commenced in accordance with good
construction practice, the Landlord shall notify Tenant to that effect and shall
permit Tenant and its authorized representatives and contractors to have access
to the Building for a period of not less than thirty (30) days for the purpose
of installing Tenant's trade fixtures, equipment and other Tenant's Property in
the Building. Landlord and Tenant shall cooperate in good faith to schedule and
coordinate Tenant's fixturing with the Landlord's construction in a manner which
will assure Substantial Completion of the Improvements by the Scheduled
Completion Dates, will reduce each party's cost, and ensure labor harmony. While
performing fixturing, Tenant shall comply, and shall cause its employees,
contractors and suppliers to comply, with the reasonable work rules observed by
Landlord's Contractors and Suppliers.
(f) Inspection & Punchlist. Tenant's Representative and Tenant's
architect, designers and consultants shall have the right to enter on the
Premises at all reasonable times and upon notice to Landlord's Representative
for the purpose of inspecting the progress of the work. Tenant's Representative,
Landlord's Representative and the Architect(s), and such advisers as they shall
desire, shall inspect the Building upon its Substantial Completion using their
best efforts to discover all uncompleted or defective construction. After such
inspection has been completed, a list of "punchlist" items shall be prepared by
Landlord which the parties agree are to be corrected by Landlord. Landlord shall
use its best efforts to complete and/or repair such "punchlist" items within
thirty (30) days. Tenant's taking possession of the Premises shall be deemed to
be an acceptance by Tenant of the Premises as complete and in accordance with
the terms of this Lease, subject to completion of the punchlist items within
said period.
<PAGE> 54
5. Payment of Construction Costs. Landlord and Tenant shall each bear
their own cost for performance of their respective obligations under this
Improvement Agreement, except that Tenant shall reimburse Landlord for the
amount, if any, by which the TI Cost exceeds the TI Allowance in the following
manner: Landlord shall submit receipted bills and/or lien releases evidencing
Landlord's payment of TI Costs in such amounts and at such times as bills are
submitted to Landlord for the TI Costs by Contractors and Suppliers for Tenant
Improvement work in place prior to the date of the bill (a "TI Progress Cost").
On or before the twenty-fifth (25th) day following receipt of the request,
Tenant shall pay to Landlord a sum equal to (i) the TI Progress Cost times a
fraction, the numerator of which shall be equal to the TI Cost Estimate minus
the TI Allowance and the denominator of which shall be equal to the TI Cost
Estimate, minus (ii) the sums previously reimbursed by Tenant to Landlord;
provided, however that in no event shall Tenant be required to reimburse
Landlord (1) for more than 90% of the difference between the TI Cost Estimate
and the TI Allowance prior to the Substantial Completion Date, (2) so long as
Landlord has failed to use the reimbursements previously paid by Tenant to
discharge the obligation of the Landlord to the Contractors and Suppliers, or
(3) so long as Landlord is in default of its obligations under this Improvement
Agreement in any material respect.
6. Delay In Completion Caused By Tenant. The parties hereto acknowledge
that the date on which Tenant's obligation to pay the Monthly Installment would
otherwise commence could be delayed because of Tenant Delays. It is the intent
of the parties hereto that Tenant's obligation to pay the Monthly Installments
of rent not be delayed by any of such causes or by any other act of Tenant, and
in the event it is so delayed, then Tenant's obligation to pay the Monthly
Installments shall commence as of the date it would otherwise have commenced
absent said Tenant Delay. Tenant Delays in excess of thirty (30) days for any of
the above-mentioned reasons may affect Landlord's financing of construction of
the Premises, and Tenant agrees to pay any reasonable additional financing
costs, including loan fees, incurred by Landlord as a result thereof.
7. Notices. The notices to be delivered to the parties pursuant to this
Improvement Agreement shall be given by personal delivery or by facsimile (with
receipt confirmed) to the Tenant's Representative and the Landlord's
Representative at the following address and facsimile number.
<PAGE> 55
Tenant's Representative: [FOLLOWING EXECUTION OF THIS LEASE, TENANT
SHALL PROMPTLY PROVIDE LANDLORD WITH THE NAME, ADDRESS AND FACSIMILE
NUMBER FOR TENANT'S REPRESENTATIVE.]
Address:
---------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Facsimile:
-------------------------------------------------------------
Landlord's Representative:
Address: South Bay Development Company, Inc.
511 Division Street
Campbell, California 95008
Attn: Mr. Scott Trobbe
Facsimile: (408) 379-3229
8. Miscellaneous. Except as otherwise expressly provided in this
Improvement Agreement, whenever either party's consent, approval, designation,
or advice is required by the other party, such consent, approval, designation,
or advice shall not be unreasonably withheld or delayed. This Improvement
Agreement and the Lease contain the entire agreement between the parties with
respect to the construction of the Tenant Improvements and, in the event of any
conflict between the terms of this Improvement Agreement and the Lease, this
Improvement Agreement shall prevail. This Improvement Agreement may be amended
and the provisions hereof may be waived only by a writing signed by Landlord and
Tenant and the provisions hereof shall be binding upon the successors and
assigns of the parties to the Lease. If any legal action, arbitration or other
proceeding is commenced to interpret or enforce this Improvement Agreement, the
prevailing party in such action, arbitration or proceeding shall be entitled to
recover its reasonable attorneys' fees and costs.
<PAGE> 56
IN WITNESS WHEREOF, the parties have executed this Agreement on the
dates set forth below.
LANDLORD TENANT
South Bay/San Tomas Associates, Auspex Systems, Inc.,
a California general partnership a Delaware corporation
By:CIIF Associates II Limited
partnership, a Delaware limited
partnership, its general partner By:
--------------------------------
By:AEW Advisors, Inc., Its:
a Massachusetts corporation, -------------------------------
its managing general partner
By:
------------------------------------
Its:
-----------------------------------
<PAGE> 57
EXHIBIT 1 TO EXHIBIT C
DEFINITION OF BUILDING SHELL
The components and systems below shall be included in the design of the new
building. All code requirements should be considered minimum beginning
requirements and not the highest level of design. Landlord's cost shall include
all "hard and soft" costs related to the construction of the site and shell,
including architectural and engineering services, permits, utility fees for
connections and meters, etc.
1. BUILDING STRUCTURE
(a) All foundations to include footings, piers, caissons, pilings,
grade beams, foundation walls or other building foundation
components required to support the entire building structure.
(b) Columns shall be steel box or pipe columns.
(c) All columns, beams, joists, purlins, headers, or other framing
members to support the roof and roofing membrane.
(d) Five inch (5") thick concrete slab on grade with welded wire
mesh and any other reinforcing or structural connections that
may be necessary or required.
(e) Exterior walls that enclose the perimeter of the building with
steel reinforcing and structural connections that may be
necessary or required.
(f) All exterior glass and glazing with anodized aluminum frames.
Glass to be tinted as appropriate to the aesthetic design of
the building. All exterior doors, door closer and locking
devices necessary for proper functioning.
(g) Wood panel roof system to support roofing membrane.
(h) Three (3) ply built up roofing with cap sheet and all
flashings by Owens-Corning, John Manville, or equal.
(i) Exterior painting of all concrete with Tex-Coat or Kel-Tex
textural paint. All caulking of exterior concrete joints in
preparation for painting.
(j) The foundation and structural framing should be designed to
<PAGE> 58
support a minimum live load of 100 psf in all areas.
(k) The floor-to-floor height of the building shall allow a
minimum of 10'- 0" interior drop ceiling height.
2. PLUMBING
(a) Underground sanitary sewer laterals connected to the city
sewer main in the street and piped into the building and under
the concrete slab on grade for the length of the building.
Main waste lines under the slabs will be in as close proximity
as possible to the building rest room locations.
(b) Domestic water mains connected to the city water main in the
street and stubbed to the building. Water mains to the
building shall not be less than 2.5" in size.
(c) Roof drain leaders piped and connected to the site storm
drainage systems.
(d) Gas lines connected to the city public utility mains and gas
meters adjacent to, and in close proximity to the building.
Meters supplied by utility company.
3. ELECTRICAL
(a) All primary electrical service to the building that is
complete including underground conduit and wire feeders from
transformer pads into the building's main switchgear
electrical room. The electrical characteristics of the
secondary side of transformers shall be 277/480 Volt. 3 Phase
and the rated capacity of the transformers shall be 4,000 amps
for the building. All electrical panels and breakers will have
isolated grounds and surge protectors.
(b) Underground pull section, meter, and panel(s), for site
lighting and landscaping.
(c) Underground conduit from the street to the building for
telephone trunk line service by Pacific Telephone. Conduit to
the building shall not be less than 4".
(d) An electrically operated landscape irrigation controller that
is a complete and functioning system.
<PAGE> 59
(e) Underground conduit from the building to the main fire
protection system, shut off valve (PIV) for installation of
security alarm wiring.
(f) All parking lot and landscaping lighting to include fixtures,
underground conduit, wire, distribution panel and controller.
All exterior lighting shall be a complete and functioning
system.
4. FIRE PROTECTION (SPRINKLERS)
(a) A complete and fully functional overhead system distributed
throughout the building. The systems shall be classified
ordinary hazard group II and be distributed throughout the
building.
(b) System shall include all sprinkler heads that may be required
by building codes above the ceiling, when ceilings are
installed.
(c) Site sprinkler main to be sized adequately to support Tenant's
uses within the building.
5. SITEWORK
(a) All work outside the building perimeter walls shall be
considered site work for the building shell and shall include
grading, asphalt concrete, paving, landscaping (hard and
soft), landscape irrigation, storm drainage, utility service
laterals, including conduit for voice and data connecting the
building, curbs, gutters, sidewalks, specialty paving (if
required), retaining walls, fencing and gates, trash
enclosures, planters, sign monuments, parking lot and
landscape lighting and other exterior lighting per code.
(b) Paving sections for automobile and truck access shall be
according to the Geological Soils Report.
(c) All parking lot striping to include handicap signage and
spaces (parking ratio: no less than 1 space per 295 gross
square feet).
(d) Underground site storm drainage system shall be connected to
the city storm system main.
<PAGE> 60
EXHIBIT 2 TO EXHIBIT C
CONSTRUCTION SCHEDULE
[TO BE DETERMINED]
<PAGE> 61
EXHIBIT 3 TO EXHIBIT C
FINAL TENANT IMPROVEMENT PLANS
[TO BE DETERMINED]
<PAGE> 62
EXHIBIT 4 TO EXHIBIT C
PLANNING SCHEDULE
[TO BE DETERMINED]
<TABLE>
<CAPTION>
Required Action Last Date for Completion
- --------------------------------------------------------- ---------------------------------------------------------
Tenant Improvements Plans and Specifications
- --------------------------------------------------------- --------------------------------------------------------
<S> <C>
1. Tenant delivers its design __________________ , 199__
requirements_________________________
to______________________.
2. Landlord causes the Architect to __________________days after Task 1 is satisfied
deliver preliminary plans, and a preliminary cost
estimate for the Tenant Improvements and a list of any
expected construction schedule changes to Tenant for its
review.
3. Tenant approves or disapproves the ______________ days after Task 2 is completed
items delivered pursuant to Task 8.
4. Landlord and Tenant agree upon ____________________________, 199__
preliminary plans, a cost estimate and any construction
schedule changes for Tenant Improvements.
5. Landlord delivers proposed plans, ______________ days after Task 4 is completed
specifications and working drawings, a proposed final
TI Cost Estimate for the Tenant Improvements, and a final
Construction Schedule to Tenant for its review.
6. Tenant approves or disapproves the ______________ days after Task 5 is completed
items delivered pursuant to Task 1.
7. Landlord and Tenant agree upon Final ____________________________, 199__
Tenant Improvement Plans, a final TI Cost Estimate,
and a final Construction Schedule.
Permitting & Governmental Approvals
- --------------------------------------------------------------------------------------------------------------------
8. Landlord submits the Final Tenant ______________ days after Task 7 is completed
Improvement Plans to all applicable governmental
authorities for Permits.
9. All governmental permits and approvals ____________________________, 199__
necessary for the construction of the Improvements for
the Permitted Uses are obtained.
</TABLE>
<PAGE> 63
EXHIBIT "D"
Commencement Date Memorandum
With respect to that certain Lease Agreement ("Lease"), dated January
___, 1997, by and between South Bay/San Tomas Associates, a California general
partnership ("LANDLORD"), and Auspex Systems, Inc., a Delaware corporation
("TENANT"), whereby Landlord leased to Tenant and Tenant leased from Landlord
the Premises (as defined in the Lease). All terms not defined herein shall have
the same meaning as set forth for such terms in the Lease. Tenant hereby
acknowledges and certifies to Landlord as follows:
(1) The Lease commenced on ___________________, 19___ ("Commencement
Date");
(2) The Initial Term of the Lease shall expire on ____________________,
______ (the "Expiration Date");
(3) The initial Monthly Installment of Rent for the Premises is
____________ _______________________________ Dollars ($_________________); and
(4) Tenant has accepted [and is currently in possession of] the
Premises.
IN WITNESS WHEREOF, this Commencement Date Memorandum is executed this
______ day of __________________, 199____.
"Tenant"
Auspex Systems, Inc., a
Delaware corporation
By:
--------------------------
Its:
-------------------------
<PAGE> 64
EXHIBIT "E"
List of Hazardous Materials
Tenant Will Use on The Premises
<PAGE> 65
EXHIBIT "F"
Description of Existing Environmental Reports
Environmental Reports & Correspondence
The Former Unisys Site
1. Environmental Baseline Report - Revised October 1989
A. Including the following tables, figures and appendices (359
pages)
Tables
1. Tanks and Chemical Storage
2. Previous Tank Storage Summary
3. Groundwater Monitoring Data 10/88
Figures
1. Map
2. Site Map
3. Tank Locations
4. Previous Tank Storage Sites
5. Monitoring Well Locations
Appendices
PCB Information
Asbestos Information
Tank Pull 1/84
Well Destruction Investigation
Hydrogeological Investigation 10/87
Unisys for SFRWQCB; Environmental Baseline
Investigation (Appx 60 pages)
Hydrogeological Investigation 11/88
Soil Gas Survey 5/89
Semi-Annual Sampling 5/89
<PAGE> 66
Clarifier Removal 10/89
2. Tank Removal - Completed 2/6/90 - Santa Clara Fire Department Permit
3. Internal Memo 3/2/90 Regional Water Quality Control Board/2 pages
4. Letter: 3/5/90 to Unisys from Pacific Environmental Group, Inc./4 pages
5. Table 1: Summary of Current Groundwater Laboratory Results/4 pages.
6. Letter: 6/11/90 to E2C, Inc. from Chips Environmental Consultants/16
pages
7. Letter: 6/28/90 to South Bay Construction and Development Company from
E2C, Inc./3 pages
8. Report: 6/29/90 Level II Environmental Site Assessment prepared by E2C,
Inc. previously forwarded to ASK 3/17/92
9. Television inspection location sheet dated 7/16/90-VCR tape available/2
pages
10. Letter: 7/19/90 to City of Santa Clara from E2C, Inc./1 page
11. Progress report sanitary sewer line video and groundwater analysis
dated 8/7/90 prepared by E2C, Inc./44 pages
12. Letter: 8/31/90 to South Bay Construction and Development Company from
E2C, Inc./3 pages
13. Television inspection location sheet dated 8/31/90-VCR tape available/2
pages
14. Letter: 10/19/90 to Prevention Bureau, Santa clara Fire Department from
Pacific Environmental Group, Inc./22 pages
15. Letter; 10/23/90 to South Bay Construction and Development Company from
Unisys/9 pages
16. Letter: 11/1/90 to South Bay Construction and Development Company from
Unisys/9 pages
17. Letter: 11/1/90 to Prevention Bureau, Santa Clara Fire Department from
Pacific Environmental Group, Inc./8 pages
18. Letter: 11/21/90 to South Bay Construction and Development Company from
E2C, Inc./6 pages
19. Letter: 1/3/91 to South Bay/San Thomas Associates from Unisys/2 pages
20. Memo: 1/29 91 to Unisys Corporation from Pacific Environmental group,
Inc./41 pages
21. Fax: 2/11/91 to Unisys from E2C, Inc./7 pages
22. Final submittals-Unisys Corporation-Asbestos/25 pages
23. Letter: 3/15/91 to Pacific Environmental Group from Clayton
Environmental Consultants/26 pages
24. Letter: 3/19/91 to E2C, Inc., from Pacific Environmental Group, Inc./16
pages
<PAGE> 67
25. Letter: 3/21/91 to South Bay/San Tomas Associates from Unisys/16 pages
26. Letter: 3/21/91 to Unisys from Pacific Environmental Group, Inc./12
pages
27. Letter: 3/22/91 to South Bay Development Company from Unisys/2 pages
28. Fax: 4/4/91 to Pacific Environmental Group/1 page
29. Fax: 4/4/91 to Pacific Environmental Group/1 page
30. Fax: 4/8/91 from Pacific Environmental Group-Organic Analysis Data
Sheets/8 pages
31. Fax: 4/10/91 from Pacific Environmental Group-Permits Santa Clara Fire
Department/5 pages
32. Letter: 4/12/91 to San Francisco Regional Water Quality Control Board
from Unisys/81 pages
33. Letter: 4/23/91 to South Bay Development Company from Unisys/1 page
34. Letter: 5/21/91 to South Bay Development Company from Unisys/7 pages
35. Uniform Hazardous Waste Manifests 5/22/91/44 pages
36. Letter: 6/5/91 to Unisys from California Regional Water Quality Control
Board/2 pages
37. Report of Abatement Observation and Air Monitoring June 6, 1991
prepared by Law Associates/66 pages
38. Letter: 6/20/91 to Unisys from Pacific Environmental Group, Inc./18
pages
39. Soil & Groundwater Assessment dated July 11, 1991, prepared by E2C,
Inc.
40. Fax: 8/28/91 to SBC&D Co., from E2C, Inc./7 pages
41. Letter: 1/14/92 to California Regional Water Quality Control Board from
Unisys/8 pages
42. Letter: 1/14/92 to Unisys from Pacific Environmental Group, Inc./4
pages
43. Report: 1/20/92 Second and Third Quarter Split Sampling prepared by
E2C, Inc./121 pages
44. Letter: 2/3/92 from Unisys from California Regional Water Quality
Control Board/2 pages
45. Letter: 3/24/92 to South Bay Construction and Development from E2C,
Inc./8 pages
46. Letter: 3/25/92 to Regional Water Quality Control Board from Unisys/12
pages
47. Report: 4/2/92 Installation of B-Zone Well prepared by E2C, Inc./53
pages
48. Report: 8/25/92 Phase I Environmental Assessments Building 14 prepared
for the ASK Companies by Environ Corporation
49. Letter: 11/10/92 to South Bay Development Company from Unisys/9 pages;
Justification for
<PAGE> 68
Removal
50. Letter: 12/11/92 to South Bay Construction and Development Company from
E2C, Inc./3 pages
51. Letter: 12/11/92 to South Bay Construction and Development Company from
E2C, Inc./4 pages
52. Letter: 12/11/92 to Regional Water Quality Control Board from Unisys/8
pages; Table-Unisys Monitoring Well Removal Notification
53. Letter: 12/14/92 to Regional Water Quality Control Board from E2C,
Inc./4 pages
54. Letter: 12/21/92 to E2C, Inc. from California Regional Water Quality
Control Board/1 page
55. Letter: 12/28/92 to The ASK Companies from South Bay Construction and
Development Company/1 page
56. Letter: 1/22/93 to Regional Water Quality Control Board from Unisys/1
page
57. Fax: 3/29/93 to South Bay Construction and Development Company from
E2C, Inc./2 pages
58. Letter: 4/1/93 to South Bay/San Tomas from E2C, Inc./1 page
59. Letter: 4/8/93 to South Bay Construction and Development Company from
E2C, Inc./8 pages; Well Destruction Report
60. Letter: 6/15/93 to Regional Water Quality Control Board from Unisys/15
pages; Well Abandonment Report
61. Site Investigation Summary by Unisys Corporate Environmental Affairs
dated March 6, 1995 containing Report, Figures, Tables and Appendices A
through D
62. Letter: 6/22/95 to Regional Water Quality Control Board from Unisys/21
pages
63. Letter: 9/11/95 to Regional Water Quality Control Board from Unisys/8
pages
64. Letter: 12/19/95 to South Bay Construction and Development Company from
Unisys/14 pages
65. Letter: 1/26/96 to California Regional Water Quality Control Board from
Unisys/21 pages
66. Fax: 4/10/96 to Larry Patterson from Asbestos Control Center/13 pages
67. Report: 7/19/96 System Installation and Additional Investigation
prepared by Unisys Corporate Environmental Affairs
<PAGE> 69
EXHIBIT "G"
Preliminary Title Report
<PAGE> 70
EXHIBIT "H"
CC&R's and Excluded Obligations
Under CC&R's Described in the Title Report
The documents referred to in the following specially enumerated
exceptions in the Title Report attached as Exhibit "G" to this Lease constitute
the "CC&R's" referred to in Paragraph 34 of the Lease. Pursuant to Paragraph 34
of the Lease, except as otherwise stated below as being obligations of Landlord,
Tenant shall abide by and comply during the Lease Term with the obligations
stated below with respect to the documents listed below to the extent the
obligations arise from the ownership or occupancy of the Premises (and to the
extent they arise from Landlord's ownership of the Premises together with
Landlord's ownership of other property, then to the extent such obligations are
reasonably allocable to the Premises).
Exception No. 6 pertains to an Agreement Regarding Separation of
Certain Utilities between the City of Santa Clara and Unisys Corporation. Tenant
shall not be responsible for any obligations thereunder, with any obligations
affecting the Premises to be borne by Landlord.
Exception No. 7 pertains to a Grant Deed with Grant and Reservation of
Easements from Unisys Corporation to Landlord. Tenant shall be responsible for
the obligations embodied therein as relate to the use by Tenant of the easements
which are reflected therein as appurtenances to the Premises.
Exception No. 8 pertains to a Declaration of Covenants, Conditions,
Restrictions and Easements between Landlord and Unisys Corporation. Tenant shall
be responsible for the obligations thereunder pertaining to maintaining ingress
and egress easement areas located within the boundaries of the Premises in the
manner required by that Declaration and for the obligations not to unreasonably
interfere with the surface water drainage easement in favor of Unisys over the
Premises.
Exception No. 7 pertains to a Grant Deed with Reservation of Easement
from Unisys Corporation to Landlord, which grants Unisys Corporation certain
rights of access over the Premises associated with the operation of groundwater
monitoring wells on the Property. Paragraph 2(b) of this document indicates that
the rights and obligations of the parties thereunder are set forth in and are
subject to certain terms and conditions in the Agreement of Purchase and Sale
and Escrow Instructions between Landlord and Unisys Corporation. Tenant's only
obligation with regard to the easements reserved in this Grant Deed is not to
unreasonably interfere with the access of Unisys to any monitoring wells that
may be hereafter placed upon the Property. Landlord shall be responsible under
this Lease to ensure that if any monitoring wells are to be installed on the
Premises by Unisys, that they shall be installed in a manner which will not
unreasonably interfere with Tenant's use of the Premises and that Unisys
exercises its rights under this Grant Deed in manner not to unreasonably
interfere with Tenant's use of the Premises.
Exception No. 10 pertains to a Declaration of Covenants, Conditions,
Restrictions and Easements executed by Landlord. Tenant shall have the
obligations for maintenance of such easements and utilities as are located
within the boundaries of the Premises as referred to in this Declaration, and
the obligation to contribute the share of expenses (as provided therein) which
is allocable to the Premises associated with the costs of maintenance of the
easement areas on other parcels for the benefit of the Premises. As relates to
easements over, under or across the Premises for the benefit of other parcels,
Tenant shall have the right to obtain reimbursement from the owners of other
parcels for the cost of maintenance of the easements in accordance with the
terms of this Declaration, including recovery from Landlord to the extent it is
at such time the owner of any other parcel which is obligated to share in such
costs under this Declaration. Landlord shall cooperate with Tenant in any
collection efforts from other owners.
<PAGE> 1
EXHIBIT 11.1
AUSPEX SYSTEMS, INC. & SUBSIDIARIES
STATEMENT OF COMPUTATION OF COMMON
AND COMMON EQUIVALENT SHARES
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE YEARS ENDED
------------------------------------
JUNE 30, JUNE 30, JUNE 30,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net Income ......................................... $13,420 $19,830 $12,411
Weighted average common shares outstanding ......... 24,641 23,701 23,029
Weighted average common equivalent shares
Common stock options .......................... 1,017 2,001 1,342
Total weighted average common shares and equivalents 25,658 25,702 24,371
======= ======= =======
Net income per share ............................... $ 0.52 $ 0.77 $ 0.51
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 21.1
AUSPEX SYSTEMS, INC.
(AS OF JUNE 30, 1997)
<TABLE>
<CAPTION>
DATE OF
NAME INCORPORATION PLACE OF INCORPORATION
---- ------------- ----------------------
<S> <C> <C>
Auspex International, Inc. 07/19/93 California, USA
Systemes Auspex, Inc. 07/02/93 Quebec, Canada
Auspex Systems Limited 08/23/93 Reading, United Kingdom
Auspex Systems GmbH 09/24/93 Munich, Germany
Auspex Systems S.A. 12/23/93 Paris, France
Auspex Foreign Sales Corporation 08/03/92 Barbados
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K into the Company's previously filed
Registration Statements No 33-67100, No. 33-76640 and No. 333-00886 on Form S-8.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
San Jose, California
September 23, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 25,056
<SECURITIES> 35,830
<RECEIVABLES> 44,323
<ALLOWANCES> 1,193
<INVENTORY> 18,096
<CURRENT-ASSETS> 134,270
<PP&E> 62,988
<DEPRECIATION> 42,952
<TOTAL-ASSETS> 157,152
<CURRENT-LIABILITIES> 28,836
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> 128,291
<TOTAL-LIABILITY-AND-EQUITY> 157,152
<SALES> 182,533
<TOTAL-REVENUES> 202,486
<CGS> 79,062
<TOTAL-COSTS> 93,008
<OTHER-EXPENSES> 87,422
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> 24,362
<INCOME-TAX> 10,942
<INCOME-CONTINUING> 13,420
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,420
<EPS-PRIMARY> .52
<EPS-DILUTED> 0
</TABLE>
